10-K 1 a2019medleycapitalcorp10k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

Form 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Fiscal Year Ended September 30, 2019
or
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to

Commission file number: 1-35040

MEDLEY CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware
 
27-4576073
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
 
280 Park Avenue, 6th Floor East, New York, NY 10017
 
10017
(Address of Principal Executive Offices)
 
(Zip Code)

(212) 759-0777
(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
Common Stock, par value $0.001 per share
 
MCC
 
The New York Stock Exchange
6.500% Notes due 2021
 
MCX
 
The New York Stock Exchange
6.125% Notes due 2023
 
MCV
 
The New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ý         Non-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 ý

The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant as of March 29, 2019 was $138,207,781. The Registrant had 54,474,211 shares of common stock, $0.001 par value, outstanding as of December 16, 2019.



MEDLEY CAPITAL CORPORATION

TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I

In this annual report on Form 10-K, except as otherwise indicated, the terms: 

“we”, “us”, “our”, “Medley Capital” and the “Company” refer to Medley Capital Corporation, a Delaware corporation, and its subsidiaries for the periods after our consummation of the formation transaction and to Medley Capital BDC LLC, a Delaware limited liability company, for the periods prior to our consummation of the formation transaction described elsewhere in this Form 10-K;

“MCC Advisors” and the “Adviser” refer to MCC Advisors LLC, our investment adviser; MCC Advisors is a wholly owned subsidiary of Medley LLC, which is controlled by Medley Management Inc. (“MDLY”), 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; and

“Medley” refers, 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.

Item 1. Business

GENERAL

Medley Capital Corporation is a 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”), commencing with our first taxable year as a corporation. We are externally managed and advised by our investment adviser, MCC Advisors, pursuant to an investment management agreement.

Our investment objective is to generate current income and capital appreciation by lending directly to privately held middle market companies, primarily through directly originated transactions to help these companies expand their business, refinance and make acquisitions. Our investment portfolio generally consists of senior secured first lien term loans, senior secured second lien term loans, preferred equity and common equity. In connection with some of our investments, we receive warrants or other equity participation features which we believe will increase the total investment returns.

We believe the middle-market private debt market is undergoing structural shifts that are creating significant opportunities for non-bank lenders and investors. The underlying drivers of these structural changes include: reduced participation by banks in the private debt markets, particularly within the middle-market, and demand for private debt created by committed and uninvested private equity capital. We focus on taking advantage of this structural shift by lending directly to companies that are underserved by the traditional banking system and generally seek to avoid broadly marketed investment opportunities. We source investment opportunities primarily through direct relationships with financial sponsors, as well as financial intermediaries such as investment banks and commercial banks.

Our investment activities are managed by our investment adviser, MCC Advisors, which is registered with the Securities and Exchange Commission (the “SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). MCC Advisors is an affiliate of Medley and is based in New York. Our Investment Team, which is provided for by MCC Advisors, is responsible for sourcing investment opportunities, conducting industry research, performing diligence on potential investments, structuring our investments and monitoring our portfolio companies on an ongoing basis.  MCC Advisors’ team draws on its expertise in lending to predominantly privately held borrowers in a range of sectors, including industrials, and transportation, energy and natural resources, financials and real estate.  In addition, MCC Advisors seeks to diversify our portfolio of loans by company type, asset type, transaction size, industry and geography.

Our Investment Team has extensive experience in the credit business, including originating, underwriting, principal investing and loan structuring. Our Adviser, through Medley, has access to over 60 employees, including over 30 investment, origination and credit management professionals, and over 30 operations, marketing and distribution professionals, each with extensive experience in their respective disciplines. We believe that MCC Advisors’ disciplined and consistent approach to origination, portfolio construction and risk management should allow it to achieve attractive risk-adjusted returns for Medley Capital.

MCC Advisors also serves as our administrator and provides us with office space, equipment and other office services. The responsibilities of our administrator include overseeing our financial records, preparing reports to our stockholders and reports filed with the SEC and generally monitoring the payment of our expenses and the performance of administrative and professional services rendered to us by others.

As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to continue to, finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% if certain requirements under the 1940 Act are met) after such borrowing. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing.

As of September 30, 2019, the Company’s asset coverage was 184.2% after giving effect to leverage and therefore the Company’s asset coverage is below 200%, the minimum asset coverage requirement under the 1940 Act. As a result, the Company is prohibited from making distributions to stockholders, including the payment of any dividend, and may not employ further leverage until the Company’s asset coverage is at least 200% after giving effect to such leverage.

Opportunities for co-investments may arise when MCC Advisors or an affiliated investment adviser becomes aware of investment opportunities that may be appropriate for the Company, other clients, or affiliated funds. On November 25, 2013, the Company obtained an exemptive order from the SEC that permits us to participate in negotiated co-investment transactions with certain affiliates, each of whose investment adviser is Medley, LLC or an

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investment adviser controlled by Medley, LLC in a manner consistent with our investment objective, strategies and restrictions, as well as regulatory requirements and other pertinent factors (the “Prior Exemptive Order”). On March 29, 2017, the Company, MCC Advisors and certain other affiliated funds and investment advisers received an exemptive order (the “Exemptive Order”) that supersedes the Prior Exemptive Order and allows affiliated registered investment companies to participate in co-investment transactions with us that would otherwise have been prohibited under Section 17(d) and 57(a)(4) of the 1940 Act and Rule 17d-1 thereunder. On October 4, 2017, the Company, MCC Advisors and certain of our affiliates received an exemptive order that supersedes the Exemptive Order (the “Current Exemptive Order”) and allows, in addition to the entities already covered by the Exemptive Order, Medley LLC and its subsidiary, Medley Capital LLC, to the extent they hold financial assets in a principal capacity, and any direct or indirect, wholly or majority owned subsidiary of Medley LLC that is formed in the future, to participate in co-investment transactions with us that would otherwise be prohibited by either or both of Sections 17(d) and 57(a)(4) of the 1940 Act. The terms of the Current Exemptive Order are otherwise substantially similar to the Exemptive Order. Co-investment under the Current Exemptive Order is subject to certain conditions, including the condition that, in the case of each co-investment transaction, our board of directors determines that it would be in our best interest to participate in the transaction. However, neither we nor the affiliated funds are obligated to invest or co-invest when investment opportunities are referred to us or them.

In situations where co-investment with other funds managed by MCC Advisors or its affiliates is not permitted or appropriate, such as when there is an opportunity to invest in different securities of the same issuer or where the different investments could be expected to result in a conflict between our interests and those of other MCC Advisors clients, MCC Advisors will need to decide which client will proceed with the investment. MCC Advisors will make these determinations based on its policies and procedures, which generally require that such opportunities be offered to eligible accounts on an alternating basis that will be fair and equitable over time. Moreover, except in certain circumstances, we will be unable to invest in any issuer in which a fund managed by MCC Advisors or its affiliates has previously invested. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates.

On March 26, 2013, our wholly owned subsidiary, Medley SBIC LP (“SBIC LP”), a Delaware limited partnership, received a license from the Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Company Act of 1958, as amended. Effective July 1, 2019, SBIC LP surrendered its SBIC license and changed its name to Medley Small Business Fund, LP (“Medley Small Business Fund”). In addition, Medley SBIC GP, LLC changed its name to Medley Small Business Fund GP, LLC. See Note 5 for further information.

Our principal executive office is located at 280 Park Avenue, 6th Floor East, New York, NY 10017 and our telephone number is (212) 759-0777.

Formation Transactions

Medley Capital BDC LLC (the “LLC”), a Delaware limited liability company, was formed on April 23, 2010.

Prior to the pricing of our IPO, Medley Opportunity Fund LP (“MOF LP”), a Delaware limited partnership, and Medley Opportunity Fund, Ltd. (“MOF LTD”), a Cayman Islands exempted limited liability company, transferred all of their respective interests in six loan participations in secured loans to middle market companies with a combined fair value, plus payment-in-kind interest and accrued interest thereon, of approximately $84.95 million (the “Loan Assets”) to MOF I BDC LLC, a Delaware limited liability company (“MOF I BDC”) in exchange for membership interests in MOF I BDC.  As a result, MOF LTD owned approximately 90% of the outstanding MOF I BDC membership interests and MOF LP owned approximately 10% of the outstanding MOF I BDC membership interests. On January 18, 2011, each of MOF LTD and MOF LP contributed their respective MOF I BDC membership interests to the LLC in exchange for LLC membership interests. As a result, MOF I BDC became a wholly owned subsidiary of the LLC.

On January 18, 2011, the LLC converted into Medley Capital Corporation, a Delaware corporation.  As a result, MOF LTD and MOF LP’s LLC membership interests were exchanged for 5,759,356 shares of the Company’s common stock at $14.75 per share.  On January 20, 2011, the Company filed an election to be regulated as a BDC under the 1940 Act.

On January 20, 2011, we priced our IPO and sold 11,111,112 shares of common stock at $12.00 per share.  On February 24, 2011, an additional 450,000 shares of our common stock were issued at a price of $12.00 per share pursuant to the partial exercise of the underwriters’ over-allotment option.  Net of underwriting fees and estimated offering costs, the Company raised a total of approximately $129.6 million. Our shares began trading on January 20, 2011 on the New York Stock Exchange (“NYSE”) under the symbol “MCC.”

Investment Process Overview

We view our investment process as consisting of three distinct phases described below:

Sourcing and Origination   MCC Advisors sources investment opportunities through access to a network of contacts developed in the financial services and related industries by Medley. It is the Adviser’s responsibility to identify specific opportunities, to refine opportunities through rigorous due diligence of the underlying facts and circumstances while remaining flexible and responsive to client’s needs. With over 30 investment professionals based in New York involved in sourcing and origination for MCC Advisors, each investment professional is able to maintain long-standing relationships and responsibility for a specified market.

An investment pipeline is maintained to manage all prospective investment opportunities and is reviewed weekly by the Investment Committee of MCC Advisors (“Investment Committee”). The purpose of the investment pipeline, which is comprised of all prospective investment opportunities at various stages of due diligence and approval, is to evaluate, monitor and approve all of our investments, subject to the oversight of our Investment Committee. 

Credit Evaluation We utilize a systematic, consistent approach to credit evaluation developed by Medley, with a particular focus on determining the value of a business in a downside scenario. The key criteria that we consider and attributes that we seek include: (i) strong and resilient underlying business fundamentals; (ii) a substantial equity cushion in the form of capital ranking junior in the right of payment to our investment; (iii) sophisticated management teams with a minimum operating history of two years; (iv) a conclusion that overall downside risk is manageable; (v) collateral support in the form of accounts receivable, inventory, machinery, equipment, real estate, IP, overall enterprise value and other assets; and (vi) limited requirements

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for future financing beyond the proposed commitment. The first review of an opportunity is conducted using the above-mentioned analysis to determine if the opportunity meets MCC Advisors' general investment criteria. The next three reviews performed by the Investment Committee include the following: (1) an Early Read Memo, (2) a Green Light Memo, and (3) Investment Committee approval memo. MCC Advisors maintains a rigorous in-house due diligence process. Prior to making each investment, MCC Advisors subjects each potential portfolio company to an extensive credit review process, including analysis of market and operational dynamics as well as both historical and projected financial information. Areas of additional focus include management or sponsor experience, industry and competitive dynamics, and tangible asset values. Background checks and tax compliance checks are typically required on all portfolio company management teams.

Our due diligence process typically entails:
 
negotiation and execution of a term sheet;

on-site visits;

interviews with management, employees, customers and vendors;

review of loan documents and material contracts, as applicable;

obtaining  background checks on all principals/partners/founders;

completing customer and supplier calls;

review of tax and accounting issues related to a contemplated capital structure;

developing a financial model with sensitivity analysis that includes a management case, expected case and downside case;

receiving third party reports such as environmental, appraisal and consulting reports, as applicable.

Monitoring  MCC Advisors views active portfolio monitoring as a vital part of our investment process. MCC Advisors utilizes an investment management system, which maintains a centralized, dynamic electronic reporting system which houses, organizes and archives all portfolio data by investment. This is the primary system that tracks all changes to investment terms and conditions. On a quarterly basis, the asset management team produces a report for each investment within the portfolio by summarizing the investment’s general information, terms and structure, financial performance, covenant package, and business updates. This feature enables MCC Advisors to track the history of every investment, while maintaining access to the most recent reporting information available, ensuring accurate reporting of the investment.

MCC Advisors will typically require portfolio companies to adhere to certain affirmative covenants requiring the following reports:
 
Ÿ
monthly or quarterly financial statements
Ÿ
annual audits and management letters
 
 
 
 
Ÿ
monthly or quarterly covenant certificates
Ÿ
quarterly industry updates
 
 
 
 
Ÿ
monthly or quarterly management discussion & analysis
Ÿ
quarterly customer and supplier concentration updates
 
 
 
 
Ÿ
monthly or quarterly bank statements
Ÿ
quarterly backlog/pipeline reports
 
 
 
 
Ÿ
annual insurance certificates
Ÿ
annual budgets and forecasts.

MCC Advisors holds regular portfolio reviews where the Investment Committee reviews each transaction in detail and reassesses the risk rating presently assigned.
 
Rating Criteria   In addition to external risk management research and internal monitoring tools, we use an investment rating system to characterize and monitor the credit profile and our expected level of returns on each investment in our portfolio. We use a five-level numeric rating scale. The following is a description of the conditions associated with each investment rating:


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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.
 
Investment Committee
 
The purpose of the Investment Committee, which is comprised of a minimum of three members selected from senior members of MCC Advisors’ Investment Team, is to evaluate and approve all of our investments. The Investment Committee process is intended to bring the diverse experience and perspectives of the committee’s members to the analysis and consideration of each investment. The Investment Committee serves to provide investment consistency and adherence to our core investment philosophy and policies. The Investment Committee also determines appropriate investment sizing and suggests ongoing monitoring requirements.
 
In addition to reviewing investments, Investment Committee meetings serve as a forum to discuss credit views and outlooks. Potential transactions and deal flow are reviewed on a regular basis.  Members of the investment team are encouraged to share information and views on credits with the Investment Committee early in their analysis.  We believe this process improves the quality of the analysis and assists the investment team members to work more efficiently.
 
Each transaction is presented to the Investment Committee in a formal written report. All of our new investments and the exit or sale of an existing investment must be approved by a majority vote of the Investment Committee, although unanimous agreement is sought.
 
Investment Structure
 
Once we have determined that a prospective portfolio company is suitable for investment, we work with the management of that company and its other capital providers to structure an investment.  We negotiate among these parties to agree on how our investment is expected to perform relative to the other capital in the portfolio company’s capital structure.

We structure our investments, which typically have maturities of three to seven years, as follows:

Senior Secured First Lien Term Loans   We structure these investments as senior secured loans.  We obtain security interests in the assets of the portfolio companies that serve as collateral in support of the repayment of such loans.  This collateral generally takes the form of first-priority liens on the assets of the portfolio company borrower.  Our senior secured loans may provide for amortization of principal with the majority of the amortization due at maturity.

Senior Secured Second Lien Term Loans   We structure these investments as junior, secured loans. We obtain security interests in the assets of these portfolio companies that serves as collateral in support of the repayment of such loans. This collateral generally takes the form of second-priority liens on the assets of a portfolio company. These loans typically provide for amortization of principal in the initial years of the loans, with the majority of the amortization due at maturity.

Senior Secured First Lien Notes   We structure these investments as senior secured loans. We obtain security interests in the assets of these portfolio companies that serve as collateral in support of the repayment of such loans. This collateral generally takes the form of priority liens on the assets of a portfolio company. These loans typically have interest-only payments (often representing a combination of cash pay and payment-in-kind, or ("PIK") interest), with amortization of principal due at maturity. PIK interest represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term and recorded as interest income on an accrual basis to the extent such amounts are expected to be collected.

Warrants and Minority Equity Securities   In some cases, we may also receive nominally priced warrants or options to buy a minority equity interest in the portfolio company in connection with a debt investment.  As a result, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest.  We may structure such warrants to include provisions protecting our rights as a minority-interest holder, as well as a “put,” or right to sell such securities back to the issuer, upon the occurrence of specified events.  In many cases, we may also seek to obtain registration rights in connection with these equity interests, which may include demand and “piggyback” registration rights.

Unitranche Loans   We structure our unitranche loans, which combine the characteristics of traditional senior secured first lien term loans and subordinated notes as senior secured loans.  We obtain security interests in the assets of these portfolio companies that serve as collateral in support of the repayment of these loans. This collateral generally takes the form of first-priority liens on the assets of a portfolio company.  Unitranche loans typically provide for amortization of principal in the initial years of the loans, with the majority of the amortization due at maturity.

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Unsecured Debt   We structure these investments as unsecured, subordinated loans that provide for relatively high, fixed interest rates that provide us with significant current interest income. These loans typically have interest-only payments (often representing a combination of cash pay and payment-in-kind, or PIK interest), with amortization of principal due at maturity. Subordinated notes generally allow the borrower to make a large lump sum payment of principal at the end of the loan term, and there is a risk of loss if the borrower is unable to pay the lump sum or refinance the amount owed at maturity. Subordinated notes are generally more volatile than secured loans and may involve a greater risk of loss of principal. Subordinated notes often include a PIK feature, which effectively operates as negative amortization of loan principal.

We tailor the terms of each investment to the facts and circumstances of the transaction and the prospective portfolio company, negotiating a structure that protects our rights and manages our risk while creating incentives for the portfolio company to achieve its business plan and improve its operating results.  We seek to limit the downside potential of our investments by:

selecting investments that we believe have a low probability of loss of principal;

requiring a total return on our investments (including both interest and potential equity appreciation) that we believe will compensate us appropriately for credit risk; and

negotiating covenants in connection with our investments that afford our portfolio companies as much flexibility in managing their businesses as possible, consistent with the preservation of our capital. Such restrictions may include affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or rights to a seat on the board of directors under some circumstances.

We expect to hold most of our investments to maturity or repayment, but we may realize or sell some of our investments earlier if a liquidity event occurs, such as a sale or recapitalization transaction, or the worsening of the credit quality of the portfolio company.

Managerial Assistance

As a BDC, we offer, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. MCC Advisors provides such managerial assistance on our behalf to portfolio companies that request this assistance. We may receive fees for these services and will reimburse MCC Advisors, as our administrator, for its allocated costs in providing such assistance, subject to the review and approval by our board of directors, including our independent directors.

Leverage

Through any credit facility that we may enter into in the future, we may borrow funds to make additional investments, a practice known as ‘‘leverage,’’ to attempt to increase return to our stockholders. The amount of leverage that we employ at any particular time will depend on our Adviser's and our board of directors’ assessments of market and other factors at the time of any proposed borrowing. We are also subject to certain regulatory requirements relating to our borrowings. For a discussion of such requirements, see ‘‘Regulation - Senior Securities’’ and ‘‘Regulation - Small Business Investment Company Regulations.’’

We may from time to time seek to retire or repurchase our common stock through cash purchases, as well as retire, cancel or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. The amounts involved may be material.

Competition

Our primary competitors to provide financing to private middle-market companies are public and private funds, commercial and investment banks, commercial finance companies, other BDCs, SBICs and private equity and hedge funds. Some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or to the distribution and other requirements we must satisfy to maintain our favorable RIC tax status.

Employees

We do not have any employees. Our day-to-day investment operations are managed by our Adviser. Our Adviser employs over 30 investment professionals, including its principals. In addition, we reimburse our administrator for the allocable portion of overhead and other expenses incurred by it in performing its obligations under an administration agreement, including the compensation of our Chief Financial Officer and Chief Compliance Officer, and their respective staff. 

Administration

We have entered into an administration agreement, pursuant to which MCC Advisors furnishes us with office facilities, equipment and clerical, bookkeeping, recordkeeping and other administrative services at such facilities. Under our administration agreement, MCC Advisors performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain and preparing reports to our stockholders and reports filed with the SEC.

Agreements and Plan of Mergers

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On August 9, 2018 the Company entered into a definitive agreement to merge with Sierra Income Corporation (“Sierra”). Pursuant to the Agreement and Plan of Merger (the “MCC Merger Agreement”) by and between Sierra and the Company, the Company would, on the terms and subject to the conditions set forth in the MCC Merger Agreement, merge with and into Sierra, with Sierra as the surviving entity in the merger (the "MCC Merger"). Under the MCC Merger, each share of our common stock issued and outstanding immediately prior to the MCC Merger effective time (other than shares of our common stock held by the Company, Sierra or their respective wholly owned subsidiaries) would be converted into the right to receive 0.8050 shares of Sierra’s common stock.

Simultaneously, pursuant to the Agreement and Plan of Merger (the “MDLY Merger Agreement”) by and among Sierra, MDLY and Sierra Management, Inc., a newly formed Delaware corporation and wholly owned subsidiary of Sierra (“Merger Sub”), MDLY would, on the terms and subject to the conditions set forth in the MDLY Merger Agreement, merge with and into the Merger Sub, and MDLY’s existing asset management business would continue to operate as a wholly owned subsidiary of Sierra in the merger (the “MDLY Merger” together with the MCC Merger, the “Mergers”). In the MDLY Merger, each share of MDLY Class A common stock, issued and outstanding immediately prior to the MDLY Merger effective time (other than Dissenting Shares (as defined in the MDLY Merger Agreement) and shares of MDLY Class A common stock held by MDLY, Sierra or their respective wholly owned subsidiaries) would be converted into the right to receive (i) 0.3836 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $3.44 per share. In addition, MDLY’s stockholders would have the right to receive certain dividends and/or other payments.

On July 29, 2019, the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MCC Merger Agreement”), by and between the Company and Sierra, pursuant to which the Company will, on the terms and subject to the conditions set forth in the Amended MCC Merger Agreement, merge with and into Sierra, with Sierra as the surviving company in the MCC Merger. In the MCC Merger, each share of the Company’s common stock (other than shares of the Company’s common stock held by the Company, Sierra or their respective wholly owned subsidiaries) will be exchanged for the right to receive (i) 0.68 shares of Sierra’s common stock if the attorneys’ fees of plaintiffs’ counsel and litigation expenses paid or incurred by plaintiffs’ counsel or advanced by plaintiffs in connection with the FrontFour Action, as described in “Item 3. Legal Proceedings” (such fees and expenses, the “Plaintiff Attorney Fees”), are less than or equal to $10,000,000; (ii) 0.66 shares of Sierra’s common stock if the Plaintiff Attorney Fees are equal to or greater than $15,000,000; (iii) between 0.68 and 0.66 per share of Sierra’s common stock if the Plaintiff Attorney Fees are greater than $10,000,000 but less than $15,000,000, calculated on a descending basis, based on straight line interpolation between $10,000,000 and $15,000,000; or (iv) 0.66 shares of Sierra’s common stock in the event that the Plaintiff Attorney Fees are not determined prior to the closing of the MCC Merger (such ratio, the “MCC Merger Exchange Ratio”).

In addition, on July 29, 2019, Sierra and MDLY announced the execution of the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MDLY Merger Agreement”), by and among MDLY, Sierra, and Merger Sub, pursuant to which MDLY will, on the terms and subject to the conditions set forth in the Amended MDLY Merger Agreement, merge with and into Merger Sub, with Merger Sub as the surviving company in the MDLY Merger. In the MDLY Merger, each share of MDLY Class A common stock, issued and outstanding immediately prior to the MDLY Merger effective time, other than shares of MDLY Class A common stock held by MDLY, Sierra or their respective wholly owned subsidiaries (the “Excluded MDLY Shares”) and the Dissenting Shares (as defined in the Amended MDLY Merger Agreement), held, immediately prior to the MDLY Merger effective time, by any person other than a Medley LLC unitholder, will be exchanged for (i) 0.2668 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $2.96 per share. In addition, in the MDLY Merger, each share of MDLY Class A common stock issued and outstanding immediately prior to the MDLY Merger effective time, other than the Excluded MDLY Shares and the Dissenting Shares, held, immediately prior to the MDLY Merger effective time, by Medley LLC unitholders will be exchanged for (i) 0.2072 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $2.66 per share.

Pursuant to terms of the Amended MCC Merger Agreement, the consummation of the MCC Merger is conditioned upon the satisfaction or waiver of each of the conditions to closing under the Amended MDLY Merger Agreement and the consummation of the MDLY Merger. However, pursuant to the terms of the Amended MDLY Merger Agreement, the consummation of the MDLY Merger is not contingent upon the consummation of the MCC Merger. If both Mergers are successfully consummated, Sierra’s common stock would be listed on the NYSE, with such listing expected to be effective as of the closing date of the Mergers, and Sierra’s common stock will be listed on the Tel Aviv Stock Exchange (“TASE”), with such listing expected to be effective as of the closing date of the MCC Merger. If, however, only the MDLY Merger is consummated, Sierra’s common stock would be listed on the NYSE. If both Mergers are successfully consummated, the investment portfolios of MCC and Sierra would be combined, Merger Sub, as a successor to MDLY, would be a wholly owned subsidiary of the Combined Company, and the Combined Company would be internally managed by MCC Advisors LLC, its wholly controlled adviser subsidiary. If only the MDLY Merger is consummated, the investment portfolios of MCC and Sierra would not be combined; however, the investment management function relating to the operation of Sierra, as the surviving company, would still be internalized (the “Sierra/MDLY Company”) and the Sierra/MDLY Company would be managed by MCC Advisors. The Mergers are subject to approval by the stockholders of the Company, Sierra, and MDLY, regulators, including the SEC, court approval of the Stipulation (as described below), other customary closing conditions and third-party consents. There is no assurance that any of the foregoing conditions will be satisfied.

On February 11, 2019, a purported stockholder class action was commenced in the Court of Chancery of the State of Delaware by FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. (together, “FrontFour”), captioned as FrontFour Capital Group LLC, et al. v. Brook Taube et al., Case No. 2019-0100 (the “FrontFour Action”) against defendants Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, Sierra, the Company, MCC Advisors, Medley Group LLC, and Medley LLC. The complaint, as amended on February 12, 2019, alleged that the individuals named as defendants breached their fiduciary duties to the Company’s stockholders in connection with the MCC Merger, and that MDLY, Sierra, MCC Advisors, Medley Group LLC, and Medley LLC aided and abetted those alleged breaches of fiduciary duties. The complaint sought to enjoin the vote of MCC stockholders on the proposed merger and enjoin enforcement of certain provisions of the Agreement and Plan of Merger, dated as of August 9, 2018, by and between MCC and Sierra (the “MCC Merger Agreement”). The Court held a trial on the plaintiffs’ claims on March 6-7, 2019 and issued a Memorandum Opinion (the “Decision”) on March 11, 2019. The Court denied the plaintiffs’ requests to (i) permanently enjoin the proposed merger and (ii) require the Company to conduct a “shopping process” for the Company on terms proposed by the plaintiffs in their complaint. The Court held that the Company’s directors breached their fiduciary duties in entering into the proposed merger, but rejected the plaintiffs’ claim that Sierra aided and abetted those breaches of fiduciary duties. The Court ordered the defendants to issue corrective disclosures consistent with the Decision, and enjoined a vote of the Company’s stockholders on the proposed merger until such disclosures have been made and stockholders have had the opportunity to assimilate this information. On March 20, 2019, another purported stockholder class action was commenced by Stephen Altman

6



against Brook Taube, Seth Taube, Jeff Tonkel, Arthur S. Ainsberg, Karin Hirtler-Garvey, Mark Lerdal, and John E. Mack in the Court of Chancery of the State of Delaware, captioned Altman v. Taube, Case No. 2019-0219 (the “Altman Action”). The complaint alleged that the defendants breached their fiduciary duties to stockholders of the Company in connection with the vote of the Company’s stockholders on the proposed mergers. On April 8, 2019, the Court granted a stipulation consolidating the FrontFour Action and the Altman Action, designating the amended complaint in the FrontFour Action as the operative complaint, and designating the plaintiffs in the FrontFour Action and their counsel the lead plaintiffs and lead plaintiffs’ counsel, respectively.

On April 15, 2019, certain parties reached agreement on the principal terms of a settlement of the FrontFour Action, which were contained in a term sheet, dated April 15, 2019 (the “Settlement Term Sheet”). On July 29, 2019, MCC entered into a Stipulation of Settlement (and, as amended on August 8, 2019, the “Stipulation”) by and among the Company, Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, MCC Advisors, Medley LLC and Medley Group LLC (the “Medley Parties”), on the one hand, and FrontFour, on behalf of itself and a class of similarly situated stockholders of the Company, on the other hand, in connection with the FrontFour Action.

The Stipulation provides for the settlement of all claims brought against the Medley Parties in the FrontFour Action. Under the Stipulation, the Company agreed to seek the agreement and/or consent of Sierra to effect certain amendments to (i) the MCC Merger Agreement and (ii) the MDLY Merger Agreement (together with the MCC Merger Agreement, the “Merger Agreements”), which have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. The Stipulation also provides for, if the MCC Merger is consummated, the creation of a settlement fund, consisting of $17 million in cash and $30 million of Sierra stock, with the number of shares of Sierra stock to be calculated using the pro forma net asset value reported in the future proxy supplement describing the amendments to the MCC Merger Agreement, which will be distributed to eligible members of the Settlement Class (as defined in the Stipulation). Under the Stipulation, MDLY also consented to certain amendments to the Merger Agreements that have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. In addition, in connection with the Stipulation, on July 29, 2019, the Company entered into a Governance Agreement with FrontFour Capital Group LLC, FrontFour Master Fund, Ltd., FrontFour Capital Corp., FrontFour Opportunity Fund, David A. Lorber, Stephen E. Loukas and Zachary R. George, pursuant to which, among other matters, FrontFour is subject to customary standstill restrictions and required to vote in favor of the MCC Merger at a meeting of stockholders to approve the Amended MCC Merger Agreement.

The Stipulation also provides for mutual releases between and among FrontFour and the Settlement Class, on the one hand, and the Medley Parties, on the other hand, of all claims that were or could have been asserted in the FrontFour Action. The Medley Parties will also release all claims arising out of or relating to the prosecution and settlement of the FrontFour Action and all claims that were or could have been asserted (other than claims against the Highland Parties, as defined in the Stipulation) in the litigation pending in the United States District Court for the Southern District of New York captioned Medley Capital Corporation v. FrontFour Capital Group LLC, et al., No. 1:19-cv-02055-LTS (S.D.N.Y.) (the “Federal Action”), and FrontFour and the Settlement Class will release all claims arising out of or relating to the prosecution and settlement of the Federal Action.

The Stipulation further provides that the Company and FrontFour shall work together in good faith to agree to supplemental disclosures relating to the transactions contemplated by the Merger Agreements consistent with the Decision.

The Stipulation is subject to the approval of the Court. On September 26, 2019, FrontFour filed a motion seeking an order approving the Stipulation, and also moved for the Court to award plaintiffs’ counsel attorneys’ fees in the amount of $22 million and expenses in the amount of $420,334.97 (the “Fee Application”). The Court held a hearing to consider the Stipulation and the Fee Application on October 24, 2019.

On November 19, 2019, the Court issued a bench ruling approving the Stipulation. The Court also awarded attorney’s fees as follows: (i) an award of $3,000,000 to lead plaintiffs’ counsel and $75,000 to counsel to plaintiff Stephen Altman (the “Therapeutics Fee Award”) and (ii) an award in an amount equal to 26% of the nominal value of the settlement fund, grossed up to include the amount of the lead plaintiffs’ counsel’s attorney’s fees, and excluding the portion of the fees borne by the class under the Amended MCC Merger Agreement, as well as an award of $100,000 relating to the composition of the board of directors of the post-Merger company (the “Contingent Fee Award” and, together with the Therapeutics Fee Award, the “Fee Awards”). The parties disagreed as to how to apply the formula that the Court indicated will be used to calculate the Contingent Fee Award. Accordingly, the parties submitted different forms of the proposed form of order and final judgment, as applicable, for review and entry by the Court, together with letter briefs setting forth their respective interpretations of the Court’s November 19, 2019 bench ruling. The Plaintiff contends that the amount of the Contingent Fee Award is fixed at $14,540,888. Defendants contend that the amount will be less than $14,540,888, but the actual amount cannot be determined prior to closing. The Therapeutics Fee Award will be payable within five (5) business days of the entry of an order and judgment by the Court. The Contingent Fee Award is contingent upon the closing of the MCC Merger, and will be due within five (5) business days of the closing of the MCC Merger and establishment of the Settlement Fund. The Fee Awards will be paid by MCC or its successor.

Information Available

We maintain a website at http://www.medleycapitalcorp.com.  We make available, free of charge, on our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission, or SEC. Information contained on our website is not incorporated by reference into this annual report on Form 10-K and you should not consider information contained on our website to be part of this annual report on Form 10-K or any other report we file with the SEC.

INVESTMENTS

We have built a diverse portfolio that includes senior secured first lien term loans, senior secured second lien term loans, unitranche, senior secured first lien notes, subordinated notes and warrants and minority equity securities by investing approximately $10 million to $50 million of capital, on average, in the securities of middle-market companies.

The following table shows the portfolio composition by industry grouping at fair value at September 30, 2019 (dollars in thousands):

7



 
Fair Value
 
Percentage
Multisector Holdings
$
69,949

 
17.6
%
Construction & Building
59,608

 
15.0

Services:  Business
49,512

 
12.5

High Tech Industries
38,254

 
9.6

Healthcare & Pharmaceuticals
25,698

 
6.5

Energy:  Oil & Gas
23,632

 
6.0

Hotel, Gaming & Leisure
21,127

 
5.3

Wholesale
13,850

 
3.5

Services:  Consumer
13,278

 
3.3

Containers, Packaging & Glass
12,637

 
3.2

Capital Equipment
10,680

 
2.7

Automotive
10,375

 
2.6

Banking, Finance, Insurance & Real Estate
10,000

 
2.5

Aerospace & Defense
8,604

 
2.2

Consumer goods:  Non-durable
6,326

 
1.6

Consumer goods:  Durable
6,170

 
1.6

Environmental Industries
3,991

 
1.0

Metals & Mining
3,436

 
0.9

Forest Products & Paper
2,830

 
0.7

Media:  Broadcasting & Subscription
2,408

 
0.6

Chemicals, Plastics & Rubber
2,277

 
0.6

Media: Advertising, Printing & Publishing
1,715

 
0.4

Retail
532

 
0.1

Total
$
396,889

 
100.0
%
 

The following table shows the portfolio composition by industry grouping at fair value at September 30, 2018 (dollars in thousands):
 
Fair Value
 
Percentage
Services:  Business
$
95,021

 
14.5
%
Construction & Building
92,850

 
14.2

Multisector Holdings
78,371

 
12.0

High Tech Industries
65,662

 
10.0

Healthcare & Pharmaceuticals
46,020

 
7.0

Energy:  Oil & Gas
45,584

 
7.0

Aerospace & Defense
36,714

 
5.6

Hotel, Gaming & Leisure
32,487

 
5.0

Containers, Packaging & Glass
24,219

 
3.7

Banking, Finance, Insurance & Real Estate
22,587

 
3.4

Wholesale
18,515

 
2.8

Services:  Consumer
16,940

 
2.6

Consumer goods:  Durable
15,307

 
2.3

Automotive
13,027

 
2.0

Capital Equipment
12,944

 
2.0

Metals & Mining
8,814

 
1.3

Consumer goods:  Non-durable
6,252

 
0.9

Retail
5,802

 
0.9

Media:  Broadcasting & Subscription
5,703

 
0.9

Chemicals, Plastics & Rubber
4,078

 
0.6

Environmental Industries
3,283

 
0.5

Media: Advertising, Printing & Publishing
2,750

 
0.4

Forest Products & Paper
2,500

 
0.4

Total
$
655,430

 
100.0
%

The following table sets forth certain information as of September 30, 2019, for each portfolio company in which we had an investment. Other than these investments, our only formal relationship with our portfolio companies is the managerial assistance that we provide upon request and the board observer or participation rights we may receive in connection with our investment. 

8



Name of Portfolio Company
 
Sector
 
Security Owned by Us
 
Maturity
 
Interest Rate(1)
 
Principal Due at Maturity
 
Fair Value
 
% of Net Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1888 Industrial Services, LLC
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan A
 
9/30/2021
 
7.10
%
 
$
9,304,145

 
$
9,304,145

 
4.3
%
1888 Industrial Services, LLC
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan B
 
9/30/2021
 
10.10
%
 
23,547,567

 
5,886,892

 
2.7
%
1888 Industrial Services, LLC
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan C
 
6/30/2021
 
7.10
%
 
1,170,014

 
1,170,014

 
0.5
%
1888 Industrial Services, LLC
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan D
 
9/18/2020
 
7.10
%
 
224,456

 
224,456

 
0.1
%
1888 Industrial Services, LLC
 
Energy:  Oil & Gas
 
Revolving Credit Facility
 
9/30/2021
 
7.10
%
 
4,387,025

 
4,387,025

 
2.0
%
1888 Industrial Services, LLC
 
Energy:  Oil & Gas
 
Equity
 
 
 
 
 

 

 
0.0
%
Access Media Holdings, LLC
 
Media:  Broadcasting & Subscription
 
Senior Secured First Lien Term Loan
 
7/22/2020
 
10.00
%
 
10,036,355

 
2,509,089

 
1.2
%
Access Media Holdings, LLC
 
Media:  Broadcasting & Subscription
 
Preferred Equity Series A
 
 
 
 
 
1,600,000

 

 
0.0
%
Access Media Holdings, LLC
 
Media:  Broadcasting & Subscription
 
Preferred Equity Series AA
 
 
 
 
 
800,000

 

 
0.0
%
Access Media Holdings, LLC
 
Media:  Broadcasting & Subscription
 
Preferred Equity Series AAA
 
 
 
 
 
971,200

 
(100,800
)
 
0.0
%
Access Media Holdings, LLC
 
Media:  Broadcasting & Subscription
 
Equity
 
 
 
 
 

 

 
0.0
%
Alpine SG, LLC
 
High Tech Industries
 
Senior Secured First Lien Term Loan
 
11/16/2022
 
7.76
%
 
5,061,750

 
5,020,244

 
2.3
%
Alpine SG, LLC
 
High Tech Industries
 
Senior Secured First Lien Delayed Draw Term Loan
 
11/16/2022
 
7.76
%
 
2,444,350

 
2,424,306

 
1.1
%
Alpine SG, LLC
 
High Tech Industries
 
Revolving Credit Facility
 
11/16/2022
 
 
 

 
(8,200
)
 
0.0
%
American Dental Partners, Inc.
 
Healthcare & Pharmaceuticals
 
Senior Secured Second Lien Term Loan
 
9/25/2023
 
10.60
%
 
4,387,500

 
4,274,741

 
2.0
%
Autosplice, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan
 
6/17/2020
 
10.33
%
 
13,336,018

 
13,252,001

 
6.1
%
Avantor, Inc.
 
Wholesale
 
Equity
 
 
 
 
 

 
13,849,752

 
6.4
%
Barry's Bootcamp Holdings, LLC
 
Services:  Consumer
 
Senior Secured First Lien Term Loan
 
7/14/2022
 
8.10
%
 
7,609,499

 
7,609,499

 
3.5
%
Barry's Bootcamp Holdings, LLC
 
Services:  Consumer
 
Senior Secured First Lien Delayed Draw Term Loan
 
7/14/2022
 
8.83
%
 
1,268,251

 
1,268,251

 
0.6
%
Barry's Bootcamp Holdings, LLC
 
Services:  Consumer
 
Revolving Credit Facility
 
7/14/2022
 
8.26
%
 
4,400,000

 
4,400,000

 
2.0
%
Be Green Packaging, LLC
 
Containers, Packaging & Glass
 
Equity
 
 
 
 
 

 

 
0.0
%
Black Angus Steakhouses, LLC
 
Hotel, Gaming & Leisure
 
Senior Secured First Lien Term Loan
 
4/24/2020
 
11.26
%
 
7,341,518

 
7,307,747

 
3.4
%
Black Angus Steakhouses, LLC
 
Hotel, Gaming & Leisure
 
Senior Secured First Lien Delayed Draw Term Loan
 
4/24/2020
 
 
 

 
(4,107
)
 
0.0
%
Black Angus Steakhouses, LLC
 
Hotel, Gaming & Leisure
 
Revolving Credit Facility
 
4/24/2020
 
11.26
%
 
892,857

 
890,804

 
0.4
%
Caddo Investors Holdings LLC
 
Forest Products & Paper
 
Equity
 
 
 
10.25
%
 

 
2,830,051

 
1.3
%
Capstone Nutrition Development, LLC
 
Healthcare & Pharmaceuticals
 
Equity
 
 
 
 
 

 
1,383,319

 
0.6
%
CPI International, Inc.
 
Aerospace & Defense
 
Senior Secured Second Lien Term Loan
 
7/28/2025
 
9.29
%
 
3,010,025

 
2,937,483

 
1.4
%
Crow Precision Components, LLC
 
Aerospace & Defense
 
Equity
 
 
 
 
 

 
666,998

 
0.3
%

9



Name of Portfolio Company
 
Sector
 
Security Owned by Us
 
Maturity
 
Interest Rate(1)
 
Principal Due at Maturity
 
Fair Value
 
% of Net Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CT Technologies Intermediate Holdings, Inc.
 
Healthcare & Pharmaceuticals
 
Senior Secured Second Lien Term Loan
 
12/1/2022
 
11.04
%
 
7,500,000

 
6,345,750

 
2.9
%
DataOnline Corp.
 
High Tech Industries
 
Senior Secured First Lien Term Loan
 
7/31/2025
 
8.01
%
 
15,840,000

 
15,607,152

 
7.2
%
DataOnline Corp.
 
High Tech Industries
 
Revolving Credit Facility
 
7/31/2024
 
 
 

 
(18,900
)
 
0.0
%
Dermatologists of Southwestern Ohio, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan
 
4/20/2022
 
8.54
%
 
1,065,457

 
1,056,614

 
0.5
%
Dermatologists of Southwestern Ohio, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Delayed Draw Term Loan
 
4/20/2022
 
8.54
%
 
404,248

 
400,893

 
0.2
%
Dream Finders Homes, LLC
 
Construction & Building
 
Senior Secured First Lien Term Loan B
 
4/1/2020
 
10.00
%
 
1,613,455

 
1,613,455

 
0.7
%
Dream Finders Homes, LLC
 
Construction & Building
 
Preferred Equity
 
 
 
8.00
%
 
4,185,480

 
3,315,319

 
1.5
%
Dynamic Energy Services International LLC
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan
 
12/31/2021
 
15.71
%
 
11,124,375

 
1,264,841

 
0.6
%
Dynamic Energy Services International LLC
 
Energy:  Oil & Gas
 
Revolving Credit Facility
 
12/31/2019
 
12.00
%
 
545,103

 
545,103

 
0.2
%
Dynamic Energy Services International LLC
 
Energy:  Oil & Gas
 
Equity
 
 
 
 
 

 

 
0.0
%
FKI Security Group, LLC
 
Capital Equipment
 
Senior Secured First Lien Term Loan
 
3/30/2020
 
10.83
%
 
10,906,250

 
10,680,491

 
4.9
%
Footprint Acquisition, LLC
 
Services:  Business
 
Preferred Equity
 
 
 
8.75
%
 
7,281,664

 
7,281,664

 
3.4
%
Footprint Acquisition, LLC
 
Services:  Business
 
Equity
 
 
 
 
 

 
3,347,965

 
1.5
%
Freedom Powersports, LLC
 
Automotive
 
Senior Secured First Lien Term Loan
 
11/11/2019
 
12.33
%
 
9,450,000

 
9,450,000

 
4.4
%
Global Accessories Group, LLC
 
Consumer goods:  Non-durable
 
Equity
 
 
 
 
 

 
151,339

 
0.1
%
Imagine! Print Solutions, LLC
 
Media: Advertising, Printing & Publishing
 
Senior Secured Second Lien Term Loan
 
6/21/2023
 
10.80
%
 
3,000,000

 
1,715,100

 
0.8
%
Impact Sales, LLC
 
Services:  Business
 
Senior Secured First Lien Term Loan
 
6/27/2023
 
8.60
%
 
3,254,623

 
3,104,911

 
1.4
%
Impact Sales, LLC
 
Services:  Business
 
Senior Secured First Lien Delayed Draw Term Loan
 
6/27/2023
 
8.62
%
 
9,430,010

 
8,996,229

 
4.2
%
InterFlex Acquisition Company, LLC
 
Containers, Packaging & Glass
 
Senior Secured First Lien Term Loan
 
8/18/2022
 
11.04
%
 
13,259,175

 
12,637,320

 
5.8
%
JFL-NGS Partners, LLC
 
Construction & Building
 
Preferred Equity - A-2 Preferred
 
 
 
3.00
%
 
20,150,684

 
20,150,684

 
9.3
%
JFL-NGS Partners, LLC
 
Construction & Building
 
Preferred Equity - A-1 Preferred
 
 
 
3.00
%
 
2,607,661

 
2,607,661

 
1.2
%
JFL-NGS Partners, LLC
 
Construction & Building
 
Equity
 
 
 
 
 

 
19,096,371

 
8.8
%
JFL-WCS Partners, LLC
 
Environmental Industries
 
Preferred Equity - Class A Preferred
 
 
 
6.00
%
 
1,236,269

 
1,236,269

 
0.6
%
JFL-WCS Partners, LLC
 
Environmental Industries
 
Equity
 
 
 
 
 

 
2,755,041

 
1.3
%
Kemmerer Operations, LLC
 
Metals & Mining
 
Senior Secured First Lien Term Loan
 
6/21/2023
 
15.00
%
 
1,766,511

 
1,766,511

 
0.8
%
Kemmerer Operations, LLC
 
Metals & Mining
 
Senior Secured First Lien Delayed Draw Term Loan
 
6/21/2023
 
15.00
%
 
706,604

 
706,604

 
0.3
%
Kemmerer Operations, LLC
 
Metals & Mining
 
Equity
 
 
 
 
 

 
962,717

 
0.4
%
L & S Plumbing Partnership, Ltd.
 
Construction & Building
 
Senior Secured First Lien Term Loan
 
2/15/2022
 
9.62
%
 
5,345,754

 
5,345,754

 
2.5
%

10



Name of Portfolio Company
 
Sector
 
Security Owned by Us
 
Maturity
 
Interest Rate(1)
 
Principal Due at Maturity
 
Fair Value
 
% of Net Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lighting Science Group Corporation
 
Containers, Packaging & Glass
 
Warrants
 
2/19/2024
 
 
 

 

 
0.0
%
Manna Pro Products, LLC
 
Consumer goods:  Non-durable
 
Senior Secured First Lien Term Loan
 
12/8/2023
 
8.05
%
 
5,398,622

 
5,132,470

 
2.4
%
Manna Pro Products, LLC
 
Consumer goods:  Non-durable
 
Senior Secured First Lien Delayed Draw Term Loan
 
12/8/2023
 
8.04
%
 
1,096,209

 
1,042,166

 
0.5
%
MCC Senior Loan Strategy JV I LLC
 
Multisector Holdings
 
Equity
 
 
 
 
 

 
69,948,970

 
32.3
%
NVTN LLC
 
Hotel, Gaming & Leisure
 
Senior Secured First Lien Term Loan
 
11/9/2020
 
6.04
%
 
4,255,990

 
4,255,990

 
2.0
%
NVTN LLC
 
Hotel, Gaming & Leisure
 
Senior Secured First Lien Term Loan B
 
11/9/2020
 
11.29
%
 
13,436,693

 
7,152,352

 
3.3
%
NVTN LLC
 
Hotel, Gaming & Leisure
 
Senior Secured First Lien Term Loan C
 
11/9/2020
 
14.04
%
 
8,747,134

 

 
0.0
%
NVTN LLC
 
Hotel, Gaming & Leisure
 
Equity
 
 
 
 
 

 

 
0.0
%
Path Medical, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan
 
10/11/2021
 
11.60
%
 
9,534,512

 
8,845,167

 
4.1
%
Path Medical, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan A
 
10/11/2021
 
11.60
%
 
3,284,977

 
3,047,473

 
1.4
%
Path Medical, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan C
 
10/11/2021
 
12.26
%
 
344,463

 
344,291

 
0.2
%
Path Medical, LLC
 
Healthcare & Pharmaceuticals
 
Warrants
 
1/9/2027
 
 
 

 

 
0.0
%
Point.360
 
Services:  Business
 
Senior Secured First Lien Term Loan
 
7/8/2020
 
8.10
%
 
2,563,464

 
590,366

 
0.3
%
Quantum Spatial, Inc.
 
Aerospace & Defense
 
Senior Secured First Lien Term Loan
 
9/5/2024
 
7.32
%
 
5,000,000

 
5,000,000

 
2.3
%
RateGain Technologies, Inc.
 
Services:  Business
 
Unsecured Debt
 
7/31/2020
 
 
 
761,905

 
761,905

 
0.4
%
RateGain Technologies, Inc.
 
Services:  Business
 
Unsecured Debt
 
7/31/2021
 
 
 
761,905

 
761,905

 
0.4
%
Redwood Services Group, LLC
 
Services:  Business
 
Revolving Credit Facility
 
6/6/2023
 
8.12
%
 
875,000

 
860,475

 
0.4
%
Sendero Drilling Company, LLC
 
Energy:  Oil & Gas
 
Unsecured Debt
 
8/31/2021
 
8.00
%
 
850,000

 
850,000

 
0.4
%
Seotowncenter, Inc.
 
Services:  Business
 
Equity
 
 
 
 
 

 
1,236,301

 
0.6
%
SFP Holding, Inc.
 
Construction & Building
 
Senior Secured First Lien Term Loan
 
9/1/2022
 
8.35
%
 
4,820,605

 
4,775,291

 
2.2
%
SFP Holding, Inc.
 
Construction & Building
 
Senior Secured First Lien Delayed Draw Term Loan
 
9/1/2022
 
8.51
%
 
1,871,234

 
1,853,644

 
0.9
%
SFP Holding, Inc.
 
Construction & Building
 
Equity
 
 
 
 
 

 
849,545

 
0.4
%
Ship Supply Acquisition Corporation
 
Services:  Business
 
Senior Secured First Lien Term Loan
 
7/31/2020
 
10.26
%
 
7,433,740

 

 
0.0
%
SMART Financial Operations, LLC
 
Retail
 
Equity
 
 
 
 
 

 
532,000

 
0.2
%
Stancor, Inc.
 
Services:  Business
 
Equity
 
 
 
 
 

 
274,367

 
0.1
%
Starfish Holdco, LLC
 
High Tech Industries
 
Senior Secured Second Lien Term Loan
 
8/18/2025
 
11.04
%
 
2,000,000

 
1,977,000

 
0.9
%
TPG Plastics LLC
 
Chemicals, Plastics & Rubber
 
Senior Secured Second Lien Term Loan
 
12/31/2019
 
15.00
%
 
352,984

 
352,984

 
0.2
%
TPG Plastics LLC
 
Chemicals, Plastics & Rubber
 
Unsecured Debt
 
 
 
10.00
%
 
278,810

 
278,810

 
0.1
%

11



Name of Portfolio Company
 
Sector
 
Security Owned by Us
 
Maturity
 
Interest Rate(1)
 
Principal Due at Maturity
 
Fair Value
 
% of Net Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TPG Plastics LLC
 
Chemicals, Plastics & Rubber
 
Equity
 
 
 
 
 

 
1,644,752

 
0.8
%
URT Acquisition Holdings Corporation
 
Services:  Business
 
Senior Secured Second Lien Term Loan
 
5/2/2022
 
10.26
%
 
18,905,403

 
18,905,403

 
8.7
%
URT Acquisition Holdings Corporation
 
Services:  Business
 
Preferred Equity
 
 
 
12.00
%
 
6,552,890

 
4,914,667

 
2.3
%
URT Acquisition Holdings Corporation
 
Services:  Business
 
Equity
 
 
 
 
 

 

 
0.0
%
US Multifamily, LLC
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan
 
6/17/2021
 
10.00
%
 
6,670,000

 
6,670,000

 
3.1
%
US Multifamily, LLC
 
Banking, Finance, Insurance & Real Estate
 
Equity
 
 
 
 
 

 
3,330,000

 
1.5
%
Velocity Pooling Vehicle, LLC
 
Automotive
 
Senior Secured First Lien Term Loan
 
4/28/2023
 
13.10
%
 
894,050

 
789,715

 
0.4
%
Velocity Pooling Vehicle, LLC
 
Automotive
 
Equity
 
 
 
 
 

 
20,893

 
0.0
%
Velocity Pooling Vehicle, LLC
 
Automotive
 
Warrants
 
3/30/2028
 
 
 

 
24,983

 
0.0
%
Walker Edison Furniture Company LLC
 
Consumer goods:  Durable
 
Senior Secured First Lien Term Loan
 
9/26/2024
 
8.83
%
 
3,611,900

 
3,611,900

 
1.7
%
Walker Edison Furniture Company LLC
 
Consumer goods:  Durable
 
Equity
 
 
 
 
 

 
2,557,657

 
1.2
%
Watermill-QMC Midco, Inc.
 
Automotive
 
Equity
 
 
 
 
 

 
88,989

 
0.0
%

(1)
All interest is payable in cash and/or PIK, and all London Interbank Offering Rate (“LIBOR”) represents 1 and 3 Month LIBOR unless otherwise indicated. For each debt investment, we have provided the current interest rate as of September 30, 2019.

As of September 30, 2019, our income-bearing investment portfolio, which represented 80.0% of our total portfolio, had a weighted average yield based upon cost of our portfolio investments of approximately 9.5%, and 85.2% of our income-bearing investment portfolio bore interest based on floating rates, such as LIBOR, while 14.8% of our income-bearing investment portfolio bore interest at fixed rates. As of September 30, 2019, the weighted average yield based upon cost of our total portfolio was approximately 5.2%. The weighted average yield of our total portfolio does not represent the total return to our stockholders. The weighted average yield on income producing investments is computed based upon a combination of the cash flows to date and the contractual interest payments, principal amortization and fee notes due at maturity without giving effect to closing fees received, base management fees, incentive fees or general fund related expenses. For each floating rate loan, the projected fixed-rate equivalent coupon rate used to forecast the interest cash flows was calculated by adding the interest rate spread specified in the relevant loan document to the fixed-rate equivalent floating rate, duration-matched to the specific loan, adjusted by the floating rate floor and/or cap in place on that loan.

Overview of Portfolio Companies

Set forth below is a brief description of the business of our portfolio companies as of September 30, 2019:
Portfolio Company
 
Brief Description of Portfolio Company
 
 
 
1888 Industrial Services, LLC
 
1888 Industrial Services, LLC (“1888”) provides field support services to oil and gas independent producers, drilling companies and midstream companies in the Denver-Julesburg Basin, with headquarters in the heart of the Wattenberg region in Greeley, CO. 1888 builds, repairs, modifies and maintains oil and gas production equipment, sites, wells and pipelines.
Access Media Holdings, LLC
 
Access Media Holdings, LLC (d/b/a Access Media 3, Inc.) headquartered in Oak Brook, IL, is a triple-play provider of digital satellite television, high speed internet and voice services to the residential multi-dwelling unit market in the United States.
Alpine SG, LLC
 
Alpine SG, LLC ("Alpine SG") is an aggregator of niche, vertically oriented software businesses. Each acquired business operates independently with oversight from the Alpine SG management team. The platform at close includes the following five companies: CSF, Aerialink, Minute Menu, Bill4Time, and Exym.
American Dental Partners, Inc.
 
American Dental Partners, Inc., founded in 1995 and headquartered in Wakefield, MA, provides dental groups with critical administrative functions, enabling dentists to focus on clinical care.

12



Portfolio Company
 
Brief Description of Portfolio Company
 
 
 
Autosplice, Inc.
 
Autosplice, Inc. (“Autosplice”), founded in 1954 and headquartered in San Diego, CA, is a global supplier of highly engineered, mission-critical electrical interconnectors to OEMs and Tier 1 suppliers. Autosplice serves a wide variety of end-markets, providing the automotive, industrial, telecommunications, medical, transportation, consumer, and other applications.
Avantor, Inc.
 
Avantor, Inc. is a global provider of products and services to the biopharma, healthcare, education & government, and advanced technologies & applied materials industries.
Barry's Bootcamp Holdings, LLC
 
Barry’s Bootcamp Holdings, LLC, founded in 1998 and headquartered in Los Angeles, CA, is a leading boutique fitness studio operator offering hour-long workouts that focus on high-intensity interval training, cardio, and strength training.
Be Green Packaging, LLC
 
Be Green Packaging, LLC, founded in 2007 and headquartered in Thousand Oaks, CA, designs and manufactures sustainable, tree-free, molded fiber products and packaging for the food service and consumer packaged goods end markets.
Black Angus Steakhouses, LLC
 
Black Angus Steakhouses, LLC, founded in 1964 and headquartered in Los Altos, CA, operates restaurants across six states including California, Arizona, Alaska, New Mexico, Washington, and Hawaii.
Caddo Investors Holdings 1 LLC
 
Caddo Investors Holdings 1 LLC (d/b/a TexMark Timber Treasury, L.P.), consists of ~1.1 million acres of high quality and relatively young timber lands located in East Texas.
Capstone Nutrition Development, LLC
 
Capstone Nutrition Development, LLC ("Capstone") which is headquartered in Ogden, UT is a pure-play developer and manufacturer in the nutrition industry. Since 1992, Capstone has been developing, producing, and packaging capsule, tablet, and powder products for a variety of customers in the United States and Internationally.
CPI International, Inc.
 
CPI International, Inc., headquartered in Palo Alto, CA. develops and manufactures microwave, radio frequency, power, and control products for critical communications, defense and medical applications.
Crow Precision Components, LLC
 
Crow Precision Components, LLC is a Fort Worth, TX based forger of aluminum and steel used for mission critical aircraft components, among other end markets.
CT Technologies Intermediate Holdings, Inc.
 
CT Technologies Intermediate Holdings, Inc., founded in 1976 and located in Alpharetta, GA, is a provider of outsourced release-of-information services, which involves the interaction between healthcare providers, who possess protected medical information, and authorized requestors, who are entitled to receive that information for various commercial, legal, or personal purposes.
DataOnline Corp.
 
DataOnline Corp. ("DataOnline") is a global provider of M2M solutions specifically for the monitoring of both fixed and mobile remote industrial assets. DataOnline specializes in robust and reliable devices & sensors, remote data collection, global wireless communications & web-based applications.
Dermatologists of Southwestern Ohio, LLC
 
Dermatologists of Southwestern Ohio, LLC, headquartered in Dayton, OH, serves dermatology clinics throughout Ohio.
Dream Finders Homes, LLC
 
Dream Finders Homes, LLC ("DFH"), founded in 2009 and headquartered in Jacksonville, FL, is a residential homebuilder currently operating in the greater Jacksonville, FL market. DFH builds both single-family homes and townhomes, and is developing and building units in a number of attractive communities across Clay County, St. John’s County, and Nassau County.
Dynamic Energy Services International LLC
 
Dynamic Energy Services International LLC, headquartered in Wayne, PA, is a provider of full-service fabrication, construction and maintenance services to a broad range of worldwide markets including oil and gas, industrial and petrochemical markets.
FKI Security Group, LLC
 
FKI Security Group, LLC, founded in 1951 and headquartered in New Albany, IN, is a global manufacturer and national service provider of security, safety and asset protection products used in a variety of industries, including the financial services, government, retail, education, and medical end markets.
Footprint Acquisition, LLC
 
Footprint Acquisition, LLC, headquartered in Lisle, IL, is a provider of in store merchandising and logistics solutions to major retailers and consumer packaged goods manufacturers.
Freedom Powersports, LLC
 
Freedom Powersports, LLC, headquartered in Weatherford, TX and founded in 2013, is a powersports dealer with locations in Texas, Georgia and Alabama.
Global Accessories Group, LLC
 
Global Accessories Group, LLC, headquartered in New York City, designs, manufactures, and sells custom-themed jewelry and accessory collections. These collections are tailored to leading retailers in the specialty, department store, off-price and juniors markets.
The Imagine Group, LLC
 
The Imagine Group, LLC, founded in 1988 and headquartered in Minneapolis, MN, is a provider of in-store marketing solutions in North America providing comprehensive in-store, point-of-purchase / point of sale marketing campaigns.
Impact Group, LLC
 
Impact Group, LLC is a Boise, Idaho based sales and marketing agency providing outsourced sales, marketing and merchandising services to consumer packaged goods manufacturers.
InterFlex Acquisition Company, LLC
 
InterFlex Acquisition Company, LLC, headquartered in Wilkesboro, NC, is a comprehensive provider of specialized printed and converted flexible packaging solutions for food and consumer packaged goods producers throughout the USA and UK.
JFL-NGS Partners, LLC
 
JFL-NGS Partners, LLC (d/b/a NorthStar Group Services, Inc.), is a one-stop provider of demolition and environmental remediation services including demolition, asset & scrap recovery, abatement of asbestos, lead, and mold, and disaster response.
JFL-WCS Partners, LLC
 
JFL-WCS Partners, LLC (d/b/a Waste Control Specialists LLC), headquartered in Dallas, Texas, operates a state-of-the-art facility for the processing, treatment, storage and disposal of LLRW, hazardous waste, and mixed hazardous and radioactive wastes.
Kemmerer Operations, LLC
 
Kemmerer Operations, LLC, location in Wyoming, is a producer of high-value thermal coal and surface-mined coal.
L & S Plumbing Partnership, Ltd.
 
L & S Plumbing Partnership, Ltd., founded in 1984 and headquartered in Richardson, TX, is a provider of plumbing, electrical and HVAC installation services for new single family home development in Texas.

13



Portfolio Company
 
Brief Description of Portfolio Company
 
 
 
Lighting Science Group Corporation
 
Lighting Science Group Corporation (“LSG”), headquartered in Satellite Beach, FL, is one of the world’s light emitting diode (“LED”) lighting technology companies. LSG designs, develops and markets general illumination products that exclusively use LEDs as their light source. The LSG’s broad product portfolio includes LED-based retrofit lamps (replacement bulbs) used in existing light fixtures as well as purpose-built LED-based luminaires (light fixtures).
Manna Pro Products, LLC
 
Manna Pro Products, LLC (“Manna Pro”), founded in 1985 and headquartered in Chesterfield, MO, is a manufacturer and distributor of pet nutrition and care products. Manna Pro targets five core animal end markets: dog & cat, horse, backyard chicken, other backyard pets and deer.
MCC Senior Loan Strategy JV I LLC
 
MCC Senior Loan Strategy JV I LLC commenced operations on July 15, 2015 and generates current income and capital appreciation by investing primarily in the debt of privately-held middle market companies in the United States with a focus on senior secured first lien term loans (see Note 3 "Investments" in Item 8. "Consolidated Financial Statements and Supplementary Data").
NVTN LLC
 
NVTN LLC (d/b/a “Dick’s Last Resort”), established in 1985 and headquartered in Nashville, TN, operates company owned restaurants and earns a licensing fee on licensed restaurants located throughout the United States. Dick’s Last Resort has developed an identifiable brand for its unique casual dining restaurant concept that targets tourists and business travelers in high foot traffic locations.
Path Medical, LLC
 
Path Medical, LLC, founded in 1993, is a provider of fully-integrated acute trauma treatment and diagnostic imaging solutions to patients injured in automobile and non-work related accidents throughout Florida.
Point.360
 
Point.360, headquartered in Los Angeles, CA is a full-service content management company with several facilities strategically located throughout Los Angeles supporting all aspects of postproduction.
Quantum Spatial, Inc.
 
Quantum Spatial, Inc., founded in 1969 and headquartered in Sheboygan, Wisconsin, collects and analyzes geospatial data and imagery for a variety of terrain mapping use cases by commercial, state/regional and federal customers.
RateGain Technologies, Inc.
 
RateGain Technologies, Inc. provides hospitality and travel technology solutions for revenue management decision support, rate intelligence, electronic distribution and brand engagement helping customers across the world in streamlining their operations and sales.
Redwood Services Group, LLC
 
Redwood Services Group, LLC is a group of regional IT managed service providers that provide fully outsourced IT services to small and medium sized businesses.
Sendero Drilling Company, LLC
 
Sendero Drilling Company, LLC, founded in 2010 as a wholly owned subsidiary of Pioneer Natural Resources, is a land drilling contractor headquartered in San Angelo, TX.
Seotowncenter, Inc.
 
Seotowncenter, Inc., founded in 2009 and based in Lehi, UT, is a tech-enabled business services company that delivers white label search engine optimization and local search and digital campaign fulfillment to the small and midsize business market.
SFP Holding, Inc.
 
SFP Holding, Inc., founded in 1999 and headquartered in St. Paul, MN, is a provider of fire and life safety security systems.
Ship Supply Acquisition Corporation
 
Ship Supply Acquisition Corporation, founded in 1968 and headquartered in Miami, FL, is a logistics services business that provides products and maritime services for commercial and military marine vessels through four segments: (i) global logistics services, (ii) comprehensive husbandry services, (iii) full service vessel management to large passenger-carrying vessels, and (iv) fuel broker services.
SMART Financial Operations, LLC
 
SMART Financial Operations, LLC, headquartered in Orlando, FL, is a specialty retail platform initially comprised of three distinct retail pawn store chains and a pawn industry consulting firm.
Stancor, Inc.
 
Stancor, Inc., founded in 1985 and based out of Monroe, CT, is a designer and manufacturer of electric submersible pumps, control, accessories, and parts.
Starfish Holdco, LLC
 
Starfish Holdco, LLC (d/b/a Syncsort) through its subsidiaries will be a global software company specializing in Big Data, high speed sorting products, data protection, data quality and integration software and services, for mainframe, power systems and open system environments to enterprise customers.
TPG Plastics LLC
 
TPG Plastics LLC ("TPG"), founded in 1997 and based in Willowbrook, IL, is a full-service manufacturer of blow molded plastic components and systems for a targeted set of growing applications and end markets. TPG operates two complementary businesses: a custom business serving original equipment manufacturer customers and a proprietary line of consumer products sold through retailers and distributors.
URT Acquisition Holdings Corporation
 
URT Acqusition Holdings Corporation (d/b/a United Road Towing or “URT”) headquartered in Moneka, IL is an integrated towing company in the United States. URT provides a complete range of towing, vehicle storage and vehicle auction services.
US Multifamily, LLC
 
US Multifamily, LLC (“US Multifamily”) is a real estate private equity firm headquartered in Atlantic Beach, FL, with offices in Atlanta, Georgia and Charlotte, North Carolina. US Multifamily is focused on distressed multifamily assets primarily located in the Southeastern region of the United States.
Velocity Pooling Vehicle, LLC
 
Velocity Pooling Vehicle, LLC, headquartered in Indianapolis, IN, is a manufacturer comprised of a group of highly recognizable brands serving nearly all product categories in the powersports aftermarket industry and a distributor of proprietary and sourced brands to a variety of dealers and retailers.
Walker Edison Furniture Company LLC
 
Walker Edison Furniture Company LLC ("Walker Edison") is an e-commerce furniture platform exclusively selling through the websites of top online retailers. Walker Edison operates a data-driven business model to sell a variety of home furnishings in the discount category including TV stands, bedroom furniture, chairs & tables, desks and other.
Watermill-QMC Midco, Inc.
 
Watermill-QMC Midco, Inc. (d/b/a Quality Metalcraft, Inc.), founded in 1964 and headquartered in Livonia, MI, is a provider of complex assemblies for specialty automotive production, prototype and factory assist applications.

THE ADVISER


14



MCC Advisors serves as our investment adviser and is registered with the SEC as an investment adviser under the Advisers Act. Subject to the overall supervision of our board of directors, MCC Advisors manages the day-to-day operations of, and provides investment advisory and management services to us pursuant to an investment management agreement by and between the Company and MCC Advisors.

Investment Management Agreement

Under the terms of our investment management agreement, MCC Advisors:

determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;

identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and

executes, closes, monitors and administers the investments we make, including the exercise of any voting or consent rights.

MCC Advisors’ services under the investment management agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired.

Pursuant to our investment management agreement, we pay MCC Advisors a fee for investment advisory and management services consisting of a base management fee and a two-part incentive fee.

On December 3, 2015, MCC Advisors recommended and, in consultation with the Board, agreed to reduce fees under the investment management agreement. Beginning January 1, 2016, the base management fee was reduced to 1.50% on gross assets above $1 billion. In addition, MCC Advisors reduced its incentive fee from 20% on pre-incentive fee net investment income over an 8% hurdle, to 17.5% on pre-incentive fee net investment income over a 6% hurdle. Moreover, the revised incentive fee includes a netting mechanism and is subject to a rolling three-year look back from January 1, 2016 forward. Under no circumstances will the new fee structure result in higher fees to MCC Advisors than fees under the prior investment management agreement.

The following discussion of our base management fee and two-part incentive fee reflects the terms of the fee waiver agreement executed by MCC Advisors on February 8, 2016 (the “Fee Waiver Agreement”). The terms of the Fee Waiver Agreement are effective as of January 1, 2016, and are a permanent reduction in the base management fee and incentive fee on net investment income payable to MCC Advisors for the investment advisory and management services it provides under the investment management agreement. The Fee Waiver Agreement does not change the second component of the incentive fee, which is the incentive fee on capital gains.

Base Management Fee

For providing investment advisory and management services to us, MCC Advisors receives a base management fee. The base management fee is calculated at an annual rate of 1.75% (0.4375% per quarter) of up to $1.0 billion of the Company’s gross assets and 1.50% (0.375% per quarter) of any amounts over $1.0 billion of the Company’s gross assets, and is payable quarterly in arrears. The base management fee will be calculated based on the average value of the Company’s gross assets at the end of the two most recently completed calendar quarters and will be appropriately pro-rated for any partial quarter. On May 4, 2018, MCC Advisors voluntarily elected to waive $380,000 of the base management fee payable for the quarter ended March 31, 2018, which is shown on the Consolidated Statements of Operations.

Incentive Fee

The incentive fee has two components, as follows:

Incentive Fee Based on Income

The first component of the incentive fee is payable quarterly in arrears and is based on our pre-incentive fee net investment income earned during the calendar quarter for which the incentive fee is being calculated. MCC Advisors is entitled to receive the incentive fee on net investment income from us if our Ordinary Income (as defined below) exceeds a quarterly “hurdle rate” of 1.5%. The hurdle amount is calculated after making appropriate adjustments to the Company’s net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter.

Beginning with the calendar quarter that commenced on January 1, 2016, the incentive fee on net investment income is determined and paid quarterly in arrears at the end of each calendar quarter by reference to our aggregate net investment income, as adjusted as described below, from the calendar quarter then ending and the eleven preceding calendar quarters (or if shorter, the number of quarters that have occurred since January 1, 2016). We refer to such period as the “Trailing Twelve Quarters.”

The hurdle amount for the incentive fee on net investment income is determined on a quarterly basis, and is equal to 1.5% multiplied by the Company’s net asset value at the beginning of each applicable calendar quarter comprising the relevant Trailing Twelve Quarters. The hurdle amount is calculated after making appropriate adjustments to the Company’s net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter. The incentive fee for any partial period will be appropriately prorated. Any incentive fee on net investment income will be paid to MCC Advisors on a quarterly basis, and will be based on the amount by which (A) aggregate net investment income (“Ordinary

15



Income”) in respect of the relevant Trailing Twelve Quarters exceeds (B) the hurdle amount for such Trailing Twelve Quarters. The amount of the excess of (A) over (B) described in this paragraph for such Trailing Twelve Quarters is referred to as the “Excess Income Amount.” For the avoidance of doubt, Ordinary Income is net of all fees and expenses, including the reduced base management fee but excluding any incentive fee on Pre-Incentive Fee net investment income or on the Company’s capital gains.

Quarterly Incentive Fee Based on Income

The incentive fee on net investment income for each quarter is determined as follows:

No incentive fee on net investment income is payable to MCC Advisors for any calendar quarter for which there is no Excess Income Amount;

100% of the Ordinary Income, if any, that exceeds the hurdle amount, but is less than or equal to an amount, which we refer to as the “Catch-up Amount,” determined as the sum of 1.8182% multiplied by the Company’s net assets at the beginning of each applicable calendar quarter, as adjusted as noted above, comprising the relevant Trailing Twelve Quarters is included in the calculation of the incentive fee on net investment income; and

17.5% of the Ordinary Income that exceeds the Catch-up Amount is included in the calculation of the incentive fee on net investment income.

The amount of the incentive fee on net investment income that will be paid to MCC Advisors for a particular quarter will equal the excess of the incentive fee so calculated minus the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters but not in excess of the Incentive Fee Cap (as described below).

The incentive fee on net investment income that is paid to MCC Advisors for a particular quarter is subject to a cap (the “Incentive Fee Cap”). The Incentive Fee Cap for any quarter is an amount equal to (a) 17.5% of the Cumulative Net Return (as defined below) during the relevant Trailing Twelve Quarters minus (b) the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters.

“Cumulative Net Return” means (x) the Ordinary Income in respect of the relevant Trailing Twelve Quarters minus (y) any Net Capital Loss (as described below), if any, in respect of the relevant Trailing Twelve Quarters. If, in any quarter, the Incentive Fee Cap is zero or a negative value, the Company will pay no incentive fee on net investment income to MCC Advisors for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is a positive value but is less than the incentive fee on net investment income that is payable to MCC Advisors for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Company will pay an incentive fee on net investment income to MCC Advisors equal to the Incentive Fee Cap for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is equal to or greater than the incentive fee on net investment income that is payable to MCC Advisors for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Company will pay an incentive fee on net investment income to MCC Advisors, calculated as described above, for such quarter without regard to the Incentive Fee Cap.

“Net Capital Loss” in respect of a particular period means the difference, if positive, between (i) aggregate capital losses, whether realized or unrealized, and dilution to the Company’s net assets due to capital raising or capital actions, in such period and (ii) aggregate capital gains, whether realized or unrealized and accretion to the Company’s net assets due to capital raising or capital action, in such period.

Dilution to the Company’s net assets due to capital raising is calculated, in the case of issuances of common stock, as the amount by which the net asset value per share was adjusted over the transaction price per share, multiplied by the number of shares issued. Accretion to the Company’s net assets due to capital raising is calculated, in the case of issuances of common stock (including issuances pursuant to our dividend reinvestment plan), as the excess of the transaction price per share over the amount by which the net asset value per share was adjusted, multiplied by the number of shares issued. Accretion to the Company’s net assets due to other capital action is calculated, in the case of repurchases by the Company of its own common stock, as the excess of the amount by which the net asset value per share was adjusted over the transaction price per share multiplied by the number of shares repurchased by the Company.

For the avoidance of doubt, the purpose of the new incentive fee calculation under the Fee Waiver Agreement is to permanently reduce aggregate fees payable to MCC Advisors by the Company, effective as of January 1, 2016. In order to ensure that the Company will pay MCC Advisors lesser aggregate fees on a cumulative basis, as calculated beginning January 1, 2016, we will, at the end of each quarter, also calculate the base management fee and incentive fee on net investment income owed by the Company to MCC Advisors based on the formula in place prior to January 1, 2016. If, at any time beginning January 1, 2016, the aggregate fees on a cumulative basis, as calculated based on the formula in place after January 1, 2016, would be greater than the aggregate fees on a cumulative basis, as calculated based on the formula in place prior to January 1, 2016, MCC Advisors shall only be entitled to the lesser of those two amounts.

The second component of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment management agreement as of the termination date) and equals 20.0% of our cumulative aggregate realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the investment adviser.

Under GAAP, the Company calculates the second component of the incentive fee as if the Company had realized all assets at their fair values as of the reporting date. Accordingly, when applicable, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional capital gains incentive fee is subject to the performance of investments until there is a realization event, the amount of the provisional capital gains incentive fee accrued at a reporting date may vary from the capital gains incentive that is ultimately realized and the differences could be material.

For the year ended September 30, 2019, the Company incurred net base management fees payable to MCC Advisors of $11.2 million and did not incur any incentive fees related to pre-incentive fee net investment income.

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The following is a graphical representation of the calculation of the income-related portion of the incentive fee effective as of January 1, 2016 pursuant to the Fee Waiver Agreement:
 
Pre-incentive Fee Net Investment Income
(Expressed as a Percentage of the Value of Net Assets)

incentivefeegrapha06.jpg

Examples of Quarterly Incentive Fee Calculation

Example 1: Income Related Portion of Incentive Fee:
 
Quarter 1
Net Asset Value at the start of Quarter 1 = $100.0 million (1 million shares)
Quarter 1 Ordinary Income = $5.0 million
Quarter 1 Issue 1 million shares at $101 per share = $1.0 million
Quarter 1 Capital Gain = $1.0 million
Quarter 1 Hurdle Amount = $1.5 million (calculated based on a quarterly 1.5% hurdle rate)
Quarter 1 Catchup Amount = $1.81818 million (calculated based on a quarterly 1.81818% rate)
Quarter 2
Net Asset Value at the start of Quarter 2 = $100.0 million (1 million shares)
Quarter 2 Ordinary Income = $1.5 million
Quarter 2 Capital Gain = $1.0 million
Quarter 2 Hurdle Amount = $1.5 million (calculated based on a quarterly 1.5% hurdle rate)
Quarter 2 Catchup Amount = $1.81818 million (calculated based on a quarterly 1.81818% rate)
Quarter 3
Net Asset Value at the start of Quarter 3 = $100.0 million (1 million shares)
Quarter 3 Ordinary Income = $4.0 million
Quarter 3 Repurchase 500,000 shares at $99 per share = $0.50 million
Quarter 3 Capital Loss = ($8.0) million
Quarter 3 Hurdle Amount = $1.5 million (calculated based on a quarterly 1.5% hurdle rate)
Quarter 3 Catchup Amount = $1.81818 million (calculated based on a quarterly 1.81818% rate)
Quarter 4
Net Asset Value at the start of Quarter 4 = $100.0 million (1 million shares)
Quarter 4 Ordinary Income = $4.0 million
Quarter 4 Capital Gain = $3.0 million
Quarter 4 Hurdle Amount = $1.5 million (calculated based on a quarterly 1.5% hurdle rate)
Quarter 4 Catchup Amount = $1.81818 million (calculated based on a quarterly 1.81818% rate)

Determination of Incentive Fee Based on Income:
 
In Quarter 1, the Ordinary Income of $5.0 million exceeds the Hurdle Amount of $1.50 million and the Catchup Amount of $1.8182 million. There is $2 million of Net Capital Gains, including a capital gain of $1 million and accretion to the Company’s net asset value of $1 million as a result of issuing shares at a transaction price that exceeds the net asset value per share. As a result, an Incentive Fee based on income of $875,000 ((100% of $318,182) + (17.5% of $3,181,818)) is payable to our investment adviser for Quarter 1.
 
In Quarter 2, the Quarter 2 Ordinary Income of $1.50 million does not exceed the Quarter 2 Hurdle Amount of $1.50 million, but the aggregate Ordinary Income for the Trailing Twelve Quarters of $6.50 million exceeds the aggregate Hurdle Amount for the Trailing Twelve Quarters of $3.0 million and the aggregate Catchup Amount for the Trailing Twelve Quarters of $3.6364 million. There are no Net Capital Losses. As a result, an Incentive Fee based on income of $262,500 ($1,137,500 (100% of $636,364) + (17.5% of 2,863,636) minus $875,000 paid in Quarter 1) would be payable to our investment adviser for Quarter 2.
 
In Quarter 3, the aggregate Ordinary Income of the Trailing Twelve Quarters of $10.5 million exceeds the aggregate Hurdle Amount for the Trailing Twelve Quarters of $4.5 million and the aggregate Catchup Amount for the Trailing Twelve Quarters of $5.4545 million. However, there is an aggregate

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Net Capital Loss of ($4.5) million for the Trailing Twelve Quarters. As a result, the Incentive Fee Cap would apply. The Incentive Fee Cap equals $(87,500), calculated as follows:
 
(17.5% x ($10.5 million minus $4.5 million)) minus $1,137,500 paid in Quarters 1 and 2. Because the Incentive Fee Cap is a negative value, there is no Incentive Fee based on income payable to the adviser for Quarter 3.
 
In Quarter 4, the aggregate Ordinary Income of the Trailing Twelve Quarters of $14.50 million exceeds the aggregate Hurdle Amount for the Trailing Twelve Quarters of $6.0 million and the aggregate Catchup Amount for the Trailing Twelve Quarters of $7.2727 million. The calculation of the Incentive Fee based on income would be $1.40 million ($2,537,500 (100% of $1,272,727) + (17.5% of $7,227,272) minus $1,137,500 million paid in Quarters 1 and 2). However, there is an aggregate Net Capital Loss of $(1.50) million for the Trailing Twelve Quarters. As a result, the Incentive Fee Cap would apply. The Incentive Fee Cap equals $1,137,500 calculated as follows:
 
(17.5% X ($14.5 million minus $1.5 million)) minus $1,137,500. Because the Incentive Fee Cap is positive but less than the Incentive Fee based on Income of $1.40 million calculated prior to the Incentive Fee Cap, an Incentive Fee based on Income of $1,137,500 is payable to our investment adviser for Quarter 4.
 
Example 2: Capital Gains Portion of Incentive Fee:
 
Alternative 1:
Assumptions

Year 1:  $20 million investment made in Company A (“Investment A”), and $30 million investment made in Company B (“Investment B”)
Year 2:  Investment A sold for $50 million and fair market value, or FMV, of Investment B determined to be $32 million
Year 3:  FMV of Investment B determined to be $25 million
Year 4:  Investment B sold for $31 million
The capital gains portion of the incentive fee would be:
Year 1:  None
Year 2:  Capital gains incentive fee of $6.0 million ($30 million realized capital gains on sale of Investment A multiplied by 20.0%)
Year 3:  None; $5.0 million (20.0% multiplied by ($30 million cumulative capital gains less $5 million cumulative capital depreciation)) less $6.0 million (previous capital gains fee paid in Year 2) (the $1.0 million difference would not be deducted from future capital gains incentive fees)
Year 4:  Capital gains incentive fee of $200,000; $6.2 million ($31 million cumulative realized capital gains multiplied by 20.0%) less $6.0 million (capital gains fee paid in Year 2)

Alternative 2:
Assumptions
 
Year 1:  $20 million investment made in Company A (“Investment A”), $30 million investment made in Company B (“Investment B”) and $25 million investment made in Company C (“Investment C”)
Year 2:  Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25 million
Year 3:  FMV of Investment B determined to be $27 million and Investment C sold for $30 million
Year 4:  FMV of Investment B determined to be $35 million
Year 5:  Investment B sold for $20 million
The capital gains portion of the incentive fee would be:
Year 1:  None
Year 2:  Capital gains incentive fee of $5.0 million; 20.0% multiplied by $25 million ($30 million realized capital gains on Investment A less $5 million unrealized capital depreciation on Investment B)
Year 3:  Capital gains incentive fee of $1.4 million; $6.4 million (20.0% multiplied by $32 million ($35 million cumulative realized capital gains less $3 million unrealized capital depreciation on Investment B)) less $5.0 million capital gains fee received in Year 2
Year 4:  None
Year 5:  None; $5.0 million of capital gains incentive fee (20.0% multiplied by $25 million (cumulative realized capital gains of $35 million less realized capital losses of $10 million)) less $6.4 million cumulative capital gains fee paid in Year 2 and Year 3 (the $1.4 million difference would not be deducted from future capital gains incentive fees)
 
As noted above, in order to ensure that the Company will pay MCC Advisors a lesser base management fee and incentive fee on net investment income on a cumulative basis, as calculated beginning January 1, 2016, the Company will, at the end of each quarter, also calculate the base management fee and incentive fee on net investment income owed by the Company to MCC Advisors based on the formula in place prior to the Fee Waiver Agreement, and pay lesser of those two amounts. Set forth below is a description of the base management fee and the incentive fee on net investment income payable to MCC Advisors prior to the Fee Waiver Agreement.
 
Base Management Fee — Prior to Fee Waiver Agreement
 
The base management fee was calculated at an annual rate of 1.75% of our gross assets, and is payable quarterly in arrears. The base management fee is based on the average value of our gross assets at the end of the two most recently completed calendar quarters.
 
Incentive Fee — Prior to Fee Waiver Agreement
 
The incentive fee based on net investment income was calculated as 20.0% of the amount, if any, by which our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets calculated as of the end of the calendar quarter immediately preceding the calendar quarter for which the incentive fee is being calculated, exceeds a 2.0% (which is 8.0% annualized) hurdle rate but also includes a “‘catch-up’ provision. Under

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this provision, in any calendar quarter, our investment adviser receives no incentive fee until our net investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up”, 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, our investment adviser will receive 20% of our pre-incentive fee net investment income as if the hurdle rate did not apply. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies accrued during the calendar quarter, minus our operating expenses for the quarter including the base management fee, expenses payable under the administration agreement, and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash.
 
Payment of Our Expenses
 
All investment professionals and staff of MCC Advisors, when, and to the extent, engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses of such personnel allocable to such services, is provided and paid for by MCC Advisors. We bear all other costs and expenses of our operations and transactions, including those relating to:

our organization and continued corporate existence;

calculating our net asset value (“NAV”) (including the cost and expenses of any independent valuation firms);

expenses, including travel expense, incurred by MCC Advisors or payable to third parties performing due diligence on prospective portfolio companies, monitoring our investments and, if necessary, enforcing our rights;

interest payable on debt incurred to finance our investments;

the costs of  all offerings of common shares and other securities;

the base management fee and any incentive management fee;

distributions on our shares;

administration fees payable under our administration agreement;

the allocated costs incurred by MCC Advisors as our administrator in providing managerial assistance to those portfolio companies that request it;

amounts payable to third parties relating to, or associated with, making investments;

transfer agent and custodial fees;

all registration and listing fees;

U.S. federal, state and local taxes;

independent directors’ 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;

indemnification payments;

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

all other expenses reasonably incurred by us or MCC Advisors in connection with administering our business, such as the allocable portion of overhead under our administration agreement, including rent and other allocable portions of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs (including travel expenses).

We reimburse MCC Advisors for costs and expenses incurred for office space rental, office equipment and utilities allocable to the performance by MCC Advisors of its duties under the administration agreement, as well as any costs and expenses incurred relating to any non-investment advisory, administrative or operating services provided to us or in the form of managerial assistance to portfolio companies that request it.
 
From time to time, MCC Advisors pays amounts owed by us to third party providers of goods or services.  We subsequently reimburse MCC Advisors for such amounts paid on our behalf.

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Limitation of Liability and Indemnification

The investment management agreement provides that MCC Advisors and its officers, directors, employees and affiliates are not liable to us or any of our stockholders for any act or omission by it or its employees in the supervision or management of our investment activities or for any loss sustained by us or our stockholders, except that the foregoing exculpation does not extend to any act or omission constituting willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations under the investment management agreement. The investment management agreement also provides for indemnification by us of MCC Advisors’ members, directors, officers, employees, agents and control persons for liabilities incurred by it in connection with their services to us, subject to the same limitations and to certain conditions.

Duration and Termination

The investment management agreement was initially approved by our board of directors on November 3, 2010 and was executed on January 11, 2011. Pursuant to its terms and under the 1940 Act, the investment management agreement had an initial two-year term, and then was subject to an annual approval by our board of directors. Unless terminated earlier as described below, it will continue in effect from year to year if approved annually by our board of directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. The investment management agreement will automatically terminate in the event of its assignment. The investment management agreement may be terminated by either party without penalty upon not more than 60 days’ written notice to the other. See “Risks — Risks Related to Our Business — We are dependent upon senior management personnel of MCC Advisors for our future success, and if MCC Advisors is unable to retain qualified personnel or if MCC Advisors loses any member of its senior management team, our ability to achieve our investment objective could be significantly harmed.”

Annual Board Approval of the Investment Management Agreement

On November 29, 2018, our board of directors, at an in-person meeting, approved the renewal of the investment management agreement for an additional one-year term. Based on the information reviewed and the discussions held, our board of directors, including a majority of the independent directors, concluded that the investment management fees and terms are reasonable in relation to the services to be provided and approved the investment management agreement for a period of one additional year, which will expire on January 19, 2020. In making its determination, our board of directors took into account, among other things, its consideration and approval of the MCC Merger, consummation of which is subject to a number of conditions and approvals.

Administration Agreement

On January 19, 2011, the Company entered into an administration agreement with MCC Advisors. Pursuant to this agreement, MCC Advisors furnishes us with office facilities and equipment, clerical, bookkeeping, recordkeeping and other administrative services related to the operations of the Company. We reimburse MCC Advisors for our allocable portion of overhead and other expenses incurred by it performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staff. From time to time, our administrator may pay amounts owed by us to third-party service providers and we will subsequently reimburse our administrator for such amounts paid on our behalf. For the years ended September 30, 2019, 2018 and 2017, we incurred $3.3 million, $3.6 million, and $3.8 million in administrator expenses, respectively.

Our board of directors approved the continuation of our administration agreement on November 29, 2018, which extended the term of the agreement for an additional period of one year beginning on January 19, 2019. Based on the information relating to the terms of the Administration Agreement and the discussions held, our board of directors, including a majority of the non-interested directors, approved the Administration Agreement as being in the best interests of our stockholders. The administration agreement may be terminated by either party without penalty upon 60 days' written notice to the other party.

License Agreement

We have entered into a license agreement with Medley Capital LLC under which Medley Capital LLC has agreed to grant us a non-exclusive, royalty-free license to use the name “Medley”. Under this agreement, we will have a right to use the “Medley” name for so long as MCC Advisors or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “Medley” name. This license agreement will remain in effect for so long as the investment management agreement with MCC Advisors is in effect.

REGULATION

General

We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons”, as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by “a majority of our outstanding voting securities.”

As a BDC, we are required to meet an asset coverage ratio, reflecting the value of our total assets to our total senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 200%. However, in March 2018, the Small Business Credit Availability Act (the “SBCA”) modified the 1940 Act by allowing a BDC to increase the maximum amount of leverage it may incur from 200% to 150%, if certain requirements are met. Under the 1940 Act, we are allowed to increase our leverage capacity if stockholders representing at least a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive stockholder approval, we would be allowed to increase our leverage capacity

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on the first day after such approval. Alternatively, the 1940 Act allows the majority of our independent directors to approve an increase in our leverage capacity, and such approval would become effective on the one-year anniversary of such approval. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage. The Company has not sought stockholder or independent director approval to reduce its coverage ratio to 150%.

The SBCA also instructs the SEC to issue rules or amendments to rules allowing BDCs to use the same securities offering and proxy rules that are available to operating companies, including, among other things, allowing BDCs to incorporate by reference in registration statements filed with the SEC and allow certain BDCs to file shelf registration statements that are automatically effective and take advantage of other benefits available to “well-known seasoned issuers” as defined in rules promulgated under the Securities Act. On March 20, 2019, the SEC proposed rule amendments to implement certain provisions of the SBCA; however, as of the date of this Annual Report on Form 10-K, the Company does not know if and when the proposed rules relating to this legislation will be implemented.

We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC.

Qualifying Assets

Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our business are the following:

(1)
Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:

is organized under the laws of, and has its principal place of business in, the United States;

is not an investment company (other than a small business investment company wholly owned by the Company) or a company that would be an investment company but for certain exclusions under the 1940 Act; and

satisfies either of the following:

*
has a market capitalization of less than $250 million or does not have any class of securities listed on a national securities exchange; or

*
is controlled by a BDC or a group of companies including a BDC, the BDC actually exercises a controlling influence over the management or policies of the eligible portfolio company, and, as a result thereof, the BDC has an affiliated person who is a director of the eligible portfolio company.

(2)
Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.

(3)
Securities received in exchange for or distributed on or with respect to securities described above, or pursuant to the exercise of warrants or rights relating to such securities.

(4)
Securities of any eligible portfolio company which we control.

(5)
Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.

(6)
Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment.

The regulations defining and interpreting qualifying assets may change over time. We may adjust our investment focus needed to comply with and/or take advantage of any regulatory, legislative, administrative or judicial actions in this area.

Managerial Assistance to Portfolio Companies

A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in “Regulation — Qualifying Assets” above. However, in order to count portfolio securities as qualifying assets for the purpose of the 70% requirement, the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance. Where the BDC purchases such securities in conjunction with one or more other persons acting together, the BDC will satisfy this test if one of the other persons in the group makes available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.


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Temporary Investments

Pending investment in other types of “qualifying assets”, as described above, our investments may consist of cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in highly rated commercial paper, U.S. Government agency notes, U.S. Treasury bills or in repurchase agreements relating to such securities that are fully collateralized by cash or securities issued by the U.S. Government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, certain diversification tests in order to qualify as a RIC for U.S. federal income tax purposes will typically require us to limit the amount we invest with any one counterparty.  Our investment adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.

Senior Securities

We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% (or 150% if certain requirements are met) immediately after each such issuance. In addition, while any preferred stock or publicly traded debt securities are outstanding, we may be prohibited from making distributions to our stockholders or the repurchasing of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Item 1A. Risk Factors—Risks Related to our Business—If we use borrowed funds to make investments or fund our business operations, we will be exposed to risks typically associated with leverage which will increase the risk of investing in us.”

Code of Ethics

We and MCC Advisors have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. The code of ethics is available at our website, www.medleycapitalcorp.com, and is available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov.

Privacy Policy

We are committed to maintaining the privacy of stockholders and to safeguarding our non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

Generally, we do not receive any nonpublic personal information relating to our stockholders, although certain nonpublic personal information of our stockholders may become available to us. We do not disclose any nonpublic personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third party administrator).

We restrict access to nonpublic personal information about our stockholders to our investment adviser’s employees with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our stockholders. 

Proxy Voting Policies and Procedures

We have delegated our proxy voting responsibility to MCC Advisors. The Proxy Voting Policies and Procedures of MCC Advisors are set forth below. The guidelines are reviewed periodically by MCC Advisors and our independent directors, and, accordingly, are subject to change.

MCC Advisors is registered with the SEC as an investment adviser under the Advisers Act. As an investment adviser registered under the Advisers Act, MCC Advisors will have fiduciary duties to us. As part of this duty, MCC Advisors recognizes that it must vote client securities in a timely manner free of conflicts of interest and in our best interests and the best interests of our stockholders. MCC Advisors’ Proxy Voting Policies and Procedures have been formulated to ensure decision-making consistent with these fiduciary duties.

These policies and procedures for voting proxies for our investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.

Proxy Policies

MCC Advisors evaluates routine proxy matters, such as proxy proposals, amendments or resolutions on a case-by-case basis. Routine matters are typically proposed by management and MCC Advisors will normally support such matters so long as they do not measurably change the structure, management control, or operation of the corporation and are consistent with industry standards as well as the corporate laws of the state of incorporation.

MCC Advisors also evaluates non-routine matters on a case-by-case basis. Non-routine proposals concerning social issues are typically proposed by stockholders who believe that the corporation’s internally adopted policies are ill-advised or misguided. If MCC Advisors has determined that management is generally socially responsible, MCC Advisors will generally vote against these types of non-routine proposals. Non-routine proposals concerning financial or corporate issues are usually offered by management and seek to change a corporation’s legal, business or financial structure. MCC Advisors will generally vote in favor of such proposals provided the position of current stockholders is preserved or enhanced. Non-routine proposals concerning stockholder rights are made regularly by both management and stockholders. They can be generalized as involving issues that transfer or realign board or stockholder voting power. MCC Advisors typically would oppose any proposal aimed solely at thwarting potential takeovers by requiring, for example,

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super-majority approval. At the same time, MCC Advisors believes stability and continuity promote profitability. MCC Advisors’ guidelines in this area seek a balanced view and individual proposals will be carefully assessed in the context of their particular circumstances.

If a vote may involve a material conflict of interest, prior to approving such vote, MCC Advisors must consult with its Chief Compliance Officer to determine whether the potential conflict is material and if so, the appropriate method to resolve such conflict. If the conflict is determined not to be material, MCC Advisors’ employees shall vote the proxy in accordance with MCC Advisors’ proxy voting policy.

Proxy Voting Records

You may obtain information about how we voted proxies by making a written request for proxy voting information to:

Chief Compliance Officer
Medley Capital Corporation
280 Park Avenue, 6th Floor East
New York, NY 10017

Other

Under the 1940 Act, we are not generally able to issue and sell our common stock at a price below NAV per share. We may, however, issue and sell our common stock, at a price below the current NAV of the common stock, or issue and sell warrants, options or rights to acquire such common stock, at a price below the current NAV of the common stock if our board of directors determines that such sale is in our best interest and in the best interests of our stockholders, and our stockholders have approved our policy and practice of making such sales within the preceding 12 months. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities. However, we currently do not have the requisite stockholder approval, nor do we have any current plans to seek stockholder approval, to sell or issue shares of our common stock at a price below NAV per share.

In addition, at our 2012 Annual Meeting of Stockholders we received approval from our stockholders to authorize us, with the approval of our board of directors, to issue securities to, subscribe to, convert to, or purchase shares of the Company’s common stock in one or more offerings, subject to certain conditions as set forth in the proxy statement. Such authorization has no expiration.

We expect to be periodically examined by the SEC for compliance with the 1940 Act.

We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

We and MCC Advisors adopted written policies and procedures reasonably designed to prevent violation of the federal securities laws, and will review these policies and procedures annually for their adequacy and the effectiveness of their implementation. We and MCC Advisors have designated a Chief Compliance Officer to be responsible for administering the policies and procedures.

Election to Be Taxed as a RIC

As a BDC, we have elected and qualified to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, we must distribute to our stockholders, for each taxable year, at least 90% of our “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 (the “Distribution Requirement”).

Taxation as a RIC

As a RIC, if we satisfy the Distribution Requirement, we will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain, defined as net long-term capital gains in excess of net short-term capital losses, we distribute to stockholders. We will be subject to U.S. federal income tax at regular corporate rates on any net income or net capital gain not distributed to our stockholders.

Medley Capital will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least the sum of 98% of its ordinary income in any calendar year, 98.2% of its capital gain net income for each one-year period ending on October 31, and any income and gains recognized, but not distributed, in preceding years and on which the Company did not pay U.S. federal income tax. Depending on the level of investment company taxable income (“ICTI”) earned in a tax year and the amount of net capital gains recognized in such tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. In order to eliminate our liability for income tax, and to the extent necessary to maintain our qualification as a RIC, any such carryover ICTI and net capital gains must be distributed before the end of that next tax year through a dividend declared prior to the 15th day of the 9th month after the close of the taxable year in which such ICTI was generated. 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.

In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:

qualify to be treated as a BDC under the 1940 Act at all times during each taxable year;


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derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities, and net income derived from interests in “qualified publicly traded partnerships” (partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends and other permitted RIC income) (the “90% Income Test”); and

diversify our holdings so that at the end of each quarter of the taxable year:

at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and

no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or in the securities of one or more qualified publicly traded partnerships (the “Diversification Tests”).

We may invest in partnerships, including qualified publicly traded partnerships, which may result in our being subject to state, local or foreign income and franchise or withholding liabilities.

Any underwriting fees paid by us are not deductible. We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, with increasing interest rates or issued with warrants), we must include in income 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 us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Distribution Requirement, even though we will not have received any corresponding cash amount.

Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “Business — Regulation — Senior Securities.” Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our qualification as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Distribution Requirement or the excise tax requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

Some of the income and fees that we may recognize will not satisfy the 90% Income Test. In order to ensure that such income and fees do not disqualify us as a RIC for a failure to satisfy the 90% Income Test, we may be required to recognize such income and fees indirectly through one or more entities treated as corporations for U.S. federal income tax purposes. Such corporations will be required to pay U.S. corporate income tax on their earnings, which ultimately will reduce our return on such income and fees.

Failure to Qualify as a RIC

If we were unable to continue to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would they be required to be made. Distributions, including distributions of net long-term capital gain, would generally be taxable to our stockholders as ordinary dividend income to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. If we fail to qualify as a RIC for a period greater than two taxable years, to qualify as a RIC in a subsequent year we may be subject to regular corporate tax on any net built-in gains with respect to certain of our assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if we had been liquidated) that we elect to recognize on requalification or when recognized over the next five years.

Company Investments

Certain of our investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things, (1) disallow, suspend or otherwise limit the allowance of certain losses or deductions, including the dividends received deduction, (2) convert lower taxed long-term capital gains and qualified dividend income into higher taxed short-term capital gains or ordinary income, (3) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (4) cause us to recognize income or gain without a corresponding receipt of cash, (5) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (6) adversely alter the characterization of certain complex financial transactions and (7) produce income that will not qualify as good income for purposes of the 90% annual gross income requirement described above. We will monitor our transactions and may make certain tax elections and may be required to borrow money or dispose of securities to mitigate the effect of these rules and prevent disqualification as a RIC.

Investments we make in securities issued at a discount or providing for deferred interest or payment of interest in kind are subject to special tax rules that will affect the amount, timing and character of distributions to stockholders. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, with increasing interest rates or issued with warrants), we will generally be required to accrue daily as income a portion of the discount and to distribute such income each year to avoid U.S. federal income and excise taxes. Since in certain circumstances we may recognize income before or without receiving cash representing such income, we may have difficulty making distributions in the amounts necessary to satisfy the requirements for maintaining RIC tax treatment and for avoiding U.S. federal

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income and excise taxes. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify for tax treatment as a RIC and thereby be subject to corporate-level U.S. federal income tax.

Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long term or short term, depending on how long we held a particular warrant.

In the event we invest in foreign securities, we may be subject to withholding and other foreign taxes with respect to those securities. In that case, our yield on those securities would be decreased. We do not expect to satisfy the requirements necessary to pass through to our stockholders their share of the foreign taxes paid by us.

If we purchase shares in a ‘‘passive foreign investment company’’ (a ‘‘PFIC’’), we may be subject to U.S. federal income tax on a portion of any ‘‘excess distribution’’ or gain from the disposition of such shares even if such income is distributed as a taxable dividend by us to our stockholders. Additional charges in the nature of interest may be imposed on us in respect of deferred taxes arising from such distributions or gains. If we invest in a PFIC and elect to treat the PFIC as a ‘‘qualified electing fund’’ under the Code (a ‘‘QEF’’), in lieu of the foregoing requirements, we will be required to include in income each year a portion of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed to us. Alternatively, we can elect to mark-to-market at the end of each taxable year our shares in a PFIC; in this case, we will recognize as ordinary income any increase in the value of such shares, and as ordinary loss any decrease in such value to the extent it does not exceed prior increases included in income. Under either election, we may be required to recognize in a year income in excess of our distributions from PFICs and our proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes of the 4% U.S. federal excise tax.

Income inclusions from a QEF will be ‘‘good income’’ for purposes of the 90% Income Test provided that they are derived in connection with our business of investing in stocks and securities or the QEF distributes such income to us in the same taxable year in which the income is included in our income.

Item 1A. Risk Factors

Before you invest in our securities, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this Form 10-K, before you decide whether to make an investment in our securities. The risks set out below are not the only risks we face. The risks described below, as well as additional risks and uncertainties presently unknown by us or currently not deemed significant could negatively affect our business, financial condition and results of operations. In such case, our NAV and the trading price of our common stock or other securities could decline, and you may lose all or part of your investment.

RISK RELATING TO OUR BUSINESS AND STRUCTURE

Certain Risks in the Current Environment

Capital markets may experience periods of disruption and instability and we cannot predict when these conditions will occur. Such market conditions could materially and adversely affect debt and equity capital markets in the United States and abroad, which could have a negative impact on our business, financial condition and results of operations.

As a business development company, we must maintain our ability to raise additional capital for investment purposes. Without sufficient access to the capital markets or credit markets, we may be forced to curtail our business operations or we may not be able to pursue new business opportunities.

The U.S. and global capital markets experienced extreme volatility and disruption that began in mid-2007, and the U.S. economy was in recession for several consecutive calendar quarters during the same period, as evidenced by a lack of liquidity in the debt capital markets, write-offs in the financial services sector, the re-pricing of credit risk and the failure of certain major financial institutions. While the capital markets have improved, these conditions could deteriorate again in the future. During such market disruptions, we may have difficulty raising debt or equity capital, especially as a result of regulatory constraints.

Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness and any failure to do so could have a material adverse effect on our business. The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments. In addition, significant changes in the capital markets, including the disruption and volatility, have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition and results of operations.

Various social and political tensions in the United States and globally, including instability in the financial markets, may contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause economic uncertainties or deterioration in the United States and worldwide. In recent years, financial markets have been affected at times by a number of global macroeconomic and political events, including the following: large sovereign debts and fiscal deficits of several countries in Europe and in emerging markets jurisdictions, levels of non-performing loans on the balance sheets of European banks, the potential effect of any European country leaving the Eurozone, the potential effect of the United Kingdom leaving the European Union, the potential effect of Scotland leaving the United Kingdom, and market volatility and loss of investor confidence driven by political events, including the general elections in the United Kingdom in June 2017 and in Germany in September 2017 and referenda in the United Kingdom in June 2016 and Italy in December 2016. Market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and home prices, among other factors. We cannot assure you that market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, will not impact the global economy, and we cannot assure you that assistance packages will be available, or if available, be sufficient to stabilize countries and markets in Europe or elsewhere affected by a financial crisis. To the extent uncertainty regarding any economic recovery in Europe

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negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected.

In the second quarter of 2015, stock prices in China experienced a significant drop, resulting primarily from continued sell-off of shares trading in Chinese markets. In August 2015, Chinese authorities sharply devalued China’s currency. In June 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union (“Brexit”), and, subsequently, on March 29, 2017, the U.K. government began the formal process of leaving the European Union. Brexit created political and economic uncertainty and instability in the global markets (including currency and credit markets), and especially in the United Kingdom and the European Union, and this uncertainty and instability may last indefinitely. Because the U.K. Parliament rejected former Prime Minister Theresa May’s proposed Brexit deal with the European Union and because current Prime Minister Boris Johnson is in discussions with the European Union on alternatives, there is increased uncertainty on the timing of Brexit. There is also continued concern about national-level support for the euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries.

The Republican Party currently controls the executive branch and the Senate portion of the legislative branch of government, which we believe increases the likelihood that legislation may be adopted that could significantly affect the regulation of U.S. financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Reform Act and the authority of the Federal Reserve and the Financial Stability Oversight Council. The United States may also potentially withdraw from or renegotiate various trade agreements and take other actions that would change current trade policies of the United States. We cannot predict which, if any, of these actions will be taken or, if taken, their effect on the financial stability of the United States. Such actions could have a significant adverse effect on our business, financial condition and results of operations. We cannot predict the duration of the effects related to these or similar events in the future on the U.S. economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.

Any further disruptive conditions in the financial industry and the impact of new legislation in response to those conditions could restrict our business operations and could adversely impact our results of operations and financial condition. In addition, the business development company market may be more sensitive to changes in interest rates or other factors and to the extent the business development company market trades down, our shares might likewise be affected. If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratios imposed upon us by the 1940 Act. Any such failure would affect our ability to issue securities, including borrowings, and pay distributions, which could materially impair our business operations. Our liquidity could be impaired further by an inability to access the capital markets or to consummate new borrowing facilities to provide capital for normal operations, including new originations. In recent years, reflecting concern about the stability of the financial markets, many lenders and institutional investors have reduced or ceased providing funding to borrowers.

Difficult market and political conditions may adversely affect our business in many ways, including by reducing the value or hampering the performance of the investments made by our funds, each of which could materially and adversely affect our business, results of operations and financial condition.

Our business is materially affected by conditions in the global financial markets and economic and political conditions throughout the world, such as interest rates, availability and cost of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to our taxation, taxation of our investors, the possibility of changes to tax laws in either the United States or any non-U.S. jurisdiction and regulations on asset managers), trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts and security operations). These factors are outside of our control and may affect the level and volatility of asset prices and the liquidity and value of investments, and we may not be able to or may choose not to manage our exposure to these conditions. While market conditions have largely recovered from the unprecedented turmoil in the global capital markets and the financial services industry in late 2008 and early 2009, there have been continuing periods of volatility, some lasting longer than others. There can be no assurance that these market conditions will not repeat themselves or worsen in the future. These and other conditions in the global financial markets and the global economy may result in adverse consequences for our funds and their respective investee companies, which could restrict such funds’ investment activities and impede such funds’ ability to effectively achieve their investment objectives. In addition, because the fees we earn under our investment management agreements are based in part on the market value of our assets under management and in part on investment performance, if any of these factors cause a decline in our assets under management or result in non-performance of loans by investee companies, it would result in lower fees earned, which could in turn materially and adversely affect our business and results of operations.

The downgrade of the U.S. credit rating and the economic crisis in Europe could negatively impact our liquidity, financial condition and earnings.

U.S. debt ceiling and budget deficit concerns together with signs of deteriorating sovereign debt conditions in Europe continue to present the possibility of a credit-rating downgrade, economic slowdowns, or a recession for the United States. The impact of any further downgrades to the U.S. government’s sovereign credit rating or downgraded sovereign credit ratings of European countries or the Russian Federation, or their perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. These developments, along with any further European sovereign debt issues, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. Continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.

In October 2019, the Federal Reserve decreased the federal funds rate, which was the third such interest rate decrease in 2019, to a range between 1.50% to 1.75%. Although the Federal Reserve elected not to raise the federal funds rate in October 2019, it had previously raised the federal funds rate nine times during the period between December 2015 and December 2018, and it may continue to raise the Federal Funds Rate in the future. Further, if key economic indicators, such as the unemployment rate or inflation, do not progress at a rate consistent with the Federal Reserve’s objectives, the target range for the federal funds rate may increase and cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. Any continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.

A failure or the perceived risk of a failure to raise the statutory debt limit of the United States could have a material adverse effect on our business, financial condition and results of operations.

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Recent U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns, or a recession in the United States. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. In the future, the U.S. government may not be able to meet its debt payments unless the federal debt ceiling is raised. A failure by Congress to raise the debt limit to the extent necessary would increase the risk of default by the United States on its obligations, as well as the risk of other economic dislocations. If the U.S. government fails to complete its budget process or to provide for a continuing resolution before the expiration of the current continuing resolution, another federal government shutdown may result. Such a failure or the perceived risk of such a failure, consequently, could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world. It could also limit our ability and the ability of our portfolio companies to obtain financing, and it could have a material adverse effect on the valuation of our portfolio companies. Consequently, the continued uncertainty in the general economic environment and potential debt ceiling implications, as well in specific economies of several individual geographic markets in which our portfolio companies operate, could adversely affect our business, financial condition and results of operations.

Risks Related to Our Business

We may suffer credit losses.

Private debt in the form of secured loans to corporate and asset-based borrowers is highly speculative and involves a high degree of risk of credit loss, and therefore an investment in our securities may not be suitable for someone with a low tolerance for risk. These risks are likely to increase during an economic recession, such as the economic recession or downturn that the United States and many other countries have recently experienced or are experiencing.

Because we use borrowed funds to make investments or fund our business operations, we are exposed to risks typically associated with leverage which increase the risk of investing in us.

We have borrowed funds, including through the issuance of $77.8 million, $74.0 million, and $105.1 million in aggregate principal amount of 6.125% unsecured notes due March 30, 2023 (the "2023 Notes"), 6.50% unsecured notes due January 30, 2021 (the "2021 Notes" and together with the 2023 Notes, the "U.S. Notes"), and 6.55% Series A Notes due January 31, 2021 (the "Israeli 2021 Notes" and collectively with the U.S. Notes, the "Notes"), to leverage our capital structure, which is generally considered a speculative investment technique. In addition, although our Revolving Credit Facility has been terminated, we may replace the facility with another revolving or other credit facility. As a result:

our common shares may be exposed to an increased risk of loss because a decrease in the value of our investments may have a greater negative impact on the value of our common shares than if we did not use leverage;

if we do not appropriately match the assets and liabilities of our business, adverse changes in interest rates could reduce or eliminate the incremental income we make with the proceeds of any leverage;

our ability to pay distributions on our common stock may be restricted if our asset coverage ratio with respect to each of our outstanding senior securities representing indebtedness and our outstanding preferred shares, as defined by the 1940 Act, is not at least 200% and any amounts used to service indebtedness or preferred stock would not be available for such distributions;

any credit facility to which we became a party may be subject to periodic renewal by our lenders, whose continued participation cannot be guaranteed;

any credit facility to which we became a party may contain covenants restricting our operating flexibility;

we, and indirectly our stockholders, bear the cost of issuing and paying interest or dividends on such securities; and

any convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our common shares.

Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue debt securities or preferred stock and/or borrow money from banks and other financial institutions, which we collectively refer to as “senior securities”, only in amounts such that our asset coverage ratio equals at least 200% (or 150% if, pursuant to the 1940 Act, certain requirements are met) after each issuance of senior securities.

For a discussion of the terms of the Notes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources.”

As of September 30, 2019, the Company’s asset coverage was 184.2% after giving effect to leverage and therefore the Company’s asset coverage is below 200%, the minimum asset coverage requirement under the 1940 Act. As a result, the Company is prohibited from making distributions to stockholders, including the payment of any dividend, and may not employ further leverage until the Company’s asset coverage is at least 200% after giving effect to such leverage.

The lack of liquidity in our investments may adversely affect our business.

We anticipate that our investments generally will be made in private companies. Substantially all of these securities will be subject to legal and other restrictions on resale or will be otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less

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than the value at which we had previously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we or MCC Advisors has material non-public information regarding such portfolio company.

A substantial portion of our portfolio investments will be recorded at fair value as determined in good faith by or under the direction of our board of directors and, as a result, there may be uncertainty regarding the value of our portfolio investments.

The debt and equity securities in which we invest for which market quotations are not readily available will be valued at fair value as determined in good faith by or under the direction of our board of directors. Most, if not all, of our investments (other than cash and cash equivalents) will be classified as Level 3 under Accounting Standards Codification Topic 820 - Fair Value Measurements and Disclosures. This means that our portfolio valuations will be based on unobservable inputs and our own assumptions about how market participants would price the asset or liability in question. We expect that inputs into the determination of fair value of our portfolio investments will require significant management judgment or estimation. Even if observable market data are available, such information may be the result of consensus 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 disclaimers materially reduces the reliability of such information. We have retained the services of independent valuation firms to review the valuation of these loans and securities. The types of factors that our board of directors may take into account in determining the fair value of our investments generally include, as appropriate, comparison to publicly traded securities including such factors as yield, maturity and measures of credit quality, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these loans and securities existed. Our NAV could be adversely affected if our determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such loans and securities.

We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.

We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. We also have not adopted any policy restricting the percentage of our assets that may be invested in a single portfolio company. To the extent that we assume large positions in the securities of a small number of issuers, our NAV may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond our income tax diversification requirements under Subchapter M of the Code, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few portfolio companies.

Our ability to enter into transactions with our affiliates will be restricted, which may limit the scope of investments available to us.

We are prohibited under the 1940 Act from participating in certain transactions with our affiliates without the prior approval of our independent directors and, in some cases, of the SEC. Any person that owns, directly or indirectly, five percent or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act, and we are generally prohibited from buying or selling any security from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfolio company, without prior approval of our independent directors and, in some cases, of the SEC. We are prohibited from buying or selling any security from or to any person who owns more than 25% of our voting securities or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. As a result of these restrictions, we may be prohibited from buying or selling any security (other than any security of which we are the issuer) from or to any portfolio company of a private equity fund managed by our investment adviser or its affiliates without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.

We may, however, co-invest with our investment adviser and its affiliates’ other clients in certain circumstances where doing so is consistent with applicable law and SEC staff interpretations. For example, we may co-invest with such accounts consistent with guidance promulgated by the SEC staff permitting us and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that MCC Advisors, acting on our behalf and on behalf of other clients, negotiates no term other than price. We may also co-invest with our investment adviser’s other clients as otherwise permissible under regulatory guidance, applicable regulations and MCC Advisors’ allocation policy. Under this allocation policy, a fixed percentage of each opportunity, which may vary based on asset class and from time to time, will be offered to us and similar eligible accounts, as periodically determined by MCC Advisors and approved by our board of directors, including our independent directors. The allocation policy further provides that allocations among us and these other accounts will generally be made pro rata based on each account’s capital available for investment, as determined, in our case, by MCC Advisors. It is our policy to base our determinations as to the amount of capital available for investment based on such factors as the amount of cash on-hand, existing commitments and reserves, if any, the targeted leverage level, the targeted asset mix and diversification requirements and other investment policies and restrictions set by our board of directors or imposed by applicable laws, rules, regulations or interpretations. We expect that these determinations will be made similarly for other accounts. However, we can offer no assurance that investment opportunities will be allocated to us fairly or equitably in the short-term or over time.

In addition, we have received an order from the SEC that permits us to negotiate the terms of co-investments with other funds managed by MCC Advisors or its affiliates subject to the conditions included therein. In situations where co-investment with other funds managed by MCC Advisors or its affiliates is not permitted or appropriate, such as when there is an opportunity to invest in different securities of the same issuer or where the different investments could be expected to result in a conflict between our interests and those of other MCC Advisors clients, MCC Advisors will need to decide which client will proceed with the investment. MCC Advisors will make these determinations based on its policies and procedures, which generally require that such opportunities be offered to eligible accounts on an alternating basis that will be fair and equitable over time. Moreover, except in certain circumstances, we will be unable to invest in any issuer in which a fund managed by MCC Advisors or its affiliates has previously invested. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates.


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We will be exposed to risks associated with changes in interest rates.

Interest rate fluctuations may have a substantial negative impact on our investments, the value of our common stock and our rate of return on invested capital. A reduction in the interest rates on new investments relative to interest rates on current investments could also have an adverse impact on our net interest income. An increase in interest rates could decrease the value of any investments we hold which earn fixed interest rates and also could increase our interest expense, thereby decreasing our net income. Also, an increase in interest rates available to investors could make investment in our common stock less attractive if we are not able to increase our dividend rate, which could reduce the value of our common stock.

It is unclear how increased regulatory oversight and changes in the method for determining LIBOR may affect the value of the financial obligations to be held or issued by us that are linked to LIBOR, or how such changes could affect our results of operations or financial condition.

In the recent past, concerns have been publicized that some of the member banks surveyed by British Bankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivative positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.

Accordingly, uncertainty as to the nature of such changes may adversely affect the market for or value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is unclear if at that time whether LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The first publication of SOFR was released in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain. 

At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.

Because we use debt to finance our investments, changes in interest rates will affect our cost of capital and net investment income.

Because we borrow money to make investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income in the event we use our existing debt to finance our investments. In periods of rising interest rates, our cost of funds will increase to the extent we access any credit facility with a floating interest rate, which could reduce our net investment income to the extent any debt investments have fixed interest rates. We expect that our long-term fixed-rate investments will be financed primarily with issuances of equity and long-term debt securities. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.

You should also be aware that a rise in the general level of interest rates typically leads to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates may result in an increase of the amount of incentive fees payable to MCC Advisors.

If MCC Advisors is unable to manage our investments effectively, we may be unable to achieve our investment objective.

Our ability to achieve our investment objective will depend on our ability to manage our business, which will depend, in turn, on the ability of MCC Advisors to identify, invest in and monitor companies that meet our investment criteria. Accomplishing this result largely will be a function of MCC Advisors’ investment process and, in conjunction with its role as our administrator, its ability to provide competent, attentive and efficient services to us.

MCC Advisors’ senior management team is comprised of members of the senior management team for Medley LLC, and they manage other investment funds. They may also be required to provide managerial assistance to our portfolio companies. These demands on their time may distract them or slow our rate of investment. Any failure to manage our business effectively could have a material adverse effect on our business, financial condition and results of operations.

We may experience fluctuations in our periodic operating results.

We could experience fluctuations in our periodic operating results due to a number of factors, including the interest rates payable on the debt securities we acquire, the default rate on such securities, the level of our expenses (including the interest rates payable on our borrowings), the dividend rates payable on preferred stock we issue, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

Any failure on our part to maintain our status as a BDC would reduce our operating flexibility.

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If we fail to maintain our status as a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more onerous regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility.

We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

For U.S. federal income tax purposes, we may include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, such as PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount, which could be significant relative to our overall investment activities, or increases in loan balances as a result of PIK arrangements are included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we do not receive in cash.

Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the tax requirement to 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, to maintain our tax treatment as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to raise cash from other sources, we may fail to qualify and maintain our tax treatment as a RIC and thus become subject to corporate-level U.S. federal income tax. See “Tax Matters - Taxation of the Company”.

We may be required to pay incentive fees on income accrued, but not yet received in cash.

That part of the incentive fee payable by us that relates to our net investment income is computed and paid on income that may include interest that has been accrued but not yet received in cash, such as market discount, debt instruments with PIK, interest, preferred stock with PIK dividends and zero coupon securities. If a portfolio company defaults on a loan, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible. Consequently, we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a clawback right against MCC Advisors.

We may not be able to pay you distributions and our distributions may not grow over time.

When possible, we intend to 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 September 30, 2019, the Company’s asset coverage was 184.2% after giving effect to leverage and therefore the Company’s asset coverage is below 200%, the minimum asset coverage requirement under the 1940 Act. As a result, the Company is prohibited from making distributions to stockholders. 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.

The highly competitive market in which we operate may limit our investment opportunities.
 
A number of entities compete with us to make the types of investments that we make. We compete with other BDCs and investment funds (including public and private funds, commercial and investment banks, commercial financing companies, other SBICs and, to the extent they provide an alternative form of financing, private equity funds). Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles, such as hedge funds, those entities have begun to invest in areas in which they have not traditionally invested. As a result of these new entrants, competition for investment opportunities has intensified in recent years and may intensify further in the future. Some of our existing and potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions and valuation requirements that the 1940 Act imposes on us as a BDC and the tax consequences of qualifying as a RIC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this existing and potentially increasing competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.
 
We do not seek to compete primarily based on the interest rates we offer, and we believe that some of our competitors make loans with interest rates that are comparable to or lower than the rates we offer. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss. A significant part of our competitive advantage stems from the fact that the market for investments in mid-sized companies is underserved by traditional commercial banks and other financial institutions. A significant increase in the number and/or size of our competitors in this target market could force us to accept less attractive investment terms. Furthermore, many of our competitors have greater experience operating under the regulatory restrictions of the 1940 Act.
 
We depend upon senior management personnel of MCC Advisors for our future success, and if MCC Advisors is unable to retain qualified personnel or if MCC Advisors loses any member of its senior management team, our ability to achieve our investment objective could be significantly harmed.
 
We depend on MCC Advisors’ investment management team, or the Investment Team, which is provided by MCC Advisors, for the identification, final selection, structuring, closing and monitoring of our investments. Our Investment Team is integral to our asset management activities and has critical industry experience and relationships that we will rely on to implement our business plan. Our future success depends on our Investment Team’s continued

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service to MCC Advisors. The departure of any of the members of the Investment Team could have a material adverse effect on our ability to achieve our investment objective. As a result, we may not be able to operate our business as we expect, and our ability to compete could be harmed, which could cause our operating results to suffer. In addition, we can offer no assurance that MCC Advisors will remain our investment adviser or our administrator. Moreover, we also experience competition in attracting and retaining qualified personnel, particularly investment professionals, and we may be unable to maintain or grow our business if we cannot attract and retain such personnel.
 
MCC Advisors may not be able to achieve the same or similar returns as those achieved by our senior management and Investment Team while they were employed at prior positions.
 
The track record and achievements of the senior management and Investment Team of MCC Advisors are not necessarily indicative of future results that will be achieved by our investment adviser. As a result, MCC Advisors may not be able to achieve the same or similar returns as those achieved by our senior management and Investment Team while they were employed at prior positions.
 
Because we expect to distribute substantially all of our net investment income and net realized capital gains to our stockholders, we will need additional capital to finance our growth and such capital may not be available on favorable terms or at all.
 
We have elected and qualified to be taxed for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we must meet certain requirements, including source-of-income, asset diversification and distribution requirements in order to not have to pay corporate-level U.S. on income we distribute to our stockholders as distributions, which allows us to substantially reduce or eliminate our corporate-level U.S. federal income tax liability. As a BDC, we are generally required to meet a coverage ratio of total assets to total senior securities, which includes all of our 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) at the time we issue any debt or preferred stock. This requirement limits the amount of our leverage. Because we will continue to need capital to grow our investment portfolio, this limitation may prevent us from incurring debt or issuing preferred stock and require us to raise additional equity at a time when it may be disadvantageous to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms of any of our outstanding borrowings. In addition, as a BDC, we are generally not permitted to issue common stock priced below NAV without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our NAV could decline. 
 
Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval.
 
Our board of directors has the authority to modify or waive certain of our operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results or value of our stock. Nevertheless, the effects could adversely affect our business and impact our ability to make distributions and cause you to lose all or part of your investment.
 
There are significant potential conflicts of interest that could affect our investment returns.
 
There may be times when MCC Advisors, its senior management and Investment Team, and members of its Investment Committee have interests that differ from those of our stockholders, giving rise to a conflict of interest. In particular, certain private investment funds managed by the senior members of MCC Advisors hold controlling or minority equity interests, or have the right to acquire such equity interests, in some of our portfolio companies. As a result, the senior members of MCC Advisors may face conflicts of interest in connection with making business decisions for these portfolio companies to the extent that such decisions affect the debt and equity holders in these portfolio companies differently. In addition, the senior members of MCC Advisors may face conflicts of interests in connection with making investment or other decisions, including granting loan waivers or concessions on our behalf with respect to these portfolio companies given that they also manage private investment funds that hold the equity interests in these portfolio companies.
 
There may be conflicts of interest related to obligations MCC Advisors’ senior management and Investment Team and members of its Investment Committee have to other clients.
 
Senior management, the Investment Team, and the Investment Committee of MCC Advisors serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of investment funds managed by MCC Advisors or its affiliates. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interests or in the best interest of our stockholders. For example, members of the Investment Team have management responsibilities for other investment funds, accounts or other investment vehicles managed by affiliates of MCC Advisors, which gives rise to conflicts of interest.
 
Our investment objective may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. For example, affiliates of MCC Advisors currently manage private funds and managed accounts that are seeking new capital commitments and will pursue an investment strategy similar to our strategy, and we may compete with these and other entities managed by affiliates of MCC Advisors for capital and investment opportunities. As a result, those individuals may face conflicts in the allocation of investment opportunities among us and other investment funds or accounts advised by principals of, or affiliated with, MCC Advisors.
 
We have received an order from the SEC which permits us to co-invest with certain other investment funds managed by MCC Advisors or its affiliates, subject to the conditions included therein. In situations where we cannot co-invest with other investment funds managed by MCC Advisors or its affiliates, the investment policies and procedures of MCC Advisors generally require that such opportunities be offered to us and such other investment funds on an alternating basis. However, there can be no assurance that we will be able to participate in all investment opportunities that are suitable to us.
 
MCC Advisors may, from time to time, possess material non-public information, limiting our investment discretion.
 

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MCC Advisors and members of its senior management and the Investment Team and the Investment Committee may serve as directors of, or in a similar capacity with, companies in which we invest, the securities of which are purchased or sold on our behalf. In the event that material nonpublic information is obtained with respect to such companies, we could be prohibited for a period of time from purchasing or selling the securities of such companies by law or otherwise, and this prohibition may have an adverse effect on us.
 
Our incentive fee structure may create incentives for MCC Advisors that are not fully aligned with the interests of our stockholders.
 
In the course of our investing activities, we will pay management and incentive fees to MCC Advisors. These fees are based on our gross assets. As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in a lower rate of return than one might achieve through direct investments. Because these fees are based on our gross assets, MCC Advisors will benefit when we incur debt or use leverage. Additionally, under the incentive fee structure, MCC Advisors may benefit when capital gains are recognized and, because MCC Advisors determines when a holding is sold, MCC Advisors controls the timing of the recognition of such capital gains. Our board of directors is charged with protecting our interests by monitoring how MCC Advisors addresses these and other conflicts of interests associated with its management services and compensation. While they are not expected to review or approve each borrowing or incurrence of leverage, our independent directors will periodically review MCC Advisors’ services and fees as well as its portfolio management decisions and portfolio performance. In connection with these reviews, our independent directors will consider whether our fees and expenses (including those related to leverage) remain appropriate. As a result of this arrangement, MCC Advisors or its affiliates may from time to time have interests that differ from those of our stockholders, giving rise to a conflict.
 
The part of the incentive fee payable to MCC Advisors that relates to our net investment income will be computed and paid on income that may include interest income that has been accrued but not yet received in cash. This fee structure may be considered to involve a conflict of interest for MCC Advisors to the extent that it may encourage MCC Advisors to favor debt financings that provide for deferred interest, rather than current cash payments of interest. MCC Advisors may have an incentive to invest in deferred interest securities in circumstances where it would not have done so but for the opportunity to continue to earn the incentive fee even when the issuers of the deferred interest securities would not be able to make actual cash payments to us on such securities. This risk could be increased because MCC Advisors is not obligated to reimburse us for any incentive fees received even if we subsequently incur losses or never receive in cash the deferred income that was previously accrued.
 
Because we borrow money, the potential for loss on amounts invested in us will be magnified and may increase the risk of investing in us.
 
Borrowings, also known as leverage, magnify the potential for loss on invested equity capital. If we continue to use leverage to partially finance our investments, which we have increasingly done over the years, you will experience increased risks of investing in our securities. We issued the Notes and may issue other debt securities or enter into other types of borrowing arrangements in the future. If the value of our assets decreases, leveraging would cause our NAV to decline more sharply than it otherwise would have had we not leveraged. Similarly, any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock distributions or scheduled debt payments. Leverage is generally considered a speculative investment technique and we only intend to use leverage if expected returns will exceed the cost of borrowing.

As of September 30, 2019, there was $257.0 million of outstanding Notes. The weighted average interest rate charged on our borrowings as of September 30, 2019 was 6.0% (exclusive of debt issuance costs). We will need to generate sufficient cash flow to make these required interest payments. In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on total assets of at least 4.3% as of September 30, 2019. If we are unable to meet the financial obligations under the Notes, the holders thereof will have the right to declare the principal amount and accrued and unpaid interest on the outstanding Notes to be due and payable immediately. If we are unable to meet the financial obligations under any credit facility we enter into, the lenders thereunder would likely have a superior claim to our assets over our stockholders.

Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below.

Assumed Return on Our Portfolio(1) 
(net of expenses)
 
(10)%
 
(5)%
 
0%
 
5%
 
10%
Corresponding net return to common stockholder
(29.6
)%
 
(18.4
)%
 
(7.2
)%
 
4.1
%
 
15.3
%
  
(1)
Assumes $486.3 million in total assets, $257.0 million in debt outstanding, $216.4 million in net assets, and a weighted average interest rate of 6.0%. Actual interest payments may be different.

Our incentive fee may induce our investment adviser to make certain investments, including speculative investments.
 
The incentive fee payable by us to MCC Advisors may create an incentive for MCC Advisors to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to MCC Advisors is determined, which is calculated separately in two components as a percentage of the interest and other ordinary income in excess of a quarterly minimum hurdle rate and as a percentage of the realized gain on invested capital, may encourage MCC Advisors to use leverage or take additional risk to increase the return on our investments. The use of leverage may magnify the potential for gain or loss on amounts invested. The use of leverage is considered a speculative technique. If we borrow from banks or other lenders, we would expect that such lenders will seek recovery against our assets in the event of a default and these lenders likely will have claims on our assets that are superior to those of our equity holders. In addition, MCC Advisors receives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on income, there is no minimum level of gain applicable to the portion of the incentive fee based on net capital gains. As a result, MCC Advisors may have an incentive to invest more in investments that are likely to result in capital gains as compared to income producing securities. This practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

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We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent we so invest, we will bear our ratable share of any such investment company’s expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to MCC Advisors with respect to the assets invested in the securities and instruments of other investment companies. With respect to each of these investments, each of our common stockholders will bear his or her share of the management and incentive fee of MCC Advisors as well as indirectly bear the management and performance fees and other expenses of any investment companies in which we invest.
 
We may be obligated to pay our investment adviser incentive compensation even if we incur a loss and may pay more than 20% of our net capital gains because we cannot recover payments made in previous years.
 
MCC Advisors will be entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our net investment income for that quarter above a threshold return for that quarter. Our pre-incentive fee net investment income for incentive compensation purposes excludes realized and unrealized capital losses that we may incur in the fiscal quarter, even if such capital losses result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay MCC Advisors incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter. If we pay an incentive fee of 20% of our realized capital gains (net of all realized capital losses and unrealized capital depreciation on a cumulative basis) and thereafter experience additional realized capital losses or unrealized capital depreciation, we will not be able to recover any portion of the incentive fee previously paid.
 
The valuation process for certain of our portfolio holdings creates a conflict of interest.
 
A substantial portion of our portfolio investments are expected to be made in the form of securities that are not publicly traded. As a result, our board of directors will determine the fair value of these securities in good faith pursuant to our valuation policy. In connection with that determination, investment professionals from MCC Advisors prepare portfolio company valuations based upon the most recent financial statements available and projected financial results of each portfolio company. In addition, certain members of our board of directors, including Brook Taube, Seth Taube and Jeff Tonkel, have a pecuniary interest in MCC Advisors. The participation of MCC Advisors’ investment professionals in our valuation process, and the pecuniary interest in MCC Advisors by certain members of our board of directors, could result in a conflict of interest as the management fee that we will pay MCC Advisors is based on our gross assets.
 
Other arrangements with MCC Advisors may create conflicts of interest.
 
We utilize MCC Advisors’ office space and pay to MCC Advisors our allocable portion of overhead and other expenses incurred by MCC Advisors in performing its obligations under the administration agreement, such as our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. This results in conflicts of interest that our board of directors must monitor.
 
The investment management agreement and administration agreement with MCC Advisors were not negotiated on an arm’s length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party.
 
The investment management agreement and the administration agreement were negotiated between related parties. Consequently, their terms, including fees payable to MCC Advisors, may not be as favorable to us as if they had been negotiated with an unaffiliated third party.
 
Our ability to sell or otherwise exit investments in which affiliates of MCC Advisors also have an investment may be restricted.
 
We may be considered affiliates with respect to certain of our portfolio companies. Certain private funds advised by the senior members of MCC Advisors also hold interests in these portfolio companies and as such these interests may be considered a joint enterprise under applicable regulations. To the extent that our interests in these portfolio companies may need to be restructured in the future or to the extent that we choose to exit certain of these transactions, our ability to do so will be limited. 
 
We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay distributions.
 
Our business is highly dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:

sudden electrical or telecommunications outages;

natural disasters such as earthquakes, tornadoes and hurricanes;

disease pandemics;

events arising from local or larger scale political or social matters, including terrorist acts; and

cyber-attacks.

These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay distributions to our stockholders.
 

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The failure in cybersecurity systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively.
 
Cybersecurity refers to the combination of technologies, processes, and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. We are subject to cybersecurity risks. Information cybersecurity risks have significantly increased in recent years and, while we have not experienced any material losses relating to cyber-attacks or other information security breaches, we could suffer such losses in the future. Our computer systems, both internal and those provided by third-party service providers, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize confidential and other information, including nonpublic personal information and sensitive business data, processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties, which could result in significant losses or reputational damage. This could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results of operations. Privacy and information security laws and regulation changes, and compliance with those changes, may result in cost increases due to system changes and the development of new administrative processes. In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We currently do not maintain insurance coverage relating to cybersecurity risks, and we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are not fully insured.
 
Third parties with which we do business may also be sources of cybersecurity or other technological risks. Cybersecurity failures or breaches by our investment adviser and other service providers (including, but not limited to, accountants, custodians, transfer agents and administrators), and the issuers of securities in which we invest, also have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with our ability to calculate its net asset value, impediments to trading, the inability of our stockholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputation damages, reimbursement of other compensation costs, or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future.
 
We outsource certain functions and these relationships allow for the storage and processing of our information, as well as customer, counterparty, employee and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above.
 
Our business and operations could be negatively affected because we have been named as a defendant in various securities class actions and derivative lawsuits and may be named in additional ones in the future, which could cause us to incur significant expense, hinder execution of investment strategy and impact our stock price.
 
In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been brought against that company. Stockholder activism, which could take many forms or arise in a variety of situations, has been increasing in the BDC space recently. The Company is currently a defendant in the FrontFour Action and the New York Actions, and due to the potential volatility of our stock price, the significant nature of the Amended MCC Merger Agreement (and that it involves affiliated parties) and for a variety of other reasons, we may in the future become the target of securities litigation or stockholder activism. Securities litigation and stockholder activism, including potential proxy contests, could result in substantial costs and divert management’s and our board of directors’ attention and resources from our business. Additionally, such securities litigation and stockholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist stockholder matters. Further, our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and stockholder activism. See “Risks Relating to the Mergers - We have been named as a defendant in various securities class actions and derivative lawsuits and may be named in additional ones in the future, which has resulted in, and which may result in the future in, substantial costs and may delay or prevent the completion of the Mergers or the MDLY Merger, as applicable.”

Risks Related to Our Investments

We may not realize gains from our equity investments.
 
When we make a debt investment, we may acquire warrants or other equity securities as well. In addition, we may invest directly in the equity securities of portfolio companies. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
 
Our investments are very risky and highly speculative.
 
We invest primarily in senior secured first lien term loans and senior secured second lien term loans issued by private middle-market companies.
 
Senior Secured Loans There is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies.
 
Equity Investments When we invest in senior secured first lien term loans or senior secured second lien term loans, we may receive warrants or other equity securities as well. In addition, we may invest directly in the equity securities of portfolio companies. The warrants or equity interests we receive

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may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our warrants or equity interests, and any gains that we do realize on the disposition of any warrants or equity interests may not be sufficient to offset any other losses we experience.
 
In addition, investing in private middle-market companies involves a number of significant risks. See “Our investments in private middle-market portfolio companies may be risky, and you could lose all or part of your investment” below.
 
Our investments in private middle-market portfolio companies may be risky, and you could lose all or part of your investment.
 
Investments in private middle-market companies involve a number of significant risks. Generally, little public information exists about these companies, and we are required to rely on the ability of the Investment Team to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Private middle-market companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees we may have obtained in connection with our investment. In addition, they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. Additionally, private middle-market companies are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us. Private middle-market companies also generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and MCC Advisors may, in the ordinary course of business, be named as defendants in litigation arising from our investments in these types of companies.
 
We intend to invest primarily in secured debt issued by our portfolio companies. In the case of our senior secured first lien term loans, the portfolio companies usually have, or may be permitted to incur, other debt that ranks equally with the debt securities in which we invest. With respect to our senior secured second lien term loans, the portfolio companies usually have, or may be permitted to incur, other debt that ranks above or equally with the debt securities in which we invest. In the case of debt ranking above the senior secured second lien term loans in which we invest, we would be subordinate to such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company and therefore the holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution. In the case of debt ranking equally with debt securities in which we invest, we would have to share any distributions on an equal and ratable basis with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.  
 
Additionally, certain loans that we make to portfolio companies may be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of, and be entitled to receive proceeds from, any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.
 
The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: (1) the ability to cause the commencement of enforcement proceedings against the collateral; (2) the ability to control the conduct of such proceedings; (3) the approval of amendments to collateral documents; (4) releases of liens on the collateral; and (5) waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.
 
Continuation of the current decline in oil and natural gas prices for a prolonged period of time could have a material adverse effect on the Company.

As of September 30, 2019, approximately 6.0% of our portfolio at fair value is invested in energy-related businesses. A decline in oil and natural gas prices would adversely affect the credit quality of these investments. A decrease in credit quality would, in turn, negatively affect the fair value of these investments, which would consequently negatively affect the Company's financial position and results of operations. Should the current decline in oil and natural gas prices persist, it is likely that the Company's energy-related portfolio companies' abilities to satisfy financial or operating covenants imposed by the Company or other lenders will be adversely affected, thereby negatively impacting the Company's financial condition and their ability to satisfy their debt service and other obligations to the Company.
 
Our portfolio companies may prepay loans, which prepayment may reduce stated yields if capital returned cannot be invested in transactions with equal or greater expected yields.
 
Our loans to portfolio companies are prepayable at any time, and most of them at no premium to par. It is uncertain as to when each loan may be prepaid. Whether a loan is prepaid will depend both on the continued positive performance of the portfolio company and the existence of favorable financing market conditions that allow such company the ability to replace existing financing with less expensive capital. As market conditions change frequently, it is unknown when, and if, this may be possible for each portfolio company. In the case of some of these loans, having the loan prepaid early may reduce

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the achievable yield for us below the stated yield to maturity contained herein if the capital returned cannot be invested in transactions with equal or greater expected yields.

We may acquire indirect interests in loans rather than direct interests, which would subject us to additional risk.
 
We may make or acquire loans or investments through participation agreements. A participation agreement typically results in a contractual relationship only with the counterparty to the participation agreement and not with the borrower. MCC Advisors has adopted best execution procedures and guidelines to mitigate credit and counterparty risk when we acquire a loan through a participation agreement. In investing through participations, we will generally not have a right to enforce compliance by the borrower with the terms of the loan agreement against the borrower, and we may not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a result, we will be exposed to the credit risk of both the borrower and the counterparty selling the participation. In the event of insolvency of the counterparty, we, by virtue of holding participation interests in the loan, may be treated as its general unsecured creditor. In addition, although we may have certain contractual rights under the loan participation that require the counterparty to obtain our consent prior to taking various actions relating to the loan, we cannot guarantee that the counterparty will seek such consent prior to taking various actions. Further, in investing through participation agreements, we may not be able to conduct the due diligence on the borrower or the quality of the loan with respect to which it is buying a participation that we would otherwise conduct if we were investing directly in the loan, which may result in us being exposed to greater credit or fraud risk with respect to the borrower or the loan than we expected when initially purchasing the participation. See “Risks Related to Our Business - There are significant potential conflicts of interest that could affect our investment returns” above.  
 
Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio and our ability to make follow-on investments in certain portfolio companies may be restricted.
 
Following an initial investment in a portfolio company, provided that there are no restrictions imposed by the 1940 Act, we may make additional investments in that portfolio company as “follow-on” investments in order to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or (3) attempt to preserve or enhance the value of our initial investment.
 
We have the discretion to make any follow-on investments, subject to the availability of capital resources. We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. Our failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make such follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, because we are inhibited by compliance with BDC requirements or because we desire to maintain our RIC tax treatment. We also may be restricted from making follow-on investments in certain portfolio companies to the extent that affiliates of ours hold interests in such companies.

Our ability to invest in public companies may be limited in certain circumstances.

To maintain our tax treatment as a BDC, we are not permitted to acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Subject to certain exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as qualifying assets only if such issuer has a market capitalization that is less than $250 million at the time of such investment. In addition, we may invest up to 30% of our portfolio in opportunistic investments which will be intended to diversify or complement the remainder of our portfolio and to enhance our returns to stockholders. These investments may include private equity investments, securities of public companies that are broadly traded and securities of non-U.S. companies. We expect that these public companies generally will have debt securities that are non-investment grade.
 
Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.
 
Our investment strategy contemplates that a portion of our investments may be in securities of foreign companies. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.
 
Although it is anticipated that most of our investments will be denominated in U.S. dollars, our investments that are denominated in a foreign currency will be subject to the risk that the value of a particular currency may change in relation to the U.S. dollar. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. We may employ hedging techniques to minimize these risks, but we can offer no assurance that we will, in fact, hedge currency risk or, that if we do, such strategies will be effective. As a result, a change in currency exchange rates may adversely affect our profitability.
 
Hedging transactions may expose us to additional risks.
 
We may engage in currency or interest rate hedging transactions. If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transaction may also limit the opportunity for gain if the values of the

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underlying portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.
 
While we may enter into transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek or be able to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.  
 
The disposition of our investments may result in contingent liabilities.
 
We currently expect that a significant portion of our investments will involve lending directly to private companies. In connection with the disposition of an investment in private securities, we may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to certain potential liabilities. These arrangements may result in contingent liabilities that ultimately yield funding obligations that must be satisfied through our return of certain distributions previously made to us.
 
If we invest in the securities and obligations of distressed and bankrupt issuers, we might not receive interest or other payments.
 
We may invest in the securities and obligations of distressed and bankrupt issuers, including debt obligations that are in covenant or payment default. Such investments generally are considered speculative. The repayment of defaulted obligations is subject to significant uncertainties. Defaulted obligations might be repaid only after lengthy workout or bankruptcy proceedings, during which the issuer of those obligations might not make any interest or other payments. We may not realize gains from our equity investments.
 
Risks Related to Our Operations as a BDC and a RIC
 
Regulations governing our operation as a BDC may limit 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 September 30, 2019, the Company’s asset coverage was 184.2% after giving effect to leverage and therefore the Company’s asset coverage is below 200%, the minimum asset coverage requirement under the 1940 Act. As a result, the Company is prohibited from making distributions to stockholders, including the payment of any dividend, and may not employ further leverage until the Company’s asset coverage is at least 200% after giving effect to such leverage.

Senior Securities. As a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred securities, such securities would rank “senior” to common stock in our capital structure, resulting in preferred stockholders having separate voting rights and possibly rights, preferences or privileges more favorable than those granted to holders of our common stock. Furthermore, the issuance of preferred securities could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for our common stockholders or otherwise be in your best interest.

Additional Common Stock. Our board of directors may decide to issue common stock to finance our operations rather than issuing debt or other senior securities. As a BDC, we are generally not able to issue our common stock at a price below NAV without first obtaining required approvals from our stockholders and our independent directors. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our board of directors, closely approximates the market value of such securities at the relevant time. We may also make rights offerings to our stockholders at prices per share less than the NAV per share, subject to the requirements of the 1940 Act. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease, and such stockholders may experience dilution.

Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure by us to comply with these laws or regulations, could have a material adverse effect on our business, results of operations or financial condition.
 
Changes in the laws or regulations or the interpretations of the laws and regulations that govern BDCs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, we may have to incur significant expenses in order to comply, or we might have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and may be subject to civil fines and criminal penalties.

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The impact of recent financial reform legislation on us is uncertain.
 
The Dodd-Frank Reform Act became effective on July 21, 2010. Many provisions of the Dodd-Frank Reform Act have delayed effective dates or have required extensive rulemaking by regulatory authorities. However, the new presidential administration has announced its intention to repeal, amend, or replace certain portions of the Dodd-Frank Act and the regulations implemented thereunder. Given the uncertainty associated with the manner in which and whether the provisions of the Dodd-Frank Act will be implemented, repealed, amended, or replaced, the full impact such requirements will have on our business, results of operations or financial condition is unclear. The changes resulting from the Dodd-Frank Act or any changes to the regulations already implemented thereunder may require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with any such laws, regulations or principles, or changes thereto, may negatively impact our business, results of operations or financial condition. While we cannot predict what effect any changes in the laws or regulations or their interpretations would have on us as a result of recent financial reform legislation, these changes could be materially adverse to us and our stockholders.
 
We cannot predict how tax reform legislation will affect the Company, our investments, or our stockholders, and any such legislation could adversely affect our business. 

Legislative or other actions relating to taxes could have a negative effect on the Company. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. In December 2017, Congress passed tax reform legislation, which the President signed into law. Such legislation has made many changes to the Code, including significant changes to the taxation of business entities, the deductibility of interest expense, and the tax treatment of capital investment. We cannot predict with certainty how any changes in the tax laws might affect us, our stockholders, or our portfolio investments. New legislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation could significantly and negatively affect our ability to qualify for tax treatment as a RIC or the U.S. federal income tax consequences to us and our stockholders of such qualification, or could have other adverse consequences. Stockholders are urged to consult with their tax advisors regarding tax legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in our securities.

Recent legislation may allow the Company to incur additional leverage.

The 1940 Act generally prohibits the Company from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of MCC’s assets). However, in March 2018, the SBCA modified the 1940 Act by allowing a business development company to increase the maximum amount of leverage it may incur from an asset coverage ratio of 200% to 150%, if certain requirements are met. Under the SBCA, the Company is allowed to increase its leverage capacity if our stockholders representing at least a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive stockholder approval, we would be allowed to increase our leverage capacity on the first day after such approval. Alternatively, the SBCA allows the majority of our independent directors to approve an increase in our leverage capacity, and such approval would become effective after the one-year anniversary of such proposal. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage.

As a result of the SBCA, the Company may be able to increase its leverage up to an amount that reduces our asset coverage ratio from 200% to 150%. Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, our stockholders will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the NAV attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause NAV to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect the Company’s ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Leverage is generally considered a speculative investment technique.

If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC, which would have a material adverse effect on our business, financial condition and results of operations.
 
As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Regulation”. Our intent is that a substantial portion of the investments that we acquire will constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could be found to be in violation of the 1940 Act provisions applicable to BDCs and possibly lose our tax treatment as a BDC, which would have a material adverse effect on our business, financial condition and results of operations.
 
We will become subject to corporate-level U.S. federal income tax if we are unable to maintain our qualification as a regulated investment company under Subchapter M of the Code or to satisfy regulatory investment company distribution requirements.
 
We have elected and qualified to be treated as a RIC under Subchapter M of the Code and intend to maintain such qualification for succeeding tax years. No assurance can be given that we will be able to qualify for and maintain our RIC tax treatment. To obtain and maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source and asset diversification requirements.

The distribution requirement for a RIC is satisfied if we distribute to our stockholders on an annual basis 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. Because we may use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that

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could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level U.S. federal income tax.

The income source requirement is satisfied if we obtain at least 90% of our income for each fiscal year from dividends, interest, gains from the sale of stock or securities or similar sources.

The asset diversification requirement is satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other acceptable securities, with those other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of its total assets and that does not represent more than 10% of the outstanding voting securities of such issuer; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet those requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC tax treatment. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

If we fail to qualify for RIC tax treatment for any reason or become subject to corporate-level U.S. federal income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on our results of operations and financial conditions, and thus, our stockholders.

Risks Relating to an Investment in Our Securities
 
Investing in our securities may involve an above average degree of risk.
 
The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and a higher risk of volatility or loss of principal. Our investments in portfolio companies involve higher levels of risk and, therefore, an investment in our securities may not be suitable for someone with lower risk tolerance.  
 
Shares of closed-end investment companies, including business development companies, may, at times, trade at a discount to their NAV.
 
Shares of closed-end investment companies, including business development companies, may, at times, trade at a discount from NAV. This characteristic of closed-end investment companies and business development companies is separate and distinct from the risk that our NAV per share may decline. We cannot predict whether our common stock will trade at, above or below NAV.
 
The market price of our common stock may fluctuate significantly.
 
The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

significant volatility in the market price and trading volume of securities of business development companies or other companies in our sector, which are not necessarily related to the operating performance of the companies;

changes in regulatory policies, accounting pronouncements or tax guidelines, particularly with respect to BDCs or RICs;

loss of our qualification as a RIC or BDC;

changes in earnings or variations in operating results;

changes in the value of our portfolio of investments;

changes in accounting guidelines governing valuation of our investments;

any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

departure of MCC Advisors’ or any of its affiliates’ key personnel;

operating performance of companies comparable to us;

general economic trends and other external factors; and

loss of a major funding source.

Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.
 
Sales of substantial amounts of our common stock, or the availability of such common stock for sale, could adversely affect the prevailing market prices for our common stock. If this occurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so.

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Certain provisions of the Delaware General Corporation Law and our certificate of incorporation and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.
 
The Delaware General Corporation Law, our certificate of incorporation and our bylaws contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price of our common stock.
  
The NAV per share of our common stock may be diluted if we sell shares of our common stock in one or more offerings at prices below the then current NAV per share of our common stock or securities to subscribe for or convertible into shares of our common stock.
 
While we currently do not have the requisite stockholder approval to sell shares of our common stock at a price or prices below our then current NAV per share, we may seek such approval in the future. In addition, at our 2012 Annual Meeting of Stockholders, we received approval from our stockholders to authorize the Company, with the approval of our board of directors, to issue securities to, subscribe to, convert to, or purchase shares of the Company’s common stock in one or more offerings, subject to certain conditions as set forth in the proxy statement. Such authorization has no expiration.  
  
Any decision to sell shares of our common stock below its then current NAV per share or issue securities to subscribe for or convertible into shares of our common stock would be subject to the determination by our board of directors that such issuance is in our and our stockholders’ best interests.
 
If we were to sell shares of our common stock below its then current NAV per share, such sales would result in an immediate dilution to the NAV per share of our common stock. This dilution would occur as a result of the sale of shares at a price below the then current NAV per share of our common stock and a proportionately greater decrease in the stockholders’ interest in our earnings and assets and their voting interest in us than the increase in our assets resulting from such issuance. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted.
 
If we issue warrants or securities to subscribe for or convertible into shares of our common stock, subject to certain limitations, the exercise or conversion price per share could be less than NAV per share at the time of exercise or conversion (including through the operation of anti-dilution protections). Because we would incur expenses in connection with any issuance of such securities, such issuance could result in a dilution of the NAV per share at the time of exercise or conversion. This dilution would include reduction in NAV per share as a result of the proportionately greater decrease in the stockholders’ interest in our earnings and assets and their voting interest than the increase in our assets resulting from such issuance.
 
Further, if our current stockholders do not purchase any shares to maintain their percentage interest, regardless of whether such offering is above or below the then current NAV per share, their voting power will be diluted. For example, if we sell an additional 10% of our shares of common stock at a 5% discount from NAV, a stockholder who does not participate in that offering for its proportionate interest will suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV.
 
The U.S. Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future.

The U.S. Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the U.S. Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have currently incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the U.S. Notes.
 
The U.S. Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
 
The U.S. Notes are obligations exclusively of the Company and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the U.S. Notes and the U.S. Notes are not required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the U.S. Notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the U.S. Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the U.S. Notes will be structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish. Although our subsidiaries currently do not have any indebtedness outstanding, they may incur substantial indebtedness in the future, all of which would be structurally senior to the U.S. Notes.
 
The indenture under which the U.S. Notes were issued contains limited protection for holders of the U.S. Notes.

The indenture under which the U.S. Notes were issued offers limited protection to holders of the U.S. Notes. The terms of the indenture and the U.S. Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on your investment in the U.S. Notes. In particular, the terms of the indenture and the U.S. Notes place no restrictions on our or our subsidiaries’ ability to:

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 U.S. Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the U.S. Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed

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by one or more of our subsidiaries and which therefore is structurally senior to the U.S. 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 U.S. Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) of the 1940 Act, as modified by Section 61(a)(1) of the 1940 Act, or any successor provisions. 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 September 30, 2019, the Company’s asset coverage was 184.2% after giving effect to leverage and therefore the Company is prohibited from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities;

pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the U.S. Notes, in each case other than dividends, purchases, redemptions or payments that would cause a violation of Section 18(a)(1)(B) of the 1940 Act, as modified by Section 61(a)(1) of the 1940 Act, or any successor provisions. 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. As of September 30, 2019, the Company’s asset coverage was 184.2% after giving effect to leverage and therefore the Company is prohibited from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock;

sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

enter into transactions with affiliates;

create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

make investments; or

create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

In addition, the indenture does not require us to offer to purchase the U.S. Notes in connection with a change of control or any other event.

Furthermore, the terms of the indenture and the U.S. Notes generally do not protect holders of the U.S. Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity other than as described under the indenture. Any changes, while unlikely, to the financial tests in the 1940 Act could affect the terms of the U.S. Notes.

Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the U.S. Notes may have important consequences for you as a holder of the U.S. Notes, including making it more difficult for us to satisfy our obligations with respect to the U.S. Notes or negatively affecting the trading value of the U.S. Notes. Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the U.S. Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the U.S. Notes.

An active trading market for the Notes may not develop or be sustained, which could limit the market price of the Notes or your ability to sell them.

Although the Notes are listed on the NYSE under the symbols “MCV,” in the case of the 2023 Notes, and “MCX,” in the case of the 2021 Notes, and listed on the Tel Aviv Stock Exchange (“TASE”) in the case of the Israeli 2021 Notes, we cannot provide any assurances that an active trading market will develop or be sustained for the Notes or that you will be able to sell your Notes. At various times, the Notes may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, general economic conditions, our financial condition, performance and prospects and other factors. To the extent an active trading market is not sustained, the liquidity and trading price for the Notes may be harmed.

We may be unable to meet our covenant obligations under the agreements governing certain of our debt instruments, which could adversely affect our business.
 
The agreements governing certain of our debt instruments impose certain financial and operating covenants that may restrict a portion of our business activities, including limitations that could hinder our ability to obtain additional financings and make distributions.  If we cannot meet these covenants, events of default would arise, which could result in payment of the applicable indebtedness being accelerated and may limit our ability to execute on our investment strategy and have a material adverse impact on our liquidity, financial condition and results of operations. For example, with regard to the Israeli 2021 Notes, as of September 30, 2019, we have net assets of $216.4 million and a maximum debt to total assets ratio of below 70%. Therefore, as of September 30, 2019, we were in compliance with the minimum net assets covenant under the Israeli 2021 Notes. However, if we experience realized losses or unrealized declines in the fair value of the Company’s portfolio investments, it is reasonably likely, absent injection of capital or waivers or an amendment to the covenants, that we could not satisfy the minimum net assets covenant under the Israeli 2021 Notes as early as the date we publish financial statements for the quarter ending December 31, 2019, which would be no later than February 21, 2020.  While there are no immediate consequences to breaching this financial covenant for a single period, if the Company reports net assets of less than $215 million for two consecutive quarters and does not obtain an extension of time, the holders of the Israel 2021 Notes can require that the Israeli 2021 Notes be accelerated. In that regard, if the Company’s net assets are below $215 million as of December 31, 2019, and the Company’s net assets remain below $215 million as of March 31, 2020, and the Company does not obtain an extension of time for compliance or an adequate waiver or amendment, then an event of default on the Israeli 2021 Notes will occur on the date that the Company publishes its quarterly report on Form 10-Q for the fiscal quarter ending March 31, 2020, which would be no later than May 11, 2020. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Secured Notes - Israeli 2021 Notes.”

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If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

Any default under the agreements governing our indebtedness that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under the debt that we may incur in the future to avoid being in default. If we breach our covenants under our debt and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under such debt, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt. Because any future credit facility will likely have customary cross-default provisions, if the indebtedness under the Notes or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.

If we issue preferred stock, the NAV and market value of our common stock may become more volatile.
 
If we issue preferred stock, we cannot assure you that such issuance would result in a higher yield or return to the holders of our common stock. The issuance of preferred stock would likely cause the NAV and market value of our common stock to become more volatile. If the dividend rate on the preferred stock were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of our common stock would be reduced. If the dividend rate on the preferred stock were to exceed the net rate of return on our portfolio, the leverage would result in a lower rate of return to the holders of our common stock than if we had not issued preferred stock. Any decline in the NAV of our investments would be borne entirely by the holders of our common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater decrease in NAV to the holders of our common stock than if we were not leveraged through the issuance of preferred stock. This greater NAV decrease would also tend to cause a greater decline in the market price for our common stock. We might be in danger of failing to maintain the required asset coverage of the preferred stock or of losing our ratings on the preferred stock or, in an extreme case, our current investment income might not be sufficient to meet the dividend requirements on the preferred stock. In order to counteract such an event, we might need to liquidate investments in order to fund a redemption of some or all of the preferred stock. In addition, we would pay (and the holders of our common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, including higher advisory fees if our total return exceeds the dividend rate on the preferred stock. Holders of preferred stock may have different interests than holders of our common stock and may at times have disproportionate influence over our affairs.
 
Holders of any preferred stock we might issue would have the right to elect members of the board of directors and class voting rights on certain matters.
 
Holders of any preferred stock we might issue, voting separately as a single class, would have the right to elect two members of the board of directors at all times and in the event dividends become two full years in arrears, would have the right to elect a majority of our directors until such arrearage is completely eliminated. In addition, preferred stockholders would have class voting rights on certain matters, including changes in fundamental investment restrictions and conversion to open-end status, and accordingly would be able to veto any such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies or the terms of any credit facility to which MCC is a party, might impair our ability to maintain our qualification as a RIC for U.S. federal income tax purposes. While we would intend to redeem our preferred stock to the extent necessary to enable us to distribute our income as required to maintain our qualification as a RIC, there can be no assurance that such actions could be effected in time to meet the tax requirements.

RISKS RELATING TO THE MERGERS

On July 29, 2019, the Company entered into an amended and restated definitive agreement to merge with Sierra. Pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019, by and between the Company and Sierra (the “Amended MCC Merger Agreement”), the Company will, on the terms and subject to the conditions set forth in the Amended MCC Merger Agreement, merge with and into Sierra, with Sierra as the surviving company (the “Combined Company”) in the merger (the “MCC Merger”). Pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019, by and among MDLY, Sierra and Merger Sub (the “Amended MDLY Merger Agreement”), MDLY will, on the terms and subject to the conditions set forth in the Amended MDLY Merger Agreement, merge with and into Merger Sub, with Merger Sub as the surviving company in the merger (the “MDLY Merger” together with the MCC Merger, the “Mergers”), and MDLY’s existing asset management business will continue to operate as a wholly owned subsidiary of the Combined Company. Pursuant to terms of the Amended MCC Merger Agreement, the consummation of the MCC Merger is conditioned upon the satisfaction or waiver of each of the conditions to closing under the Amended MDLY Merger Agreement and the consummation of the MDLY Merger. However, pursuant to the terms of the Amended MDLY Merger Agreement, the consummation of the MDLY Merger is not conditioned upon the consummation of the MCC Merger. If the Mergers are or only the MDLY Merger is consummated, Sierra’s common stock will be listed on the NYSE under the symbol “SRA”, with such listing expected to be effective as of the closing date of the Mergers, or the MDLY Merger, as applicable. If the MCC Merger is also consummated, Sierra's common stock will be listed on the TASE, with such listing expected to be effective as of the closing date of the Mergers. Upon completion of both of the Mergers, the investment portfolios of the Company and Sierra would be combined, Merger Sub, as a successor to MDLY, would be a wholly owned subsidiary of the Combined Company, and the Combined Company would be internally managed by its wholly controlled adviser subsidiary. If the MDLY Merger is consummated and the MCC Merger is not consummated, Sierra’s common stock would be listed on the NYSE (but not the TASE), and the investment portfolios of the Company and Sierra would not be combined. Set forth below are certain risks relating to the Mergers. For more information, please refer to our proxy statement on Schedule 14A that will be filed with the SEC on when available.


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The completion of the Mergers is subject to several conditions, including, the receipt of SEC exemptive relief and, with respect to the MCC Merger, court approval of the Settlement. There can be no assurances when or if the Mergers will be completed.

Although the Company, Sierra and MDLY expect to complete the Mergers as early as the first quarter of 2020, there can be no assurances as to the exact timing of completion of the MCC Merger or the MDLY Merger, or that the Mergers will be completed at all. The completion of the Mergers is subject to numerous conditions, including, among others, the continued effectiveness of the Registration Statement on Form N-14; the approval of Sierra’s common stock (including the Settlement Shares (as defined in the Amended MCC Merger Agreement) and the shares of Sierra’s common stock to be issued in the Mergers) for listing on the NYSE; receipt of requisite approvals of each of our stockholders, Sierra’s stockholders, and MDLY’s stockholders; receipt of required regulatory approvals, including from the SEC (including necessary exemptive relief to consummate the Mergers); the settlement of the FrontFour Action in accordance with the Settlement; any necessary approvals under the Hart Scott Rodino Antitrust Improvements Act of 1976, amended, and, if applicable, state securities regulators; the SEC shall not have rescinded its confirmation that the equity of Merger Sub, as the successor to MDLY Merger, be treated as a portfolio investment of the Combined Company and reflected in the Combined Company’s consolidated financial statements at fair value for accounting purposes (i.e., not consolidated into the financial statements of the Combined Company); the relevant parties having taken all actions reasonably required in order to keep existing indebtedness outstanding following the Mergers; receipt of necessary consents relating to joint ventures between us and Sierra; receipt of a specified level of consents from third-party advisory clients of MDLY; with respect to the MCC Merger, satisfaction (or appropriate wavier) of the conditions to closing of the MDLY Merger; and other customary closing conditions. There is no assurance that any of the foregoing conditions will be satisfied.

The Company, Sierra and MDLY cannot assure their respective stockholders that the conditions required to complete the Mergers will be satisfied or waived on the anticipated schedule, or at all. If the Mergers are not completed, the resulting failure of the Mergers could have a material adverse impact on the Company’s, Sierra’s, and MDLY’s financial condition, results of operations, assets or business. In addition, if the Mergers are not completed, the Company, Sierra, and MDLY will have incurred substantial expenses for which no ultimate benefit will have been received, and if the MDLY Merger is completed and the MCC Merger is not consummated, the Company will have incurred substantial expenses for which no ultimate benefit will have been received. See “If the Mergers do not close, we will not benefit from the expenses incurred in connection with the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement. If the MDLY Merger closes and the MCC Merger does not close, we will not benefit from the expenses incurred in connection with the Amended MCC Merger Agreement.” Moreover, if either the Amended MCC Merger Agreement or the Amended MDLY Merger Agreement is terminated under certain circumstances, the Company, Sierra or MDLY may be obligated to pay the other party to the applicable merger agreement a termination fee. See “Under certain circumstances, we may be obligated to pay a termination fee upon termination of the Amended MCC Merger Agreement.” Any decision that our stockholders, Sierra’s stockholders, and MDLY’s stockholders make should be made with the understanding that the completion of the Mergers may not happen as scheduled, or at all.

If the Mergers are completed, certain additional risks regarding the Combined Company following the Mergers may be presented.

Because the NAV of Sierra may change, our stockholders cannot be sure of the value of the stock portion of the merger consideration or, in the case of the eligible members of the Settlement Class (as defined in the Stipulation), the Settlement Shares, they will receive until the MCC Merger effective time.

Under the Amended MCC Merger Agreement, the MCC Merger Exchange Ratio is not subject to adjustment based on changes in the NAV of Sierra or the market price of our common stock before the MCC Merger effective time. In addition, under the Stipulation, the defendant parties to the Stipulation (other than MDLY) shall, among other things, deposit or cause to be deposited the Settlement Shares, the number of shares of which is to be calculated using the pro forma NAV reported in the subsequent proxy supplement describing the Amended MCC Merger Agreement, and is not subject to subsequent adjustment based on changes in the NAV of Sierra or the market price of our common stock before the MCC Merger effective time.
Accordingly, at the time of the stockholder meeting, our stockholders will not know or be able to calculate with certainty the value of the merger consideration they would receive upon the completion of the Mergers, and such value may vary materially from the value of the merger consideration determined as of the date the MCC Merger was announced, as of the date that this the subsequent proxy supplement describing the Amended MCC Merger Agreement is mailed to our stockholders, and as of the date of the special meeting of our stockholders. Any change in the NAV of Sierra prior to completion of the Mergers will affect the value (either positively or negatively) of the merger consideration to be paid by Sierra, and to be received by our stockholders upon the completion of the Mergers relative to the value of the merger consideration determined as of the date the respective Mergers were announced.

The value of the stock portion of the merger consideration that our stockholders will receive upon the completion of the Mergers may be affected, either positively or negatively, by the trading performance of Sierra’s common stock following the Mergers.

There is currently no public trading market for Sierra’s common stock and there is no way to predict with certainty how the shares of Sierra’s common stock, including the shares of Sierra’s common stock to be issued in the Mergers will trade following consummation of the Mergers. Any change in the trading price of Sierra’s common stock following completion of the Mergers will affect the value (either positively or negatively) of the stock portion of the merger consideration received by MCC Stockholders upon the completion of the Mergers. Stock price changes may result from a variety of factors, including, among other things:

changes in the business, operations or prospects of the Combined Company;
the financial condition of current or prospective portfolio companies of the Combined Company;
interest rates or general market or economic conditions;
the supply and demand for the Combined Company’s common stock; and
 market perception of the future profitability of the Combined Company.

These factors are generally beyond the control of the Company and Sierra prior to completion of the Mergers and, following completion of the Mergers, will generally be beyond the control of the Combined Company or. As noted above, there is currently no public trading market for Sierra’s common stock and there is no way to predict with certainty how the shares of Sierra’s common stock will trade following consummation of the Mergers. During the 12-month period ending September 30, 2019, the NAV per share of Sierra’s common stock varied from a low of $6.03 to a high of $6.72 and the

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closing price per share of our common stock varied from a low of $2.20 to a high of $3.95. However, the historical NAV per share of Sierra and the historic trading prices of our common stock are not necessarily indicative of future performance of Sierra’s common stock following the Mergers.

The inability of Sierra, the Company and/or MDLY to obtain certain third-party consents and approvals could delay or prevent the completion of the Mergers or the MDLY Merger, as applicable.

Pursuant to the Amended MCC Merger Agreement, each of Sierra’s and the Company’s obligations to complete the MCC Merger is conditioned upon, among other things, and in addition to the regulatory approvals described below (see “- There can be no assurances when or if the Mergers will be completed”), the prior receipt by Sierra or the Company, as applicable, of third party consents and approvals relating to the joint venture arrangements of Sierra and MCC. In addition, each of Sierra’s and the Company’s obligations to complete the MCC Merger is conditioned upon completion of the MDLY Merger, pursuant to the Amended MDLY Merger Agreement, having received written consents to the continuation, following the MDLY Merger effective time, of the advisory relationship with private funds and managed accounts representing 65% of MDLY’s total revenues from private funds and managed accounts for the 12-month period ended June 30, 2018. In addition to the foregoing mutual conditions for closing, Sierra and the Company must obtain all consents and approvals, and take all necessary steps, in order to keep their respective indebtedness outstanding following the MCC Merger effective time. Although Sierra and the Company expect that all such approvals and consents will be obtained and remain in effect and all conditions related to such consents will be satisfied, if they are not, the closing of the Mergers or the MDLY Merger, as applicable, could be significantly delayed, only the MDLY Merger may occur, or both Mergers may not occur at all.

Pursuant to the Amended MDLY Merger Agreement, each of Sierra’s and MDLY’s obligations to complete the MDLY Merger is conditioned upon, among other things, and in addition to the regulatory approvals described below (see the “- There can be no assurances when or if the Mergers will be completed”), prior receipt by MDLY of written consents to the continuation, following the MDLY Merger effective time, of the advisory relationship with private funds and managed accounts representing 65% of MDLY’s total revenues from private funds and managed accounts for the 12-month period ended June 30, 2018. In addition to the foregoing mutual conditions for closing, Sierra and MDLY must obtain all consents and approvals, and take all necessary steps, in order to keep their respective indebtedness outstanding following the MDLY Merger effective time. Although Sierra and MDLY expect that all such approvals and consents will be obtained and remain in effect and all conditions related to such consents will be satisfied, if they are not, the closing of the Mergers or the MDLY Merger, as applicable, could be significantly delayed, only the MDLY Merger may occur, or both Mergers may not occur at all.

The opinions obtained by our special committee from its financial advisors will not reflect changes in circumstances after the date of the opinion between signing of the Amended MCC Merger Agreement and the MCC Merger effective time.

Our special committee has not obtained updated opinions from its financial advisor and does not anticipate obtaining updated opinions prior to the MCC Merger effective time. Changes in the operations and prospects of the Company and Sierra, general market and economic conditions and other factors beyond the control of the Company or Sierra and on which our special committee’s financial advisors’ opinions were based may significantly alter the value of Sierra or the Company or the prices at which shares of our common stock or the NAV per share of Sierra’s common stock by the time the MCC Merger is completed. The opinion of such financial advisor speaks only to the date such opinion was rendered and do not speak as of the time the MCC Merger will be completed or as of any other date. Our special committee does not expect to obtain updated opinions from its financial advisor.

The MCC Merger consideration was the product of extensive negotiations among the special committees of the Company and Sierra and therefore may include business considerations beyond share price, NAV or other financial or valuation metrics relating to MCC and Sierra.

The Mergers were the product of extensive negotiations among the parties and each special committee considered a number of factors in determining to enter into the Amended MCC Merger Agreement. As a result, the terms of the Amended MCC Merger Agreement are not necessarily reflective of the share price, NAV or other financial or valuation metrics relating to Sierra, MCC, and MDLY at the time the merger agreements were entered into, and may reflect additional business considerations.

We have been named as a defendant in various securities class actions and derivative lawsuits and may be named in additional ones in the future, which has resulted in, and which may result in the future in, substantial costs and may delay or prevent the completion of the Mergers.

The Company is currently a defendant in the FrontFour Action and the New York Actions. For more information about such legal proceedings, see “Item 3. Legal Proceedings.” The Company may be a target of additional securities class actions and derivative lawsuits. Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into merger agreements in an effort to enjoin the merger or seek monetary relief from such companies. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. The Company cannot predict the outcome of these lawsuits, or others, if any, nor can we predict the amount of time and expense that will be required to resolve any such litigation. An unfavorable resolution of any such litigation surrounding the Mergers could delay or prevent their consummation. In addition, the costs defending the litigation, even if resolved in our favor, could be substantial and such litigation could distract us from pursuing the consummation of the Mergers and other potentially beneficial business opportunities. It is a condition to the completion of the MCC Merger that the FrontFour Action be settled in accordance with the terms of the Settlement.

If the Mergers do not close, we will not benefit from the expenses incurred in connection with the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement. If the MDLY Merger closes and the MCC Merger does not close, we will not benefit from the expenses incurred in connection with the Amended MCC Merger Agreement.

The Company has incurred, and will continue to incur, substantial expenses in connection with the Mergers. The Mergers may not be completed. If the Mergers are not completed we will have incurred substantial expenses for which no ultimate benefit will have been received. If only the MDLY Merger closes, the Company will have incurred substantial expenses for which no ultimate benefit will have been received. We have incurred out-of-pocket expenses in connection with the Mergers for investment banking, legal and accounting fees and financial printing and other costs and expenses, much of which will be incurred even if the Mergers are not completed. In addition, depending upon the circumstances surrounding termination of the Amended MCC Merger Agreement or the Amended MDLY Merger Agreement, as applicable, we may be obligated to pay a termination fee to the other party to

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the applicable merger agreement. See “Under certain circumstances, we may be obligated to pay a termination fee upon termination of the Amended MCC Merger Agreement.”

Failure to complete the Mergers could negatively impact the business, financial results, and ability to pay dividends and distributions, if any or at its current level, to our stockholders, and negatively impact our stock prices.

If the Mergers are not completed, our ongoing business may be adversely affected.  We may experience negative reactions from the financial markets and from our creditors and customers if the anticipated benefits of the Mergers are not able to be realized.  Such anticipated benefits include, among others, the expected increase in distributions to the stockholders of the Combined Company, the benefits of the larger balance sheet of the Combined Company and potential for greater scale, the fee earning potential of Merger Sub’s asset management business, the enhanced market value of Sierra’s common stock following the completion of the Mergers upon listing on the NYSE and the TASE (in connection with the MCC Merger), and the benefits of operational efficiencies, cost savings, and synergies.  If the Mergers are not consummated, we cannot assure our stockholders that the risks described above will not negatively impact the business, financial results, and ability to pay dividends and distributions, if any or at its current level, to our stockholders, and negatively impact our stock prices.

Termination of the Amended MCC Merger Agreement or the Amended MDLY Merger Agreement or failure to otherwise complete the Mergers could negatively impact us.

Termination of the Amended MCC Merger Agreement or the Amended MDLY Merger Agreement or any failure to otherwise complete the Mergers may result in various consequences, including:

our business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Mergers, without realizing any of the anticipated benefits of completing the Mergers; 

the market price of our common stock may decline to the extent that the market price prior to termination reflects a market assumption that the Mergers will be completed; 

we may not be able to find a party willing to pay an equivalent or more attractive price than the price Sierra has agreed to pay in the MCC Merger and the MDLY Merger, respectively; and

the payment of any termination fee, if required under the circumstances, could adversely affect our financial condition and liquidity.

Under certain circumstances, we may be obligated to pay a termination fee upon termination of the Amended MCC Merger Agreement.

The Amended MCC Merger Agreement provides for the payment by us or Sierra to the other party a termination fee of $6,000,000 in cash if the Amended MCC Merger Agreement is terminated by us or Sierra under certain circumstances.

The Amended MCC Merger Agreement limits our ability to actively pursue alternatives to the MCC Merger and to accept a superior proposal.

The Amended MCC Merger Agreement contains provisions that limit the Company’s ability to actively solicit, discuss or negotiate competing third-party proposals for strategic transactions following the end of the “go-shop” process conducted by our special committee. Although these provisions, which are customary for transactions of this type, allows us to engage in negotiations regarding, and to ultimately accept, a “MCC Merger Superior Proposal” (as such term is defined in the Amended MCC Merger Agreement), in certain circumstances, subject to the payment of a termination fee, such provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of the Company from considering or proposing a MCC Merger Superior Proposal to us, or might result in a potential competing acquiror proposing to pay a lower price to acquire us than it might otherwise have proposed to pay.

In certain circumstances, Sierra, the Company, and MDLY may waive one or more conditions to the Mergers or the MDLY Merger, as applicable, or amend the Amended MCC Merger Agreement or the Amended MDLY Merger Agreement, without resoliciting stockholder approval.

Certain conditions to Sierra’s and the Company’s obligations to complete the MCC Merger may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by agreement of Sierra and the Company. In addition, certain conditions to Sierra’s and MDLY’s obligations to complete the MDLY Merger may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by agreement of Sierra and MDLY. In the event that any such waiver does not require resolicitation of stockholders, the parties to the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement will have the discretion to complete the MCC Merger and the MDLY Merger, respectively, without seeking further stockholder approval. However, certain conditions, such as the conditions requiring the approval of Sierra’s stockholders, our stockholders and MDLY’s stockholders, are required under applicable law or the applicable company’s charter documents and may not be waived.

The Amended MCC Merger Agreement and the Amended MDLY Merger Agreement may be amended by the respective parties at any time before or after receipt of approval of Sierra’s stockholders, approval of our stockholders, or the approval of MDLY’s stockholders, as the case may be; provided, however, that after receipt of the relevant stockholder approvals, there may not be any amendment of the Amended MCC Merger Agreement or the Amended MDLY Merger Agreement that requires further approval under applicable law or its charter documents of the relevant stockholders without receipt of such further approvals.

In addition to the foregoing, waiver or amendment of the Amended MCC Merger Agreement requires the consent of MDLY to the extent such waiver or amendment would adversely affect the economic or other rights or interests of MDLY and the MDLY’s stockholders under the Amended MCC Merger Agreement in any material respect. Conversely, waiver or amendment of the Amended MDLY Merger Agreement requires the consent of the Company to the extent such waiver or amendment would adversely affect the economic or other rights or interests of the Company and our stockholders under the Amended MDLY Merger Agreement in any material respect.

45




Certain persons related to us have interests in the Mergers that differ from the interests of our stockholders.

Certain of our directors and executive officers of the Company have financial interests in the Mergers that are different from, or in addition to, the interests of our stockholders. Our special committee, comprised solely of the independent directors of our board, and, acting on the recommendation of our special committee, our board of directors were aware of and considered these interests, among other matters, in evaluating the Amended MCC Merger Agreement, including the MCC Merger, and in recommending to our stockholders to approve the adoption of the Amended MCC Merger Agreement.

We will be subject to business uncertainties and contractual restrictions while the Mergers are pending.

Uncertainty about the effect of the Mergers may have an adverse effect on us and, consequently, on the Combined Company, following completion of the Mergers. These uncertainties could cause those that deal with us to seek to change their existing business relationships with us. In addition, each of the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement restricts us from taking actions that it might otherwise consider to be in its respective best interests. These restrictions may prevent us from pursuing certain business opportunities that may arise prior to the completion of the Mergers.

The shares of Sierra’s common stock to be received by our stockholders as a result of the Mergers will have different rights associated with them than shares of our common stock currently held by them.

The rights associated with our common stock are different from the rights associated with Sierra’s common stock following the Mergers.

If the MDLY Merger is consummated and the MCC Merger is not consummated, the investment management agreement would be automatically terminated, which could have a material adverse effect on us.

If the MDLY Merger is consummated and the MCC Merger is not consummated, such change of control would result in an assignment under our investment management agreement. Our investment management agreement will automatically terminate in the event of its assignment. In that event, if our board of directors desires for MCC Advisors to continue to serve as the Company’s investment adviser, then our board of directors, including a majority of independent directors, and our stockholders would be required to approve a new investment management agreement by and between the Company and MCC Advisors, which could cause disruption in the Company's business and may adversely affect the Company's ability to successfully implement its business strategy. This process also could be costly and time consuming.

The MCC Merger and the MDLY Merger are conditioned on the Company, Sierra, MDLY and certain of its affiliates receiving exemptive relief from the SEC.

The MCC Merger and the MDLY Merger are conditioned on the Company, Sierra, MDLY, and certain of their affiliates, as applicable, receiving exemptive relief from the SEC from: (i) Sections 17(d) and 57(a)(1), (2), and (4) of the 1940 Act and Rule 17d-1 thereunder because the Mergers would involve a joint arrangement among two affiliated BDCs and their investment advisers and (ii) Sections 12(d)(3) and 60 of the 1940 Act because, in connection with the MDLY Merger, MDLY, a registered investment adviser, will be become a wholly owned subsidiary of the Combined Company or the Sierra/MDLY Company, as applicable. In addition, Sierra and certain of its affiliates are requesting exemptive relief from the SEC from Sections 23(a), 23(b), 23(c), and 63 and pursuant to Section 61(a)(3)(B) and Sections 57(a)(4) and 57(i) of the 1940 Act and Rule 17d-1 thereunder that would permit the Combined Company or the Sierra/MDLY Company, as applicable, to grant stock options, restricted stock, and restricted stock units in exchange for and in recognition of services by its directors, executive officers and employees. There can be no assurance if or when the Company, Sierra and MDLY will receive the exemptive relief.

Our stockholders could be subject to significant U.S. federal income tax liabilities if the MCC Merger fails to qualify as tax-free reorganizations for U.S. federal income tax purposes.

The completion of the MCC Merger is conditioned upon the receipt of the MCC Merger tax opinion from Eversheds Sutherland (US) LLP or other acceptable counsel, dated the closing date of the MCC Merger, substantially to the effect that the MCC Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. The MCC Merger tax opinion is not binding on the IRS or a court, and does not preclude the IRS from asserting or adopting a contrary position. It is possible that the MCC Merger may fail to satisfy all of the requirements necessary to qualify as a tax-free reorganization. In this event, our stockholders could be subject to certain U.S. federal income tax consequences and, among others, the MCC Merger would result in the recognition of gain or loss to our stockholders in the amount equal to the difference between their tax basis in their shares of our common stock and the MCC Merger consideration for U.S. federal income tax purposes. Our stockholders would, in the event that the MCC Merger does not qualify as tax-free reorganizations, receive a new tax basis in the shares of Sierra’s common stock they receive (initially equal to the value of such shares at the time of the MCC Merger) for calculation of gain or loss upon their ultimate disposition and would start a new holding period for such shares.

The U.S. federal income tax consequences to our stockholders in the event that the MCC Merger fails to qualify as tax-free reorganizations are complex. Our stockholders are urged to consult their tax advisors regarding the U.S. federal income tax consequences that may be applicable to them in the event that the MCC Merger does not qualify as tax-free reorganizations for U.S. federal income tax purposes.
Item 1B. Unresolved Staff Comments
 
None.
 
Item 2. Properties

Properties

We do not own any real estate or other physical properties materially important to our operation. Our headquarters are currently located at 280 Park Avenue, 6th Floor East, New York, NY 10017. Our administrator furnishes us office space and we reimburse it for such costs on an allocated basis.

Item 3. 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.

On January 25, 2019, two purported class actions were commenced in the Supreme Court of the State of New York, County of New York, by alleged stockholders of Medley Capital Corporation, captioned, respectively, Helene Lax v. Brook Taube, et al., Index No. 650503/2019, and Richard Dicristino, et al. v. Brook Taube, et al., Index No. 650510/2019 (together with the Lax Action, the “New York Actions”). Named as defendants in each complaint are Brook Taube, Seth Taube, Jeffrey Tonkel, Arthur S. Ainsberg, Karin Hirtler-Garvey, John E. Mack, Mark Lerdal, Richard T. Allorto, Jr., Medley Capital Corporation, Medley Management Inc., Sierra Income Corporation, and Sierra Management, Inc. The complaints in each of the New York Actions allege that the individuals named as defendants breached their fiduciary duties in connection with the proposed merger of MCC with and into Sierra, and that the other defendants aided and abetted those alleged breaches of fiduciary duties. Compensatory damages in unspecified amounts are sought. On February 27, 2019, the Court entered a stipulated scheduling order requiring that defendants respond to the complaints 45 days following the later of (a) the stockholder vote on the proposed merger and (b) plaintiffs’ filing of a consolidated, amended complaint. A preliminary conference is scheduled to take place on December 17, 2019. The defendants believe the claims asserted in the New York Actions are without merit and they intend to defend

46



these lawsuits vigorously. At this time, we are unable to determine whether an unfavorable outcome from these matters is probable or remote or to estimate the amount or range of potential loss, if any.

On February 11, 2019, a purported stockholder class action was commenced in the Court of Chancery of the State of Delaware by FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. (together, “FrontFour”), captioned as FrontFour Capital Group LLC, et al. v. Brook Taube, et al., Case No. 2019-0100 (the “FrontFour Action”) against defendants Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, Sierra, the Company, MCC Advisors, Medley Group LLC, and Medley LLC. The complaint, as amended on February 12, 2019, alleged that the individuals named as defendants breached their fiduciary duties to the Company’s stockholders in connection with the MCC Merger, and that MDLY, Sierra, MCC Advisors, Medley Group LLC, and Medley LLC aided and abetted those alleged breaches of fiduciary duties. The complaint sought to enjoin the vote of MCC stockholders on the proposed merger and enjoin enforcement of certain provisions of the Agreement and Plan of Merger, dated as of August 9, 2018, by and between MCC and Sierra (the “MCC Merger Agreement”). The Court held a trial on the plaintiffs’ claims on March 6-7, 2019 and issued a Memorandum Opinion (the “Decision”) on March 11, 2019. The Court denied the plaintiffs' requests to (i) permanently enjoin the proposed merger and (ii) require the Company to conduct a “shopping process” for the Company on terms proposed by the plaintiffs in their complaint. The Court held that the Company’s directors breached their fiduciary duties in entering into the proposed merger, but rejected the plaintiffs' claim that Sierra aided and abetted those breaches of fiduciary duties. The Court ordered the defendants to issue corrective disclosures consistent with the Decision, and enjoined a vote of the Company’s stockholders on the proposed merger until such disclosures have been made and stockholders have had the opportunity to assimilate this information. On March 20, 2019, another purported stockholder class action was commenced by Stephen Altman against Brook Taube, Seth Taube, Jeff Tonkel, Arthur S. Ainsberg, Karin Hirtler-Garvey, Mark Lerdal, and John E. Mack in the Court of Chancery of the State of Delaware, captioned Altman v. Taube, Case No. 2019-0219 (the “Altman Action”). The complaint alleged that the defendants breached their fiduciary duties to stockholders of the Company in connection with the vote of the Company’s stockholders on the proposed mergers. On April 8, 2019, the Court granted a stipulation consolidating the FrontFour Action and the Altman Action, designating the amended complaint in the FrontFour Action as the operative complaint, and designating the plaintiffs in the FrontFour Action and their counsel the lead plaintiffs and lead plaintiffs’ counsel, respectively.

On April 15, 2019, certain parties reached agreement on the principal terms of a settlement of the FrontFour Action, which were contained in a term sheet, dated April 15, 2019 (the “Settlement Term Sheet”). On July 29, 2019, MCC entered into a Stipulation of Settlement (and, as amended on August 8, 2019, the “Stipulation”) by and among the Company, Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, MCC Advisors, Medley LLC and Medley Group LLC (the “Medley Parties”), on the one hand, and FrontFour, on behalf of itself and a class of similarly situated stockholders of the Company, on the other hand, in connection with the FrontFour Action.

The Stipulation provides for the settlement of all claims brought against the Medley Parties in the FrontFour Action. Under the Stipulation, the Company agreed to seek the agreement and/or consent of Sierra to effect certain amendments to (i) the MCC Merger Agreement and (ii) the MDLY Merger Agreement (together with the MCC Merger Agreement, the “Merger Agreements”), which have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. The Stipulation also provides for, if the MCC Merger is consummated, the creation of a settlement fund, consisting of $17 million in cash and $30 million of Sierra stock, with the number of shares of Sierra stock to be calculated using the pro forma net asset value reported in the future proxy supplement describing the amendments to the MCC Merger Agreement, which will be distributed to eligible members of the Settlement Class (as defined in the Stipulation). Under the Stipulation, MDLY also consented to certain amendments to the Merger Agreements that have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. In addition, in connection with the Stipulation, on July 29, 2019, the Company entered into a Governance Agreement with FrontFour Capital Group LLC, FrontFour Master Fund, Ltd., FrontFour Capital Corp., FrontFour Opportunity Fund, David A. Lorber, Stephen E. Loukas and Zachary R. George, pursuant to which, among other matters, FrontFour is subject to customary standstill restrictions and required to vote in favor of the MCC Merger at a meeting of stockholders to approve the Amended MCC Merger Agreement.

The Stipulation also provides for mutual releases between and among FrontFour and the Settlement Class, on the one hand, and the Medley Parties, on the other hand, of all claims that were or could have been asserted in the FrontFour Action. The Medley Parties will also release all claims arising out of or relating to the prosecution and settlement of the FrontFour Action and all claims that were or could have been asserted (other than claims against the Highland Parties, as defined in the Stipulation) in the litigation pending in the United States District Court for the Southern District of New York captioned Medley Capital Corporation v. FrontFour Capital Group LLC, et al., No. 1:19-cv-02055-LTS (S.D.N.Y.) (the “Federal Action”), and FrontFour and the Settlement Class will release all claims arising out of or relating to the prosecution and settlement of the Federal Action.

The Stipulation further provides that the Company and FrontFour shall work together in good faith to agree to supplemental disclosures relating to the transactions contemplated by the Merger Agreements consistent with the Decision.

The Stipulation is subject to the approval of the Court. On September 26, 2019, FrontFour filed a motion seeking an order approving the Stipulation, and also moved for the Court to award plaintiffs’ counsel attorneys’ fees in the amount of $22 million and expenses in the amount of $420,334.97 (the “Fee Application”). The Court held a hearing to consider the Stipulation and the Fee Application on October 24, 2019.

On November 19, 2019, the Court issued a bench ruling approving the Stipulation. The Court also awarded attorney’s fees as follows: (i) an award of $3,000,000 to lead plaintiffs’ counsel and $75,000 to counsel to plaintiff Stephen Altman (the “Therapeutics Fee Award”) and (ii) an award in an amount equal to 26% of the nominal value of the settlement fund, grossed up to include the amount of the lead plaintiffs’ counsel’s attorney’s fees, and excluding the portion of the fees borne by the class under the Amended MCC Merger Agreement, as well as an award of $100,000 relating to the composition of the board of directors of the post-Merger company (the “Contingent Fee Award” and, together with the Therapeutics Fee Award, the “Fee Awards”). The parties disagreed as to how to apply the formula that the Court indicated will be used to calculate the Contingent Fee Award. Accordingly, the parties submitted different forms of the proposed form of order and final judgment, as applicable, for review and entry by the Court, together with letter briefs setting forth their respective interpretations of the Court’s November 19, 2019 bench ruling. The Plaintiff contends that the amount of the Contingent Fee Award is fixed at $14,540,888. Defendants contend that the amount will be less than $14,540,888, but the actual amount cannot be determined prior to closing. The Therapeutics Fee Award will be payable within five (5) business days of the entry of an order and judgment by the Court. The Contingent Fee Award is contingent upon the closing of the MCC Merger, and will be due within five (5) business days of the closing of the MCC Merger and establishment of the Settlement Fund. The Fee Awards will be paid by MCC or its successor.

47




On March 1, 2019, Marilyn Adler, a former employee who served as a Managing Director of Medley Capital LLC, filed suit in the New York Supreme Court, Commercial Part, against Medley Capital LLC, MCC Advisors, Medley SBIC GP, LLC, the Company, MDLY, as well as Brook Taube, and Seth Taube, individually. The action is captioned Marilyn S. Adler v. Medley Capital LLC et al. (Supreme Court of New York, March 2019). Ms. Adler alleges that she is due in excess of $6.5 million in compensation based upon her role with Medley’s SBIC Fund. Her claims are for breach of contract, unjust enrichment, conversion, tortious interference, as well as a claim for an accounting of funds maintained by the defendants. The Company believes the claims are without merit, intends to vigorously defend them, and has asserted counterclaims against Ms. Adler for breach of contract and breach of fiduciary duties. In response to the Company’s motion to dismiss the breach of contract claim, Ms. Adler has conceded there was no written contract.  The parties are in the initial stages of discovery.

The Company was named as a defendant in a lawsuit on May 29, 2015, by Moshe Barkat and Modern VideoFilm Holdings, LLC (“MVF Holdings”) against the Company, MOF II, MCC Advisors LLC, Deloitte Transactions and Business Analytics LLP A/K/A Deloitte ERG (“Deloitte”), Scott Avila (“Avila”), Charles Sweet, and Modern VideoFilm, Inc. (“MVF”). The lawsuit is pending in the California Superior Court, Los Angeles County, Central District, as Case No. BC 583437. The lawsuit was filed after the Company, as agent for the lender group, exercised remedies following a series of defaults by MVF and MVF Holdings on a secured loan with an outstanding balance at the time in excess of $65 million. The lawsuit sought damages in excess of $100 million. Deloitte and Avila have settled the claims against them in exchange for payment of $1.5 million. On June 6, 2016, the court granted the Medley defendants’ demurrers on several counts and dismissed Mr. Barkat’s claims with prejudice except with respect to his claim for intentional interference with contract. On March 18, 2018, the court granted the Medley defendants’ motion for summary adjudication with respect to Mr. Barkat’s sole remaining claim against the Medley Defendants for intentional interference. Now that the trial court has ruled in favor of the Medley defendants on all counts, the only remaining claims in the Barkat litigation are the Company and MOF II’s affirmative counterclaims against Mr. Barkat and MVF Holdings, which the Company and MOF II are diligently prosecuting.

On August 29, 2016, MVF Holdings filed another lawsuit in the California Superior Court, Los Angeles County, Central District, as Case No. BC 631888 (the “Derivative Action”), naming MCC Advisors LLC and certain of Medley’s employees as defendants, among others. The plaintiff in the Derivative Action, asserts claims against the defendants for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unfair competition, breach of the implied covenant of good faith and fair dealing, interference with prospective economic advantage, fraud, and declaratory relief. MCC Advisors LLC and the other defendants believe the causes of action asserted in the Derivative Action are without merit and all defendants intend to continue to assert a vigorous defense. All proceedings in the Derivative Action were stayed as a result of the chapter 11 bankruptcy proceedings of MVF, which were commenced on May 16, 2018. On August 29, 2016, however, despite the automatic stay of the MVF Bankruptcy, the Plaintiff filed an amended complaint seeking to restyle the derivative action into a direct action to circumvent the MVF bankruptcy’s automatic stay. To date, the California Superior Court has not proceeded with the amended complaint. MVF recently stipulated to relief from the automatic stay on July 19, 2019, which relief was approved by the bankruptcy court on August 30, 2019, allowing the litigation to proceed. 

Medley LLC, Medley Capital Corporation, Medley Opportunity Fund II LP, Medley Management, Inc., Medley Group, LLC, Brook Taube, and Seth Taube were named as defendants, along with other various parties, in a putative class action lawsuit captioned as Royce Solomon, Jodi Belleci, Michael Littlejohn, and Giulianna Lomaglio v. American Web Loan, Inc., AWL, Inc., Mark Curry, MacFarlane Group, Inc., Sol Partners, Medley Opportunity Fund, II, LP, Medley LLC, Medley Capital Corporation, Medley Management, Inc., Medley Group, LLC, Brook Taube, Seth Taube, DHI Computing Service, Inc., Middlemarch Partners, and John Does 1-100, filed on December 15, 2017, amended on March 9, 2018, and amended a second time on February 15, 2019, in the United States District Court for the Eastern District of Virginia, Newport News Division, as Case No. 4:17-cv-145 (hereinafter, “Class Action 1”). Medley Opportunity Fund II LP and Medley Capital Corporation were also named as defendants, along with various other parties, in a putative class action lawsuit captioned George Hengle and Lula Williams v. Mark Curry, American Web Loan, Inc., AWL, Inc., Red Stone, Inc., Medley Opportunity Fund II LP, and Medley Capital Corporation, filed February 13, 2018, in the United States District Court, Eastern District of Virginia, Richmond Division, as Case No. 3:18-cv-100 (“Class Action 2”). Medley Opportunity Fund II LP and Medley Capital Corporation were also named as defendants, along with various other parties, in a putative class action lawsuit captioned John Glatt, Sonji Grandy, Heather Ball, Dashawn Hunter, and Michael Corona v. Mark Curry, American Web Loan, Inc., AWL, Inc., Red Stone, Inc., Medley Opportunity Fund II LP, and Medley Capital Corporation, filed August 9, 2018 in the United States District Court, Eastern District of Virginia, Newport News Division, as Case No. 4:18-cv-101 (“Class Action 3”) (together with Class Action 1 and Class Action 2, the “Virginia Class Actions”). Medley Opportunity Fund II LP was also named as a defendant, along with various other parties, in a putative class action lawsuit captioned Christina Williams and Michael Stermel v. Red Stone, Inc. (as successor in interest to MacFarlane Group, Inc.), Medley Opportunity Fund II LP, Mark Curry, Brian McGowan, Vincent Ney, and John Doe entities and individuals, filed June 29, 2018 and amended July 26, 2018, in the United States District Court for the Eastern District of Pennsylvania, as Case No. 2:18-cv-2747 (the “Pennsylvania Class Action”) (together with the Virginia Class Actions, the “Class Action Complaints”). The plaintiffs in the Class Action Complaints filed their putative class actions alleging claims under the Racketeer Influenced and Corrupt Organizations Act, and various other claims arising out of the alleged payday lending activities of American Web Loan. The claims against Medley Opportunity Fund II LP, Medley LLC, Medley Capital Corporation, Medley Management, Inc., Medley Group, LLC, Brook Taube, and Seth Taube (in Class Action 1, as amended); Medley Opportunity Fund II LP and Medley Capital Corporation (in Class Action 2 and Class Action 3); and Medley Opportunity Fund II LP (in the Pennsylvania Class Action), allege that those defendants in each respective action exercised control over, or improperly derived income from, and/or obtained an improper interest in, American Web Loan’s payday lending activities as a result of a loan to American Web Loan. The loan was made by Medley Opportunity Fund II LP in 2011. American Web Loan repaid the loan from Medley Opportunity Fund II LP in full in February of 2015, more than 1 year and 10 months prior to any of the loans allegedly made by American Web Loan to the alleged class plaintiff representatives in Class Action 1. In Class Action 2, the alleged class plaintiff representatives have not alleged when they received any loans from American Web Loan. In Class Action 3, the alleged class plaintiff representatives claim to have received loans from American Web Loan at various times from February 2015 through April 2018. In the Pennsylvania Class Action, the alleged class plaintiff representatives claim to have received loans from American Web Loan in 2017. By orders dated August 7, 2018 and September 17, 2018, the Court presiding over the Virginia Class Actions consolidated those cases for all purposes. On October 12, 2018, Plaintiffs in Class Action 3 filed a notice of voluntary dismissal of all claims, and on October 29, 2018, Plaintiffs in Class Action 2 filed a notice of voluntary dismissal of all claims. Medley LLC, Medley Capital Corporation, Medley Management, Inc., Medley Group, LLC, Brook Taube, and Seth Taube never made any loans or provided financing to, or had any other relationship with, American Web Loan. Medley Opportunity Fund II LP, Medley LLC, Medley Capital Corporation, Medley Management, Inc., Medley Group, LLC, Brook Taube, Seth Taube are seeking indemnification from American Web Loan, various affiliates, and other parties with respect to the claims in the Class Action Complaints. Medley Opportunity Fund II LP, Medley LLC, Medley

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Capital Corporation, Medley Management, Inc., Medley Group, LLC, Brook Taube, and Seth Taube believe the alleged claims in the Class Action Complaints are without merit and they intend to defend these lawsuits vigorously.

Item 4. Mine Safety Disclosures
 
None.
 

49



PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is currently traded on the New York Stock Exchange (“NYSE”) and the Tel Aviv Stock Exchange (“TASE”) under the symbol “MCC”.

As of September 30, 2019, we had 11 stockholders of record.

Sales of Unregistered Securities

During the year ended September 30, 2019, we did not issue any shares of common stock under our dividend reinvestment plan.

The Company had a share repurchase program from February 5, 2015 to December 31, 2017. Under the share repurchase program, the Company repurchased an aggregate of 4,259,073 shares of common stock at an average price of $8.00 per share with a total cost of approximately $34.1 million, and the Company's net asset value per share was increased by approximately $0.23 as a result of the share repurchases. We did not repurchase any shares during the year ended September 30, 2019.

Stock Performance Graph

This graph compares the stockholder return on our common stock from January 20, 2011 (IPO) to September 30, 2019 with that of the Standard & Poor’s 500 Stock Index and the Russell 2000 Financial Services Index. This graph assumes that on January 20, 2011, $100 was invested in our common stock, the S&P 500 Index, and the Russell 2000 Financial Services Index. The graph also assumes the reinvestment of all cash dividends prior to any tax effect.
The graph and other information furnished under this Part II Item 5 of this annual report on Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in the below graph is not necessarily indicative of future stock performance.
stockperformanceinceptionthr.jpg



50



Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The following selected financial and other data for the years ended September 30, 2019, 2018, 2017, 2016, and 2015 (dollars in thousands, except per share amounts) is derived from the audited consolidated financial statements for such years, and included in Part II, Item 8, Consolidated Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
 
 
For the years ended September 30,
 
2019
 
2018
 
2017
 
2016
 
2015
Statement of Operations data:
 
 
 
 
 
 
 
 
 
Total investment income
$
46,299

 
66,820

 
96,256

 
120,749

 
149,196

Base management fees
11,190

 
14,724

 
17,773

 
19,470

 
22,450

Incentive fees

 

 
896

 
11,492

 
18,234

All other expenses
55,976

 
40,072

 
41,309

 
39,843

 
35,576

Management fee waiver

 
(380
)
 
(48
)
 
(143
)
 

Incentive fee waiver

 

 
(44
)
 
(3,504
)
 

Net investment income/(loss)
(20,867
)
 
12,404

 
36,370

 
53,591

 
72,936

Net realized gain/(loss) on investments
(112,173
)
 
(89,221
)
 
(73,086
)
 
(39,383
)
 
(60,910
)
Net unrealized appreciation/(depreciation) on investments
38,498

 
(32,194
)
 
21,644

 
(42,257
)
 
(26,723
)
Change in provision for deferred taxes on unrealized (appreciation)/depreciation on investments

 
474

 
1,092

 
87

 
(61
)
Loss on extinguishment of debt
(2,033
)
 
(2,387
)
 
(1,097
)
 

 

Net increase/(decrease) in net assets resulting from operations
(96,575
)
 
(110,924
)
 
(15,077
)
 
(27,962
)
 
(14,758
)
Per share data:
 
 
 
 
 
 
 
 
 
Net asset value per common share at year end
$
3.97

 
5.90

 
8.45

 
9.49

 
11.00

Market price at year end
2.59

 
3.82

 
5.97

 
7.63

 
7.44

Net investment income
(0.38
)
 
0.23

 
0.67

 
0.97

 
1.27

Net realized and unrealized loss on investments
(1.35
)
 
(2.23
)
 
(0.94
)
 
(1.47
)
 
(1.52
)
Change in provision for deferred taxes on unrealized (appreciation)/depreciation on investments

 
0.01

 
0.02

 

 
(0.01
)
Loss on extinguishment of debt
(0.04
)
 
(0.04
)
 
(0.20
)
 

 

Net increase/(decrease) in net assets resulting from operations
(1.77
)
 
(2.04
)
 
(0.28
)
 
(0.50
)
 
(0.26
)
Dividends paid
0.15

 
0.52

 
0.76

 
1.12

 
1.27

Statement of Assets and Liabilities data:
 
 
 
 
 
 
 
 
 
Total investments at fair value
$
396,889

 
655,430

 
836,991

 
914,184

 
1,216,092

Cash and cash equivalents
68,245

 
75,666

 
108,572

 
104,485

 
15,714

Other assets(2)
21,133

 
10,500

 
13,997

 
12,211

 
12,276

Total assets
486,267

 
741,596

 
959,560

 
1,030,880

 
1,244,082

Total liabilities
269,834

 
420,417

 
499,131

 
513,961

 
624,162

Total net assets
216,433

 
321,179

 
460,429

 
516,919

 
619,920

Other data:
 
 
 
 
 
 
 
 
 
Weighted average annual yield on debt investments(1)
9.5%

 
9.9
 %
 
10.8
 %
 
11.8
%
 
12.3
 %
Total return based on market value(3)
(29.91
)%
 
(27.82
)%
 
(12.73
)%
 
19.37
%
 
(27.56
)%
Total return based on net asset value(4)
(29.47
)%
 
(21.29
)%
 
(0.68
)%
 
0.42
%
 
1.76
 %
Number of investments at year end
51

 
67

 
64

 
58

 
72


(1)
The weighted average yield is based upon original cost on our income bearing debt investments.
(2)
On January 1, 2016, we adopted Accounting Standards Update (“ASU”) 2015-03 which requires that debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability rather than as an asset. Adoption of ASU 2015-03 requires the changes to be applied retrospectively.
(3)
Total return is historical and assumes changes in share price, reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales charge for the period.
(4)
Total return is historical and assumes changes in NAV, reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales charge for the period.

51



Item 7.  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 annual report on Form 10-K.

Except as otherwise specified, references to “we,” “us,” “our,” or the “Company,” refer to Medley Capital Corporation.

Forward-Looking Statements

Some of the statements in this annual report on Form 10-K constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K 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 relative and absolute investment performance and operations of MCC Advisors;

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 or MCC Advisors;

our contractual arrangements and relationships with third parties;

any future financings by us;

the ability of MCC Advisors to attract and retain highly talented professionals;

fluctuations in foreign currency exchange rates;

the impact of changes to tax legislation and, generally, our tax position; and

the unfavorable resolution of legal proceedings.

This annual report on Form 10-K also includes “forward-looking” statements regarding the proposed transactions. Because forward-looking statements, such as the date that the parties expect the proposed transactions to be completed and the expectation that the proposed transactions will provide improved liquidity for Sierra, the Company, and MDLY’s stockholders and will be accretive to net investment income for both Sierra and the Company, include risks and uncertainties, actual results may differ materially from those expressed or implied and include, but are not limited to, those discussed in each of Sierra’s, the Company’s and MDLY’s filings with the SEC, and (i) the satisfaction or waiver of closing conditions relating to the proposed transactions described herein, including, but not limited to, the requisite approvals of the stockholders of each of Sierra, the Company, and MDLY; Sierra successfully taking all actions reasonably required with respect to certain outstanding indebtedness of the Company and MDLY to prevent any material adverse effect relating thereto; certain required approvals of the SEC (including necessary exemptive relief to consummate the merger transactions), approval by the Court of Chancery of the State of Delaware of the Stipulation of Settlement in connection with the consolidated actions under caption of In re Medley Capital Corporation Stockholder Litigation, C.A. No. 2019-0100-KSJM, the necessary consents of certain third-party advisory clients of MDLY; and any applicable waiting period (and any extension thereof) applicable to the transactions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired or been terminated; (ii) the parties’ ability to successfully consummate the proposed transactions, and the timing thereof; and (iii) the possibility that competing offers or acquisition proposals related to the proposed transactions will be made and, if made, could be successful. Additional risks and uncertainties specific to Sierra, the Company and MDLY include, but are not limited to, (i) the costs and expenses that Sierra, the Company and MDLY have, and may incur, in connection with the proposed transactions (whether or not they are consummated); (ii) the impact that any litigation relating to the proposed transactions may have on any of Sierra, the Company and MDLY; (iii) that projections with respect to distributions may prove to be incorrect; (iv) Sierra’s ability to invest its portfolio of cash in a timely manner following the closing of the proposed transactions; (v) the market performance of the combined portfolio; (vi) the ability of portfolio companies to pay interest and principal in the future; (vii) the ability of MDLY to grow its fee earning assets under management; (viii) whether Sierra, as the surviving company, will trade with more volume and perform better than the Company and MDLY prior to the proposed transactions;  and (ix) negative effects of entering into the proposed transactions on the trading volume and market price of the Company’s or MDLY’s common stock. There can be no assurance of the level of any distributions to be paid, if any, following consummation of the proposed transactions.

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 annual report on Form 10-K involve risks and uncertainties. Our actual results

52



could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” in this annual report on Form 10-K.

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 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.

Overview

We are an externally-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.

We commenced operations and completed our initial public offering on January 20, 2011. Our investment activities are managed by MCC Advisors and supervised by our board of directors, of which a majority of the members are independent of us.

Our investment objective is to generate current income and capital appreciation by lending to privately-held middle market companies, primarily through directly originated transactions, to help these companies fund acquisitions, growth or refinancing. Our portfolio generally consists of senior secured first lien term loans and senior secured second lien term loans. Occasionally, we receive warrants or other equity participation features, which we believe will increase the total investment returns.

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.

Agreements and Plan of Mergers

On August 9, 2018, the Company entered into a definitive agreement to merge with Sierra Income Corporation (“Sierra”). Pursuant to the Agreement and Plan of Merger, dated as of August 9, 2018, by and between the Company and Sierra (the “MCC Merger Agreement”), the Company would, on the terms and subject to the conditions set forth in the MCC Merger Agreement, merge with and into Sierra, with Sierra as the surviving entity (the “Combined Company”) in the merger (the “MCC Merger”). Under the MCC Merger, each share of our common stock issued and outstanding immediately prior to the MCC Merger effective time (other than shares of our common stock held by the Company, Sierra or their respective wholly owned subsidiaries) would be converted into the right to receive 0.8050 shares of the Sierra’s common stock. Simultaneously, pursuant to the Agreement and Plan of Merger (the “MDLY Merger Agreement”), dated as of August 9, 2018, by and among Medley Management Inc. (“MDLY”), Sierra, and Sierra Management, Inc., a newly formed Delaware corporation and a wholly owned subsidiary of Sierra (“Merger Sub”), MDLY would, on the terms and subject to the conditions set forth in the MDLY Merger Agreement, merge with and into Merger Sub, with Merger Sub as the surviving company in the Merger (the “MDLY Merger” together with the MCC Merger, the “Mergers”), and MDLY’s existing asset management business would continue to operate as a wholly owned subsidiary of the Combined Company. In the MDLY Merger, each share of MDLY Class A common stock, issued and outstanding immediately prior to the MDLY Merger effective time (other than Dissenting Shares (as defined in the MDLY Merger Agreement) and shares of MDLY Class A common stock held by MDLY, Sierra or their respective wholly owned subsidiaries) would be converted into the right to receive (i) 0.3836 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $3.44 per share. In addition, MDLY’s stockholders would have the right to receive certain dividends and/or other payments.

On July 29, 2019, the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MCC Merger Agreement”), by and between the Company and Sierra, pursuant to which the Company will, on the terms and subject to the conditions set forth in the Amended MCC Merger Agreement, merge with and into Sierra, with Sierra as the surviving company in the MCC Merger. In the MCC Merger, each share of the Company’s common stock (other than shares of the Company’s common stock held by the Company, Sierra or their respective wholly owned subsidiaries) will be exchanged for the right to receive (i) 0.68 shares of Sierra’s common stock if the attorneys’ fees of plaintiffs’ counsel and litigation expenses paid or incurred by plaintiffs’ counsel or advanced by plaintiffs in connection with the FrontFour Action, as described below (such fees and expenses, the “Plaintiff Attorney Fees”), are less than or equal to $10,000,000; (ii) 0.66 shares of Sierra’s common stock if the Plaintiff Attorney Fees are equal to or greater than $15,000,000; (iii) between 0.68 and 0.66 per share of Sierra’s common stock if the Plaintiff Attorney Fees are greater than $10,000,000 but less than $15,000,000, calculated on a descending basis, based on straight line interpolation between $10,000,000 and $15,000,000; or (iv) 0.66 shares of Sierra’s common stock in the event that the Plaintiff Attorney Fees are not determined prior to the closing of the MCC Merger (such ratio, the “MCC Merger Exchange Ratio”).

In addition, on July 29, 2019, Sierra and MDLY announced the execution of the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MDLY Merger Agreement”), by and among MDLY, Sierra, and Merger Sub, pursuant to which MDLY will, on the terms and subject to the conditions set forth in the Amended MDLY Merger Agreement, merge with and into Merger Sub, with Merger Sub as the surviving company in the MDLY Merger. In the MDLY Merger, each share of MDLY Class A common stock, issued and outstanding immediately prior to the MDLY Merger effective time, other than shares of MDLY Class A common stock held by MDLY, Sierra or their respective wholly owned subsidiaries (the “Excluded MDLY Shares”) and the Dissenting Shares (as defined in the Amended MDLY Merger Agreement), held, immediately prior to the MDLY Merger effective time, by any person other than a Medley LLC unitholder, will be exchanged for (i) 0.2668 shares of Sierra’s common stock; plus (ii) cash in an amount

53



equal to $2.96 per share. In addition, in the MDLY Merger, each share of MDLY Class A common stock issued and outstanding immediately prior to the MDLY Merger effective time, other than the Excluded MDLY Shares and the Dissenting Shares, held, immediately prior to the MDLY Merger effective time, by Medley LLC unitholders will be exchanged for (i) 0.2072 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $2.66 per share.

Pursuant to terms of the Amended MCC Merger Agreement, the consummation of the MCC Merger is conditioned upon the satisfaction or waiver of each of the conditions to closing under the Amended MDLY Merger Agreement and the consummation of the MDLY Merger. However, pursuant to the terms of the Amended MDLY Merger Agreement, the consummation of the MDLY Merger is not contingent upon the consummation of the MCC Merger. If both Mergers are successfully consummated, Sierra’s common stock would be listed on the NYSE, with such listing expected to be effective as of the closing date of the Mergers, and Sierra’s common stock will be listed on the Tel Aviv Stock Exchange (“TASE”), with such listing expected to be effective as of the closing date of the MCC Merger. If, however, only the MDLY Merger is consummated, Sierra’s common stock would be listed on the NYSE. If both Mergers are successfully consummated, the investment portfolios of MCC and Sierra would be combined, Merger Sub, as a successor to MDLY, would be a wholly owned subsidiary of the Combined Company, and the Combined Company would be internally managed by MCC Advisors LLC, its wholly controlled adviser subsidiary. If only the MDLY Merger is consummated, the investment portfolios of MCC and Sierra would not be combined; however, the investment management function relating to the operation of Sierra, as the surviving company, would still be internalized (the “Sierra/MDLY Company”) and the Sierra/MDLY Company would be managed by MCC Advisors. The Mergers are subject to approval by the stockholders of the Company, Sierra, and MDLY, regulators, including the SEC, court approval of the Stipulation (as described below), other customary closing conditions and third-party consents. There is no assurance that any of the foregoing conditions will be satisfied.

On February 11, 2019, a purported stockholder class action was commenced in the Court of Chancery of the State of Delaware by FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. (together, “FrontFour”), captioned as FrontFour Capital Group LLC, et al. v. Brook Taube, et al., Case No. 2019-0100 (the “FrontFour Action”) against defendants Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, Sierra, the Company, MCC Advisors, Medley Group LLC, and Medley LLC. The complaint, as amended on February 12, 2019, alleged that the individuals named as defendants breached their fiduciary duties to the Company’s stockholders in connection with the MCC Merger, and that MDLY, Sierra, MCC Advisors, Medley Group LLC, and Medley LLC aided and abetted those alleged breaches of fiduciary duties. The complaint sought to enjoin the vote of MCC stockholders on the proposed merger and enjoin enforcement of certain provisions of the Agreement and Plan of Merger, dated as of August 9, 2018, by and between MCC and Sierra (the “MCC Merger Agreement”). The Court held a trial on the plaintiffs’ claims on March 6-7, 2019 and issued a Memorandum Opinion (the “Decision”) on March 11, 2019. The Court denied the plaintiffs’ requests to (i) permanently enjoin the proposed merger and (ii) require the Company to conduct a “shopping process” for the Company on terms proposed by the plaintiffs in their complaint. The Court held that the Company’s directors breached their fiduciary duties in entering into the proposed merger, but rejected the plaintiffs’ claim that Sierra aided and abetted those breaches of fiduciary duties. The Court ordered the defendants to issue corrective disclosures consistent with the Decision, and enjoined a vote of the Company’s stockholders on the proposed merger until such disclosures have been made and stockholders have had the opportunity to assimilate this information. On March 20, 2019, another purported stockholder class action was commenced by Stephen Altman against Brook Taube, Seth Taube, Jeff Tonkel, Arthur S. Ainsberg, Karin Hirtler-Garvey, Mark Lerdal, and John E. Mack in the Court of Chancery of the State of Delaware, captioned Altman v. Taube, Case No. 2019-0219 (the “Altman Action”). The complaint alleged that the defendants breached their fiduciary duties to stockholders of the Company in connection with the vote of the Company’s stockholders on the proposed mergers. On April 8, 2019, the Court granted a stipulation consolidating the FrontFour Action and the Altman Action, designating the amended complaint in the FrontFour Action as the operative complaint, and designating the plaintiffs in the FrontFour Action and their counsel the lead plaintiffs and lead plaintiffs’ counsel, respectively.

On April 15, 2019, certain parties reached agreement on the principal terms of a settlement of the FrontFour Action, which were contained in a term sheet, dated April 15, 2019 (the “Settlement Term Sheet”). On July 29, 2019, MCC entered into a Stipulation of Settlement (and, as amended on August 8, 2019, the “Stipulation”) by and among the Company, Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, MCC Advisors, Medley LLC, and Medley Group LLC (the “Medley Parties”), on the one hand, and FrontFour, on behalf of itself and a class of similarly situated stockholders of the Company, on the other hand, in connection with the FrontFour Action.

The Stipulation provides for the settlement of all claims brought against the Medley Parties in the FrontFour Action. Under the Stipulation, the Company agreed to seek the agreement and/or consent of Sierra to effect certain amendments to (i) the MCC Merger Agreement and (ii) the MDLY Merger Agreement (together with the MCC Merger Agreement, the “Merger Agreements”), which have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. The Stipulation also provides for, if the MCC Merger is consummated, the creation of a settlement fund, consisting of $17 million in cash and $30 million of Sierra stock, with the number of shares of Sierra stock to be calculated using the pro forma net asset value reported in the future proxy supplement describing the amendments to the MCC Merger Agreement, which will be distributed to eligible members of the Settlement Class (as defined in the Stipulation). Under the Stipulation, MDLY also consented to certain amendments to the Merger Agreements that have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. In addition, in connection with the Stipulation, on July 29, 2019, the Company entered into a Governance Agreement with FrontFour Capital Group LLC, FrontFour Master Fund, Ltd., FrontFour Capital Corp., FrontFour Opportunity Fund, David A. Lorber, Stephen E. Loukas and Zachary R. George, pursuant to which, among other matters, FrontFour is subject to customary standstill restrictions and required to vote in favor of the MCC Merger at a meeting of stockholders to approve the Amended MCC Merger Agreement.

The Stipulation also provides for mutual releases between and among FrontFour and the Settlement Class, on the one hand, and the Medley Parties, on the other hand, of all claims that were or could have been asserted in the FrontFour Action. The Medley Parties will also release all claims arising out of or relating to the prosecution and settlement of the FrontFour Action and all claims that were or could have been asserted (other than claims against the Highland Parties, as defined in the Stipulation) in the litigation pending in the United States District Court for the Southern District of New York captioned Medley Capital Corporation v. FrontFour Capital Group LLC, et al., No. 1:19-cv-02055-LTS (S.D.N.Y.) (the “Federal Action”), and FrontFour and the Settlement Class will release all claims arising out of or relating to the prosecution and settlement of the Federal Action.

The Stipulation further provides that the Company and FrontFour shall work together in good faith to agree to supplemental disclosures relating to the transactions contemplated by the Merger Agreements consistent with the Decision.


54



The Stipulation is subject to the approval of the Court. On September 26, 2019, FrontFour filed a motion seeking an order approving the Stipulation, and also moved for the Court to award plaintiffs’ counsel attorneys’ fees in the amount of $22 million and expenses in the amount of $420,334.97 (the “Fee Application”). The Court held a hearing to consider the Stipulation and the Fee Application on October 24, 2019.

On November 19, 2019, the Court issued a bench ruling approving the Stipulation. The Court also awarded attorney’s fees as follows: (i) an award of $3,000,000 to lead plaintiffs’ counsel and $75,000 to counsel to plaintiff Stephen Altman (the “Therapeutics Fee Award”) and (ii) an award in an amount equal to 26% of the nominal value of the settlement fund, grossed up to include the amount of the lead plaintiffs’ counsel’s attorney’s fees, and excluding the portion of the fees borne by the class under the Amended MCC Merger Agreement, as well as an award of $100,000 relating to the composition of the board of directors of the post-Merger company (the “Contingent Fee Award” and, together with the Therapeutics Fee Award, the “Fee Awards”). The parties disagreed as to how to apply the formula that the Court indicated will be used to calculate the Contingent Fee Award. Accordingly, the parties submitted different forms of the proposed form of order and final judgment, as applicable, for review and entry by the Court, together with letter briefs setting forth their respective interpretations of the Court’s November 19, 2019 bench ruling. The Plaintiff contends that the amount of the Contingent Fee Award is fixed at $14,540,888. Defendants contend that the amount will be less than $14,540,888, but the actual amount cannot be determined prior to closing. The Therapeutics Fee Award will be payable within five (5) business days of the entry of an order and judgment by the Court. The Contingent Fee Award is contingent upon the closing of the MCC Merger, and will be due within five (5) business days of the closing of the MCC Merger and establishment of the Settlement Fund. The Fee Awards will be paid by MCC or its successor.

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 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 generated in connection with our investments and recognized as earned.

Expenses

Our primary operating expenses include the payment of management and incentive fees pursuant to the investment management agreement we have with MCC Advisors and overhead expenses, including our allocable portion of our administrator’s overhead under the administration agreement. Our management and incentive fees compensate MCC Advisors for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other 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 by MCC Advisors payable to third parties, including agents, consultants or other advisers, 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;

the base management fee and any incentive fee;

distributions on our shares;

administration fees payable under our administration agreement;

the allocated costs incurred by MCC Advisors in providing managerial assistance to those portfolio companies that request it;

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;

55




our fidelity bond;

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

indemnification payments;

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

all other expenses reasonably incurred by us or MCC Advisors in connection with administering our business, such as the allocable portion of overhead under our administration agreement, including rent and other allocable portions of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs (including travel expenses).

Portfolio and Investment Activity

As of September 30, 2019 and 2018, our portfolio had a fair market value of approximately $396.9 million and $655.4 million, respectively. The following table summarizes our portfolio and investment activity during the fiscal years ended September 30, 2019 and 2018 (dollars in thousands):
 
For the years ended September 30
 
2019
 
2018
Investments made in new portfolio companies
$
6,326

 
$
149,002

Investments made in existing portfolio companies
60,101

 
47,352

Aggregate amount in exits and repayments
(259,940
)
 
(267,502
)
Net investment activity
$
(193,513
)
 
$
(71,148
)
 
 
 
 
Portfolio Companies, at beginning of year
67

 
64

Number of new portfolio companies
4

 
15

Number of exited portfolio companies
(20
)
 
(12
)
Portfolio companies, at end of year
51

 
67

 
 
 
 
Number of investments in existing portfolio companies
22

 
17


The following table summarizes the amortized cost and the fair value of our average portfolio company investment, including the equity investment in the MCC Senior Loan Strategy JV I LLC (“MCC JV”), and largest portfolio company investment, excluding the equity investment in the MCC JV, as of September 30, 2019 and 2018 (dollars in thousands):
 
September 30, 2019
 
September 30, 2018
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Average portfolio company investment
$
9,170

 
$
7,782

 
$
11,413

 
$
9,783

Largest portfolio company investment
20,151

 
20,151

 
31,469

 
31,469


The following table summarizes the amortized cost and the fair value of investments as of September 30, 2019 (dollars in thousands):
 
Amortized Cost
 
Percentage
 
Fair Value
 
Percentage
Senior Secured First Lien Term Loans
$
243,342

 
52.0
%
 
$
192,770

 
48.6
%
Senior Secured Second Lien Term Loans
39,089

 
8.4

 
36,508

 
9.2

Senior Secured First Lien Notes

 

 

 

Unsecured Debt
2,653

 
0.6

 
2,653

 
0.7

MCC Senior Loan Strategy JV I LLC
78,575

 
16.8

 
69,949

 
17.6

Equity/Warrants
103,989

 
22.2

 
95,009

 
23.9

Total
$
467,648

 
100.0
%
 
$
396,889

 
100.0
%

The following table summarizes the amortized cost and the fair value of investments as of September 30, 2018 (dollars in thousands):
 
Amortized Cost
 
Percentage
 
Fair Value
 
Percentage
Senior Secured First Lien Term Loans
$
475,801

 
62.2
%
 
$
395,015

 
60.3
%
Senior Secured Second Lien Term Loans
49,162

 
6.4

 
48,890

 
7.5

Senior Secured First Lien Notes
20,000

 
2.6

 
19,268

 
2.9

Unsecured Debt
26,108

 
3.4

 
3,381

 
0.5

MCC Senior Loan Strategy JV I LLC
78,575

 
10.3

 
78,371

 
11.9

Equity/Warrants
115,040

 
15.1

 
110,505

 
16.9

Total
$
764,686

 
100.0
%
 
$
655,430

 
100.0
%


56



As of September 30, 2019, our income-bearing investment portfolio, which represented 80.0% of our total portfolio, had a weighted average yield based upon cost of our portfolio investments of approximately 9.5%, and 85.2% of our income-bearing investment portfolio bore interest based on floating rates, such as the London Interbank Offering Rate (“LIBOR”), while 14.8% of our income-bearing investment portfolio bore interest at fixed rates. As of September 30, 2019, the weighted average yield based upon cost of our total portfolio was approximately 5.2%. The weighted average yield of our total portfolio does not represent the total return to our stockholders.

MCC Advisors regularly assesses the risk profile of each of our investments and rates each of them based on the following categories, which we refer to as MCC Advisors’ investment credit rating:
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 September 30, 2019 and 2018 (dollars in thousands): 
 
 
September 30, 2019
 
September 30, 2018
Investment Performance Rating
 
Fair Value
 
Percentage
 
Fair Value
 
Percentage
1
 
$
105,231

 
26.5
%
 
$
50,245

 
7.7
%
2
 
146,053

 
36.8

 
448,240

 
68.4

3
 
123,253

 
31.1

 
106,236

 
16.2

4
 
4,915

 
1.2

 
503

 
0.1

5
 
17,437

 
4.4

 
50,206

 
7.6

Total
 
$
396,889

 
100.0
%
 
$
655,430

 
100.0
%


57



Results of Operations

Operating results for the years ended September 30, 2019, 2018, and 2017 are as follows (dollars in thousands):
 
For the years ended September 30
 
2019
 
2018
 
2017
Total investment income/(loss)
$
46,299

 
$
66,820

 
$
96,256

Total expenses, net
67,166

 
54,258

 
59,619

Net investment income before excise taxes
(20,867
)
 
12,562

 
36,637

Excise tax expense

 
(158
)
 
(267
)
Net investment income
(20,867
)
 
12,404

 
36,370

Net realized gains/(losses) from investments
(112,173
)
 
(89,221
)
 
(73,086
)
Net unrealized appreciation/(depreciation) on investments
38,498

 
(32,194
)
 
21,644

Change in provision for deferred taxes on unrealized (appreciation)/depreciation on investments

 
474

 
1,092

Loss on extinguishment of debt
(2,033
)
 
(2,387
)
 
(1,097
)
Net increase in net assets resulting from operations
$
(96,575
)
 
$
(110,924
)
 
$
(15,077
)

Investment Income

For the year ended September 30, 2019, investment income totaled $46.3 million, of which $44.0 million was attributable to portfolio interest and dividend income, and $2.3 million to fee income.

For the year ended September 30, 2018, investment income totaled $66.8 million, of which $62.3 million was attributable to portfolio interest and dividend income, and $4.5 million to fee income.

For the year ended September 30, 2017, investment income totaled $96.3 million, of which $89.7 million was attributable to portfolio interest and dividend income, and $6.6 million to fee income.

Operating Expenses
 
Operating expenses for the years ended September 30, 2019, 2018, and 2017 are as follows (dollars in thousands):
 
For the years ended September 30
 
2019
 
2018
 
2017
Base management fees
$
11,190

 
$
14,724

 
$
17,773

Incentive fees

 

 
896

Interest and financing expenses
24,049

 
27,918

 
31,403

Professional fees
19,323

 
4,430

 
2,192

General and administrative
7,399

 
2,171

 
2,555

Administrator expenses
3,324

 
3,582

 
3,848

Directors fees
1,258

 
1,271

 
647

Insurance
623

 
542

 
397

Expenses before management and incentive fee waivers
67,166

 
54,638

 
59,711

Management fee waiver

 
(380
)
 
(48
)
Incentive fee waiver

 

 
(44
)
Expenses, net of management and incentive fee waivers
$
67,166

 
$
54,258

 
$
59,619


For the year ended September 30, 2019, total operating expenses before management and incentive fee waivers increased by $12.5 million, or 22.9%, compared to the year ended September 30, 2018.

For the year ended September 30, 2018, total operating expenses before management and incentive fee waivers decreased by $5.1 million, or 8.5%, compared to the year ended September 30, 2017.

Interest and Financing Expenses

Interest and financing expenses for the year ended September 30, 2019 decreased by $3.9 million, or 13.9%, compared to the year ended September 30, 2018. The decrease in interest and financing expenses was primarily due to the $102.0 million repayment of the Senior Secured Term Loan Credit Facility (the “Term Loan Facility”) on January 31, 2018, the voluntary satisfaction and termination of the Senior Secured Revolving Credit Facility (the “Revolving Credit Facility”) on September 28, 2018, the redemption of $12.0 million of 6.125% unsecured notes that mature on March 30, 2023 (the “2023 Notes”), and the voluntary repayment of $135.0 million SBA-guaranteed debentures (the “SBA Debentures”), which the Company repaid between March 28, 2019 and May 10, 2019, partially offset by interest payments on the 6.55% Series A Notes due January 31, 2021 (the “Israeli 2021 Notes”).

Interest and financing expenses for the year ended September 30, 2018 decreased by $3.5 million, or 11.1%, compared to the year ended September 30, 2017. The decrease in interest and financing expenses was primarily due to the $102.0 million repayment of the Senior Secured Term Loan Credit Facility

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(the “Term Loan Facility”), the reduction of the Senior Secured Revolving Credit Facility (the “Revolving Credit Facility”) commitment to $150.0 million from $200.0 million, the repayment of the 7.125% unsecured notes (the “2019 Notes”) in February 2017, the redemption of $13.0 million of the 2023 Notes, and the $15.0 million repayment of the SBA-guaranteed debentures (the “SBA Debentures”), partially offset by an increase in LIBOR rates and the pricing of the Israeli 2021 Notes.

Base Management Fees and Incentive Fees

Base management fees for the year ended September 30, 2019 decreased by $3.5 million, or 24.0%, compared to the year ended September 30, 2018 due to the decline in our gross assets during the period.

Base management fees for the year ended September 30, 2018 decreased by $3.0 million, or 17.2%, compared to the year ended September 30, 2017 due to the decline in our gross assets during the period. Incentives fees for the year ended September 30, 2018 decreased by $0.9 million, or 100%, compared to the year ended September 30, 2017 due to the decrease in pre-incentive fee net investment income.

Professional Fees and Other General and Administrative Expenses

Professional fees and general and administrative expenses for the year ended September 30, 2019 increased by $19.9 million, or 166.1%, compared to the year ended September 30, 2018 primarily due to an increase in legal expenses, general and administrative expenses, insurance expenses, and audit expenses in connection with the Mergers, offset by a decrease in administrator expenses and valuation expenses.

Professional fees and general and administrative expenses for the year ended September 30, 2018 increased by $2.4 million, or 24.4%, compared to the year ended September 30, 2017 primarily due to an increase in legal expenses, directors expenses, insurance expenses, and audit expenses, in connection with the Mergers, partially offset by a decrease in general administrative expenses, administrator expenses, and valuation expenses.

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 year ended September 30, 2019, we recognized $112.2 million of realized losses on our portfolio investments. The realized losses were primarily due to the non-cash restructuring transactions of two investments, the sale of two investments and the write-off of two investments, partially offset by a realized gain resulting from exercising warrants and converting junior preferred equity in one portfolio company into common shares of a new portfolio company.

During the year ended September 30, 2018, we recognized $89.2 million of realized losses on our portfolio investments. The realized losses were primarily due to the non-cash restructuring transactions of three investments, as well as the sale of one investment.

During the year ended September 30, 2017, we recognized $73.1 million of realized losses on our portfolio investments. The realized losses were primarily due to the non-cash restructuring transactions of three investments, the liquidation of one investment as well as the write off of certain investments offset by the non-cash exchange of one equity investment.

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.

During the year ended September 30, 2019, the Company recognized a net loss on extinguishment of debt of $2.0 million, which was primarily due to a loss on extinguishment of debt of $1.8 million from the pre-payment of $135.0 million of SBA Debentures in connection with SBIC LP's surrender of its SBIC license and a $0.2 million loss on extinguishment of debt from the $12.0 million partial redemption of the 2023 Notes.

During the year ended September 30, 2018, we recognized a loss on extinguishment of debt of $2.4 million from the payment of the remaining $102.0 million outstanding under the Term Loan Facility, the $13.0 million partial redemption of the 2023 Notes, the $15.0 million repayment of the SBA Debentures, and the voluntary satisfaction and termination of our Revolving Credit Facility in accordance with its terms.

During the year ended September 30, 2017, we recognized a loss on extinguishment of debt of $1.1 million from the redemption of the 2019 Notes as well as the paydown of the Term Loan Facility.

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 year ended September 30, 2019, we had $38.5 million of net unrealized appreciation on investments. The net unrealized appreciation comprised of $59.6 million of net unrealized depreciation on investments offset by $98.1 million of net unrealized appreciation that resulted from the reversal of previously recorded unrealized depreciation on investments that were realized or written-off during the year.

For the year ended September 30, 2018, we had $32.2 million of net unrealized depreciation on investments. The net unrealized depreciation comprised of $72.1 million of net unrealized depreciation on investments offset by $39.9 million of net unrealized appreciation that resulted from the reversal of previously recorded unrealized depreciation on investments that were realized or written-off during the year.

59




For the year ended September 30, 2017, we had $21.6 million of net unrealized appreciation on investments. The net unrealized appreciation comprised of $39.8 million of net unrealized depreciation on investments offset by $61.4 million of net unrealized appreciation that resulted from the reversal of previously recorded unrealized depreciation on investments that were realized or written-off during the year.
 
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 year ended September 30, 2019, the Company did not record a change in provision for deferred taxes on the unrealized (appreciation)/depreciation on investments. For the years ended September 30, 2018 and 2017, the change in provision for deferred taxes on the unrealized depreciation on investments was $0.5 million and $1.1 million, respectively.
 
Changes in Net Assets from Operations

For the year ended September 30, 2019, we recorded a net decrease in net assets resulting from operations of $96.6 million compared to a net decrease in net assets resulting from operations of $110.9 million for the year ended September 30, 2018, and a net decrease in net assets resulting from operations of $15.1 million for the year ended September 30, 2017 as a result of the factors discussed above. Based on 54,474,211 weighted average common shares outstanding for the years ended September 30, 2019, 2018, and 2017, our per share net decrease in net assets resulting from operations was $1.77, $2.04 and $0.28 for the years ended September 30, 2019, 2018, and 2017, respectively.

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 have been generated primarily from the net proceeds of public offerings of common stock, advances from the Revolving 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 September 30, 2019, we had $84.3 million in cash and cash equivalents, of which $16.0 million was restricted, as it was in transit towards repaying principal and interest on the Israeli 2021 Notes.

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. As of September 30, 2019, the Company’s asset coverage was 184.2% after giving effect to leverage and therefore the Company’s asset coverage is below 200%, the minimum asset coverage requirement under the 1940 Act. As a result, the Company is prohibited from making distributions to stockholders, including the payment of any dividend, and may not employ further leverage until the Company’s asset coverage is at least 200% after giving effect to such leverage.

Credit Facility

Term Loan Facility

The Company had a Term Loan Facility which was scheduled to mature on July 28, 2020.

On September 1, 2017, the Company reduced the Term Loan Facility commitment to $102.0 million from $174.0 million. The reduction was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $0.6 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.

On January 31, 2018, the Company voluntarily prepaid the remaining $102.0 million outstanding on the Term Loan Facility in accordance with its terms. The payment was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $0.9 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.

Revolving Credit Facility

The Company had a Revolving Credit Facility with ING Capital LLC, as Administrative Agent, in order to borrow funds to make additional investments.

The Revolving Credit Facility had a revolving period that was to end July 28, 2019, followed by a one year amortization period and a final maturity on July 28, 2020.

On February 14, 2017, the Company elected to reduce the total commitment of the Revolving Credit Facility to $200.0 million from $343.5 million. The reduction was accounted for as a debt modification to a line-of credit or revolving-debt arrangement in accordance with ASC 470-50, Modifications and

60



Extinguishments, which attributed to an acceleration of debt issuance costs in the amount of $1.3 million and recorded on the Consolidated Statements of Operations as a component of interest and financing expenses.

On February 12, 2018, the Company elected to reduce the total commitment of the Revolving Credit Facility to $150.0 million from $200.0 million. The reduction was accounted for as a debt modification to a line-of credit or revolving-debt arrangement in accordance with ASC 470-50, Modifications and Extinguishments, which attributed to an acceleration of debt issuance costs in the amount of $0.4 million and recorded on the Consolidated Statements of Operations as a component of interest and financing expenses.

On September 28, 2018, the Company voluntarily satisfied and terminated the commitments under the Revolving Credit Facility in accordance with its terms. The termination was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $1.0 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.

Unsecured Notes

2019 Notes

On March 21, 2012, the Company issued $40.0 million in aggregate principal amount of the 2019 Notes. The 2019 Notes bore interest at a rate of 7.125% per year, and were payable quarterly on March 30, June 30, September 30 and December 30 of each year, beginning June 30, 2012. The 2019 Notes were listed on the NYSE and traded thereon under the trading symbol “MCQ”. On February 22, 2017, the 2019 Notes were redeemed at par plus accrued and unpaid interest. 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 $0.5 million.

2021 Notes

On December 17, 2015, the Company issued $70.8 million in aggregate principal amount of 6.50% unsecured notes that mature on January 30, 2021 (the 2021 Notes and together with the 2023 Notes, the "U.S. Notes"). On January 14, 2016, the Company closed an additional $3.25 million in aggregate principal amount of the 2021 Notes, pursuant to the partial exercise of the underwriters’ option to purchase additional notes. The 2021 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after January 30, 2019. The 2021 Notes bear interest at a rate of 6.50% per year, payable quarterly on January 30, April 30, July 30 and October 30 of each year, beginning January 30, 2016. The 2021 Notes are listed on the NYSE and trade thereon under the trading symbol ‘‘MCX’’.

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 bear 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. The 2023 Notes are listed on the NYSE and trade thereon under the trading symbol “MCV”.

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.

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 $0.4 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.

Secured Notes

Israeli 2021 Notes

On January 26, 2018, the Company priced a debt offering in Israel of $121.3 million of Israeli 2021 Notes (collectively with the U.S. Notes, the "Notes"). The Israeli 2021 Notes are listed on the TASE and denominated in New Israeli Shekels, but linked to the US Dollar at a fixed exchange rate which mitigates any currency exposure to the Company. The Israeli 2021 Notes have not been and will not be registered under the Securities Act of 1933, and may not be offered or sold in the United States absent registration under the Securities Act or in transactions exempt from, or not subject to, such registration requirements. In connection with this offering, we have dual listed our common stock on the TASE.

On August 12, 2019, the Company and its wholly owned subsidiaries, Medley Small Business Fund, LP (formerly known as Medley SBIC, LP) (“Medley Small Business Fund”) and Medley SLF Funding I LLC (“Medley SLF”), on the one hand, and the Trustee, on the other hand, entered into an amendment to the deed of trust (the “Deed”) governing the Israeli 2021 Notes (the “Amendment”). The Amendment amends the Deed by, among other things: (a) modifying Section 2.2 of the Deed to provide for full repayment of the Israeli 2021 Notes in eight (8) equal installments, each comprising twelve and one-half percent (12.5%) of the principal amount of the Israeli 2021 Notes, beginning on August 12, 2019 (the “Effective Date”) and ending on January 31, 2021, rather than four (4) equal annual installments, each comprising twenty five percent (25%) of the principal amount of the Israeli 2021 Notes, that were payable on February 27 of each of the years 2021-2024 (inclusive); (b) changing the interest payment dates for the Israeli 2021 Notes from semi-annual to quarterly except for the initial interest payment, which was paid on the Effective Date, and the final interest payment, which will be paid

61



on January 31, 2021; (c) decreasing the annual interest rate on the Israeli 2021 Notes by 0.25% per annum on the Effective Date and further decreasing the annual interest rate on the Israeli 2021 Notes by 0.50% per annum if  the Mergers close, which further decrease will be effective upon the closing of the Mergers; (d) decreasing the minimum Total Net Asset covenant in Section 6.1.1 of the Deed from $275 million to $215 million; (e) modifying the acceleration event in Section 10.1.25 of the Deed to provide that it will occur if the credit rating on the Israeli 2021 Notes drops below (i) il/B of Maalot before November 30, 2019, (ii) il/BB- of Maalot during the period between December 1, 2019 and April 1, 2020, and (iii) il/BBB- of Maalot on or after April 1, 2020; (f) waiving the make-whole and market value payment requirements of Section 9.1.7 of the Deed for all early redemption payments on the Israeli 2021 Notes within eighteen (18) months following the Effective Date; (g) requiring each of Medley Small Business Fund and Medley SLF to guarantee all of the Company’s obligations under the Deed (including the Amendment) and the Israeli 2021 Notes and to grant security interests on all of their assets (the “Collateral”) to secure such guaranties and providing for the termination of the Medley SLF guaranty and release of the security interests in Medley SLF’s assets upon the closing of the Mergers, subject to certain limitations; (h) that the Company use principal collections from the Collateral to make early redemption payments on the Israeli 2021 Notes, which payments will be applied in inverse order of the maturity of the required principal installment payments on the Israeli 2021 Notes; (i) providing for a waiver by the Trustee and the holders of the Israeli 2021 Notes of any right to accelerate the full balance of the amount due to the holders of the Israeli 2021 Notes based on any claims, allegations, actions, and/or rights that were raised, and/or resulting or deriving from certain claims or allegations as set forth in Section 19.1 of the Amendment; (j) providing for a waiver by the Trustee and the holders of the Israeli 2021 Notes of certain claims, demands, rights, and/or actions against and/or relating to the Company, its subsidiaries and/or affiliates and their respective employees (including their respective directors, officers, members of the Company’s board of directors, employees, stockholders, stakeholders and advisors); and (k) adding other definitions, representations and covenants to the Deed and making related conforming changes to the Deed. Pursuant to the Amendment, no prepayment penalties were due or payable in connection with the payment of principal made by the Company on the Effective Date.

The Deed (including the amendment) includes certain customary covenants, including minimum net assets of $215 million and a maximum debt to total assets ratio of 70%. The date for determining compliance with these financial covenants is the date that the Company publishes its financial statements (i.e., in a quarterly report on Form 10-Q or an annual report on Form 10-K) with the SEC. If the Company does not satisfy these financial covenants for two consecutive quarters, it is an event of default under the Deed. If this event of default is expected to occur, the Company has the right to request the trustee for the Israeli 2021 Notes (the “Trustee”) to appoint an emergency committee of the three largest noteholders for the purpose of obtaining a one-quarter extension of time to satisfy the financial covenants. If the Company does not make this request and the breach occurs, or if the emergency committee does not grant the extension, then the Trustee is required to convene a meeting of the noteholders as described below.

In addition to not complying with the financial covenants as described above, the events of default include: (i) a change of control of the Company (defined in the Deed as MCC Advisors’ ceasing to provide investment management or advisory services to the Company); (ii) the Company not publishing a tender offer for the purchase of all of the Israeli 2021 Notes within 45 days; (iii) the Company not paying any amount due and payable to the holders of the Israeli 2021 Notes within seven business days after the payment due date; (iv) certain insolvency and receivership events with respect to the Company or with respect to all or substantially all of its assets, and (v) the Israeli 2021 Notes being delisted from the TASE or the TASE’s suspension of trading of the Israeli 2021 Notes for more than 60 days.

If an event of default occurs under the Deed, there is no automatic acceleration or mandatory redemption of the Israeli 2021 Notes. Rather, the Trustee is required to convene a meeting of the noteholders for a vote on whether to accelerate the Israeli 2021 Notes. Noteholders holding at least 50% of the principal amount of the Israeli 2021 Notes must be present at the meeting for a quorum to exist, and if a quorum exists, then the vote of a majority of the noteholders present at the meeting controls.

As of September 30, 2019, we have net assets of $216.4 million and a maximum debt to total assets ratio of below 70%. Therefore, as of September 30, 2019, we were in compliance with the minimum net assets covenant under the Israeli 2021 Notes. However, if we experience realized losses or unrealized declines in the fair value of the Company’s portfolio investments due to either portfolio company specific or macro-economic factors, it is reasonably likely, absent injection of capital or waivers or an amendment to the covenants set forth in the Deed (including the Amendment), that we could not satisfy the minimum net assets covenant under the Israeli 2021 Notes as early as the date we publish financial statements for the quarter ending December 31, 2019, which would be no later than February 21, 2020. While there are no immediate consequences to breaching this financial covenant for a single period, if the Company reports net assets of less than $215 million for two consecutive quarters and does not obtain a one-quarter extension of time as described above, the holders of the Israel 2021 Notes can require the Trustee to accelerate the Israeli 2021 Notes. In that regard, if the Company’s net assets are below $215 million as of December 31, 2019, and the Company’s net assets remain below $215 million as of March 31, 2020, and the Company does not obtain an extension of time for compliance as described above or an adequate waiver or amendment, then an event of default on the Israeli 2021 Notes will occur on the date that the Company publishes its quarterly report on Form 10-Q for the fiscal quarter ending March 31, 2020, which would be no later than May 11, 2020.

As of September 30, 2019, the Company’s net assets are $216.4 million, resulting in a cushion of approximately $1.4 million. It is reasonably likely that the Company’s net assets could decline by more than $1.4 million by December 31, 2019, which would result in a breach of the financial covenant described above.  To address these matters, we may pursue alternatives which could include discussions with the Trustee and holders of the Israeli 2021 Notes regarding potential waivers and/or an amendment to the covenants set forth in the Deed. Any such waivers or an amendment may be subject to conditions that may not be satisfied. If market or other conditions are not favorable, or if such discussions do not result in a favorable outcome, we may be unable to take any such actions or obtain waivers or an amendment from the trustee or holders of the Israeli 2021 Notes. In addition, the Company is also exploring the possibility of raising additional capital, which will have the effect of increasing the Company’s net assets, as another means to cure any future non-compliance with the financial covenants of the Deed. The Company continues to actively pursue the Mergers. If the Mergers are consummated, we expect it would result in the Company’s ability to comply with the financial covenants described above as the Combined Company is projected to have net assets well in excess of $215 million and debt to total assets ratio well below 70%. Alternatively, we believe we have the ability to sell certain portfolio investments and reduce other controllable cash outflows in order to increase our liquidity to levels sufficient to meet our debt obligations under the Israeli 2021 Notes and any other anticipated cash needs to meet our obligations as they become due.

The foregoing description of the terms of Israeli 2021 Notes, the Deed, and the Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of each of the Deed and the Amendment incorporated by reference as an exhibit to this annual report on Form 10-K.


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On June 5, 2018, the Company announced that on June 1, 2018, its board of directors authorized the Company to repurchase and retire up to $20 million of the Company’s outstanding Israeli 2021 Notes on the TASE. Execution of the repurchase plan is subject to an open trading window for the Company and continued liquidity at that time and is expected to continue until the full authorized amount is purchased or market conditions change. The repurchase of the Israeli 2021 Notes is not expected to result in any material tax consequences to the Company or the holders of the Israeli 2021 Notes.

During the quarter ended December 31, 2018, the Company exchanged $1.0 million United States Dollars to New Israeli Shekels at a rate of 3.73 USD/NIS in order to repurchase the Israeli 2021 Notes on the TASE. As the Israeli 2021 Notes were trading below par at the time of the repurchase, and the USD/NIS (foreign currency) spot rate was higher than the fixed exchange rate agreed upon in the deed of trust, the Company was able to repurchase and retire 3,812,000 units, which resulted in $1,119,201 aggregate principal amount of the Israeli 2021 Notes being retired. The redemption was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized gain of $0.1 million and was recorded on the Consolidated Statements of Operations as a gain on extinguishment of debt.

SBA Debentures

On March 26, 2013, SBIC LP received a SBIC license from the SBA. The SBIC license allowed SBIC LP to obtain leverage by issuing SBA-guaranteed debentures (“SBA Debentures”), subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA Debentures were non-recourse, interest only debentures with interest payable semi-annually and had a ten year maturity. The principal amount of SBA Debentures were not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA Debentures were fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, had a superior claim to the SBIC LP’s assets over our stockholders in the event we liquidated the SBIC LP or the SBA exercised its remedies under the SBA Debentures issued by the SBIC LP upon an event of default.

On September 1, 2018, the Company repaid $15.0 million in aggregate principal amount of the SBA Debentures. The repayment 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.

SBIC LP received a letter from the SBA (the “SBA Letter”), dated March 14, 2019, informing SBIC LP of certain alleged regulatory issues constituting a default under the terms of the SBIC LP’s outstanding SBA Debentures. The SBA Letter stated that SBIC LP had until March 29, 2019, fifteen (15) days from the date of the SBA Letter, to provide the SBA with certain additional information regarding the alleged regulatory issues, unless extended by the SBA. SBIC LP’s management submitted an orderly wind-down plan to the SBA to prepay the remaining $135.0 million of outstanding SBA Debentures using available cash at SBIC LP as well as the sale of assets to third parties or affiliates of SBIC LP. On March 28, 2019, SBIC LP agreed and made a repayment of $50.0 million of outstanding SBA Debentures by April 3, 2019 using available cash at SBIC LP and the cure period was extended to April 19, 2019. On April 18, 2019, SBIC LP agreed and made a repayment of $20.0 million of outstanding SBA Debentures on April 23, 2019 and an additional $30.0 million of outstanding SBA Debentures on April 30, 2019 using proceeds from the sale of certain assets and the cure period was extended to May 10, 2019. On May 10, 2019, SBIC LP made the final repayment of the remaining $35.0 million of outstanding SBA Debentures using proceeds from the sale of certain assets. In connection therewith, effective July 1, 2019, SBIC LP surrendered its SBIC license and operates as Medley Small Business Fund.

The $135.0 million in aggregate repayments made in connection with the orderly wind-down plan was accounted for as debt extinguishments in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a cumulative realized loss of $1.8 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.

The Company believes the wind-down plan of SBIC LP will not have a material impact on the Company’s net investment income per share. In addition, the Company believes the wind-down will not have an adverse impact on the Company’s other operations. The Company has received the necessary consents and waivers under the MCC Merger Agreement to permit the repayment of the outstanding SBA Debentures.

Contractual Obligations and Off-Balance Sheet Arrangements

The Company has a guarantee to issue up to $7.0 million in standby letters of credit through a financial intermediary on behalf of a certain portfolio company. Under this arrangement, if the standby letters of credit were to be issued, the Company would be required to make payments to third parties if the portfolio company was to default on its related payment obligations. The guarantee will renew annually until cancellation. As of September 30, 2019 and 2018, the Company had not issued any standby letters of credit under the commitment on behalf of the portfolio company.

As of September 30, 2019 and 2018, we had commitments under loan and financing agreements to fund up to $8.9 million to seven portfolio companies and $36.1 million to 17 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 September 30, 2019 and 2018 is shown in the table below (dollars in thousands):

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September 30, 2019
 
September 30, 2018
Dynamic Energy Services International LLC - Revolver
$
3,255

 
$

DataOnline Corp. - Revolver
1,890

 
1,890

Alpine SG, LLC - Revolver
1,000

 
1,000

Kemmerer Operations, LLC - Delayed Draw Term Loan
908

 

Black Angus Steakhouses, LLC - Delayed Draw Term Loan
893

 
893

Redwood Services Group, LLC - Revolver
875

 
1,750

Access Media Holdings, LLC - Series AAA Preferred Equity
101

 
173

1888 Industrial Services, LLC - Revolver(1)

 
719

Black Angus Steakhouses, LLC - Revolver(1)

 
625

Impact Group, LLC - Delayed Draw Term Loan

 
8,567

Redwood Services Group, LLC - Delayed Draw Term Loan

 
4,839

SFP Holding, Inc. - Delayed Draw Term Loan

 
2,765

Accupac, Inc. - Delayed Draw Term Loan

 
2,612

SMART Financial Operations, LLC - Delayed Draw Term Loan

 
2,400

RMS Holding Company, LLC - Revolver

 
2,327

Barry's Bootcamp Holdings, LLC - Revolver

 
2,200

Barry's Bootcamp Holdings, LLC - Delayed Draw Term Loan

 
1,271

Trans-Fast Remittance LLC - Delayed Draw Term Loan

 
1,057

Manna Pro Products, LLC - Delayed Draw Term Loan

 
429

Brook & Whittle Holding Corp. - Delayed Draw Term Loan

 
310

Central States Dermatology Services, LLC - Delayed Draw Term Loan

 
137

SavATree, LLC - Delayed Draw Term Loan

 
123

Total
$
8,922

 
$
36,087


(1)
The revolving credit facility was fully drawn as of September 30, 2019.

We have certain contracts under which we have material future commitments. We have entered into an investment management agreement with MCC Advisors in accordance with the 1940 Act. The investment management agreement became effective upon the pricing of our initial public offering. Under the investment management agreement, MCC Advisors has agreed to provide us with investment advisory and management services. For these services, we have agreed to pay a base management fee equal to a percentage of our gross assets and an incentive fee based on our performance.

We have also entered into an administration agreement with MCC Advisors as our administrator. The administration agreement became effective upon the pricing of our initial public offering. Under the administration agreement, MCC Advisors has agreed to furnish us with office facilities and equipment, provide us clerical, bookkeeping and record keeping services at such facilities and provide us with other administrative services necessary to conduct our day-to-day operations. MCC Advisors will also provide on our behalf significant managerial assistance to those portfolio companies to which we are required to provide such assistance.

The following table shows our payment obligations for repayment of debt and other contractual obligations at September 30, 2019 (dollars in thousands):
 
Payment Due by Period
 
Total
 
Less than 1 year
 
1 - 3 years
 
3 - 5 years
 
More than 5
years
2021 Notes
$
74,013

 
$

 
$
74,013

 
$

 
$

2023 Notes
77,847

 

 

 
77,847

 

Israeli 2021 Notes
105,140

 
60,080

 
45,060

 

 

Total contractual obligations
$
257,000

 
$
60,080

 
$
119,073

 
$
77,847

 
$


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

On March 27, 2015, the Company and Great American Life Insurance Company (“GALIC”) entered into a limited liability company operating agreement to co-manage MCC Senior Loan Strategy JV I LLC (“MCC JV”). The Company and GALIC have committed to provide $100 million of equity to MCC JV, with the Company providing $87.5 million and GALIC providing $12.5 million. MCC JV commenced operations on July 15, 2015. On August 4, 2015, MCC JV entered into a senior secured revolving credit facility (the “JV Facility”) led by Credit Suisse, AG with commitments of $100 million. On March 30, 2017, the Company amended the JV Facility previously administered by CS and facilitated the assignment of all rights and obligations of CS under the JV Facility to Deutsche Bank AG, New York Branch, (“DB”) and increased the total loan commitments to $200 million. As of September 30, 2019, MCC JV has drawn approximately $179.3 million on the JV Facility. As of September 30, 2019, MCC JV had total investments at fair value of $249.3 million. As of September 30, 2019, MCC JV’s portfolio was comprised of senior secured first lien term loans to 61 different borrowers. As of September 30, 2019, certain investments in one portfolio company were on non-accrual status.


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The Company has determined that MCC JV is an investment company under ASC 946, however in accordance with such guidance, the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company does not consolidate its interest in MCC JV.
 
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, including the federal 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 following table summarizes the dividend distributions during the year ended September 30, 2019:
Date Declared
 
Record Date
 
Payment Date
 
Amount Per Share
11/16/2018
 
12/5/2018
 
12/20/2018
 
$
0.10

2/10/2019
 
2/22/2019
 
3/12/2019
 
0.05

 
 
 
 
 
 
$
0.15


Stock Repurchase Program

The Company had a share repurchase program from February 5, 2015 to December 31, 2017. Under the share repurchase program, the Company repurchased an aggregate of 4,259,073 shares of common stock at an average price of $8.00 per share with a total cost of approximately $34.1 million, and the Company's net asset value per share was increased by approximately $0.23 as a result of the share repurchases.

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 an investment management agreement with MCC Advisors. Mr. Brook Taube, our Chairman and Chief Executive Officer, is a managing partner and senior portfolio manager of MCC Advisors, and Mr. Seth Taube, one of our directors, is a managing partner of MCC Advisors.


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MCC Advisors provides us with the office facilities and administrative services necessary to conduct day-to-day operations pursuant to our administration agreement. We reimburse 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.

We have entered into a license agreement with Medley Capital LLC, pursuant to which Medley Capital LLC has granted us a non-exclusive, royalty-free license to use the name “Medley.”

Certain affiliates of MCC Advisors, Medley Capital LLC, their respective affiliates and some of their employees purchased in the IPO an aggregate of 833,333 shares of common stock at the IPO price per share of $12.00. We received the full proceeds from the sale of these shares, and no underwriting discounts or commissions were paid in respect of these shares.

On August 9, 2018, the Company entered into the MCC Merger Agreement pursuant to which the Company would, on the terms and subject to the conditions set forth in the MCC Merger Agreement, merge with and into Sierra, with Sierra as the surviving company in the MCC Merger Agreement. Under the MCC Merger, each share of our common stock issued and outstanding immediately prior to the MCC Merger effective time (other than shares of our common stock held by the Company, Sierra or their respective wholly owned subsidiaries) would be converted into the right to receive 0.8050 shares of the Sierra’s common stock. In addition, pursuant to the MDLY Merger Agreement, MDLY would, on the terms and subject to the conditions set forth in the MDLY Merger Agreement, merge with and into Merger Sub, with Merger Sub as the surviving company in the MDLY Merger Agreement. In the MDLY Merger, each share of MDLY Class A common stock, issued and outstanding immediately prior to the MDLY Merger effective time (other than Dissenting Shares (as defined in the MDLY Merger Agreement) and shares of MDLY Class A common stock held by MDLY, Sierra or their respective wholly owned subsidiaries) would be converted into the right to receive (i) 0.3836 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $3.44 per share. In addition, MDLY’s stockholders would have the right to receive certain dividends and/or other payments.

On July 29, 2019, the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MCC Merger Agreement”), by and between the Company and Sierra, pursuant to which the Company will, on the terms and subject to the conditions set forth in the Amended MCC Merger Agreement, merge with and into Sierra, with Sierra as the surviving company in the MCC Merger. In the MCC Merger, each share of the Company’s common stock (other than shares of the Company’s common stock held by the Company, Sierra or their respective wholly owned subsidiaries) will be exchanged for the right to receive (i) 0.68 shares of Sierra’s common stock if the attorneys’ fees of plaintiffs’ counsel and litigation expenses paid or incurred by plaintiffs’ counsel or advanced by plaintiffs in connection with the FrontFour Action, as described below (such fees and expenses, the “Plaintiff Attorney Fees”), are less than or equal to $10,000,000; (ii) 0.66 shares of Sierra’s common stock if the Plaintiff Attorney Fees are equal to or greater than $15,000,000; (iii) between 0.68 and 0.66 per share of Sierra’s common stock if the Plaintiff Attorney Fees are greater than $10,000,000 but less than $15,000,000, calculated on a descending basis, based on straight line interpolation between $10,000,000 and $15,000,000; or (iv) 0.66 shares of Sierra’s common stock in the event that the Plaintiff Attorney Fees are not determined prior to the closing of the MCC Merger (such ratio, the “MCC Merger Exchange Ratio”).

In addition, on July 29, 2019, Sierra and MDLY announced the execution of the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MDLY Merger Agreement”), by and among MDLY, Sierra, and Merger Sub, pursuant to which MDLY will, on the terms and subject to the conditions set forth in the Amended MDLY Merger Agreement, merge with and into Merger Sub, with Merger Sub as the surviving company in the MDLY Merger. In the MDLY Merger, each share of MDLY Class A common stock, issued and outstanding immediately prior to the MDLY Merger effective time, other than shares of MDLY Class A common stock held by MDLY, Sierra or their respective wholly owned subsidiaries (the “Excluded MDLY Shares”) and the Dissenting Shares (as defined in the Amended MDLY Merger Agreement), held, immediately prior to the MDLY Merger effective time, by any person other than a Medley LLC unitholder, will be exchanged for (i) 0.2668 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $2.96 per share. In addition, in the MDLY Merger, each share of MDLY Class A common stock issued and outstanding immediately prior to the MDLY Merger effective time, other than the Excluded MDLY Shares and the Dissenting Shares, held, immediately prior to the MDLY Merger effective time, by Medley LLC unitholders will be exchanged for (i) 0.2072 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $2.66 per share.

Pursuant to terms of the Amended MCC Merger Agreement, the consummation of the MCC Merger is conditioned upon the satisfaction or waiver of each of the conditions to closing under the Amended MDLY Merger Agreement and the consummation of the MDLY Merger. However, pursuant to the terms of the Amended MDLY Merger Agreement, the consummation of the MDLY Merger is not contingent upon the consummation of the MCC Merger. If both Mergers are successfully consummated, Sierra’s common stock would be listed on the NYSE, with such listing expected to be effective as of the closing date of the Mergers, and Sierra’s common stock will be listed on the Tel Aviv Stock Exchange (“TASE”), with such listing expected to be effective as of the closing date of the MCC Merger. If, however, only the MDLY Merger is consummated, Sierra’s common stock would be listed on the NYSE. If both Mergers are successfully consummated, the investment portfolios of MCC and Sierra would be combined, Merger Sub, as a successor to MDLY, would be a wholly owned subsidiary of the Combined Company, and the Combined Company would be internally managed by MCC Advisors LLC, its wholly controlled adviser subsidiary. If only the MDLY Merger is consummated, the investment portfolios of MCC and Sierra would not be combined; however, the investment management function relating to the operation of Sierra, as the surviving company, would still be internalized (the “Sierra/MDLY Company”) and the Sierra/MDLY Company would be managed by MCC Advisors. The Mergers are subject to approval by the stockholders of the Company, Sierra, and MDLY, regulators, including the SEC, court approval of the Stipulation (as described below), other customary closing conditions and third-party consents. There is no assurance that any of the foregoing conditions will be satisfied.

On February 11, 2019, a purported stockholder class action was commenced in the Court of Chancery of the State of Delaware by FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. (together, “FrontFour”), captioned as FrontFour Capital Group LLC, et al. v. Brook Taube, et al., Case No. 2019-0100 (the “FrontFour Action”) against defendants Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, Sierra, the Company, MCC Advisors, Medley Group LLC, and Medley LLC. The complaint, as amended on February 12, 2019, alleged that the individuals named as defendants breached their fiduciary duties to the Company’s stockholders in connection with the MCC Merger, and that MDLY, Sierra, MCC Advisors, Medley Group LLC, and Medley LLC aided and abetted those alleged breaches of fiduciary duties. The complaint sought to enjoin the vote of MCC stockholders on the proposed merger and enjoin enforcement of certain provisions of the Agreement and Plan of Merger, dated as of August 9, 2018, by and between MCC and Sierra (the “MCC Merger Agreement”). The Court held a trial on the plaintiffs’ claims

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on March 6-7, 2019 and issued a Memorandum Opinion (the “Decision”) on March 11, 2019. The Court denied the plaintiffs’ requests to (i) permanently enjoin the proposed merger and (ii) require the Company to conduct a “shopping process” for the Company on terms proposed by the plaintiffs in their complaint. The Court held that the Company’s directors breached their fiduciary duties in entering into the proposed merger, but rejected the plaintiffs’ claim that Sierra aided and abetted those breaches of fiduciary duties. The Court ordered the defendants to issue corrective disclosures consistent with the Decision, and enjoined a vote of the Company’s stockholders on the proposed merger until such disclosures have been made and stockholders have had the opportunity to assimilate this information. On March 20, 2019, another purported stockholder class action was commenced by Stephen Altman against Brook Taube, Seth Taube, Jeff Tonkel, Arthur S. Ainsberg, Karin Hirtler-Garvey, Mark Lerdal, and John E. Mack in the Court of Chancery of the State of Delaware, captioned Altman v. Taube, Case No. 2019-0219 (the “Altman Action”). The complaint alleged that the defendants breached their fiduciary duties to stockholders of the Company in connection with the vote of the Company’s stockholders on the proposed mergers. On April 8, 2019, the Court granted a stipulation consolidating the FrontFour Action and the Altman Action, designating the amended complaint in the FrontFour Action as the operative complaint, and designating the plaintiffs in the FrontFour Action and their counsel the lead plaintiffs and lead plaintiffs’ counsel, respectively.

On April 15, 2019, certain parties reached agreement on the principal terms of a settlement of the FrontFour Action, which were contained in a term sheet, dated April 15, 2019 (the “Settlement Term Sheet”). On July 29, 2019, MCC entered into a Stipulation of Settlement (and, as amended on August 8, 2019, the “Stipulation”) by and among the Company, Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, MCC Advisors, Medley LLC, and Medley Group LLC (the “Medley Parties”), on the one hand, and FrontFour, on behalf of itself and a class of similarly situated stockholders of the Company, on the other hand, in connection with the FrontFour Action.

The Stipulation provides for the settlement of all claims brought against the Medley Parties in the FrontFour Action. Under the Stipulation, the Company agreed to seek the agreement and/or consent of Sierra to effect certain amendments to (i) the MCC Merger Agreement and (ii) the MDLY Merger Agreement (together with the MCC Merger Agreement, the “Merger Agreements”), which have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. The Stipulation also provides for, if the MCC Merger is consummated, the creation of a settlement fund, consisting of $17 million in cash and $30 million of Sierra stock, with the number of shares of Sierra stock to be calculated using the pro forma net asset value reported in the future proxy supplement describing the amendments to the MCC Merger Agreement, which will be distributed to eligible members of the Settlement Class (as defined in the Stipulation). Under the Stipulation, MDLY also consented to certain amendments to the Merger Agreements that have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. In addition, in connection with the Stipulation, on July 29, 2019, the Company entered into a Governance Agreement with FrontFour Capital Group LLC, FrontFour Master Fund, Ltd., FrontFour Capital Corp., FrontFour Opportunity Fund, David A. Lorber, Stephen E. Loukas and Zachary R. George, pursuant to which, among other matters, FrontFour is subject to customary standstill restrictions and required to vote in favor of the MCC Merger at a meeting of stockholders to approve the Amended MCC Merger Agreement.

The Stipulation also provides for mutual releases between and among FrontFour and the Settlement Class, on the one hand, and the Medley Parties, on the other hand, of all claims that were or could have been asserted in the FrontFour Action. The Medley Parties will also release all claims arising out of or relating to the prosecution and settlement of the FrontFour Action and all claims that were or could have been asserted (other than claims against the Highland Parties, as defined in the Stipulation) in the litigation pending in the United States District Court for the Southern District of New York captioned Medley Capital Corporation v. FrontFour Capital Group LLC, et al., No. 1:19-cv-02055-LTS (S.D.N.Y.) (the “Federal Action”), and FrontFour and the Settlement Class will release all claims arising out of or relating to the prosecution and settlement of the Federal Action.

The Stipulation further provides that the Company and FrontFour shall work together in good faith to agree to supplemental disclosures relating to the transactions contemplated by the Merger Agreements consistent with the Decision.

The Stipulation is subject to the approval of the Court. On September 26, 2019, FrontFour filed a motion seeking an order approving the Stipulation, and also moved for the Court to award plaintiffs’ counsel attorneys’ fees in the amount of $22 million and expenses in the amount of $420,334.97 (the “Fee Application”). The Court held a hearing to consider the Stipulation and the Fee Application on October 24, 2019.

On November 19, 2019, the Court issued a bench ruling approving the Stipulation. The Court also awarded attorney’s fees as follows: (i) an award of $3,000,000 to lead plaintiffs’ counsel and $75,000 to counsel to plaintiff Stephen Altman (the “Therapeutics Fee Award”) and (ii) an award in an amount equal to 26% of the nominal value of the settlement fund, grossed up to include the amount of the lead plaintiffs’ counsel’s attorney’s fees, and excluding the portion of the fees borne by the class under the Amended MCC Merger Agreement, as well as an award of $100,000 relating to the composition of the board of directors of the post-Merger company (the “Contingent Fee Award” and, together with the Therapeutics Fee Award, the “Fee Awards”). The parties disagreed as to how to apply the formula that the Court indicated will be used to calculate the Contingent Fee Award. Accordingly, the parties submitted different forms of the proposed form of order and final judgment, as applicable, for review and entry by the Court, together with letter briefs setting forth their respective interpretations of the Court’s November 19, 2019 bench ruling. The Plaintiff contends that the amount of the Contingent Fee Award is fixed at $14,540,888. Defendants contend that the amount will be less than $14,540,888, but the actual amount cannot be determined prior to closing. The Therapeutics Fee Award will be payable within five (5) business days of the entry of an order and judgment by the Court. The Contingent Fee Award is contingent upon the closing of the MCC Merger, and will be due within five (5) business days of the closing of the MCC Merger and establishment of the Settlement Fund. The Fee Awards will be paid by MCC or its successor.

MCC Advisors and its affiliates may in the future manage other accounts that have investment mandates that are similar, in whole and in part, with ours. MCC Advisors and its affiliates may determine that an investment is appropriate for us and for one or more of those other accounts. In such event, depending on the availability of such investment and other appropriate factors, and pursuant to MCC Advisors’ allocation policy, MCC Advisors or its affiliates may determine that we should invest side-by-side with one or more other accounts. We will not make any investments if they are not permitted by applicable law and interpretive positions of the SEC and its staff, the exemptive order granted by the SEC, or if they are inconsistent with MCC Advisors’ allocation procedures. Further, any investments made by related parties will be made in accordance with MCC Advisors’ related party transaction procedures.

On November 25, 2013, the Company obtained an exemptive order from the SEC that permits us to participate in negotiated co-investment transactions with certain affiliates, each of whose investment adviser is Medley, LLC or an investment adviser controlled by Medley, LLC in a manner consistent

67



with our investment objective, strategies and restrictions, as well as regulatory requirements and other pertinent factors (the “Prior Exemptive Order”). On March 29, 2017, the Company, MCC Advisors and certain other affiliated funds and investment advisers received an exemptive order (the “Exemptive Order”) that supersedes the Prior Exemptive Order and allows affiliated registered investment companies to participate in co-investment transactions with us that would otherwise have been prohibited under Section 17(d) and 57(a)(4) of the 1940 Act and Rule 17d-1 thereunder. On October 4, 2017, the Company, MCC Advisors and certain of our affiliates received an exemptive order that supersedes the Exemptive Order (the “Current Exemptive Order”) and allows, in addition to the entities already covered by the Exemptive Order, Medley LLC and its subsidiary, Medley Capital LLC, to the extent they hold financial assets in a principal capacity, and any direct or indirect, wholly or majority owned subsidiary of Medley LLC that is formed in the future, to participate in co-investment transactions with us that would otherwise be prohibited by either or both of Sections 17(d) and 57(a)(4) of the 1940 Act. If the Mergers are successfully consummated, Sierra and certain of its affiliates will not be able to rely on the Current Exemptive Order. In this regard, on November 19, 2018, Sierra and certain of its affiliates submitted an exemptive application to the SEC for an exemptive order that would supersede the Current Exemptive Order (the “Superseding Exemptive Order”) and would permit Sierra to participate in negotiated co- investment transactions with certain affiliates that would otherwise be prohibited by either or both of Sections 17(d) and 57(a)(4) of the 1940 Act. There can be no assurance if and when Sierra will receive the Superseding Exemptive Order. The terms of the Superseding Exemptive Order, if received, would be substantially similar to the Current Exemptive Order. Co-investment under the Superseding Exemptive Order is subject to certain conditions therein, including the condition that, in the case of each co-investment transaction, the board of directors determines that it would be in Sierra’s best interest to participate in the transaction. The Current Exemptive Order will remain in effect unless and until the Mergers are completed and the Superseding Exemptive Order is granted by the SEC. However, neither we nor the affiliated funds are obligated to invest or co-invest when investment opportunities are referred to us or them.

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

Investment Management Agreement

Under the terms of our investment management agreement, MCC Advisors:

determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;

identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and

executes, closes, monitors and administers the investments we make, including the exercise of any voting or consent rights.

MCC Advisors’ services under the investment management agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired.

Pursuant to our investment management agreement, we pay MCC Advisors a fee for investment advisory and management services consisting of a base management fee and a two-part incentive fee.

On December 3, 2015, MCC Advisors recommended and, in consultation with the Board, agreed to reduce fees under the investment management agreement. Beginning January 1, 2016, the base management fee was reduced to 1.50% on gross assets above $1 billion. In addition, MCC Advisors reduced its incentive fee from 20% on pre-incentive fee net investment income over an 8% hurdle, to 17.5% on pre-incentive fee net investment income over a 6% hurdle. Moreover, the revised incentive fee includes a netting mechanism and is subject to a rolling three-year look back from January 1, 2016 forward. Under no circumstances will the new fee structure result in higher fees to MCC Advisors than fees under the prior investment management agreement.

The following discussion of our base management fee and two-part incentive fee reflects the terms of the fee waiver agreement executed by MCC Advisors on February 8, 2016 (the “Fee Waiver Agreement”). The terms of the Fee Waiver Agreement are effective as of January 1, 2016, and are a permanent reduction in the base management fee and incentive fee on net investment income payable to MCC Advisors for the investment advisory and management services it provides under the investment management agreement. The Fee Waiver Agreement does not change the second component of the incentive fee, which is the incentive fee on capital gains.

Base Management Fee

For providing investment advisory and management services to us, MCC Advisors receives a base management fee. The base management fee is calculated at an annual rate of 1.75% (0.4375% per quarter) of up to $1.0 billion of the Company’s gross assets and 1.50% (0.375% per quarter) of any amounts over $1.0 billion of the Company’s gross assets, and is payable quarterly in arrears. The base management fee will be calculated based on the average value of the Company’s gross assets at the end of the two most recently completed calendar quarters and will be appropriately pro-rated for any partial quarter. On May 4, 2018, MCC Advisors voluntarily elected to waive $380,000 of the base management fee payable for the quarter ended March 31, 2018, which is shown on the Consolidated Statements of Operations.

Incentive Fee

The incentive fee has two components, as follows:

Incentive Fee Based on Income


68



The first component of the incentive fee is payable quarterly in arrears and is based on our pre-incentive fee net investment income earned during the calendar quarter for which the incentive fee is being calculated. MCC Advisors is entitled to receive the incentive fee on net investment income from us if our Ordinary Income (as defined below) exceeds a quarterly “hurdle rate” of 1.5%. The hurdle amount is calculated after making appropriate adjustments to the Company’s net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter.

Beginning with the calendar quarter that commenced on January 1, 2016, the incentive fee on net investment income is determined and paid quarterly in arrears at the end of each calendar quarter by reference to our aggregate net investment income, as adjusted as described below, from the calendar quarter then ending and the eleven preceding calendar quarters (or if shorter, the number of quarters that have occurred since January 1, 2016). We refer to such period as the “Trailing Twelve Quarters.”

The hurdle amount for the incentive fee on net investment income is determined on a quarterly basis, and is equal to 1.5% multiplied by the Company’s net asset value at the beginning of each applicable calendar quarter comprising the relevant Trailing Twelve Quarters. The hurdle amount is calculated after making appropriate adjustments to the Company’s net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter. The incentive fee for any partial period will be appropriately prorated. Any incentive fee on net investment income will be paid to MCC Advisors on a quarterly basis, and will be based on the amount by which (A) aggregate net investment income (“Ordinary Income”) in respect of the relevant Trailing Twelve Quarters exceeds (B) the hurdle amount for such Trailing Twelve Quarters. The amount of the excess of (A) over (B) described in this paragraph for such Trailing Twelve Quarters is referred to as the “Excess Income Amount.” For the avoidance of doubt, Ordinary Income is net of all fees and expenses, including the reduced base management fee but excluding any incentive fee on Pre-Incentive Fee net investment income or on the Company’s capital gains.

Quarterly Incentive Fee Based on Income

The incentive fee on net investment income for each quarter is determined as follows:

No incentive fee on net investment income is payable to MCC Advisors for any calendar quarter for which there is no Excess Income Amount;

100% of the Ordinary Income, if any, that exceeds the hurdle amount, but is less than or equal to an amount, which we refer to as the “Catch-up Amount,” determined as the sum of 1.8182% multiplied by the Company’s net assets at the beginning of each applicable calendar quarter, as adjusted as noted above, comprising the relevant Trailing Twelve Quarters is included in the calculation of the incentive fee on net investment income; and

17.5% of the Ordinary Income that exceeds the Catch-up Amount is included in the calculation of the incentive fee on net investment income.

The amount of the incentive fee on net investment income that will be paid to MCC Advisors for a particular quarter will equal the excess of the incentive fee so calculated minus the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters but not in excess of the Incentive Fee Cap (as described below).

The incentive fee on net investment income that is paid to MCC Advisors for a particular quarter is subject to a cap (the “Incentive Fee Cap”). The Incentive Fee Cap for any quarter is an amount equal to (a) 17.5% of the Cumulative Net Return (as defined below) during the relevant Trailing Twelve Quarters minus (b) the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters.

“Cumulative Net Return” means (x) the Ordinary Income in respect of the relevant Trailing Twelve Quarters minus (y) any Net Capital Loss (as described below), if any, in respect of the relevant Trailing Twelve Quarters. If, in any quarter, the Incentive Fee Cap is zero or a negative value, the Company will pay no incentive fee on net investment income to MCC Advisors for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is a positive value but is less than the incentive fee on net investment income that is payable to MCC Advisors for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Company will pay an incentive fee on net investment income to MCC Advisors equal to the Incentive Fee Cap for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is equal to or greater than the incentive fee on net investment income that is payable to MCC Advisors for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Company will pay an incentive fee on net investment income to MCC Advisors, calculated as described above, for such quarter without regard to the Incentive Fee Cap.

“Net Capital Loss” in respect of a particular period means the difference, if positive, between (i) aggregate capital losses, whether realized or unrealized, and dilution to the Company’s net assets due to capital raising or capital actions, in such period and (ii) aggregate capital gains, whether realized or unrealized and accretion to the Company’s net assets due to capital raising or capital action, in such period.

Dilution to the Company’s net assets due to capital raising is calculated, in the case of issuances of common stock, as the amount by which the net asset value per share was adjusted over the transaction price per share, multiplied by the number of shares issued. Accretion to the Company’s net assets due to capital raising is calculated, in the case of issuances of common stock (including issuances pursuant to our dividend reinvestment plan), as the excess of the transaction price per share over the amount by which the net asset value per share was adjusted, multiplied by the number of shares issued. Accretion to the Company’s net assets due to other capital action is calculated, in the case of repurchases by the Company of its own common stock, as the excess of the amount by which the net asset value per share was adjusted over the transaction price per share multiplied by the number of shares repurchased by the Company.

For the avoidance of doubt, the purpose of the new incentive fee calculation under the Fee Waiver Agreement is to permanently reduce aggregate fees payable to MCC Advisors by the Company, effective as of January 1, 2016. In order to ensure that the Company will pay MCC Advisors lesser aggregate

69



fees on a cumulative basis, as calculated beginning January 1, 2016, we will, at the end of each quarter, also calculate the base management fee and incentive fee on net investment income owed by the Company to MCC Advisors based on the formula in place prior to January 1, 2016. If, at any time beginning January 1, 2016, the aggregate fees on a cumulative basis, as calculated based on the formula in place after January 1, 2016, would be greater than the aggregate fees on a cumulative basis, as calculated based on the formula in place prior to January 1, 2016, MCC Advisors shall only be entitled to the lesser of those two amounts.

The second component of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment management agreement as of the termination date) and equals 20.0% of our cumulative aggregate realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the investment adviser.

Under GAAP, the Company calculates the second component of the incentive fee as if the Company had realized all assets at their fair values as of the reporting date. Accordingly, when applicable, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional capital gains incentive fee is subject to the performance of investments until there is a realization event, the amount of the provisional capital gains incentive fee accrued at a reporting date may vary from the capital gains incentive that is ultimately realized and the differences could be material.
 
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

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.

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

With respect to investments for which market quotations are not readily available, our board of directors will undertake a multi-step valuation process each quarter, as described below:

Our quarterly valuation process begins with each investment being initially valued by the valuation professionals responsible for monitoring the portfolio investment.

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

Independent third-party valuation firms are also employed for all of our investments for which there is not a readily available market value. At least twice annually, including at year end, the valuation for each portfolio investment is reviewed by an independent valuation firm.

The audit committee of our board of directors reviews the preliminary valuations of the valuation professionals, senior management and independent valuation firms.

Our audit committee reviews and the board of directors approves the valuations and determines the fair value of each investment in our portfolio in good faith based on the input of MCC Advisors, the respective independent valuation firms 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.

70




Revenue Recognition
 
The Company adopted ASU 2014-09, Revenue from Contracts with Customers, effective on October 1, 2018, using the modified retrospective method. Substantially all revenue streams are excluded from the scope of the new standard and the adoption of the standard had no material impact on the Company’s consolidated financial statements.

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 September 30, 2019, certain investments in seven portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $22.3 million, or 5.6% of the fair value of our portfolio. At September 30, 2018, certain investments in nine portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $48.1 million, or 7.3% of the fair value of our portfolio. At September 30, 2017, certain investments in six portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $72.5 million, or 8.7% 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, commencing with its first taxable year as a corporation, and it intends to operate in a manner so as to maintain its RIC tax treatment. As a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements. Once qualified as a RIC, the Company 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 in order to be eligible for tax treatment under Subchapter M of the Code. 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 we 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 regulations differ from GAAP, distributions in accordance with tax regulations 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.

Recent Developments

On December 12, 2019, the Company notified the TASE that it would be repaying $33.9 million of the Israeli 2021 Notes on December 31, 2019, which consists of an $18.9 million pre-payment in addition to a $15.0 million scheduled amortization payment.


71



Item 7A. 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, 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. 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 year ended September 30, 2019, we did not engage in hedging activities.

As of September 30, 2019, 85.2% of our income-bearing investment portfolio bore interest based on floating rates. The composition of our floating rate debt investments by cash interest rate LIBOR floor as of September 30, 2019 was as follows (dollars in thousands):
 
 
September 30, 2019
LIBOR Floor
 
Fair Value
 
% of Floating
Rate Portfolio
Under 1%
 
$

 
%
1% to under 2%
 
181,347

 
90.6

2% to under 3%
 
18,905

 
9.4

Total
 
$
200,252

 
100.0
%

Based on our Consolidated Statements of Assets and Liabilities as of September 30, 2019, the following table (dollars in thousands) shows the approximate increase/(decrease) in components of net assets resulting from operations of hypothetical LIBOR base rate changes in interest rates, assuming no changes in our investment and capital structure.
Basis point increase/(decrease)
 
Interest Income(1)
 
Interest Expense
 
Net Increase/
(Decrease)
300
 
$
6,200

 
$

 
$
6,200

200
 
4,100

 

 
4,100

100
 
2,100

 

 
2,100

(100)
 
(1,900
)
 

 
(1,900
)
(200)
 
(2,200
)
 

 
(2,200
)
(300)
 
(2,200
)
 

 
(2,200
)

(1)
Assumes no defaults or prepayments by portfolio companies over the next twelve months.

72



Item 8.  Consolidated Financial Statements and Supplementary Data
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Page
Report of Independent Registered Public Accounting Firm
 
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
 
Consolidated Statements of Assets and Liabilities as of September 30, 2019 and 2018
 
Consolidated Statements of Operations for the years ended September 30, 2019, 2018 and 2017
 
Consolidated Statements of Changes in Net Assets for the years ended September 30, 2019, 2018 and 2017
 
Consolidated Statements of Cash Flows for the years ended September 30, 2019, 2018 and 2017
 
Consolidated Schedules of Investments as of September 30, 2019 and 2018
 
Notes to Consolidated Financial Statements
 
 



73



Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Medley Capital Corporation
 
Opinion on the Financial Statements

We have audited the accompanying consolidated statements of assets and liabilities of Medley Capital Corporation (the Company), including the consolidated schedules of investments, as of September 30, 2019 and 2018, the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended September 30, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2019 and 2018, and the results of its operations, changes in its net assets, and its cash flows for each of the three years in the period ended September 30, 2019 in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated December 16, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of September 30, 2019 and 2018, by correspondence with the custodian, directly with designees of the portfolio companies, debt agents and brokers, as applicable, or by other appropriate auditing procedures where replies were not received. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2010

New York, New York
December 16, 2019


F-1



Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Medley Capital Corporation

Opinion on Internal Control over Financial Reporting

We have audited Medley Capital Corporation’s internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Medley Capital Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of assets and liabilities of the Company, including the consolidated schedule of investments as of September 30, 2019 and 2018, the related consolidated statements of operations, changes in net assets and cash flows, for each of the three years in the period ended September 30, 2019, and the related notes and our report dated December 16, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Item 9A of Form 10-K, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

New York, New York
December 16, 2019


F-2



Medley Capital Corporation

Consolidated Statements of Assets and Liabilities

 
September 30, 2019
 
September 30, 2018
ASSETS
 

 
 

Investments at fair value
 

 
 

Non-controlled/non-affiliated investments (amortized cost of $204,736,370 and $428,717,777, respectively)
$
189,895,466

 
$
393,149,374

Affiliated investments (amortized cost of $108,310,029 and $102,546,973, respectively)
99,539,605

 
100,640,804

Controlled investments (amortized cost of $154,601,177 and $233,421,693, respectively)
107,453,927

 
161,639,736

Total investments at fair value
396,888,998


655,429,914

Cash and cash equivalents
68,245,213

 
75,665,981

Restricted cash (see Note 2)
16,038,690

 

Other assets
2,973,731

 
3,420,442

Interest receivable
1,592,406

 
6,377,076

Receivable for dispositions and investments sold
419,299

 
160,257

Fees receivable
108,305

 
187,276

Deferred offering costs

 
354,754

Total assets
$
486,266,642


$
741,595,700

 
 
 
 
LIABILITIES
 

 
 

Notes payable (net of debt issuance costs of $5,274,164 and $8,238,300, respectively)
$
251,731,729

 
$
276,909,028

SBA debentures payable (net of debt issuance costs of $0 and $2,095,329, respectively)

 
132,904,671

Accounts payable and accrued expenses
11,956,755

 
2,935,833

Interest and fees payable
2,904,748

 
3,280,018

Management and incentive fees payable (see Note 6)
2,231,175

 
3,347,674

Administrator expenses payable (see Note 6)
861,785

 
808,546

Deferred revenue
103,583

 
192,152

Due to affiliate
44,337

 
39,051

Total liabilities
$
269,834,112


$
420,416,973

 
 
 
 
Guarantees and Commitments (see Note 8)
 

 
 

 
 
 
 
NET ASSETS
 

 
 

Common stock, par value $0.001 per share, 100,000,000 common shares authorized, 54,474,211 and 54,474,211 common shares issued and outstanding, respectively
$
54,474

 
$
54,474

Capital in excess of par value
673,532,717

 
698,586,770

Total distributable earnings/(loss)
(457,154,661
)
 
(377,462,517
)
Total net assets
216,432,530

 
321,178,727

Total liabilities and net assets
$
486,266,642


$
741,595,700

 
 
 
 
NET ASSET VALUE PER SHARE
$
3.97

 
$
5.90


See accompanying notes to consolidated financial statements.

F-3



Medley Capital Corporation

Consolidated Statements of Operations
 
For the years ended September 30
 
2019
 
2018
 
2017
INVESTMENT INCOME
 

 
 

 
 

Interest from investments
 

 
 

 
 

Non-controlled/non-affiliated investments:
 

 
 

 
 

Cash
$
25,368,027

 
$
39,636,027

 
$
65,398,561

Payment-in-kind
1,755,260

 
3,815,332

 
9,970,327

Affiliated investments:
 

 
 

 
 

Cash
2,197,555

 
2,177,167

 
1,950,454

Payment-in-kind
2,604,279

 
3,398,660

 
774,543

Controlled investments:
 

 
 

 
 

Cash
337,956

 
1,521,820

 
2,045,830

Payment-in-kind
2,800,890

 
3,560,572

 
5,099,935

Total interest income
35,063,967


54,109,578


85,239,650

Dividend income (net of provisional taxes of $0, $(437,584), and $0, respectively)
8,218,480

 
7,991,444

 
4,232,453

Interest from cash and cash equivalents
712,017

 
245,356

 
163,599

Fee income (see Note 9)
2,304,287

 
4,474,220

 
6,620,376

Total investment income
46,298,751


66,820,598


96,256,078

 
 
 
 
 
 
EXPENSES
 

 
 

 
 

Base management fees (see Note 6)
11,189,646

 
14,723,910

 
17,772,593

Incentive fees (see Note 6)

 

 
895,675

Interest and financing expenses
24,049,485

 
27,918,291

 
31,402,538

Professional fees
19,323,082

 
4,430,233

 
2,192,210

General and administrative
7,398,534

 
2,170,904

 
2,555,448

Administrator expenses (see Note 6)
3,323,989

 
3,582,162

 
3,848,299

Directors fees
1,258,378

 
1,270,523

 
646,758

Insurance
623,064

 
542,314

 
396,797

Expenses before management and incentive fee waivers
67,166,178


54,638,337


59,710,318

Management fee waiver (see Note 6)

 
(380,000
)
 
(47,941
)
Incentive fee waiver (see Note 6)

 

 
(43,663
)
Total expenses net of management and incentive fee waivers
67,166,178


54,258,337


59,618,714

Net investment income before excise taxes
(20,867,427
)
 
12,562,261

 
36,637,364

Excise tax expense

 
(157,922
)
 
(267,183
)
NET INVESTMENT INCOME/(LOSS)
(20,867,427
)
 
12,404,339

 
36,370,181

 
 
 
 
 
 
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
 

 
 

 
 

Net realized gain/(loss) from investments
 
 
 
 
 
Non-controlled/non-affiliated investments
(24,762,224
)
 
(89,221,587
)
 
(40,007,550
)
Affiliated investments
(7,670,970
)
 

 
3,391,500

Controlled investments
(79,739,742
)
 

 
(36,470,249
)
Net realized gain/(loss) from investments
(112,172,936
)
 
(89,221,587
)
 
(73,086,299
)
Net unrealized appreciation/(depreciation) on investments
 
 
 
 
 
Non-controlled/non-affiliated investments
20,727,499

 
14,044,097

 
(7,611,264
)
Affiliated investments
(6,864,255
)
 
(950,805
)
 
501,163

Controlled investments
24,634,707

 
(45,287,441
)
 
28,754,467

Net unrealized appreciation/(depreciation) on investments
38,497,951

 
(32,194,149
)
 
21,644,366

Change in provision for deferred taxes on unrealized (appreciation)/depreciation on investments

 
474,352

 
1,091,788

Loss on extinguishment of debt (see Note 5)
(2,032,655
)
 
(2,386,957
)
 
(1,096,682
)
Net realized and unrealized gain/(loss) on investments
(75,707,640
)
 
(123,328,341
)
 
(51,446,827
)
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
(96,575,067
)
 
$
(110,924,002
)
 
$
(15,076,646
)
 
 
 
 
 
 
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS PER COMMON SHARE
$
(1.77
)
 
$
(2.04
)
 
$
(0.28
)
WEIGHTED AVERAGE - BASIC AND DILUTED NET INVESTMENT INCOME PER COMMON SHARE
$
(0.38
)
 
$
0.23

 
$
0.67

WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED (SEE NOTE 11)
54,474,211

 
54,474,211

 
54,474,211

DIVIDENDS DECLARED PER COMMON SHARE
$
0.15

 
$
0.52

 
$
0.76

 
See accompanying notes to consolidated financial statements.
 

F-4



Medley Capital Corporation

Consolidated Statements of Changes in Net Assets
 
Common Stock
 
Total Distributable Earnings/(Loss)
 
Total Net Assets
 
Shares
 
Par Amount
 
Capital in Excess of Par Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2016
54,474,211

 
$
54,474

 
$
705,326,059

 
$
(188,461,391
)
 
$
516,919,142

 
 
 
 
 
 
 
 
 
 
OPERATIONS
 
 
 
 
 
 
 
 
 
Net investment income/(loss)

 

 

 
36,370,181

 
36,370,181

Net realized gain/(loss) from investments

 

 

 
(73,086,299
)
 
(73,086,299
)
Net unrealized appreciation/(depreciation) on investments

 

 

 
21,644,366

 
21,644,366

Change in provision for deferred taxes on unrealized (appreciation)/depreciation on investments

 

 

 
1,091,788

 
1,091,788

Net loss on extinguishment of debt

 

 

 
(1,096,682
)
 
(1,096,682
)
SHAREHOLDER DISTRIBUTIONS
 
 
 
 
 
 
 
 
 
Distributions from earnings

 

 

 
(41,400,401
)
 
(41,400,401
)
Tax reclassification of shareholders' equity in accordance with generally accepted accounting principals

 

 
(267,183
)
 
267,183

 

COMMON SHARE TRANSACTIONS
 
 
 
 
 
 
 
 
 
Offering costs

 

 
(12,778
)
 

 
(12,778
)
Total increase/(decrease) in net assets

 

 
(279,961
)
 
(56,209,864
)
 
(56,489,825
)
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2017
54,474,211

 
$
54,474

 
$
705,046,098

 
$
(244,671,255
)
 
$
460,429,317

 
 
 
 
 
 
 
 
 
 
OPERATIONS
 
 
 
 
 
 
 
 
 
Net investment income/(loss)

 

 

 
12,404,339

 
12,404,339

Net realized gain/(loss) from investments

 

 

 
(89,221,587
)
 
(89,221,587
)
Net unrealized appreciation/(depreciation) on investments

 

 

 
(32,194,149
)
 
(32,194,149
)
Change in provision for deferred taxes on unrealized (appreciation)/depreciation on investments

 

 

 
474,352

 
474,352

Net loss on extinguishment of debt

 

 

 
(2,386,957
)
 
(2,386,957
)
SHAREHOLDER DISTRIBUTIONS
 
 
 
 
 
 
 
 
 
Distributions from earnings

 

 

 
(22,025,185
)
 
(22,025,185
)
Return of capital

 

 
(6,301,403
)
 

 
(6,301,403
)
Tax reclassification of shareholders' equity in accordance with generally accepted accounting principals

 

 
(157,925
)
 
157,925

 

Total increase/(decrease) in net assets

 

 
(6,459,328
)
 
(132,791,262
)
 
(139,250,590
)
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2018
54,474,211

 
$
54,474

 
$
698,586,770

 
$
(377,462,517
)
 
$
321,178,727

 
 
 
 
 
 
 
 
 
 
OPERATIONS
 
 
 
 
 
 
 
 
 
Net investment income/(loss)

 

 

 
(20,867,427
)
 
(20,867,427
)
Net realized gain/(loss) from investments

 

 

 
(112,172,936
)
 
(112,172,936
)
Net unrealized appreciation/(depreciation) on investments

 

 

 
38,497,951

 
38,497,951

Change in provision for deferred taxes on unrealized (appreciation)/depreciation on investments

 

 

 

 

Net loss on extinguishment of debt

 

 

 
(2,032,655
)
 
(2,032,655
)
SHAREHOLDER DISTRIBUTIONS
 
 
 
 
 
 
 
 


Return of Capital

 

 
(8,171,130
)
 

 
(8,171,130
)
Tax reclassification of shareholders' equity in accordance with generally accepted accounting principals

 

 
(16,882,923
)
 
16,882,923

 

Total increase/(decrease) in net assets

 

 
(25,054,053
)
 
(79,692,144
)
 
(104,746,197
)
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2019
54,474,211

 
$
54,474

 
$
673,532,717

 
$
(457,154,661
)
 
$
216,432,530

 
See accompanying notes to consolidated financial statements.

F-5



Medley Capital Corporation

Consolidated Statements of Cash Flows
 
For the years ended September 30
 
2019
 
2018
 
2017
Cash flows from operating activities
 

 
 

 
 

NET INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS
$
(96,575,067
)
 
$
(110,924,002
)
 
$
(15,076,646
)
ADJUSTMENTS TO RECONCILE NET INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS TO NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES:
 
 
 
 
 
Investment increases due to payment-in-kind interest
(9,606,292
)
 
(9,545,703
)
 
(14,743,799
)
Net amortization of premium/(discount) on investments
(286,665
)
 
(959,112
)
 
(1,362,534
)
Amortization of debt issuance costs
3,022,516

 
3,583,158

 
4,587,474

Net realized (gain)/loss from investments
112,172,936

 
89,221,587

 
73,086,299

Net deferred income taxes

 
(911,936
)
 
(1,091,788
)
Net unrealized (appreciation)/depreciation on investments
(38,497,951
)
 
32,194,149

 
(21,644,366
)
Proceeds from sale and settlements of investments
261,233,495

 
267,611,933

 
281,354,722

Purchases, originations and participations
(66,474,607
)
 
(196,961,869
)
 
(239,496,926
)
Loss on extinguishment of debt
2,032,655

 
2,386,957

 
1,096,682

(Increase)/decrease in operating assets:
 
 
 
 
 
Other assets
446,711

 
(98,620
)
 
(2,428,682
)
Interest receivable
4,784,670

 
2,993,972

 
(388,894
)
Receivable for dispositions and investments sold
(259,042
)
 
71,638

 
457,484

Fees receivable
78,971

 
578,480

 
637,627

Increase/(decrease) in operating liabilities:
 
 
 
 
 
Accounts payable and accrued expenses
9,020,922

 
1,072,287

 
(799,404
)
Interest and fees payable
(375,270
)
 
(479,873
)
 
2,045,868

Management and incentive fees payable, net
(1,116,499
)
 
(964,330
)
 
(246,615
)
Administrator expenses payable
53,239

 
(51,248
)
 
(130,442
)
Deferred revenue
(88,569
)
 
(67,400
)
 
(110,253
)
Due to affiliate
5,286

 
(42,296
)
 
(9,212
)
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES
179,571,439

 
78,707,772

 
65,736,595

 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
Borrowings on debt

 
140,775,690

 
213,863,443

Paydowns on debt
(163,122,780
)
 
(217,500,000
)
 
(232,500,000
)
Debt issuance costs paid
(14,361
)
 
(6,515,112
)
 
(1,536,137
)
Payments of cash dividends
(8,171,130
)
 
(28,326,588
)
 
(41,400,401
)
Offering costs paid
354,754

 
(47,739
)
 
(76,805
)
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES
(170,953,517
)
 
(111,613,749
)
 
(61,649,900
)
 
 
 
 
 
 
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
8,617,922

 
(32,905,977
)
 
4,086,695

CASH, RESTRICTED CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
75,665,981

 
108,571,958

 
104,485,263

CASH, RESTRICTED CASH AND CASH EQUIVALENTS, END OF YEAR
$
84,283,903

 
$
75,665,981

 
$
108,571,958

 
 
 
 
 
 
Supplemental Information:
 

 
 

 
 

Interest paid during the year
$
21,402,239

 
$
24,676,749

 
$
24,692,824

Supplemental non-cash information:
 
 
 
 
 
Payment-in-kind interest income
$
7,160,429

 
$
10,774,564

 
$
15,844,805

Net amortization of premium/(discount) on investments
$
286,665

 
$
959,112

 
$
1,362,534

Amortization of debt issuance costs
$
(3,022,516
)
 
$
(3,583,158
)
 
$
(4,587,474
)
Non-cash purchase of investments
$
20,576,235

 
$
7,443,658

 
$
118,256,477

Non-cash sale of investments
$
20,528,752

 
$
7,443,658

 
$
118,256,477

 
For the years ended September 30
 
2019
 
2018
 
2017
Cash
$
68,245,213

 
$
75,665,981

 
$
108,571,958

Restricted Cash
16,038,690

 

 

Total cash and restricted cash shown in the statement of cash flows
$
84,283,903

 
$
75,665,981

 
$
108,571,958


See accompanying notes to consolidated financial statements.

F-6



Medley Capital Corporation

Consolidated Schedule of Investments

September 30, 2019
Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Controlled/Non-Affiliated Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alpine SG, LLC(7)
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.50% Cash, 1.00% LIBOR Floor)(13)(22)
 
11/16/2022
 
$
5,061,750

 
$
5,061,750

 
$
5,020,244

 
2.3
%
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 5.50% Cash, 1.00% LIBOR Floor)(13)(22)
 
11/16/2022
 
2,444,350

 
2,444,350

 
2,424,306

 
1.1
%
 
 
 
 
Revolving Credit Facility (LIBOR + 5.50% Cash, 1.00% LIBOR
Floor)(13)(16)
 
11/16/2022
 

 

 
(8,200
)
 
0.0
%
 
 
 
 
 
 
 
 
7,506,100

 
7,506,100

 
7,436,350

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
American Dental Partners, Inc.
 
Healthcare & Pharmaceuticals
 
Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(13)
 
9/25/2023
 
4,387,500

 
4,387,500

 
4,274,741

 
2.0
%
 
 
 
 
 
 
 
 
4,387,500

 
4,387,500

 
4,274,741

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Autosplice, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(13)
 
6/17/2020
 
13,336,018

 
13,336,018

 
13,252,001

 
6.1
%
 
 
 
 
 
 
 
 
13,336,018

 
13,336,018

 
13,252,001

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Avantor, Inc.(10)
 
Wholesale
 
Equity - 942,160 Common Units(17)
 
 
 

 
16,487,800

 
13,849,752

 
6.4
%
 
 
 
 
 
 
 
 

 
16,487,800

 
13,849,752

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Barry's Bootcamp Holdings, LLC
 
Services:  Consumer
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(13)(23)
 
7/14/2022
 
7,609,499

 
7,609,499

 
7,609,499

 
3.5
%
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)(13)
 
7/14/2022
 
1,268,251

 
1,268,251

 
1,268,251

 
0.6
%
 
 
 
 
Revolving Credit Facility (LIBOR + 6.00% Cash, 1.00% LIBOR
Floor)(13)(16)(22)
 
7/14/2022
 
4,400,000

 
4,400,000

 
4,400,000

 
2.0
%
 
 
 
 
 
 
 
 
13,277,750

 
13,277,750

 
13,277,750

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Be Green Packaging, LLC
 
Containers, Packaging & Glass
 
Equity - 417 Common Units
 
 
 

 
416,250

 

 
0.0
%
 
 
 
 
 
 
 
 

 
416,250

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Black Angus Steakhouses, LLC(7)
 
Hotel, Gaming & Leisure
 
Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(13)(23)
 
4/24/2020
 
7,341,518

 
7,341,518

 
7,307,747

 
3.4
%
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(13)
 
4/24/2020
 

 

 
(4,107
)
 
0.0
%
 
 
 
 
Revolving Credit Facility (LIBOR + 9.00% Cash, 1.00% LIBOR
Floor)(13)(16)
 
4/24/2020
 
892,857

 
892,857

 
890,804

 
0.4
%
 
 
 
 
 
 
 
 
8,234,375

 
8,234,375

 
8,194,444

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capstone Nutrition Development, LLC
 
Healthcare & Pharmaceuticals
 
Equity - 13,833.1916 Common Units
 
 
 

 
1,383,319

 
1,383,319

 
0.6
%
 
 
 
 
 
 
 
 

 
1,383,319

 
1,383,319

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CPI International, Inc.
 
Aerospace & Defense
 
Senior Secured Second Lien Term Loan (LIBOR + 7.25% Cash, 1.00% LIBOR Floor)(12)
 
7/28/2025
 
3,010,025

 
2,998,111

 
2,937,483

 
1.4
%
 
 
 
 
 
 
 
 
3,010,025

 
2,998,111

 
2,937,483

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-7



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Crow Precision Components, LLC
 
Aerospace & Defense
 
Equity - 350 Common Units
 
 
 

 
700,000

 
666,998

 
0.3
%
 
 
 
 
 
 
 
 

 
700,000

 
666,998

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CT Technologies Intermediate Holdings, Inc.(11)
 
Healthcare & Pharmaceuticals
 
Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(12)
 
12/1/2022
 
7,500,000

 
7,500,000

 
6,345,750

 
2.9
%
 
 
 
 
 
 
 
 
7,500,000

 
7,500,000

 
6,345,750

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DataOnline Corp.(7)
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.75% Cash, 1.00% LIBOR Floor)(13)(22)
 
7/31/2025
 
15,840,000

 
15,840,000

 
15,607,152

 
7.2
%
 
 
 
 
Revolving Credit Facility (LIBOR + 5.75% Cash, 1.00% LIBOR
Floor)(13)(16)
 
7/31/2024
 

 

 
(18,900
)
 
0.0
%
 
 
 
 
 
 
 
 
15,840,000

 
15,840,000

 
15,588,252

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dermatologists of Southwestern Ohio, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)(12)(23)
 
4/20/2022
 
1,065,457

 
1,065,457

 
1,056,614

 
0.5
%
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)(12)(23)
 
4/20/2022
 
404,248

 
404,248

 
400,893

 
0.2
%
 
 
 
 
 
 
 
 
1,469,705

 
1,469,705

 
1,457,507

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dream Finders Homes, LLC
 
Construction & Building
 
Senior Secured First Lien Term Loan B (10.00% Cash)
 
4/1/2020
 
1,613,455

 
1,613,455

 
1,613,455

 
0.7
%
 
 
 
 
Preferred Equity (8.00% PIK)
 
 
 
4,185,480

 
4,185,480

 
3,315,319

 
1.5
%
 
 
 
 
 
 
 
 
5,798,935

 
5,798,935

 
4,928,774

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FKI Security Group, LLC
 
Capital Equipment
 
Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(13)(23)
 
3/30/2020
 
10,906,250

 
10,906,250

 
10,680,491

 
4.9
%
 
 
 
 
 
 
 
 
10,906,250

 
10,906,250

 
10,680,491

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Footprint Acquisition, LLC
 
Services:  Business
 
Preferred Equity (8.75% PIK)
 
 
 
7,281,664

 
7,281,664

 
7,281,664

 
3.4
%
 
 
 
 
Equity - 150 Common Units
 
 
 

 

 
3,347,965

 
1.5
%
 
 
 
 
 
 
 
 
7,281,664

 
7,281,664

 
10,629,629

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freedom Powersports, LLC
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 10.00% Cash, 1.50% LIBOR Floor)(13)
 
11/11/2019
 
9,450,000

 
9,450,000

 
9,450,000

 
4.4
%
 
 
 
 
 
 
 
 
9,450,000

 
9,450,000

 
9,450,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Global Accessories Group, LLC(11)
 
Consumer goods:  Non-durable
 
Equity - 3.8% Membership Interest
 
 
 

 
151,337

 
151,339

 
0.1
%
 
 
 
 
 
 
 
 

 
151,337

 
151,339

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Imagine Group, LLC
 
Media: Advertising, Printing & Publishing
 
Senior Secured Second Lien Term Loan (LIBOR + 8.75% Cash, 1.00% LIBOR Floor)(12)
 
6/21/2023
 
3,000,000

 
2,968,775

 
1,715,100

 
0.8
%
 
 
 
 
 
 
 
 
3,000,000

 
2,968,775

 
1,715,100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact Group, LLC
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)(13)(23)
 
6/27/2023
 
3,254,623

 
3,254,623

 
3,104,911

 
1.4
%
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)(13)(23)
 
6/27/2023
 
9,430,010

 
9,430,010

 
8,996,229

 
4.2
%
 
 
 
 
 
 
 
 
12,684,633

 
12,684,633

 
12,101,140

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-8



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
InterFlex Acquisition Company, LLC
 
Containers, Packaging & Glass
 
Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(12)(23)
 
8/18/2022
 
13,259,175

 
13,259,175

 
12,637,320

 
5.8
%
 
 
 
 
 
 
 
 
13,259,175

 
13,259,175

 
12,637,320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
L & S Plumbing Partnership, Ltd.
 
Construction & Building
 
Senior Secured First Lien Term Loan (LIBOR + 7.50% Cash, 1.00% LIBOR Floor)(13)(22)
 
2/15/2022
 
5,345,754

 
5,345,754

 
5,345,754

 
2.5
%
 
 
 
 
 
 
 
 
5,345,754

 
5,345,754

 
5,345,754

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lighting Science Group Corporation
 
Containers, Packaging & Glass
 
Warrants - 0.56% of Outstanding Equity(18)
 
2/19/2024
 

 
955,680

 

 
0.0
%
 
 
 
 
 
 
 
 

 
955,680

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manna Pro Products, LLC
 
Consumer goods:  Non-durable
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(12)
 
12/8/2023
 
5,398,622

 
5,398,622

 
5,132,470

 
2.4
%
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(12)
 
12/8/2023
 
1,096,209

 
1,096,209

 
1,042,166

 
0.5
%
 
 
 
 
 
 
 
 
6,494,831

 
6,494,831

 
6,174,636

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Point.360
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% PIK)(9)(15)
 
7/8/2020
 
2,563,464

 
2,103,712

 
590,366

 
0.3
%
 
 
 
 
 
 
 
 
2,563,464

 
2,103,712

 
590,366

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quantum Spatial, Inc.
 
Aerospace & Defense
 
Senior Secured First Lien Term Loan (LIBOR + 5.25% Cash, 1.00% LIBOR Floor)(12)
 
9/5/2024
 
5,000,000

 
5,000,000

 
5,000,000

 
2.3
%
 
 
 
 
 
 
 
 
5,000,000

 
5,000,000

 
5,000,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RateGain Technologies, Inc.
 
Hotel, Gaming & Leisure
 
Unsecured Debt(19)(23)
 
7/31/2020
 
761,905

 
761,905

 
761,905

 
0.4
%
 
 
 
 
Unsecured Debt(19)(23)
 
7/31/2021
 
761,905

 
761,905

 
761,905

 
0.4
%
 
 
 
 
 
 
 
 
1,523,810

 
1,523,810

 
1,523,810

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redwood Services Group, LLC(7)
 
Services:  Business
 
Revolving Credit Facility (LIBOR + 6.00% Cash, 1.00% LIBOR
Floor)(13)(16)
 
6/6/2023
 
875,000

 
875,000

 
860,475

 
0.4
%
 
 
 
 
 
 
 
 
875,000

 
875,000

 
860,475

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sendero Drilling Company, LLC
 
Energy:  Oil & Gas
 
Unsecured Debt (8.00% Cash)
 
8/31/2021
 
850,000

 
850,000

 
850,000

 
0.4
%
 
 
 
 
 
 
 
 
850,000

 
850,000

 
850,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seotowncenter, Inc.
 
Services:  Business
 
Equity - 3,434,169.6 Common Units
 
 
 

 
566,475

 
1,236,301

 
0.6
%
 
 
 
 
 
 
 
 

 
566,475

 
1,236,301

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SFP Holding, Inc.
 
Construction & Building
 
Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)(23)
 
9/1/2022
 
4,820,605

 
4,820,605

 
4,775,291

 
2.2
%
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)(23)
 
9/1/2022
 
1,871,234

 
1,871,234

 
1,853,644

 
0.9
%
 
 
 
 
Equity - 94,393.87 Common Units in CI (Summit) Investment Holdings LLC(23)
 
 
 

 
985,673

 
849,545

 
0.4
%
 
 
 
 
 
 
 
 
6,691,839

 
7,677,512

 
7,478,480

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ship Supply Acquisition Corporation
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(9)(13)(23)
 
7/31/2020
 
7,433,740

 
7,239,798

 

 
0.0
%
 
 
 
 
 
 
 
 
7,433,740

 
7,239,798

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SMART Financial Operations, LLC
 
Retail
 
Equity - 700,000 Class A Preferred Units
 
 
 

 
700,000

 
532,000

 
0.2
%
 
 
 
 
 
 
 
 

 
700,000

 
532,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-9



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stancor, Inc.
 
Services:  Business
 
Equity - 263,814.43 Class A Units
 
 
 

 
263,815

 
274,367

 
0.1
%
 
 
 
 
 
 
 
 

 
263,815

 
274,367

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Starfish Holdco, LLC
 
High Tech Industries
 
Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(12)(22)
 
8/18/2025
 
2,000,000

 
1,975,691

 
1,977,000

 
0.9
%
 
 
 
 
 
 
 
 
2,000,000

 
1,975,691

 
1,977,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Velocity Pooling Vehicle, LLC
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 11.00% PIK, 1.00% LIBOR Floor)(13)
 
4/28/2023
 
894,050

 
832,281

 
789,715

 
0.4
%
 
 
 
 
Equity - 5,441 Class A Units
 
 
 

 
302,464

 
20,893

 
0.0
%
 
 
 
 
Warrants - 0.65% of Outstanding Equity
 
3/30/2028
 

 
361,667

 
24,983

 
0.0
%
 
 
 
 
 
 
 
 
894,050

 
1,496,412

 
835,591

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Walker Edison Furniture Company LLC
 
Consumer goods:  Durable
 
Senior Secured First Lien Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)(13)(23)
 
9/26/2024
 
3,611,900

 
3,611,900

 
3,611,900

 
1.7
%
 
 
 
 
Equity - 1,500 Common Units
 
 
 

 
1,500,000

 
2,557,657

 
1.2
%
 
 
 
 
 
 
 
 
3,611,900

 
5,111,900

 
6,169,557

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Watermill-QMC Midco, Inc.
 
Automotive
 
Equity - 1.3% Partnership Interest(8)
 
 
 

 
518,283

 
88,989

 
0.0
%
 
 
 
 
 
 
 
 

 
518,283

 
88,989

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal Non-Controlled/Non-Affiliated Investments
 
 
 
$
180,226,518

 
$
204,736,370

 
$
189,895,466

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliated Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1888 Industrial Services, LLC
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan A (LIBOR + 5.00% PIK, 1.00% LIBOR Floor)(13)
 
9/30/2021
 
$
9,304,145

 
$
9,304,145

 
$
9,304,145

 
4.3
%
 
 
 
 
Senior Secured First Lien Term Loan B (LIBOR + 8.00% PIK, 1.00% LIBOR Floor)(9)(13)
 
9/30/2021
 
23,547,567

 
19,468,870

 
5,886,892

 
2.7
%
 
 
 
 
Senior Secured First Lien Term Loan C (LIBOR + 5.00% PIK, 1.00% LIBOR Floor)(13)
 
6/30/2021
 
1,170,014

 
1,170,014

 
1,170,014

 
0.5
%
 
 
 
 
Senior Secured First Lien Term Loan D (LIBOR + 5.00% PIK, 1.00% LIBOR Floor)(13)
 
9/18/2020
 
224,456

 
224,456

 
224,456

 
0.1
%
 
 
 
 
Revolving Credit Facility (LIBOR + 5.00% PIK, 1.00% LIBOR
Floor)(13)(16)
 
9/30/2021
 
4,387,025

 
4,387,025

 
4,387,025

 
2.0
%
 
 
 
 
Equity - 21,562.16 Class A Units
 
 
 

 

 

 
0.0
%
 
 
 
 
 
 
 
 
38,633,207

 
34,554,510

 
20,972,532

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Access Media Holdings, LLC(7)
 
Media:  Broadcasting & Subscription
 
Senior Secured First Lien Term Loan (10.00% PIK)(9)
 
7/22/2020
 
10,036,355

 
8,446,385

 
2,509,089

 
1.2
%
 
 
 
 
Preferred Equity Series A
 
 
 
1,600,000

 
1,600,000

 

 
0.0
%
 
 
 
 
Preferred Equity Series AA
 
 
 
800,000

 
800,000

 

 
0.0
%
 
 
 
 
Preferred Equity Series AAA
 
 
 
971,200

 
971,200

 
(100,800
)
 
0.0
%
 
 
 
 
Equity - 16 Common Units
 
 
 

 

 

 
0.0
%
 
 
 
 
 
 
 
 
13,407,555

 
11,817,585

 
2,408,289

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Caddo Investors Holdings 1 LLC(10)
 
Forest Products & Paper
 
Equity - 6.15% Membership Interest(21)
 
 
 

 
2,526,373

 
2,830,051

 
1.3
%
 
 
 
 
 
 
 
 

 
2,526,373

 
2,830,051

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-10



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dynamic Energy Services International LLC(7)
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan (LIBOR + 13.50% PIK)(9)(15)
 
12/31/2021
 
11,124,375

 
7,824,974

 
1,264,841

 
0.6
%
 
 
 
 
Revolving Credit Facility (12.00% Cash)
 
12/31/2019
 
545,103

 
545,103

 
545,103

 
0.2
%
 
 
 
 
Equity - 12,350,000 Class A Units
 
 
 

 

 

 
0.0
%
 
 
 
 
 
 
 
 
11,669,478

 
8,370,077

 
1,809,944

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
JFL-NGS Partners, LLC
 
Construction & Building
 
Preferred Equity - A-2 Preferred (3.00% PIK)
 
 
 
20,150,684

 
20,150,684

 
20,150,684

 
9.3
%
 
 
 
 
Preferred Equity - A-1 Preferred (3.00% PIK)
 
 
 
2,607,661

 
2,607,661

 
2,607,661

 
1.2
%
 
 
 
 
Equity - 57,300 Class B Units
 
 
 

 
57,300

 
19,096,371

 
8.8
%
 
 
 
 
 
 
 
 
22,758,345

 
22,815,645

 
41,854,716

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
JFL-WCS Partners, LLC
 
Environmental Industries
 
Preferred Equity - Class A Preferred (6.00% PIK)
 
 
 
1,236,269

 
1,236,269

 
1,236,269

 
0.6
%
 
 
 
 
Equity - 129,588 Class B Units
 
 
 

 
129,588

 
2,755,041

 
1.3
%
 
 
 
 
 
 
 
 
1,236,269

 
1,365,857

 
3,991,310

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kemmerer Operations, LLC(7)
 
Metals & Mining
 
Senior Secured First Lien Term Loan (15.00% PIK)
 
6/21/2023
 
1,766,511

 
1,766,511

 
1,766,511

 
0.8
%
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (15.00% PIK)
 
6/21/2023
 
706,604

 
706,604

 
706,604

 
0.3
%
 
 
 
 
Equity - 6.7797 Common Units
 
 
 

 
962,717

 
962,717

 
0.4
%
 
 
 
 
 
 
 
 
2,473,115

 
3,435,832

 
3,435,832

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Path Medical, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 9.50% PIK, 1.00% LIBOR Floor)(13)
 
10/11/2021
 
9,534,512

 
9,294,959

 
8,845,167

 
4.1
%
 
 
 
 
Senior Secured First Lien Term Loan A (LIBOR + 9.50% PIK, 1.00% LIBOR Floor)(13)
 
10/11/2021
 
3,284,977

 
3,284,977

 
3,047,473

 
1.4
%
 
 
 
 
Senior Secured First Lien Term Loan C (LIBOR + 10.00% Cash, 1.00% LIBOR Floor)(13)
 
10/11/2021
 
344,463

 
344,463

 
344,291

 
0.2
%
 
 
 
 
Warrants - 7.68% of Outstanding Equity
 
1/9/2027
 

 
499,751

 

 
0.0
%
 
 
 
 
 
 
 
 
13,163,952

 
13,424,150

 
12,236,931

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
US Multifamily, LLC(10)
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (10.00% Cash)(22)
 
6/17/2021
 
6,670,000

 
6,670,000

 
6,670,000

 
3.1
%
 
 
 
 
Equity - 33,300 Preferred Units
 
 
 

 
3,330,000

 
3,330,000

 
1.5
%
 
 
 
 
 
 
 
 
6,670,000

 
10,000,000

 
10,000,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal Affiliated Investments
 
 
 
 
 
$
110,011,921

 
$
108,310,029

 
$
99,539,605

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Controlled Investments:(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MCC Senior Loan Strategy JV I LLC(10)
 
Multisector Holdings
 
Equity - 87.5% ownership of MCC Senior Loan Strategy JV I LLC(21)
 
 
 

 
78,575,000

 
69,948,970

 
32.3
%
 
 
 
 
 
 
 
 

 
78,575,000

 
69,948,970

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NVTN LLC
 
Hotel, Gaming & Leisure
 
Senior Secured First Lien Term Loan (LIBOR + 4.00% Cash, 1.00% LIBOR Floor)(12)
 
11/9/2020
 
4,255,990

 
4,255,990

 
4,255,990

 
2.0
%
 
 
 
 
Senior Secured First Lien Term Loan B (LIBOR + 9.25% PIK, 1.00% LIBOR Floor)(9)(12)
 
11/9/2020
 
13,436,693

 
12,305,096

 
7,152,352

 
3.3
%
 
 
 
 
Senior Secured First Lien Term Loan C (LIBOR + 12.00% PIK, 1.00% LIBOR Floor)(9)(12)
 
11/9/2020
 
8,747,134

 
7,570,054

 

 
0.0
%
 
 
 
 
Equity - 787.4 Class A Units
 
 
 

 
9,550,922

 

 
0.0
%
 
 
 
 
 
 
 
 
26,439,817

 
33,682,062

 
11,408,342

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-11



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TPG Plastics LLC
 
Chemicals, Plastics & Rubber
 
Senior Secured Second Lien Term Loan (Prime + 10.00% Cash)(14)
 
12/31/2019
 
352,984

 
352,984

 
352,984

 
0.2
%
 
 
 
 
Unsecured Debt (10.00% Cash)(20)
 
 
 
278,810

 
278,810

 
278,810

 
0.1
%
 
 
 
 
Equity - 35 Class B Units
 
 
 

 
3,317,149

 
1,644,751

 
0.8
%
 
 
 
 
 
 
 
 
631,794

 
3,948,943

 
2,276,545

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
URT Acquisition Holdings Corporation
 
Services:  Business
 
Senior Secured Second Lien Term Loan (LIBOR + 8.00% PIK, 2.00% LIBOR Floor)(13)
 
5/2/2022
 
18,905,403

 
18,905,403

 
18,905,403

 
8.7
%
 
 
 
 
Preferred Equity (12.00% PIK)(9)
 
 
 
6,552,890

 
6,552,890

 
4,914,667

 
2.3
%
 
 
 
 
Equity - 397,466 Common Units
 
 
 

 
12,936,879

 

 
0.0
%
 
 
 
 
 
 
 
 
25,458,293

 
38,395,172

 
23,820,070

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal Control Investments
 
 
 
 
 
$
52,529,904

 
$
154,601,177

 
$
107,453,927

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Investments, September 30, 2019
 
 
 
 
 
$
342,768,343

 
$
467,647,576

 
$
396,888,998

 
183.4
%

(1)
All of our investments are domiciled in the United States. Certain investments also have international operations.
(2)
Par amount includes accumulated payment-in-kind (“PIK”) interest, as applicable, and is net of repayments.
(3)
Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for U.S. federal income tax purposes totaled $28,155,804, $96,121,868, and $67,966,064, respectively. The tax cost basis of investments is $464,855,062 as of September 30, 2019.
(4)
Percentage is based on net assets of $216,432,530 as of September 30, 2019.
(5)
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.
(6)
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).
(7)
The investment has an unfunded commitment as of September 30, 2019 (see Note 8), and includes an analysis of the value of any unfunded commitments.
(8)
Represents 1.3% partnership interest in Watermill-QMC Partners, LP and Watermill-EMI Partners, LP.
(9)
The investment was on non-accrual status as of September 30, 2019.
(10)
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, 2019, 24.3% of the Company's portfolio investments were non-qualifying assets.
(11)
A portion of this investment was sold via a participation agreement. The amount stated is the portion retained by Medley Capital Corporation (see Note 3).
(12)
The interest rate on these loans is subject to the greater of a London Interbank Offering Rate (“LIBOR”) floor, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of September 30, 2019 was 2.04%.
(13)
The interest rate on these loans is subject to the greater of a LIBOR floor, or 3 month LIBOR plus a base rate. The 3 month LIBOR as of September 30, 2019 was 2.10%.
(14)
These loans bear interest at an alternate base rate, or in the case of these particular investments the Prime Rate set by the Federal Reserve, plus a given spread. The Prime Rate in effect at September 30, 2019 was 5.00%.
(15)
The interest rate on these loans is subject to 3 month LIBOR plus a base rate. The 3 month LIBOR as of September 30, 2019 was 2.10%.
(16)
This investment earns 0.50% commitment fee on all unused commitment as of September 30, 2019, and is recorded as a component of interest income on the Consolidated Statements of Operations.
(17)
This investment represents a Level 1 security in the ASC 820 table as of September 30, 2019 (see Note 4).
(18)
This investment represents a Level 2 security in the ASC 820 table as of September 30, 2019 (see Note 4).
(19)
Security is non-income producing.
(20)
This investment is scheduled to repay a percentage of the outstanding principal on a quarterly basis. Upon TPG Plastics, LLC obtaining all environmental and product testing authorizations, licenses and permits from all applicable governmental authorities, the remaining outstanding principal is expected to be repaid in full.
(21)
As a practical expedient, the Company uses net asset value (“NAV”) to determine the fair value of this investment.
(22)
All or a portion of this investment is held in Medley SLF Funding I LLC (see Note 5).
(23)
All or a portion of this investment is held in Medley Small Business Fund, LP (see Note 5).

See accompanying notes to consolidated financial statements.

F-12



Medley Capital Corporation

Consolidated Schedule of Investments

September 30, 2018
Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Controlled/Non-Affiliated Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3SI Security Systems, Inc.
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 5.75% Cash, 1.00% LIBOR Floor)(14)
 
6/16/2023
 
$
17,325,000

 
$
17,325,000

 
$
17,325,000

 
5.4
 %
 
 
 
 
 
 
 
 
17,325,000

 
17,325,000

 
17,325,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accupac, Inc.(7)
 
Containers, Packaging & Glass
 
Senior Secured First Lien Term Loan (LIBOR + 4.50% Cash, 1.00% LIBOR Floor)(13)(19)
 
9/14/2023
 
9,788,793

 
9,788,793

 
9,788,793

 
3.1
 %
 
 
 
 
 
 
 
 
9,788,793

 
9,788,793

 
9,788,793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alpine SG, LLC(7)
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(14)
 
11/16/2022
 
13,398,750

 
13,398,750

 
13,398,750

 
4.2
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(14)
 
11/16/2022
 
6,617,630

 
6,617,630

 
6,617,630

 
2.1
 %
 
 
 
 
Revolving Credit Facility (LIBOR + 6.00% Cash, 1.00% LIBOR
Floor)(14)(17)
 
11/16/2022
 

 

 

 
0.0
 %
 
 
 
 
 
 
 
 
20,016,380

 
20,016,380

 
20,016,380

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
American Dental Partners, Inc.
 
Healthcare & Pharmaceuticals
 
Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(14)
 
9/25/2023
 
6,500,000

 
6,500,000

 
6,565,000

 
2.1
 %
 
 
 
 
 
 
 
 
6,500,000

 
6,500,000

 
6,565,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asurion, LLC
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured Second Lien Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)(13)
 
8/4/2025
 
7,000,000

 
7,091,560

 
7,140,000

 
2.2
 %
 
 
 
 
 
 
 
 
7,000,000

 
7,091,560

 
7,140,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Autosplice, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(14)
 
6/17/2020
 
13,891,687

 
13,891,687

 
13,958,367

 
4.3
 %
 
 
 
 
 
 
 
 
13,891,687

 
13,891,687

 
13,958,367

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Barry's Bootcamp Holdings, LLC(7)
 
Services:  Consumer
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(14)
 
7/14/2022
 
7,628,570

 
7,628,570

 
7,505,750

 
2.3
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(14)
 
7/14/2022
 

 

 

 
0.0
 %
 
 
 
 
Revolving Credit Facility (LIBOR + 6.00% Cash, 1.00% LIBOR
Floor)(14)(17)
 
7/14/2022
 
2,200,000

 
2,200,000

 
2,200,000

 
0.7
 %
 
 
 
 
 
 
 
 
9,828,570

 
9,828,570

 
9,705,750

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Be Green Packaging, LLC
 
Containers, Packaging & Glass
 
Equity - 417 Common Units
 
 
 

 
416,250

 

 
0.0
 %
 
 
 
 
 
 
 
 

 
416,250

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Black Angus Steakhouses, LLC(7)
 
Hotel, Gaming & Leisure
 
Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(14)
 
4/24/2020
 
7,495,536

 
7,495,536

 
7,373,065

 
2.3
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(14)
 
4/24/2020
 

 

 

 
0.0
 %
 
 
 
 
Revolving Credit Facility (LIBOR + 9.00% Cash, 1.00% LIBOR
Floor)(14)(17)
 
4/24/2020
 
267,857

 
267,857

 
267,857

 
0.1
 %
 
 
 
 
 
 
 
 
7,763,393

 
7,763,393

 
7,640,922

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-13



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brook & Whittle Holding Corp.(7)
 
Containers, Packaging & Glass
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(14)
 
10/17/2023
 
1,320,297

 
1,320,297

 
1,331,381

 
0.4
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(14)(18)
 
10/17/2023
 

 

 

 
0.0
 %
 
 
 
 
 
 
 
 
1,320,297

 
1,320,297

 
1,331,381

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Central States Dermatology Services, LLC(7)
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)(14)
 
4/20/2022
 
1,076,331

 
1,076,331

 
1,076,331

 
0.3
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)(14)(19)
 
4/20/2022
 
270,991

 
270,991

 
270,991

 
0.1
 %
 
 
 
 
 
 
 
 
1,347,322

 
1,347,322

 
1,347,322

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CP OPCO, LLC
 
Services:  Consumer
 
Senior Secured First Lien Term Loan B (Prime + 5.50% PIK)(10)(15)
 
4/1/2019
 
1,375,911

 
1,210,237

 
234,042

 
0.1
 %
 
 
 
 
Senior Secured First Lien Term Loan C (Prime + 8.50% PIK)(10)(15)
 
4/1/2019
 
10,352,733

 
4,060,507

 

 
0.0
 %
 
 
 
 
Preferred Facility (Prime + 7.00% PIK)(10)(15)
 
4/1/2019
 
5,883,641

 

 

 
0.0
 %
 
 
 
 
Equity - 232 Common Units
 
 
 

 

 

 
0.0
 %
 
 
 
 
 
 
 
 
17,612,285

 
5,270,744

 
234,042

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CPI International, Inc.
 
Aerospace & Defense
 
Senior Secured Second Lien Term Loan (LIBOR + 7.25% Cash, 1.00% LIBOR Floor)(13)
 
7/28/2025
 
4,010,025

 
3,992,123

 
4,034,486

 
1.3
 %
 
 
 
 
 
 
 
 
4,010,025

 
3,992,123

 
4,034,486

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Crow Precision Components, LLC
 
Aerospace & Defense
 
Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(14)
 
9/30/2019
 
12,890,000

 
12,890,000

 
12,890,000

 
4.0
 %
 
 
 
 
Equity - 350 Common Units
 
 
 

 
700,000

 
521,203

 
0.2
 %
 
 
 
 
 
 
 
 
12,890,000

 
13,590,000

 
13,411,203

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CT Technologies Intermediate Holdings, Inc.(12)
 
Healthcare & Pharmaceuticals
 
Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(13)
 
12/1/2022
 
7,500,000

 
7,500,000

 
7,223,250

 
2.2
 %
 
 
 
 
 
 
 
 
7,500,000

 
7,500,000

 
7,223,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DataOnline Corp.(7)
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.75% Cash, 1.00% LIBOR Floor)(14)
 
7/31/2025
 
16,000,000

 
16,000,000

 
16,000,000

 
5.0
 %
 
 
 
 
Revolving Credit Facility (LIBOR + 5.75% Cash, 1.00% LIBOR
Floor)(14)(17)
 
7/31/2024
 

 

 

 
0.0
 %
 
 
 
 
 
 
 
 
16,000,000

 
16,000,000

 
16,000,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dream Finders Homes, LLC
 
Construction & Building
 
Senior Secured First Lien Term Loan B (LIBOR + 14.50% Cash)(16)
 
10/1/2019
 
2,418,494

 
2,418,494

 
2,418,494

 
0.8
 %
 
 
 
 
Preferred Equity (8.00% PIK)
 
 
 
3,866,737

 
3,866,737

 
3,866,737

 
1.2
 %
 
 
 
 
 
 
 
 
6,285,231

 
6,285,231

 
6,285,231

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dynamic Energy Services International LLC
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan (LIBOR + 13.50% PIK)(10)(16)
 
5/6/2019
 
20,952,402

 
18,674,779

 
6,040,577

 
1.9
 %
 
 
 
 
 
 
 
 
20,952,402

 
18,674,779

 
6,040,577

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Engineered Machinery Holdings, Inc.
 
Capital Equipment
 
Senior Secured Second Lien Term Loan (LIBOR + 7.25% Cash, 1.00% LIBOR Floor)(14)
 
7/18/2025
 
1,671,064

 
1,656,132

 
1,662,708

 
0.5
 %
 
 
 
 
 
 
 
 
1,671,064

 
1,656,132

 
1,662,708

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FKI Security Group, LLC(12)
 
Capital Equipment
 
Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(14)
 
3/30/2020
 
11,281,250

 
11,281,250

 
11,281,250

 
3.5
 %
 
 
 
 
 
 
 
 
11,281,250

 
11,281,250

 
11,281,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-14



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Footprint Acquisition, LLC
 
Services:  Business
 
Preferred Equity (8.75% PIK)
 
 
 
6,677,895

 
6,677,895

 
6,677,895

 
2.1
 %
 
 
 
 
Equity - 150 Common Units
 
 
 

 

 
1,753,260

 
0.6
 %
 
 
 
 
 
 
 
 
6,677,895

 
6,677,895

 
8,431,155

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freedom Powersports, LLC
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 10.00% Cash, 1.50% LIBOR Floor)(14)
 
9/26/2019
 
10,930,000

 
10,930,000

 
10,930,000

 
3.4
 %
 
 
 
 
 
 
 
 
10,930,000

 
10,930,000

 
10,930,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Friedrich Holdings, Inc.
 
Construction & Building
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(13)
 
2/7/2023
 
9,950,349

 
9,950,349

 
9,950,349

 
3.1
 %
 
 
 
 
 
 
 
 
9,950,349

 
9,950,349

 
9,950,349

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Global Accessories Group, LLC(12)
 
Consumer goods:  Non-durable
 
Equity - 3.8% Membership Interest
 
 
 

 
151,337

 
151,339

 
0.0
 %
 
 
 
 
 
 
 
 

 
151,337

 
151,339

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Heligear Acquisition Co.
 
Aerospace & Defense
 
Senior Secured First Lien Note (10.25% Cash)(8)
 
10/15/2019
 
20,000,000

 
20,000,000

 
19,268,000

 
6.0
 %
 
 
 
 
 
 
 
 
20,000,000

 
20,000,000

 
19,268,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Imagine Group, LLC(24)
 
Media: Advertising, Printing & Publishing
 
Senior Secured Second Lien Term Loan (LIBOR + 8.75% Cash, 1.00% LIBOR Floor)(13)
 
6/21/2023
 
3,000,000

 
2,962,275

 
2,750,100

 
0.9
 %
 
 
 
 
 
 
 
 
3,000,000

 
2,962,275

 
2,750,100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact Group,
LLC(7)(25)
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(14)
 
6/27/2023
 
3,457,319

 
3,457,319

 
3,457,319

 
1.1
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(14)(19)
 
6/27/2023
 
1,427,914

 
1,427,914

 
1,427,914

 
0.5
 %
 
 
 
 
 
 
 
 
4,885,233

 
4,885,233

 
4,885,233

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
InterFlex Acquisition Company, LLC
 
Containers, Packaging & Glass
 
Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(13)
 
8/18/2022
 
14,062,500

 
14,062,500

 
13,048,594

 
4.1
 %
 
 
 
 
 
 
 
 
14,062,500

 
14,062,500

 
13,048,594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jackson Hewitt Tax Service Inc.
 
Services:  Consumer
 
Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash)
 
5/31/2023
 
7,000,000

 
7,000,000

 
7,000,000

 
2.2
 %
 
 
 
 
 
 
 
 
7,000,000

 
7,000,000

 
7,000,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
L & S Plumbing Partnership, Ltd.
 
Construction & Building
 
Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(14)
 
2/15/2022
 
19,529,449

 
19,529,449

 
19,765,755

 
6.2
 %
 
 
 
 
 
 
 
 
19,529,449

 
19,529,449

 
19,765,755

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lighting Science Group Corporation
 
Containers, Packaging & Glass
 
Warrants - 1.01% of Outstanding Equity(20)
 
2/19/2024
 

 
955,680

 
50,000

 
0.0
 %
 
 
 
 
 
 
 
 

 
955,680

 
50,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manna Pro Products, LLC(7)
 
Consumer goods:  Non-durable
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(13)
 
12/8/2023
 
5,453,570

 
5,453,570

 
5,434,482

 
1.7
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(13)(19)
 
12/8/2023
 
670,363

 
670,363

 
666,517

 
0.2
 %
 
 
 
 
 
 
 
 
6,123,933

 
6,123,933

 
6,100,999

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midcoast Energy, LLC
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan (LIBOR + 5.50% Cash, 1.00% LIBOR Floor)(14)
 
8/1/2025
 
3,000,000

 
2,970,391

 
3,003,900

 
0.9
 %
 
 
 
 
 
 
 
 
3,000,000

 
2,970,391

 
3,003,900

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-15



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oxford Mining Company, LLC
 
Metals & Mining
 
Senior Secured First Lien Term Loan (LIBOR + 11.50% PIK, 0.75% LIBOR Floor)(10)(14)
 
12/31/2018
 
21,925,733

 
19,746,873

 
8,814,145

 
2.7
 %
 
 
 
 
 
 
 
 
21,925,733

 
19,746,873

 
8,814,145

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Path Medical, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 9.50% Cash, 1.00% LIBOR Floor)(14)
 
10/11/2021
 
8,151,557

 
7,813,946

 
7,654,312

 
2.4
 %
 
 
 
 
Senior Secured First Lien Term Loan A (LIBOR + 9.50% Cash, 1.00% LIBOR Floor)(14)
 
10/11/2021
 
2,808,500

 
2,808,500

 
2,637,182

 
0.8
 %
 
 
 
 
Warrants - 1.56% of Outstanding Equity
 
1/9/2027
 

 
499,751

 

 
0.0
 %
 
 
 
 
 
 
 
 
10,960,057

 
11,122,197

 
10,291,494

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Point.360
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% PIK)(10)(16)
 
7/8/2020
 
2,103,712

 
2,103,712

 
1,051,856

 
0.3
 %
 
 
 
 
Equity - 479,283 Common Units
 
 
 

 
129,406

 

 
0.0
 %
 
 
 
 
Warrants - 2.8% of Outstanding Equity
 
7/8/2020
 

 
52,757

 

 
0.0
 %
 
 
 
 
 
 
 
 
2,103,712

 
2,285,875

 
1,051,856

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RateGain Technologies, Inc.
 
Hotel, Gaming & Leisure
 
Unsecured Debt(26)
 
7/31/2020
 
761,905

 
761,905

 
761,905

 
0.2
 %
 
 
 
 
Unsecured Debt(26)
 
7/31/2021
 
761,905

 
761,905

 
761,905

 
0.2
 %
 
 
 
 
 
 
 
 
1,523,810

 
1,523,810

 
1,523,810

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redwood Services Group, LLC(7)
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(14)
 
6/6/2023
 
6,022,406

 
6,022,406

 
6,022,406

 
1.9
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(13)
 
6/6/2023
 
1,373,485

 
1,373,485

 
1,373,485

 
0.4
 %
 
 
 
 
Revolving Credit Facility (LIBOR + 6.00% Cash, 1.00% LIBOR
Floor)(14)(17)
 
6/6/2023
 

 

 

 
0.0
 %
 
 
 
 
 
 
 
 
7,395,891

 
7,395,891

 
7,395,891

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMS Holding Company, LLC(7)
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(14)
 
11/16/2022
 
15,269,745

 
15,269,745

 
15,269,745

 
4.8
 %
 
 
 
 
Revolving Credit Facility (LIBOR + 6.00% Cash, 1.00% LIBOR
Floor)(14)(17)
 
11/16/2022
 
1,073,204

 
1,073,204

 
1,066,744

 
0.3
 %
 
 
 
 
 
 
 
 
16,342,949

 
16,342,949

 
16,336,489

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SavATree, LLC(7)
 
Environmental Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.25% Cash, 1.00% LIBOR Floor)(14)
 
6/2/2022
 
1,858,855

 
1,858,855

 
1,858,855

 
0.6
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 5.25% Cash, 1.00% LIBOR Floor)(14)(19)
 
6/2/2022
 
43,225

 
43,225

 
43,225

 
0.0
 %
 
 
 
 
 
 
 
 
1,902,080

 
1,902,080

 
1,902,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sendero Drilling Company, LLC
 
Energy:  Oil & Gas
 
Unsecured Debt (8.00% Cash)
 
8/31/2019
 
850,000

 
850,000

 
850,000

 
0.3
 %
 
 
 
 
 
 
 
 
850,000

 
850,000

 
850,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seotowncenter, Inc.
 
Services:  Business
 
Equity - 3,249.697 Common Units
 
 
 

 
500,000

 
532,885

 
0.2
 %
 
 
 
 
 
 
 
 

 
500,000

 
532,885

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-16



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SFP Holding, Inc.(7)
 
Construction & Building
 
Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(14)
 
9/1/2022
 
9,739,371

 
9,739,371

 
9,739,371

 
3.0
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(14)(17)
 
9/1/2022
 
1,005,364

 
1,005,364

 
1,005,364

 
0.3
 %
 
 
 
 
Equity - 1.42% Company Interest
 
 
 

 
736,905

 
736,905

 
0.2
 %
 
 
 
 
 
 
 
 
10,744,735

 
11,481,640

 
11,481,640

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ship Supply Acquisition Corporation
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(10)(14)
 
7/31/2020
 
7,330,098

 
7,136,156

 
3,512,583

 
1.1
 %
 
 
 
 
 
 
 
 
7,330,098

 
7,136,156

 
3,512,583

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SMART Financial Operations, LLC(7)
 
Retail
 
Senior Secured First Lien Term Loan (LIBOR + 10.00% Cash, 1.00% LIBOR Floor)(14)
 
11/22/2021
 
2,775,000

 
2,775,000

 
2,775,833

 
0.9
 %
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 10.00% Cash, 1.00% LIBOR Floor)(14)
 
11/22/2021
 
2,325,000

 
2,325,000

 
2,326,418

 
0.7
 %
 
 
 
 
Equity - 700,000 Class A Preferred Units
 
 
 

 
700,000

 
700,000

 
0.2
 %
 
 
 
 
 
 
 
 
5,100,000

 
5,800,000

 
5,802,251

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SRS Software, LLC
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 7.00% Cash, 1.00% LIBOR Floor)(14)
 
2/17/2022
 
7,387,500

 
7,387,500

 
7,461,375

 
2.3
 %
 
 
 
 
 
 
 
 
7,387,500

 
7,387,500

 
7,461,375

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stancor, Inc.
 
Services:  Business
 
Equity - 263,814.43 Class A Units
 
 
 

 
263,814

 
274,367

 
0.1
 %
 
 
 
 
 
 
 
 

 
263,814

 
274,367

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Starfish Holdco, LLC
 
High Tech Industries
 
Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(13)
 
8/18/2025
 
4,000,000

 
3,945,676

 
4,000,000

 
1.2
 %
 
 
 
 
 
 
 
 
4,000,000

 
3,945,676

 
4,000,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trans-Fast Remittance LLC(7)
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(13)(17)
 
12/2/2021
 
3,567,857

 
3,567,857

 
3,571,557

 
1.1
 %
 
 
 
 
Revolving Credit Facility (LIBOR + 8.00% Cash, 1.00% LIBOR
Floor)(13)(17)
 
12/2/2021
 
1,875,000

 
1,875,000

 
1,875,000

 
0.6
 %
 
 
 
 
 
 
 
 
5,442,857

 
5,442,857

 
5,446,557

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vail Holdco Corp
 
Wholesale
 
Equity - 10,702 Shares of Series A Preferred Stock (12.50% PIK)(8)
 
 
 
10,702,000

 
10,276,214

 
10,234,323

 
3.2
 %
 
 
 
 
Equity - 7,700 Shares of Junior Convertible Preferred Stock
 
 
 
7,700,000

 
7,700,000

 
7,700,000

 
2.4
 %
 
 
 
 
Warrants - 0.4875% of Outstanding Equity
 
 
 

 
425,787

 
580,416

 
0.2
 %
 
 
 
 
 
 
 
 
18,402,000

 
18,402,001

 
18,514,739

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Velocity Pooling Vehicle, LLC
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 11.00% Cash, 1.00% LIBOR Floor)(14)
 
4/28/2023
 
808,000

 
734,073

 
734,553

 
0.2
 %
 
 
 
 
Equity - 5,441 Class A Units
 
 
 

 
302,464

 
302,464

 
0.1
 %
 
 
 
 
Warrants - 0.65% of Outstanding Equity
 
3/30/2028
 

 
361,667

 
361,667

 
0.1
 %
 
 
 
 
 
 
 
 
808,000

 
1,398,204

 
1,398,684

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Walker Edison Furniture Company LLC
 
Consumer goods:  Durable
 
Senior Secured First Lien Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)(14)
 
9/26/2024
 
13,807,500

 
13,807,500

 
13,807,500

 
4.3
 %
 
 
 
 
Equity - 1,500 Common Units
 
 
 

 
1,500,000

 
1,500,000

 
0.5
 %
 
 
 
 
 
 
 
 
13,807,500

 
15,307,500

 
15,307,500

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-17



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Watermill-QMC Midco, Inc.
 
Automotive
 
Equity - 1.3% Partnership Interest(9)
 
 
 

 
518,283

 
698,024

 
0.2
 %
 
 
 
 
 
 
 
 

 
518,283

 
698,024

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Xebec Global Holdings, LLC
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.50% Cash, 1.00% LIBOR Floor)(14)
 
2/12/2024
 
4,225,918

 
4,225,918

 
4,225,918

 
1.3
 %
 
 
 
 
 
 
 
 
4,225,918

 
4,225,918

 
4,225,918

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal Non-Controlled/Non-Affiliated Investments
 
 
 
$
438,395,898

 
$
428,717,777

 
$
393,149,374

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliated Investments:
 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1888 Industrial Services, LLC(7)(23)
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan A (LIBOR + 5.00% Cash, 1.00% LIBOR Floor)(14)
 
9/30/2021
 
$
8,984,232

 
$
8,984,232

 
$
8,984,232

 
2.8
 %
 
 
 
 
Senior Secured First Lien Term Loan B (LIBOR + 8.00% PIK, 1.00% LIBOR Floor)(14)
 
9/30/2021
 
21,762,155

 
19,326,112

 
19,725,217

 
6.1
 %
 
 
 
 
Revolving Credit Facility (LIBOR + 5.00% Cash, 1.00% LIBOR
Floor)(14)(17)
 
9/30/2021
 
3,593,693

 
3,593,693

 
3,593,693

 
1.1
 %
 
 
 
 
Equity - 21,562.16 Class A Units
 
 
 

 

 

 
0.0
 %
 
 
 
 
 
 
 
 
34,340,080

 
31,904,037

 
32,303,142

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Access Media Holdings, LLC(7)
 
Media:  Broadcasting & Subscription
 
Senior Secured First Lien Term Loan (10.00% PIK)(10)
 
7/22/2020
 
9,072,532

 
8,446,385

 
5,876,279

 
1.8
 %
 
 
 
 
Preferred Equity Series A
 
 
 
1,600,000

 
1,600,000

 

 
0.0
 %
 
 
 
 
Preferred Equity Series AA
 
 
 
800,000

 
800,000

 

 
0.0
 %
 
 
 
 
Preferred Equity Series AAA
 
 
 
899,200

 
899,200

 
(172,800
)
 
(0.1
)%
 
 
 
 
Equity - 16 Common Units
 
 
 

 

 

 
0.0
 %
 
 
 
 
 
 
 
 
12,371,732

 
11,745,585

 
5,703,479

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brantley Transportation LLC(12)
 
Energy:  Oil & Gas
 
Senior Secured First Lien Term Loan (12.00% PIK)(10)
 
8/2/2017
 
12,829,552

 
9,000,000

 
2,882,800

 
0.9
 %
 
 
 
 
Senior Secured First Lien Delayed Draw (LIBOR + 5.00% Cash, 1.00% LIBOR Floor)(13)
 
8/2/2017
 
503,105

 
503,105

 
503,105

 
0.2
 %
 
 
 
 
Equity - 7.5 Common Units
 
 
 

 

 

 
0.0
 %
 
 
 
 
 
 
 
 
13,332,657

 
9,503,105

 
3,385,905

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Caddo Investors Holdings 1 LLC
 
Forest Products & Paper
 
Equity - 6.15% Membership Interest(27)
 
 
 
2,500,000

 
2,500,000

 
2,500,000

 
0.8
 %
 
 
 
 
 
 
 
 
2,500,000

 
2,500,000

 
2,500,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
JFL-NGS Partners, LLC
 
Construction & Building
 
Preferred Equity - A-2 Preferred (3.00% PIK)
 
 
 
31,468,755

 
31,468,755

 
31,468,755

 
9.8
 %
 
 
 
 
Preferred Equity - A-1 Preferred (3.00% PIK)
 
 
 
4,072,311

 
4,072,311

 
4,072,311

 
1.3
 %
 
 
 
 
Equity - 57,300 Class B Units
 
 
 

 
57,300

 
9,825,804

 
3.1
 %
 
 
 
 
 
 
 
 
35,541,066

 
35,598,366

 
45,366,870

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
JFL-WCS Partners, LLC
 
Environmental Industries
 
Preferred Equity - Class A Preferred (6.00% PIK)
 
 
 
1,166,292

 
1,166,292

 
1,166,292

 
0.4
 %
 
 
 
 
Equity - 129,588 Class B Units
 
 
 

 
129,588

 
215,116

 
0.1
 %
 
 
 
 
 
 
 
 
1,166,292

 
1,295,880

 
1,381,408

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-18



Company(1)
 
Industry
 
Type of Investment(6)
 
Maturity
 
Par Amount(2)
 
Cost(3)
 
Fair Value
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
US Multifamily, LLC(11)
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (10.00% Cash)
 
6/17/2021
 
6,670,000

 
6,670,000

 
6,670,000

 
2.1
 %
 
 
 
 
Equity - 33,300 Preferred Units
 
 
 

 
3,330,000

 
3,330,000

 
1.0
 %
 
 
 
 
 
 
 
 
6,670,000

 
10,000,000

 
10,000,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal Affiliated Investments
 
 
 
 
 
$
105,921,827

 
$
102,546,973

 
$
100,640,804

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Controlled Investments:(5)
 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capstone Nutrition
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 12.50% PIK, 1.00% LIBOR Floor)(10)(14)
 
9/25/2020
 
$
30,252,541

 
$
20,846,571

 
$
12,657,663

 
3.9
 %
 
 
 
 
Senior Secured First Lien Delayed Draw (LIBOR + 12.50% PIK, 1.00% LIBOR Floor)(10)(14)
 
9/25/2020
 
13,604,437

 
9,686,866

 
5,692,096

 
1.8
 %
 
 
 
 
Senior Secured First Lien Incremental Delayed Draw (LIBOR + 12.50% PIK, 1.00% LIBOR
Floor)(14)
 
9/25/2020
 
2,242,721

 
2,242,721

 
2,242,721

 
0.7
 %
 
 
 
 
Equity - 4,664.6 Class B Units and 9,424.4 Class C Units
 
 
 

 
12

 

 
0.0
 %
 
 
 
 
Equity - 2,932.3 Common Units
 
 
 

 
400,003

 

 
0.0
 %
 
 
 
 
 
 
 
 
46,099,699

 
33,176,173

 
20,592,480

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MCC Senior Loan Strategy JV I LLC(11)
 
Multisector Holdings
 
Equity - 87.5% ownership of MCC Senior Loan Strategy JV I LLC(27)
 
 
 

 
78,575,000

 
78,370,891

 
24.4
 %
 
 
 
 
 
 
 
 

 
78,575,000

 
78,370,891

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NVTN LLC
 
Hotel, Gaming & Leisure
 
Senior Secured First Lien Term Loan (LIBOR + 4.00% Cash, 1.00% LIBOR Floor)(13)
 
11/9/2020
 
4,005,990

 
4,005,990

 
4,005,990

 
1.2
 %
 
 
 
 
Senior Secured First Lien Term Loan B (LIBOR + 9.25% PIK, 1.00% LIBOR Floor)(13)
 
11/9/2020
 
11,837,367

 
11,837,367

 
11,837,367

 
3.7
 %
 
 
 
 
Senior Secured First Lien Term Loan C (LIBOR + 12.00% PIK, 1.00% LIBOR Floor)(13)
 
11/9/2020
 
7,479,397

 
7,479,397

 
7,479,397

 
2.3
 %
 
 
 
 
Equity - 787.4 Class A Units
 
 
 

 
9,550,922

 

 
0.0
 %
 
 
 
 
 
 
 
 
23,322,754

 
32,873,676

 
23,322,754

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OmniVere, LLC
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 13.00% PIK)(10)(16)
 
5/5/2019
 
29,590,984

 
22,880,599

 

 
0.0
 %
 
 
 
 
Senior Secured First Lien Term Loan (8.00% PIK)(10)
 
5/5/2019
 
4,392,738

 
4,337,049

 
1,374,048

 
0.4
 %
 
 
 
 
Unsecured Debt (8.00% PIK)(10)
 
7/24/2025
 
28,912,172

 
22,727,575

 

 
0.0
 %
 
 
 
 
Equity - 5,055.56 Common Units
 
 
 

 
872,698

 

 
0.0
 %
 
 
 
 
 
 
 
 
62,895,894

 
50,817,921

 
1,374,048

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TPG Plastics LLC
 
Chemicals, Plastics & Rubber
 
Senior Secured Second Lien Term Loan (Prime + 0.00% Cash)(15)
 
12/31/2019
 
401,346

 
401,346

 
401,346

 
0.1
 %
 
 
 
 
Unsecured Debt (10.00% Cash)(21)
 
 
 
360,000

 
360,000

 
360,000

 
0.1
 %
 
 
 
 
Unsecured Debt (1.00% Cash)(22)
 
 
 
646,996

 
646,996

 
646,996

 
0.2
 %
 
 
 
 
Equity - 35 Class B Units
 
 
 

 
2,670,154

 
2,670,154

 
0.8
 %
 
 
 
 
 
 
 
 
1,408,342

 
4,078,496

 
4,078,496

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
URT Acquisition Holdings Corporation
 
Services:  Business
 
Senior Secured Second Lien Term Loan (LIBOR + 8.00% PIK, 2.00% LIBOR Floor)(14)
 
5/2/2022
 
15,112,754

 
15,112,754

 
15,112,754

 
4.7
 %
 
 
 
 
Preferred Equity (12.00% PIK)
 
 
 
5,850,794

 
5,850,794

 
5,850,795

 
1.8
 %
 
 
 
 
Equity - 397,466 Common Units
 
 
 

 
12,936,879

 
12,937,518

 
4.0
 %
 
 
 
 
 
 
 
 
20,963,548

 
33,900,427

 
33,901,067

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal Controlled Investments
 
 
 
 
 
$
154,690,237

 
$
233,421,693

 
$
161,639,736

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Investments, September 30, 2018
 
 
 
 
 
$
699,007,962

 
$
764,686,443

 
$
655,429,914

 
204.1
 %

F-19




(1)
All of our investments are domiciled in the United States. Certain investments also have international operations.
(2)
Par amount includes accumulated PIK interest, as applicable, and is net of repayments.
(3)
Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for U.S. federal income tax purposes totaled $17,795,949, $120,259,250, and $102,463,301, respectively. The tax cost basis of investments is $757,893,215 as of September 30, 2018.
(4)
Percentage is based on net assets of $321,178,727 as of September 30, 2018.
(5)
Control Investments are defined by 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.
(6)
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).
(7)
The investment has an unfunded commitment as of September 30, 2018 (see Note 8), and includes an analysis of the value of any unfunded commitments.
(8)
Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent a fair value of $29,502,323 and 9.2% of net assets as of September 30, 2018, and are considered restricted securities.
(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, 2018.
(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, 2018, 13.5% of the Company's portfolio investments were non-qualifying assets.
(12)
A portion of this investment was sold via a participation agreement. The amount stated is the portion retained by Medley Capital Corporation (see Note 3).
(13)
The interest rate on these loans is subject to the greater of a LIBOR floor, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of September 30, 2018 was 2.24%.
(14)
The interest rate on these loans is subject to the greater of a LIBOR floor, or 3 month LIBOR plus a base rate. The 3 month LIBOR as of September 30, 2018 was 2.39%.
(15)
These loans bear interest at an alternate base rate, or in the case of these particular investments the Prime Rate set by the Federal Reserve, plus a given spread. The Prime Rate in effect at September 30, 2018 was 5.25%.
(16)
The interest rate on these loans is subject to 3 month LIBOR plus a base rate. The 3 month LIBOR as of September 30, 2018 was 2.39%.
(17)
This investment earns 0.50% commitment fee on all unused commitment as of September 30, 2018, and is recorded as a component of interest income on the Consolidated Statements of Operations.
(18)
This investment earns 0.75% commitment fee on all unused commitment as of September 30, 2018, and is recorded as a component of interest income on the Consolidated Statements of Operations.
(19)
This investment earns 1.00% commitment fee on all unused commitment as of September 30, 2018, and is recorded as a component of interest income on the Consolidated Statements of Operations.
(20)
This investment represents a Level 2 security in the ASC 820 table as of September 30, 2018 (see Note 4).
(21)
This investment is scheduled to repay a percentage of the outstanding principal on a quarterly basis. Upon TPG Plastics, LLC obtaining all environmental and product testing authorizations, licenses and permits from all applicable governmental authorities, the remaining outstanding principal is expected to be repaid in full.
(22)
This investment shall convert to equity upon TPG Plastics, LLC obtaining all environmental and product testing authorizations, licenses and permits from all applicable governmental authorities. Upon conversion Medley Capital Corporation will continue to own 35% of the equity of TPG Plastics, LLC.
(23)
Investment changed its name from AAR Intermediate Holdings, LLC during FY 2018.
(24)
Investment changed its name from Imagine! Print Solutions, LLC during FY 2018.
(25)
Investment changed its name from Impact Sales, LLC during FY 2018.
(26)
Security is non-income producing.
(27)
As a practical expedient, the Company uses NAV to determine the fair value of this investment.

See accompanying notes to consolidated financial statements.

F-20



MEDLEY CAPITAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 2019

Note 1. Organization

Medley Capital Corporation (the “Company,” “we” and “us”) is a 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”). We are externally managed and advised by MCC Advisors LLC (“MCC Advisors”), which is registered with the Securities and Exchange Commission (the “SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), pursuant to an investment management agreement. MCC Advisors is a wholly owned subsidiary of Medley LLC, which is controlled by Medley Management Inc. (NYSE: MDLY), a publicly traded asset management firm (“MDLY”), 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.

Medley Capital BDC LLC (the “LLC”), a Delaware limited liability company, was formed on April 23, 2010. On January 18, 2011, the LLC, in accordance with Delaware law, converted into Medley Capital Corporation, a Delaware corporation, and on January 20, 2011, the Company filed an election to be regulated as a BDC under the 1940 Act.

On January 20, 2011, the Company consummated its IPO, sold 11,111,112 shares of common stock at $12.00 per share and commenced its operations and investment activities. On February 24, 2011, an additional 450,000 shares of common stock were issued at a price of $12.00 per share pursuant to the partial exercise of the underwriters’ option to purchase additional shares. Net of underwriting fees and offering costs, the Company received total cash proceeds of approximately $129.6 million.

On January 20, 2011, the Company’s shares began trading on the New York Stock Exchange (“NYSE”) under the symbol “MCC”.

Prior to the consummation of our IPO, Medley Opportunity Fund LP (“MOF LP”), a Delaware limited partnership, and Medley Opportunity Fund, Ltd. (“MOF LTD”), a Cayman Islands exempted limited liability company, which are managed by an affiliate of MCC Advisors, transferred all of their respective interests in six loan participations in secured loans to middle market companies with a combined fair value, plus payment-in-kind interest and accrued interest thereon, of approximately $84.95 million (the “Loan Assets”) to MOF I BDC LLC (“MOF I BDC”), a Delaware limited liability company, in exchange for membership interests in MOF I BDC. As a result, MOF LTD owned approximately 90% of the outstanding MOF I BDC membership interests and MOF LP owned approximately 10% of the outstanding MOF I BDC membership interests.

On January 18, 2011, each of MOF LTD and MOF LP contributed their respective MOF I BDC membership interests to the LLC in exchange for LLC membership interests. As a result, MOF I BDC became a wholly owned subsidiary of the LLC. As a result of the LLC’s conversion noted above, MOF LTD and MOF LP’s LLC membership interests were exchanged for 5,759,356 shares of the Company’s common stock at $14.75 per share. On February 23, 2012, MOF LTD and MOF LP collectively sold 4,406,301 shares of common stock in an underwritten public offering. See Note 7 for further information.

On March 26, 2013, our wholly owned subsidiary, Medley SBIC, LP (“SBIC LP”), a Delaware limited partnership that we own directly and through our wholly owned subsidiary, Medley SBIC GP, LLC, received a license from the Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Company Act of 1958, as amended. Effective July 1, 2019, SBIC LP surrendered its SBIC license and changed its name to Medley Small Business Fund, LP (“Medley Small Business Fund”). In addition, Medley SBIC GP, LLC changed its name to Medley Small Business Fund GP, LLC. See Note 5 for further information.

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 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 by lending to privately-held middle market companies, primarily through directly originated transactions, to help these companies fund acquisitions, growth or refinancing. The portfolio generally consists of senior secured first lien term loans and senior secured second lien term loans. Occasionally, we will receive warrants or other equity participation features which we believe will have the potential to increase the total investment returns.

Agreements and Plans of Mergers

On August 9, 2018, the Company entered into a definitive agreement to merge with Sierra Income Corporation (“Sierra”). Pursuant to the Agreement and Plan of Merger, dated as of August 9, 2018, by and between the Company and Sierra (the “MCC Merger Agreement”), the Company would, on the terms and subject to the conditions set forth in the MCC Merger Agreement, merge with and into Sierra, with Sierra as the surviving entity (the “Combined Company”) in the merger (the “MCC Merger”). Under the MCC Merger, each share of our common stock issued and outstanding immediately prior to the MCC Merger effective time (other than shares of our common stock held by the Company, Sierra or their respective wholly owned subsidiaries) would be converted into the right to receive 0.8050 shares of the Sierra’s common stock. Simultaneously, pursuant to the Agreement and Plan of Merger (the “MDLY Merger Agreement”), dated as of August 9, 2018, by and among MDLY, Sierra, and Sierra Management, Inc., a newly formed Delaware corporation and a wholly owned subsidiary of Sierra (“Merger Sub”), MDLY would, on the terms and subject to the conditions set forth in the MDLY Merger Agreement, merge with and into Merger Sub, with Merger Sub as the surviving company in the Merger (the “MDLY Merger” together with the MCC Merger, the “Mergers”), and MDLY’s existing asset management business would continue to operate as a wholly owned subsidiary of the Combined Company. In the MDLY Merger, each share of MDLY Class A common stock, issued and outstanding immediately prior to the MDLY Merger effective

F-21



time (other than Dissenting Shares (as defined in the MDLY Merger Agreement) and shares of MDLY Class A common stock held by MDLY, Sierra or their respective wholly owned subsidiaries) would be converted into the right to receive (i) 0.3836 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $3.44 per share. In addition, MDLY’s stockholders would have the right to receive certain dividends and/or other payments.

On July 29, 2019, the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MCC Merger Agreement”), by and between the Company and Sierra, pursuant to which the Company will, on the terms and subject to the conditions set forth in the Amended MCC Merger Agreement, merge with and into Sierra, with Sierra as the surviving company in the MCC Merger. In the MCC Merger, each share of the Company’s common stock (other than shares of the Company’s common stock held by the Company, Sierra or their respective wholly owned subsidiaries) will be exchanged for the right to receive (i) 0.68 shares of Sierra’s common stock if the attorneys’ fees of plaintiffs’ counsel and litigation expenses paid or incurred by plaintiffs’ counsel or advanced by plaintiffs in connection with the FrontFour Action, as described below (such fees and expenses, the “Plaintiff Attorney Fees”), are less than or equal to $10,000,000; (ii) 0.66 shares of Sierra’s common stock if the Plaintiff Attorney Fees are equal to or greater than $15,000,000; (iii) between 0.68 and 0.66 per share of Sierra’s common stock if the Plaintiff Attorney Fees are greater than $10,000,000 but less than $15,000,000, calculated on a descending basis, based on straight line interpolation between $10,000,000 and $15,000,000; or (iv) 0.66 shares of Sierra’s common stock in the event that the Plaintiff Attorney Fees are not determined prior to the closing of the MCC Merger (such ratio, the “MCC Merger Exchange Ratio”).

In addition, on July 29, 2019, Sierra and MDLY announced the execution of the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MDLY Merger Agreement”), by and among MDLY, Sierra, and Merger Sub, pursuant to which MDLY will, on the terms and subject to the conditions set forth in the Amended MDLY Merger Agreement, merge with and into Merger Sub, with Merger Sub as the surviving company in the MDLY Merger. In the MDLY Merger, each share of MDLY Class A common stock, issued and outstanding immediately prior to the MDLY Merger effective time, other than shares of MDLY Class A common stock held by MDLY, Sierra or their respective wholly owned subsidiaries (the “Excluded MDLY Shares”) and the Dissenting Shares (as defined in the Amended MDLY Merger Agreement), held, immediately prior to the MDLY Merger effective time, by any person other than a Medley LLC unitholder, will be exchanged for (i) 0.2668 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $2.96 per share. In addition, in the MDLY Merger, each share of MDLY Class A common stock issued and outstanding immediately prior to the MDLY Merger effective time, other than the Excluded MDLY Shares and the Dissenting Shares, held, immediately prior to the MDLY Merger effective time, by Medley LLC unitholders will be exchanged for (i) 0.2072 shares of Sierra’s common stock; plus (ii) cash in an amount equal to $2.66 per share.

Pursuant to terms of the Amended MCC Merger Agreement, the consummation of the MCC Merger is conditioned upon the satisfaction or waiver of each of the conditions to closing under the Amended MDLY Merger Agreement and the consummation of the MDLY Merger. However, pursuant to the terms of the Amended MDLY Merger Agreement, the consummation of the MDLY Merger is not contingent upon the consummation of the MCC Merger. If both Mergers are successfully consummated, Sierra’s common stock would be listed on the NYSE, with such listing expected to be effective as of the closing date of the Mergers, and Sierra’s common stock will be listed on the Tel Aviv Stock Exchange (“TASE”), with such listing expected to be effective as of the closing date of the MCC Merger. If, however, only the MDLY Merger is consummated, Sierra’s common stock would be listed on the NYSE. If both Mergers are successfully consummated, the investment portfolios of MCC and Sierra would be combined, Merger Sub, as a successor to MDLY, would be a wholly owned subsidiary of the Combined Company, and the Combined Company would be internally managed by MCC Advisors LLC, its wholly controlled adviser subsidiary. If only the MDLY Merger is consummated, the investment portfolios of MCC and Sierra would not be combined; however, the investment management function relating to the operation of Sierra, as the surviving company, would still be internalized (the “Sierra/MDLY Company”) and the Sierra/MDLY Company would be managed by MCC Advisors. The Mergers are subject to approval by the stockholders of the Company, Sierra, and MDLY, regulators, including the SEC, court approval of the Stipulation (as described below), other customary closing conditions and third-party consents. There is no assurance that any of the foregoing conditions will be satisfied.

On February 11, 2019, a purported stockholder class action was commenced in the Court of Chancery of the State of Delaware by FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. (together, “FrontFour”), captioned as FrontFour Capital Group LLC, et al. v. Brook Taube et al., Case No. 2019-0100 (the “FrontFour Action”) against defendants Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, Sierra, the Company, MCC Advisors, Medley Group LLC, and Medley LLC. The complaint, as amended on February 12, 2019, alleged that the individuals named as defendants breached their fiduciary duties to the Company’s stockholders in connection with the MCC Merger, and that MDLY, Sierra, MCC Advisors, Medley Group LLC, and Medley LLC aided and abetted those alleged breaches of fiduciary duties. The complaint sought to enjoin the vote of MCC stockholders on the proposed merger and enjoin enforcement of certain provisions of the Agreement and Plan of Merger, dated as of August 9, 2018, by and between MCC and Sierra (the “MCC Merger Agreement”). The Court held a trial on the plaintiffs’ claims on March 6-7, 2019 and issued a Memorandum Opinion (the “Decision”) on March 11, 2019. The Court denied the plaintiffs’ requests to (i) permanently enjoin the proposed merger and (ii) require the Company to conduct a “shopping process” for the Company on terms proposed by the plaintiffs in their complaint. The Court held that the Company’s directors breached their fiduciary duties in entering into the proposed merger, but rejected the plaintiffs’ claim that Sierra aided and abetted those breaches of fiduciary duties. The Court ordered the defendants to issue corrective disclosures consistent with the Decision, and enjoined a vote of the Company’s stockholders on the proposed merger until such disclosures have been made and stockholders have had the opportunity to assimilate this information. On March 20, 2019, another purported stockholder class action was commenced by Stephen Altman against Brook Taube, Seth Taube, Jeff Tonkel, Arthur S. Ainsberg, Karin Hirtler-Garvey, Mark Lerdal, and John E. Mack in the Court of Chancery of the State of Delaware, captioned Altman v. Taube, Case No. 2019-0219 (the “Altman Action”). The complaint alleged that the defendants breached their fiduciary duties to stockholders of the Company in connection with the vote of the Company’s stockholders on the proposed mergers. On April 8, 2019, the Court granted a stipulation consolidating the FrontFour Action and the Altman Action, designating the amended complaint in the FrontFour Action as the operative complaint, and designating the plaintiffs in the FrontFour Action and their counsel the lead plaintiffs and lead plaintiffs’ counsel, respectively.

On April 15, 2019, certain parties reached agreement on the principal terms of a settlement of the FrontFour Action, which were contained in a term sheet, dated April 15, 2019 (the “Settlement Term Sheet”). On July 29, 2019, MCC entered into a Stipulation of Settlement (and, as amended on August 8, 2019, the “Stipulation”) by and among the Company, Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, MCC Advisors, Medley LLC and Medley Group LLC (the “Medley Parties”), on the one hand, and FrontFour, on behalf of itself and a class of similarly situated stockholders of the Company, on the other hand, in connection with the FrontFour Action.


F-22



The Stipulation provides for the settlement of all claims brought against the Medley Parties in the FrontFour Action. Under the Stipulation, the Company agreed to seek the agreement and/or consent of Sierra to effect certain amendments to (i) the MCC Merger Agreement and (ii) the MDLY Merger Agreement (together with the MCC Merger Agreement, the “Merger Agreements”), which have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. The Stipulation also provides for, if the MCC Merger is consummated, the creation of a settlement fund, consisting of $17 million in cash and $30 million of Sierra stock, with the number of shares of Sierra stock to be calculated using the pro forma net asset value reported in the future proxy supplement describing the amendments to the MCC Merger Agreement, which will be distributed to eligible members of the Settlement Class (as defined in the Stipulation). Under the Stipulation, MDLY also consented to certain amendments to the Merger Agreements that have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. In addition, in connection with the Stipulation, on July 29, 2019, the Company entered into a Governance Agreement with FrontFour Capital Group LLC, FrontFour Master Fund, Ltd., FrontFour Capital Corp., FrontFour Opportunity Fund, David A. Lorber, Stephen E. Loukas and Zachary R. George, pursuant to which, among other matters, FrontFour is subject to customary standstill restrictions and required to vote in favor of the MCC Merger at a meeting of stockholders to approve the Amended MCC Merger Agreement.

The Stipulation also provides for mutual releases between and among FrontFour and the Settlement Class, on the one hand, and the Medley Parties, on the other hand, of all claims that were or could have been asserted in the FrontFour Action. The Medley Parties will also release all claims arising out of or relating to the prosecution and settlement of the FrontFour Action and all claims that were or could have been asserted (other than claims against the Highland Parties, as defined in the Stipulation) in the litigation pending in the United States District Court for the Southern District of New York captioned Medley Capital Corporation v. FrontFour Capital Group LLC, et al., No. 1:19-cv-02055-LTS (S.D.N.Y.) (the “Federal Action”), and FrontFour and the Settlement Class will release all claims arising out of or relating to the prosecution and settlement of the Federal Action.

The Stipulation further provides that the Company and FrontFour shall work together in good faith to agree to supplemental disclosures relating to the transactions contemplated by the Merger Agreements consistent with the Decision.

The Stipulation is subject to the approval of the Court. On September 26, 2019, FrontFour filed a motion seeking an order approving the Stipulation, and also moved for the Court to award plaintiffs’ counsel attorneys’ fees in the amount of $22 million and expenses in the amount of $420,334.97 (the “Fee Application”). The Court held a hearing to consider the Stipulation and the Fee Application on October 24, 2019.

On November 19, 2019, the Court issued a bench ruling approving the Stipulation. The Court also awarded attorney’s fees as follows: (i) an award of $3,000,000 to lead plaintiffs’ counsel and $75,000 to counsel to plaintiff Stephen Altman (the “Therapeutics Fee Award”) and (ii) an award in an amount equal to 26% of the nominal value of the settlement fund, grossed up to include the amount of the lead plaintiffs’ counsel’s attorney’s fees, and excluding the portion of the fees borne by the class under the Amended MCC Merger Agreement, as well as an award of $100,000 relating to the composition of the board of directors of the post-Merger company (the “Contingent Fee Award” and, together with the Therapeutics Fee Award, the “Fee Awards”). The parties disagreed as to how to apply the formula that the Court indicated will be used to calculate the Contingent Fee Award. Accordingly, the parties submitted different forms of the proposed form of order and final judgment, as applicable, for review and entry by the Court, together with letter briefs setting forth their respective interpretations of the Court’s November 19, 2019 bench ruling. The Plaintiff contends that the amount of the Contingent Fee Award is fixed at $14,540,888. Defendants contend that the amount will be less than $14,540,888, but the actual amount cannot be determined prior to closing. The Therapeutics Fee Award will be payable within five (5) business days of the entry of an order and judgment by the Court. The Contingent Fee Award is contingent upon the closing of the MCC Merger, and will be due within five (5) business days of the closing of the MCC Merger and establishment of the Settlement Fund. The Fee Awards will be paid by MCC or its successor.

Note 2. Significant Accounting Policies

Basis of Presentation

The Company follows the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 946 (“ASC 946”). 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 subsidiary Medley Small Business Fund, and its wholly owned Taxable Subsidiaries. All references made to the “Company,” “we,” and “us” herein include Medley Capital 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 of the Securities Act of 1933. 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. All intercompany balances and transactions have been eliminated. 

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 September 30, 2019, we had $68.2 million in cash and cash equivalents, and $16.0 million of restricted cash, as it was restricted for the purposes of repaying principal and interest on our 6.55% Series A Notes due January 31, 2021 (the “Israeli 2021 Notes”), which was effective October 2, 2019.

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. 

Deferred Offering Costs

F-23




Deferred offering costs consist of fees and expenses incurred in connection with the public offering and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These amounts are capitalized when incurred and recognized as a reduction of offering proceeds when the offering becomes effective or expensed upon expiration of the registration statement.

Debt Issuance Costs

Debt issuance costs, incurred in connection with any credit facilities, unsecured notes and SBA Debentures (see Note 5) are deferred and amortized over the life of the respective credit facility or instrument.

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

The Company adopted ASU 2014-09, Revenue from Contracts with Customers, effective on October 1, 2018, using the modified retrospective method. Substantially all revenue streams are excluded from the scope of the new standard and the adoption of the standard had no material impact on the Company’s consolidated financial statements.

Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Dividend income, which represents dividends from equity investments and distributions from Taxable Subsidiaries, is recorded on the ex-dividend date and when the distribution is received, respectively.

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 years ended September 30, 2019, 2018, and 2017, the Company earned approximately $7.2 million, $10.8 million, and $15.8 million in PIK interest, respectively.

Origination/closing, 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 years ended September 30, 2019, 2018, and 2017, fee income was approximately $2.3 million, $4.5 million, and $6.6 million, respectively (see Note 9).

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 years ended September 30, 2019, 2018, and 2017, $47.8 million, $73.0 million, and $42.9 million, respectively, of our realized losses were related to certain non-cash restructuring transactions, which is included in the Consolidated Statements of Operations as a component of net realized gain/(loss) from investments. The Company reports changes in fair value of investments as a component of the net unrealized appreciation/(depreciation) on investments in the Consolidated Statements of Operations.

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 uncollectible. 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 September 30, 2019, certain investments in seven portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $22.3 million, or 5.6% of the fair value of our portfolio. At September 30, 2018, certain investments in nine portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $48.1 million, or 7.3% of the fair value of our portfolio. At September 30, 2017, certain investments in six portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $72.5 million, or 8.7% of the fair value of our portfolio.

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 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. We refer to such investments in portfolio companies that we “control” as “Control Investments.” Under the 1940 Act, we would be deemed to be an “Affiliated Person” of a portfolio company if we own between 5% and 25% of the portfolio company’s outstanding voting securities or we are under common control with such portfolio company. We refer to such investments in Affiliated Persons as “Affiliated Investments.”

Valuation of Investments


F-24



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 the market participant who holds the financial instrument 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 the Company’s board of directors 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.

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 uses third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party 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 is 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.

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).


F-25



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 begins with each portfolio investment being internally valued by the valuation professionals;

preliminary valuation conclusions are then documented and discussed with senior management; and

an independent valuation firm engaged by our board of directors reviews approximately one third of these preliminary valuations each quarter on a rotating quarterly basis on non-fiscal year-end quarters, such that each of these investments will be valued by independent valuation firms at least twice per annum when combined with the fiscal year-end review of all the investments by independent valuation firms.

In addition, all of our investments are subject to the following valuation process:

the audit committee of our board of directors reviews the preliminary valuations of the valuation professionals, senior management and independent valuation firms; and

our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of MCC Advisors, the respective independent valuation firms 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.

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.

Recent Accounting Pronouncements

On June 16, 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This ASU is intended to introduce new guidance for the accounting for credit losses on instruments within scope based on an estimate of current expected credit losses. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The impact of this ASU on the Company's Consolidated Financial Statements is currently being evaluated.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (“ASU 2017-08”). The amendments in ASU 2017-08 require premiums on purchased callable debt securities to be amortized to the security’s earliest call date. Prior to this ASU, premiums and discounts on purchased callable debt securities were generally required to be amortized to the security’s maturity date. The amendments in ASU 2017-08 do not require any changes to treatment of securities held at a discount. ASU 2017-08 is effective for the Company October 1, 2019, with early adoption permitted. The company has evaluated ASU 2017-08, and does not expect the amendments to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. (“ASU 2018-13”). The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. The Company is currently evaluating the potential impact of this guidance on the Company’s consolidated financial statements and disclosures.

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, 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 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 in order to be eligible for tax treatment under Subchapter M of the Code. 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. 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.

The Company is subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in 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. 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. There is no provision for federal excise tax for the calendar year ended 2018 accrued at September 30, 2019. For the calendar year ended December 31, 2017, and 2016, the Company did not distribute at least 98% of its ordinary income and 98.2% of its capital gains. Accordingly, with respect to the calendar year ended December 31, 2017, and 2016, an excise tax expense of $0.2 million and $0.3 million was recorded in the fiscal years ended September 30, 2018 and 2017, respectively.


F-26



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 September 30, 2019 and 2018, 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 year ended September 30, 2019, the Company did not record a change in provision for deferred taxes on the unrealized (appreciation)/depreciation on investments. For the years ended September 30, 2018 and 2017, the change in provision for deferred taxes on the unrealized depreciation on investments was $0.5 million and $1.1 million, respectively.

As of September 30, 2019 the Company has a net deferred tax asset of $20.9 million consisting primarily of net operating losses and net unrealized losses on the investments held within its Taxable Subsidiaries. For the year ended September 30, 2019 the Company booked a valuation allowance of $20.9 million against its net deferred tax asset.

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.

Permanent differences between ICTI and net investment income for financial reporting purposes are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the years ended September 30, 2019, 2018 and 2017, the Company reclassified for book purposes amounts arising from permanent book/tax differences related to the different tax treatment of distributions and closing fees as follows:
 
For the years ended September 30
 
2019
 
2018
 
2017
Capital in excess of par value
$
(16,882,923
)
 
$
(157,925
)
 
$
(267,183
)
Accumulated undistributed net investment income/(loss)
23,174,206

 
280,924

 
3,746,825

Accumulated net realized gain/(loss) from investments
(6,291,283
)
 
(122,999
)
 
(3,479,642
)

For income tax purposes, distributions paid to stockholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the years ended September 30, 2019, 2018 and 2017 were as follows:
 
For the years ended September 30
 
2019
 
2018
 
2017
Ordinary income
$

 
$
22,025,185

 
$
41,400,401

Distributions of long-term capital gains

 

 

Return of capital
8,171,130

 
6,301,403

 

Distributions on a tax basis
$
8,171,130


$
28,326,588


$
41,400,401

 
For federal income tax purposes, the cost of investments owned at September 30, 2019, 2018 and 2017 were approximately $464.9 million, $757.9 million, and $903.8 million, respectively.
 
At September 30, 2019, 2018 and 2017, the components of distributable earnings/(accumulated deficits) on a tax basis detailed below differ from the amounts reflected in the Company’s Consolidated Statements of Assets and Liabilities by temporary and other book/tax differences, primarily relating to the tax treatment of certain fee income and organizational expenses, as follows:
 
For the years ended September 30
 
2019
 
2018
 
2017
Undistributed ordinary income
$

 
$

 
$
17,570,891

Accumulated capital and other losses(1)
(389,066,323
)
 
(268,569,450
)
 
(177,904,733
)
Other temporary differences
(122,274
)
 
(6,429,766
)
 
(17,099,606
)
Unrealized appreciation/(depreciation)
(67,966,064
)
 
(102,463,301
)
 
(67,237,807
)
Components of distributable earnings/(accumulated deficits) at year end
$
(457,154,661
)

$
(377,462,517
)

$
(244,671,255
)
  
(1)
Under the Regulated Investment Company Modernization Act of 2010, net capital losses recognized for tax years beginning after December 22, 2010, may be carried forward indefinitely, and their character is retained as short-term or long-term losses. As of September 30, 2019, the Company a had long-term capital loss carryforward available to offset future realized capital gains of $389,066,323.

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

F-27



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 September 30, 2019. 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.

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

MCC Advisors has broad discretion in making investments for the Company. Investments will 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. MCC Advisors may attempt to minimize this risk by maintaining low loan-to-liquidation values with each loan and the collateral underlying the loan.

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
 
The composition of our investments as of September 30, 2019 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
$
243,342

 
52.0
%
 
$
192,770

 
48.6
%
Senior Secured Second Lien Term Loans
39,089

 
8.4

 
36,508

 
9.2

Senior Secured First Lien Notes

 

 

 

Unsecured Debt
2,653

 
0.6

 
2,653

 
0.7

MCC Senior Loan Strategy JV I LLC
78,575

 
16.8

 
69,949

 
17.6

Equity/Warrants
103,989

 
22.2

 
95,009

 
23.9

Total
$
467,648

 
100.0
%
 
$
396,889

 
100.0
%
  
The composition of our investments as of September 30, 2018 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
$
475,801

 
62.2
%
 
$
395,015

 
60.3
%
Senior Secured Second Lien Term Loans
49,162

 
6.4

 
48,890

 
7.5

Senior Secured First Lien Notes
20,000

 
2.6

 
19,268

 
2.9

Unsecured Debt
26,108

 
3.4

 
3,381

 
0.5

MCC Senior Loan Strategy JV I LLC
78,575

 
10.3

 
78,371

 
11.9

Equity/Warrants
115,040

 
15.1

 
110,505

 
16.9

Total
$
764,686

 
100.0
%
 
$
655,430

 
100.0
%

In connection with certain of the Company’s investments, the Company receives warrants which are obtained for the objective of increasing the total investment returns and are not held for hedging purposes. At September 30, 2019 and 2018, the total fair value of warrants was $24,983 and $1.0 million, respectively, and were included in investments at fair value on the Consolidated Statement of Assets and Liabilities. During the year ended September 30, 2019, the Company exercised its warrant positions in one portfolio company in exchange for common stock in Avantor, Inc., forfeited its warrant positions in another portfolio company, and acquired additional warrants in one of an existing portfolio company. During the year ended September 30, 2018, the Company acquired two warrant positions.

Total unrealized depreciation related to warrants for the years ended September 30, 2019, 2018, and 2017 was $0.5 million, $1.3 million, and $3.4 million, respectively, and was recorded on the Consolidated Statements of Operations as net unrealized appreciation/(depreciation) on investments. The warrants are received in connection with individual investments and are not subject to master netting arrangements.

F-28




The following table shows the portfolio composition by industry grouping at fair value at September 30, 2019 (dollars in thousands):
 
Fair Value
 
Percentage
Multisector Holdings
$
69,949

 
17.6
%
Construction & Building
59,608

 
15.0

Services:  Business
49,512

 
12.5

High Tech Industries
38,254

 
9.6

Healthcare & Pharmaceuticals
25,698

 
6.5

Energy:  Oil & Gas
23,632

 
6.0

Hotel, Gaming & Leisure
21,127

 
5.3

Wholesale
13,850

 
3.5

Services:  Consumer
13,278

 
3.3

Containers, Packaging & Glass
12,637

 
3.2

Capital Equipment
10,680

 
2.7

Automotive
10,375

 
2.6

Banking, Finance, Insurance & Real Estate
10,000

 
2.5

Aerospace & Defense
8,604

 
2.2

Consumer goods:  Non-durable
6,326

 
1.6

Consumer goods:  Durable
6,170

 
1.6

Environmental Industries
3,991

 
1.0

Metals & Mining
3,436

 
0.9

Forest Products & Paper
2,830

 
0.7

Media:  Broadcasting & Subscription
2,408

 
0.6

Chemicals, Plastics & Rubber
2,277

 
0.6

Media: Advertising, Printing & Publishing
1,715

 
0.4

Retail
532

 
0.1

Total
$
396,889

 
100.0
%
  
The following table shows the portfolio composition by industry grouping at fair value at September 30, 2018 (dollars in thousands): 
 
Fair Value
 
Percentage
Services:  Business
$
95,021

 
14.5
%
Construction & Building
92,850

 
14.2

Multisector Holdings
78,371

 
12.0

High Tech Industries
65,662

 
10.0

Healthcare & Pharmaceuticals
46,020

 
7.0

Energy:  Oil & Gas
45,584

 
7.0

Aerospace & Defense
36,714

 
5.6

Hotel, Gaming & Leisure
32,487

 
5.0

Containers, Packaging & Glass
24,219

 
3.7

Banking, Finance, Insurance & Real Estate
22,587

 
3.4

Wholesale
18,515

 
2.8

Services:  Consumer
16,940

 
2.6

Consumer goods:  Durable
15,307

 
2.3

Automotive
13,027

 
2.0

Capital Equipment
12,944

 
2.0

Metals & Mining
8,814

 
1.3

Consumer goods:  Non-durable
6,252

 
0.9

Retail
5,802

 
0.9

Media:  Broadcasting & Subscription
5,703

 
0.9

Chemicals, Plastics & Rubber
4,078

 
0.6

Environmental Industries
3,283

 
0.5

Media: Advertising, Printing & Publishing
2,750

 
0.4

Forest Products & Paper
2,500

 
0.4

Total
$
655,430

 
100.0
%

The Company invests in portfolio companies principally located in North America. 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.


F-29



The following table shows the portfolio composition by geographic location at fair value at September 30, 2019 (dollars in thousands):
 
Fair Value
 
Percentage
Northeast
$
143,795

 
36.2
%
West
88,412

 
22.3

Midwest
76,001

 
19.2

Southeast
48,089

 
12.1

Southwest
24,658

 
6.2

Mid-Atlantic
15,934

 
4.0

Total
$
396,889

 
100.0
%

The following table shows the portfolio composition by geographic location at fair value at September 30, 2018 (dollars in thousands):
 
Fair Value
 
Percentage
Northeast
$
167,803

 
25.6
%
West
155,519

 
23.7

Midwest
118,291

 
18.1

Southeast
76,676

 
11.7

Mid-Atlantic
71,962

 
11.0

Southwest
65,179

 
9.9

Total
$
655,430

 
100.0
%
 

F-30



Transactions With Affiliated/Controlled Companies
 
The Company had investments in portfolio companies designated as Affiliated Investments and Controlled Investments under the 1940 Act. Transactions with Affiliated Investments and Controlled Investments during the years ended September 30, 2019 and 2018 were as follows:

Name of Investment(3)
 
Type of Investment
 
Fair Value at September 30, 2018
 
Purchases/(Sales) of or Advances/(Distributions)
 
Transfers In/(Out) of Affiliates
 
Unrealized Gain/(Loss)
 
Realized Gain/(Loss)
 
Fair Value at September 30, 2019
 
Income Earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliated Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1888 Industrial Services, LLC
 
Senior Secured First Lien Term Loan A
 
$
8,984,232

 
$
319,913

 
$

 
$

 
$

 
$
9,304,145

 
$
688,498

 
 
Senior Secured First Lien Term Loan B
 
19,725,217

 
142,757

 

 
(13,981,082
)
 

 
5,886,892

 
752,483

 
 
Senior Secured First Lien Term Loan C
 

 
1,170,014

 

 

 

 
1,170,014

 
22,203

 
 
Senior Secured First Lien Term Loan D
 

 
224,456

 

 

 

 
224,456

 
546

 
 
Revolving Credit Facility
 
3,593,693

 
793,332

 

 

 

 
4,387,025

 
247,920

 
 
Equity
 

 

 

 

 

 

 

Access Media Holdings, LLC
 
Senior Secured First Lien Term Loan
 
5,876,279

 

 

 
(3,367,190
)
 

 
2,509,089

 
(25,391
)
 
 
Preferred Equity Series A
 

 

 

 

 

 

 

 
 
Preferred Equity Series AA
 

 

 

 

 

 

 

 
 
Preferred Equity Series AAA
 
(172,800
)
 
72,000

 

 

 

 
(100,800
)
 

 
 
Equity
 

 

 

 

 

 

 

Brantley Transportation LLC
 
Senior Secured First Lien Term Loan
 
2,882,800

 
(1,329,030
)
 

 
6,117,200

 
(7,670,970
)
 

 

 
 
Senior Secured First Lien Delayed Draw Term Loan
 
503,105

 
(503,105
)
 

 

 

 

 
35,561

 
 
Equity
 

 

 

 

 

 

 

Caddo Investors Holdings 1 LLC
 
Equity
 
2,500,000

 
26,373

 

 
303,678

 

 
2,830,051

 
(61,927
)
Dynamic Energy Services International LLC
 
Senior Secured First Lien Term Loan
 

 

 
7,824,975

 
(6,560,134
)
 

 
1,264,841

 
(393,474
)
 
 
Revolving Credit Facility
 

 
(776,898
)
 
1,322,001

 

 

 
545,103

 
65,754

 
 
Equity
 

 

 

 

 

 

 

JFL-NGS Partners, LLC
 
Preferred Equity A-2
 
31,468,755

 
(11,318,071
)
 

 

 

 
20,150,684

 
924,898

 
 
Preferred Equity A-1
 
4,072,311

 
(1,464,650
)
 

 

 

 
2,607,661

 
119,689

 
 
Equity
 
9,825,804

 

 

 
9,270,567

 

 
19,096,371

 

JFL-WCS Partners, LLC
 
Preferred Equity Class A
 
1,166,292

 
69,977

 

 

 

 
1,236,269

 
72,830

 
 
Equity
 
215,116

 

 

 
2,539,925

 

 
2,755,041

 

Kemmerer Operations, LLC
 
Senior Secured First Lien Term Loan
 

 
1,766,511

 

 

 

 
1,766,511

 
72,332

 
 
Senior Secured First Lien Delayed Draw Term Loan
 

 
706,604

 

 

 

 
706,604

 
28,932

 
 
Equity
 

 
962,717

 

 

 

 
962,717

 

Path Medical, LLC
 
Senior Secured First Lien Term Loan
 

 
1,473,135

 
7,821,824

 
(449,792
)
 

 
8,845,167

 
1,148,712


F-31



 
 
Senior Secured First Lien Term Loan A
 

 
476,477

 
2,808,500

 
(237,504
)
 

 
3,047,473

 
364,754

 
 
Senior Secured First Lien Term Loan C
 

 
344,463

 

 
(172
)
 

 
344,291

 
70,514

 
 
Equity
 

 

 
499,751

 
(499,751
)
 

 

 

US Multifamily, LLC
 
Senior Secured First Lien Term Loan
 
6,670,000

 

 

 

 

 
6,670,000

 
667,000

 
 
Equity
 
3,330,000

 

 

 

 

 
3,330,000

 

Total Affiliated Investments
 
$
100,640,804

 
$
(6,843,025
)
 
$
20,277,051

 
$
(6,864,255
)
 
$
(7,670,970
)
 
$
99,539,605

 
$
4,801,834

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Controlled Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capstone Nutrition
 
Senior Secured First Lien Term Loan
 
$
12,657,663

 
$
(1,884,717
)
 
$

 
$
8,188,908

 
$
(18,961,854
)
 
$

 
$
(34,719
)
 
 
Senior Secured First Lien Delayed Draw Term Loan
 
5,692,096

 
(847,549
)
 

 
3,994,770

 
(8,839,317
)
 

 

 
 
Senior Secured First Lien Incremental Delayed Draw Term Loan
 
2,242,721

 
(2,242,721
)
 

 

 

 

 
488,373

 
 
Equity - Class B and C Units
 

 

 

 
12

 
(12
)
 

 

 
 
Equity - Common Units
 

 

 

 
400,003

 
(400,003
)
 

 

MCC Senior Loan Strategy JV I LLC(1)(2)
 
Equity
 
78,370,891

 

 

 
(8,421,921
)
 

 
69,948,970

 
8,050,000

NVTN LLC
 
Senior Secured First Lien Term Loan
 
4,005,990

 
250,000

 

 

 

 
4,255,990

 
270,259

 
 
Senior Secured First Lien Term Loan B
 
11,837,367

 
467,729

 

 
(5,152,744
)
 

 
7,152,352

 
352,280

 
 
Senior Secured First Lien Term Loan C
 
7,479,397

 
90,657

 

 
(7,570,054
)
 

 

 

 
 
Equity
 

 

 

 

 

 

 

OmniVere, LLC
 
Senior Secured First Lien Term Loan
 

 

 

 
22,880,599

 
(22,880,599
)
 

 
(2,822
)
 
 
Senior Secured First Lien Term Loan
 
1,374,048

 
661,225

 

 
2,963,001

 
(4,998,274
)
 

 

 
 
Unsecured Debt
 

 

 

 
22,727,575

 
(22,727,575
)
 

 
(2,205
)
 
 
Equity
 

 

 

 
872,698

 
(872,698
)
 

 

TPG Plastics LLC
 
Senior Secured Second Lien Term Loan
 
401,346

 
(48,362
)
 

 

 

 
352,984

 
38,253

 
 
Unsecured Debt
 
360,000

 
(21,780
)
 

 

 
(59,410
)
 
278,810

 
27,281

 
 
Unsecured Debt
 
646,996

 
(646,996
)
 

 

 

 

 
2,163

 
 
Equity
 
2,670,154

 
646,996

 

 
(1,672,399
)
 

 
1,644,751

 

URT Acquisition Holdings Corporation
 
Senior Secured Second Lien Term Loan
 
15,112,754

 
3,792,649

 

 

 

 
18,905,403

 
1,824,940

 
 
Preferred Equity
 
5,850,795

 
702,095

 

 
(1,638,223
)
 

 
4,914,667

 
175,043

 
 
Equity
 
12,937,518

 

 

 
(12,937,518
)
 

 

 

Total Controlled Investments
 
$
161,639,736

 
$
919,226

 
$

 
$
24,634,707

 
$
(79,739,742
)
 
$
107,453,927

 
$
11,188,846


F-32



Name of Investment(3)
 
Type of Investment
 
Fair Value at September 30, 2017
 
Purchases/(Sales) of or Advances/(Distributions)
 
Transfers In/(Out) of Affiliates
 
Unrealized Gain/(Loss)
 
Realized Gain/(Loss)
 
Fair Value at September 30, 2018
 
Income Earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliated Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1888 Industrial Services, LLC
 
Senior Secured First Lien Term Loan A
 
$
8,984,232

 
$

 
$

 
$

 
$

 
$
8,984,232

 
$
629,767

 
 
Senior Secured First Lien Term Loan B
 
19,746,290

 
2,618,635

 

 
(2,639,708
)
 

 
19,725,217

 
2,713,056

 
 
Revolving Credit Facility
 

 
3,593,693

 

 

 

 
3,593,693

 
129,351

 
 
Equity
 

 

 

 

 

 

 

Access Media Holdings, LLC
 
Senior Secured First Lien Term Loan
 
8,340,525

 
105,860

 

 
(2,570,106
)
 

 
5,876,279

 
212,656

 
 
Preferred Equity Series A
 

 

 

 

 

 

 

 
 
Preferred Equity Series AA
 

 

 

 

 

 

 

 
 
Preferred Equity Series AAA
 
43,200

 
536,000

 

 
(752,000
)
 

 
(172,800
)
 

 
 
Equity
 

 

 

 

 

 

 

Brantley Transportation LLC
 
Senior Secured First Lien Term Loan
 
7,719,520

 

 

 
(4,836,720
)
 

 
2,882,800

 

 
 
Senior Secured First Lien Delayed Draw Term Loan
 
668,105

 
(165,000
)
 

 

 

 
503,105

 
41,950

 
 
Equity
 

 

 

 

 

 

 

Caddo Investors Holdings 1 LLC
 
Equity
 

 
2,500,000

 

 

 

 
2,500,000

 
89,688

JFL-NGS Partners, LLC
 
Preferred Equity A-2
 
30,552,190

 
916,565

 

 

 

 
31,468,755

 
924,928

 
 
Preferred Equity A-1
 
3,953,700

 
118,611

 

 

 

 
4,072,311

 
119,693

 
 
Equity
 
63,603

 

 

 
9,762,201

 

 
9,825,804

 

JFL-WCS Partners, LLC
 
Preferred Equity Class A
 

 
1,166,292

 

 

 

 
1,166,292

 
47,738

 
 
Equity
 

 
129,588

 

 
85,528

 

 
215,116

 

US Multifamily, LLC
 
Senior Secured First Lien Term Loan
 
6,670,000

 

 

 

 

 
6,670,000

 
667,000

 
 
Equity
 
3,330,000

 

 

 

 

 
3,330,000

 

Total Affiliated Investments
 
$
90,071,365

 
$
11,520,244

 
$

 
$
(950,805
)
 
$

 
$
100,640,804

 
$
5,575,827

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Controlled Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capstone Nutrition
 
Senior Secured First Lien Term Loan
 
$
18,002,715

 
$
43,174

 
$

 
$
(5,388,226
)
 
$

 
$
12,657,663

 
$

 
 
Senior Secured First Lien Delayed Draw Term Loan
 
7,789,760

 
532,868

 

 
(2,630,532
)
 

 
5,692,096

 

 
 
Senior Secured First Lien Incremental Delayed Draw
 

 
2,242,721

 

 

 

 
2,242,721

 
222,325

 
 
Equity - Class B and C Units
 

 

 

 

 

 

 

 
 
Equity - Common Units
 

 

 

 

 

 

 

MCC Senior Loan Strategy JV I LLC(1)(2)
 
Equity
 
56,137,946

 
22,487,500

 

 
(254,555
)
 

 
78,370,891

 
7,021,875

NVTN LLC
 
Senior Secured First Lien Term Loan
 
3,505,990

 
500,000

 

 

 

 
4,005,990

 
221,859


F-33



Name of Investment(3)
 
Type of Investment
 
Fair Value at September 30, 2017
 
Purchases/(Sales) of or Advances/(Distributions)
 
Transfers In/(Out) of Affiliates
 
Unrealized Gain/(Loss)
 
Realized Gain/(Loss)
 
Fair Value at September 30, 2018
 
Income Earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured First Lien Term Loan B
 
10,604,502

 
1,232,865

 

 

 

 
11,837,367

 
1,252,532

 
 
Senior Secured First Lien Term Loan C
 
6,518,046

 
961,351

 

 

 

 
7,479,397

 
977,701

 
 
Equity
 
9,550,922

 

 

 
(9,550,922
)
 

 

 

OmniVere, LLC
 
Senior Secured First Lien Term Loan
 
24,500,205

 

 

 
(24,500,205
)
 

 

 

 
 
Senior Secured First Lien Term Loan
 
1,409,669

 
2,927,380

 

 
(2,963,001
)
 

 
1,374,048

 
152,997

 
 
Unsecured Debt
 

 

 

 

 

 

 

 
 
Equity
 

 

 

 

 

 

 

TPG Plastics LLC
 
Senior Secured Second Lien Term Loan
 

 

 
401,346

 

 

 
401,346

 
7,153

 
 
Unsecured Debt
 

 

 
360,000

 

 

 
360,000

 
12,921

 
 
Unsecured Debt
 

 

 
646,996

 

 

 
646,996

 
2,322

 
 
Equity
 

 

 
2,670,154

 

 

 
2,670,154

 

URT Acquisition Holdings Corporation
 
Senior Secured Second Lien Term Loan
 
14,966,563

 
146,191

 

 

 

 
15,112,754

 
1,540,982

 
 
Preferred Equity
 
5,500,000

 
350,795

 

 

 

 
5,850,795

 
691,600

 
 
Equity
 
12,937,518

 

 

 

 

 
12,937,518

 

Total Controlled Investments
 
$
171,423,836

 
$
31,424,845

 
$
4,078,496

 
$
(45,287,441
)
 
$

 
$
161,639,736

 
$
12,104,267


(1)
The Company and Great American Life Insurance Company (“GALIC”) are the members of MCC Senior Loan Strategy JV I LLC (“MCC JV”), a joint venture formed as a Delaware limited liability company that is not consolidated by either member for financial reporting purposes. The members of MCC JV make capital contributions as investments by MCC JV are completed, and all portfolio and other material decisions regarding MCC JV must be submitted to MCC JV’s board of managers, which is comprised of an equal number of members appointed by each of the Company and GALIC. Approval of MCC JV’s board of managers requires the unanimous approval of a quorum of the board of managers, with a quorum consisting of equal representation of members appointed by each of the Company and GALIC. Because management of MCC JV is shared equally between the Company and GALIC, the Company does not have operational control over the MCC JV for purposes of the 1940 Act or otherwise.

(2)
Amount of income earned represents distributions from MCC JV to the Company and is a component of dividend income, net of provisional taxes in the Consolidated Statements of Operations.

(3)
The par amount and additional detail are shown in the consolidated schedule of investments.

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 years ended September 30, 2019, 2018 and 2017. 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 years ended September 30, 2019, 2018 and 2017.

Loan Participation Sales

The Company may sell portions of its investments via participation agreements to a managed account, managed by an affiliate and non-affiliate of the Company. At September 30, 2019, there were two participation agreements outstanding with an aggregate fair value of $6.5 million. At September 30, 2018, there were four participation agreements outstanding with an aggregate fair value of $22.0 million. The transfer of the participated portion of the investments met the criteria set forth in ASC 860, Transfers and Servicing for treatment as a sale. In each case, the Company’s loan participation agreements satisfy the following conditions:

transferred investments have been isolated from the Company, and put presumptively beyond the reach of the Company and its creditors, even in bankruptcy or other receivership,

each participant has the right to pledge or exchange the transferred investments it received, and no condition both constrains the participant from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the Company; and

F-34




the Company, its consolidated affiliates or its agents do not maintain effective control over the transferred investments through either: (i) an agreement that entitles and/or obligates the Company to repurchase or redeem the assets before maturity, or (ii) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.

Such investments where the Company has retained proportionate interests are included in the consolidated schedule of investments. All of these investments are classified within Level 3 of the fair value hierarchy, as defined in Note 4.

During the years ended September 30, 2019, 2018 and 2017, the Company collected interest and principal payments on behalf of the participant in aggregate amounts of $3.7 million, $21.8 million and $11.7 million, respectively. Under the terms of the participation agreements, the Company will collect and remit periodic payments to the participant equal to the participant's proportionate share of any principal and interest payments received by the Company from the underlying investee companies.

MCC Senior Loan Strategy JV I LLC

On March 27, 2015, the Company and GALIC entered into a limited liability company operating agreement to co-manage MCC JV. All portfolio and other material decisions regarding MCC JV must be submitted to MCC JV’s board of managers, which is comprised of four members, two of whom are selected by the Company and the other two of whom are selected by GALIC. The Company has concluded that it does not operationally control MCC JV. As the Company does not operationally control MCC JV, it does not consolidate the operations of MCC JV within the consolidated financial statements. As a practical expedient, the Company uses NAV to determine the value of its investment in MCC JV; therefore, this investment has been presented as a reconciling item within the fair value hierarchy (see Note 4). Investments held by MCC JV are measured at fair value using the same valuation methodologies as described in Note 2.

As of September 30, 2019, MCC JV had total capital commitments of $100.0 million, with the Company providing $87.5 million and GALIC providing $12.5 million. Approximately $89.8 million was funded as of September 30, 2019 relating to these commitments, of which $78.6 million was from the Company. As of September 30, 2019, MCC JV’s board of managers had approved advances of capital of up to $0.3 million of the remaining capital commitments, of which $0.2 million is from the Company.

On August 4, 2015, MCC JV entered into a senior secured revolving credit facility (the “JV Facility”) led by Credit Suisse, AG (“CS”) with commitments of $100 million subject to leverage and borrowing base restrictions. On March 30, 2017, the Company amended the JV Facility previously administered by CS and facilitated the assignment of all rights and obligations of CS under the JV Facility to Deutsche Bank AG, New York Branch, (“DB”) and increased the total loan commitments to $200 million. The JV Facility bears interest at a rate of LIBOR (with no minimum + 2.50% per annum. On March 29, 2019, the JV Facility reinvestment period was extended to June 28, 2019 from March 30, 2019. On June 28, 2019, the JV Facility reinvestment period was extended to October 28, 2019. The stated maturity date was not impacted by the JV Facility reinvestment period extension and remained March 30, 2022. As of September 30, 2019 and 2018, there was approximately $179.3 million outstanding under the JV Facility.

At September 30, 2019 and 2018, MCC JV had total investments at fair value of $249.3 million and $251.9 million, respectively. As of September 30, 2019 and 2018, MCC JV’s portfolio was comprised of senior secured first lien term loans to 61 and 56 borrowers, respectively. As of September 30, 2019 and 2018, certain investments in one portfolio company held by MCC JV were on non-accrual status.

Below is a summary of MCC JV’s portfolio, excluding equity investments, followed by a listing of the individual investments in MCC JV’s portfolio as of September 30, 2019 and 2018:
 
September 30, 2019
 
September 30, 2018
Senior secured loans(1)
$
261,170,437

 
$
256,547,053

Weighted average current interest rate on senior secured loans(2)
7.17
%
 
7.39
%
Number of borrowers in MCC JV
61

 
56

Largest loan to a single borrower(1)
$
10,884,644

 
$
11,115,786

Total of five largest loans to borrowers(1)
$
43,626,877

 
$
47,982,607

 
(1)
At par value.
(2)
Computed as the (a) annual stated interest rate on accruing senior secured loans, divided by (b) total senior secured loans at par.

MCC JV Loan Portfolio as of September 30, 2019
Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4Over International, LLC
 
Media: Advertising, Printing & Publishing
 
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
6/7/2022
 
$
10,884,644

 
$
10,884,644

 
$
10,635,385

 
13.3
%
 
 
 
 
 
 
 
 
10,884,644

 
10,884,644

 
10,635,385

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acrisure, LLC
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
 
11/22/2023
 
724,217

 
722,980

 
720,162

 
0.9
%
 
 
 
 
 
 
 
 
724,217

 
722,980

 
720,162

 
 

F-35



Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AL Midcoast Holdings, LLC
 
Energy: Oil & Gas
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
 
8/1/2025
 
4,330,542

 
4,297,473

 
4,246,963

 
5.3
%
 
 
 
 
 
 
 
 
4,330,542

 
4,297,473

 
4,246,963

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brightspring Health Services
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%)(1)
 
3/5/2026
 
3,990,000

 
3,941,288

 
3,990,000

 
5.0
%
 
 
 
 
 
 
 
 
3,990,000

 
3,941,288

 
3,990,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Callaway Golf Company
 
Consumer Goods: Durable
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
1/4/2026
 
2,774,187

 
2,724,326

 
2,801,929

 
3.5
%
 
 
 
 
 
 
 
 
2,774,187

 
2,724,326

 
2,801,929

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cardenas Markets LLC
 
Retail
 
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1)
 
11/29/2023
 
5,348,750

 
5,316,921

 
5,172,776

 
6.5
%
 
 
 
 
 
 
 
 
5,348,750

 
5,316,921

 
5,172,776

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CHA Consulting, Inc.
 
Construction & Building
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
4/10/2025
 
1,354,100

 
1,348,742

 
1,324,581

 
1.7
%
 
 
 
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
4/10/2025
 
598,500

 
598,500

 
584,908

 
0.7
%
 
 
 
 
 
 
 
 
1,952,600

 
1,947,242

 
1,909,489

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Covenant Surgical Partners, Inc.
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%)(1)
 
7/1/2026
 
5,000,000

 
4,951,590

 
4,940,000

 
6.2
%
 
 
 
 
 
 
 
 
5,000,000

 
4,951,590

 
4,940,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CT Technologies Intermediate Holdings, Inc.
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
 
12/1/2021
 
4,131,900

 
4,067,981

 
3,770,359

 
4.7
%
 
 
 
 
 
 
 
 
4,131,900

 
4,067,981

 
3,770,359

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Envision Healthcare Corporation
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)(1)
 
10/10/2025
 
1,960,188

 
1,897,299

 
1,594,220

 
2.0
%
 
 
 
 
 
 
 
 
1,960,188

 
1,897,299

 
1,594,220

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GC EOS Buyer, Inc.
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
8/1/2025
 
3,445,086

 
3,399,335

 
3,400,989

 
4.3
%
 
 
 
 
 
 
 
 
3,445,086

 
3,399,335

 
3,400,989

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GK Holdings, Inc.
 
Services: Business
 
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
1/20/2021
 
2,908,397

 
2,903,827

 
2,641,697

 
3.3
%
 
 
 
 
 
 
 
 
2,908,397

 
2,903,827

 
2,641,697

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Glass Mountain Pipeline Holdings, LLC
 
Energy: Oil & Gas
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
12/23/2024
 
4,900,375

 
4,886,582

 
4,618,604

 
5.8
%
 
 
 
 
 
 
 
 
4,900,375

 
4,886,582

 
4,618,604

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Golden West Packaging Group LLC
 
Forest Products & Paper
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
6/20/2023
 
4,188,348

 
4,188,348

 
4,163,637

 
5.2
%
 
 
 
 
 
 
 
 
4,188,348

 
4,188,348

 
4,163,637

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High Ridge Brands Co.
 
Consumer Goods: Non-Durable
 
Senior Secured First Lien Term Loan (LIBOR + 7.00%, 1.00% LIBOR Floor)(1)(4)
 
6/30/2022
 
1,818,750

 
1,805,750

 
1,421,353

 
1.8
%
 
 
 
 
 
 
 
 
1,818,750

 
1,805,750

 
1,421,353

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-36



Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Highline Aftermarket Acquisitions, LLC
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 3.50%, 1.00% LIBOR Floor)(1)
 
4/26/2025
 
4,066,176

 
4,055,443

 
3,601,412

 
4.5
%
 
 
 
 
 
 
 
 
4,066,176

 
4,055,443

 
3,601,412

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Imagine Group, LLC
 
Media: Advertising, Printing & Publishing
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
 
6/21/2022
 
7,800,000

 
7,757,145

 
5,187,780

 
6.5
%
 
 
 
 
 
 
 
 
7,800,000

 
7,757,145

 
5,187,780

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Infogroup, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1)
 
4/3/2023
 
4,875,000

 
4,846,330

 
4,748,738

 
5.9
%
 
 
 
 
 
 
 
 
4,875,000

 
4,846,330

 
4,748,738

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intermedia Holdings, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
7/21/2025
 
2,977,500

 
2,952,588

 
2,973,034

 
3.7
%
 
 
 
 
 
 
 
 
2,977,500

 
2,952,588

 
2,973,034

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intermediate LLC
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
 
7/1/2026
 
2,750,000

 
2,732,906

 
2,732,400

 
3.4
%
 
 
 
 
 
 
 
 
2,750,000

 
2,732,906

 
2,732,400

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Isagenix International, LLC
 
Wholesale
 
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1)
 
6/16/2025
 
2,788,268

 
2,775,502

 
2,115,738

 
2.6
%
 
 
 
 
 
 
 
 
2,788,268

 
2,775,502

 
2,115,738

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jackson Hewitt Tax Service Inc.
 
Services: Consumer
 
Senior Secured First Lien Term Loan (LIBOR + 6.25%)(1)
 
5/31/2023
 
5,850,000

 
5,850,000

 
5,811,390

 
7.3
%
 
 
 
 
 
 
 
 
5,850,000

 
5,850,000

 
5,811,390

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jordan Health Products I, Inc.
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
5/15/2025
 
5,181,776

 
5,118,971

 
4,378,601

 
5.5
%
 
 
 
 
 
 
 
 
5,181,776

 
5,118,971

 
4,378,601

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Keystone Acquisition Corp.
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
5/1/2024
 
6,162,699

 
6,086,349

 
5,972,888

 
7.5
%
 
 
 
 
 
 
 
 
6,162,699

 
6,086,349

 
5,972,888

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
KNB Holdings Corporation
 
Consumer Goods: Durable
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
 
4/26/2024
 
4,871,364

 
4,807,569

 
3,975,033

 
5.0
%
 
 
 
 
 
 
 
 
4,871,364

 
4,807,569

 
3,975,033

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LifeMiles Ltd.
 
Services: Consumer
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
 
8/18/2022
 
4,836,393

 
4,821,161

 
4,759,978

 
6.0
%
 
 
 
 
 
 
 
 
4,836,393

 
4,821,161

 
4,759,978

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manna Pro Products, LLC
 
Consumer Goods: Non-Durable
 
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
12/8/2023
 
3,029,375

 
3,029,375

 
2,880,027

 
3.6
%
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
12/8/2023
 
615,125

 
615,125

 
584,799

 
0.7
%
 
 
 
 
 
 
 
 
3,644,500

 
3,644,500

 
3,464,826

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Media Holdings II LLC
 
Media: Advertising, Printing & Publishing
 
Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)(1)
 
7/14/2022
 
2,446,853

 
2,443,556

 
2,442,205

 
3.1
%
 
 
 
 
 
 
 
 
2,446,853

 
2,443,556

 
2,442,205

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NGS US Finco, LLC
 
Capital Equipment
 
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
 
10/1/2025
 
2,977,500

 
2,964,722

 
2,903,360

 
3.6
%

F-37



Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,977,500

 
2,964,722

 
2,903,360

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Northern Star Industries, Inc.
 
Capital Equipment
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
3/28/2025
 
4,186,250

 
4,169,745

 
3,984,054

 
5.0
%
 
 
 
 
 
 
 
 
4,186,250

 
4,169,745

 
3,984,054

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nuvei Technologies Corp.
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
9/29/2025
 
3,543,616

 
3,512,593

 
3,477,350

 
4.3
%
 
 
 
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
9/29/2025
 
519,107

 
519,107

 
509,399

 
0.6
%
 
 
 
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
9/29/2025
 
716,005

 
716,005

 
702,616

 
0.9
%
 
 
 
 
 
 
 
 
4,778,728

 
4,747,705

 
4,689,365

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Offen, Inc.
 
Transportation: Cargo
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%)(1)
 
6/22/2026
 
3,663,385

 
3,628,046

 
3,613,477

 
4.5
%
 
 
 
 
 
 
 
 
3,663,385

 
3,628,046

 
3,613,477

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Peraton Corp.
 
Aerospace and Defense
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
4/29/2024
 
3,406,439

 
3,395,256

 
3,384,979

 
4.2
%
 
 
 
 
 
 
 
 
3,406,439

 
3,395,256

 
3,384,979

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PetroChoice Holdings, Inc.
 
Chemicals, Plastics and Rubber
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
8/19/2022
 
6,345,900

 
6,333,392

 
6,092,064

 
7.6
%
 
 
 
 
 
 
 
 
6,345,900

 
6,333,392

 
6,092,064

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Port Townsend Holdings Company, Inc.
 
Forest Products & Paper
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
 
4/3/2024
 
3,041,842

 
3,018,790

 
2,992,564

 
3.7
%
 
 
 
 
 
 
 
 
3,041,842

 
3,018,790

 
2,992,564

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PT Network, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor, 2% PIK)(1)(5)
 
11/30/2023
 
4,880,028

 
4,562,638

 
4,562,338

 
5.7
%
 
 
 
 
Class C Common Stock
 
 
 
1

 

 

 
 
 
 
 
 
 
 
 
 
4,880,029

 
4,562,638

 
4,562,338

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PVHC Holding Corp
 
Containers, Packaging and Glass
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
 
8/5/2024
 
1,972,350

 
1,964,300

 
1,912,137

 
2.4
%
 
 
 
 
 
 
 
 
1,972,350

 
1,964,300

 
1,912,137

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quantum Spatial, Inc.
 
Aerospace & Defense
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
9/5/2024
 
5,000,000

 
5,000,000

 
5,000,000

 
6.3
%
 
 
 
 
 
 
 
 
5,000,000

 
5,000,000

 
5,000,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quartz Holding Company
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
 
4/2/2026
 
6,982,500

 
6,957,391

 
6,885,443

 
8.6
%
 
 
 
 
 
 
 
 
6,982,500

 
6,957,391

 
6,885,443

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RB Media, Inc.
 
Media: Diversified & Production
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
8/29/2025
 
3,960,000

 
3,926,377

 
3,960,000

 
5.0
%
 
 
 
 
 
 
 
 
3,960,000

 
3,926,377

 
3,960,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rough Country, LLC
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)(1)
 
5/25/2023
 
4,080,727

 
4,063,983

 
4,014,619

 
5.0
%
 
 
 
 
 
 
 
 
4,080,727

 
4,063,983

 
4,014,619

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-38



Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Safe Fleet Holdings LLC
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 3.00%, 1.00% LIBOR Floor)(1)
 
2/3/2025
 
3,422,875

 
3,417,582

 
3,297,255

 
4.1
%
 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)(1)
 
2/3/2025
 
1,335,880

 
1,288,373

 
1,288,055

 
1.6
%
 
 
 
 
 
 
 
 
4,758,755

 
4,705,955

 
4,585,310

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salient CRGT Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
2/28/2022
 
2,645,536

 
2,619,767

 
2,503,471

 
3.1
%
 
 
 
 
 
 
 
 
2,645,536

 
2,619,767

 
2,503,471

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SCS Holdings I Inc.
 
Wholesale
 
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
 
7/1/2026
 
2,244,375

 
2,238,962

 
2,249,986

 
2.8
%
 
 
 
 
 
 
 
 
2,244,375

 
2,238,962

 
2,249,986

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SFP Holding, Inc.
 
Construction & Building
 
Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)(1)
 
9/1/2022
 
4,820,605

 
4,762,317

 
4,775,291

 
6.0
%
 
 
 
 
Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)(1)
 
9/1/2022
 
1,871,234

 
1,871,234

 
1,853,644

 
2.3
%
 
 
 
 
 
 
 
 
6,691,839

 
6,633,551

 
6,628,935

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shift4 Payments, LLC
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
11/29/2024
 
9,825,000

 
9,788,662

 
9,825,000

 
12.3
%
 
 
 
 
 
 
 
 
9,825,000

 
9,788,662

 
9,825,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sierra Enterprises, LLC
 
Beverage & Food
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
 
11/11/2024
 
3,918,993

 
3,909,644

 
3,821,018

 
4.8
%
 
 
 
 
 
 
 
 
3,918,993

 
3,909,644

 
3,821,018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Simplified Logistics, LLC
 
Services: Business
 
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1)
 
2/27/2022
 
3,482,500

 
3,482,500

 
3,482,500

 
4.4
%
 
 
 
 
 
 
 
 
3,482,500

 
3,482,500

 
3,482,500

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SMB Shipping Logistics, LLC
 
Transportation: Cargo
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
 
2/5/2024
 
2,465,807

 
2,446,381

 
2,453,478

 
3.1
%
 
 
 
 
 
 
 
 
2,465,807

 
2,446,381

 
2,453,478

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Syniverse Holdings, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
3/9/2023
 
3,935,050

 
3,907,819

 
3,695,799

 
4.6
%
 
 
 
 
 
 
 
 
3,935,050

 
3,907,819

 
3,695,799

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Octave Music Group, Inc.
 
Media: Diversified & Production
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
 
5/28/2021
 
4,348,644

 
4,348,644

 
4,325,596

 
5.4
%
 
 
 
 
 
 
 
 
4,348,644

 
4,348,644

 
4,325,596

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ThoughtWorks, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
 
10/11/2024
 
6,674,943

 
6,659,353

 
6,674,943

 
8.3
%
 
 
 
 
 
 
 
 
6,674,943

 
6,659,353

 
6,674,943

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tortoise Borrower LLC
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (LIBOR + 3.50%, 1.00% LIBOR Floor)(1)
 
1/31/2025
 
2,437,875

 
2,428,557

 
2,392,287

 
3.0
%
 
 
 
 
 
 
 
 
2,437,875

 
2,428,557

 
2,392,287

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-39



Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Road Services, Inc.
 
Transportation: Cargo
 
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1)
 
9/2/2024
 
3,759,999

 
3,746,467

 
3,699,087

 
4.6
%
 
 
 
 
 
 
 
 
3,759,999

 
3,746,467

 
3,699,087

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vero Parent, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
8/16/2024
 
3,915,475

 
3,891,393

 
3,886,109

 
4.9
%
 
 
 
 
 
 
 
 
3,915,475

 
3,891,393

 
3,886,109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wawona Delaware Holdings, LLC
 
Beverage & Food
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
 
9/11/2026
 
4,975,000

 
4,925,465

 
4,925,250

 
6.2
%
 
 
 
 
 
 
 
 
4,975,000

 
4,925,465

 
4,925,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wheels Up Partners LLC
 
Aerospace & Defense
 
Senior Secured First Lien Term Loan (LIBOR + 8.55%, 1.00% LIBOR Floor)(1)
 
10/15/2021
 
3,633,328

 
3,575,903

 
3,569,381

 
4.5
%
 
 
 
 
 
 
 
 
3,633,328

 
3,575,903

 
3,569,381

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wok Holdings Inc.
 
Retail
 
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1)
 
3/1/2026
 
6,616,750

 
6,563,551

 
5,599,756

 
7.0
%
 
 
 
 
 
 
 
 
6,616,750

 
6,563,551

 
5,599,756

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wrench Group LLC
 
Services: Consumer
 
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
 
4/30/2026
 
2,225,672

 
2,208,221

 
2,225,672

 
2.8
%
 
 
 
 
 
 
 
 
2,225,672

 
2,208,221

 
2,225,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Xebec Global Holdings, LLC
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
2/12/2024
 
8,134,734

 
8,134,734

 
8,114,397

 
10.1
%
 
 
 
 
 
 
 
 
8,134,734

 
8,134,734

 
8,114,397

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Z Medica, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
 
9/29/2022
 
2,596,000

 
2,596,000

 
2,498,910

 
3.1
%
 
 
 
 
 
 
 
 
2,596,000

 
2,596,000

 
2,498,910

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Investments, September 30, 2019
 
 
 
 
 
$
261,170,438

 
$
259,371,480

 
$
249,342,871

 
311.9
%

(1)
Represents the annual current interest rate as of September 30, 2019. All interest rates are payable in cash, unless otherwise noted.
(2)
Represents the fair value in accordance with ASC 820 as reported by MCC JV. The determination of such fair value is not included in the Company’s board of directors’ valuation process described elsewhere herein.
(3)
Percentage is based on MCC JV's net assets of $79,941,680 as of September 30, 2019.
(4)
This investment was on non-accrual status as of September 30, 2019.
(5)
Par amount includes accumulated PIK interest and is net of repayments.

MCC JV Loan Portfolio as of September 30, 2018
Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4Over International, LLC
 
Media: Advertising, Printing & Publishing
 
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
6/7/2022
 
$
11,115,786

 
$
11,115,786

 
$
11,115,786

 
12.4
%
 
 
 
 
 
 
 
 
11,115,786

 
11,115,786

 
11,115,786

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acrisure, LLC
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)(1)
 
11/22/2023
 
2,942,775

 
2,936,535

 
2,942,775

 
3.3
%
 
 
 
 
 
 
 
 
2,942,775

 
2,936,535

 
2,942,775

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Avantor, Inc.
 
Wholesale
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
 
11/21/2024
 
5,528,200

 
5,455,199

 
5,583,482

 
6.2
%
 
 
 
 
 
 
 
 
5,528,200

 
5,455,199

 
5,583,482

 
 

F-40



Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BW NHHC HOLDCO INC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%)(1)
 
5/15/2025
 
6,284,250

 
6,184,580

 
6,170,505

 
6.9
%
 
 
 
 
 
 
 
 
6,284,250

 
6,184,580

 
6,170,505

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cardenas Markets LLC
 
Retail
 
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1)
 
11/29/2023
 
5,403,750

 
5,363,877

 
5,402,669

 
6.0
%
 
 
 
 
 
 
 
 
5,403,750

 
5,363,877

 
5,402,669

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CD&R TZ Purchaser, Inc.
 
Services: Consumer
 
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
7/21/2023
 
3,428,127

 
3,392,563

 
3,370,192

 
3.8
%
 
 
 
 
 
 
 
 
3,428,127

 
3,392,563

 
3,370,192

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CHA Consulting, Inc.
 
Construction & Building
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
4/10/2025
 
2,867,813

 
2,854,412

 
2,853,473

 
3.2
%
 
 
 
 
 
 
 
 
2,867,813

 
2,854,412

 
2,853,473

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Covenant Surgical Partners, Inc.
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%)(1)
 
10/4/2024
 
7,634,615

 
7,613,184

 
7,584,990

 
8.5
%
 
 
 
 
Delayed Draw Term Loan (LIBOR + 4.50%)(1)
 
10/4/2024
 
2,297,782

 
2,297,782

 
2,282,846

 
2.5
%
 
 
 
 
 
 
 
 
9,932,397

 
9,910,966

 
9,867,836

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CP OPCO, LLC
 
Services: Consumer
 
Senior Secured First Lien Term Loan B (ABR + 5.50% PIK, 5.25% ABR Floor)(1)(3)
 
4/1/2019
 
242,807

 
213,451

 
41,301

 
0.0
%
 
 
 
 
Senior Secured First Lien Term Loan C (ABR + 8.50% PIK, 5.25% ABR Floor)(1)(3)
 
4/1/2019
 
1,826,953

 
717,016

 

 
0.0
%
 
 
 
 
Senior Secured First Lien Term Loan D (ABR + 7.00% PIK, 5.25% ABR Floor)(1)(3)
 
4/1/2019
 
1,038,290

 

 

 
0.0
%
 
 
 
 
Equity - 41 Common Units
 
4/1/2019
 

 

 

 
0.0
%
 
 
 
 
 
 
 
 
3,108,050

 
930,467

 
41,301

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CT Technologies Intermediate Holdings, Inc.
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
 
12/1/2021
 
4,175,053

 
4,080,739

 
4,064,414

 
4.5
%
 
 
 
 
 
 
 
 
4,175,053

 
4,080,739

 
4,064,414

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deliver Buyer, Inc.
 
Capital Equipment
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
5/1/2024
 
531,987

 
530,704

 
530,657

 
0.6
%
 
 
 
 
 
 
 
 
531,987

 
530,704

 
530,657

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DigiCert, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
 
10/31/2024
 
1,488,750

 
1,482,238

 
1,488,750

 
1.7
%
 
 
 
 
 
 
 
 
1,488,750

 
1,482,238

 
1,488,750

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Elite Comfort Solutions, Inc.
 
Chemicals, Plastics and Rubber
 
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1)
 
1/15/2021
 
5,507,602

 
5,507,602

 
5,507,602

 
6.1
%
 
 
 
 
 
 
 
 
5,507,602

 
5,507,602

 
5,507,602

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GC EOS Buyer, Inc.
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
8/1/2025
 
3,750,000

 
3,713,265

 
3,712,500

 
4.1
%
 
 
 
 
 
 
 
 
3,750,000

 
3,713,265

 
3,712,500

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GK Holdings, Inc.
 
Services: Business
 
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
1/20/2021
 
2,938,931

 
2,930,787

 
2,656,795

 
3.0
%
 
 
 
 
 
 
 
 
2,938,931

 
2,930,787

 
2,656,795

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-41



Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Glass Mountain Pipeline Holdings, LLC
 
Energy: Oil & Gas
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
12/23/2024
 
4,950,125

 
4,933,531

 
4,950,125

 
5.5
%
 
 
 
 
 
 
 
 
4,950,125

 
4,933,531

 
4,950,125

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Golden West Packaging Group LLC
 
Forest Products & Paper
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
6/20/2023
 
8,792,361

 
8,792,361

 
8,792,361

 
9.9
%
 
 
 
 
 
 
 
 
8,792,361

 
8,792,361

 
8,792,361

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High Ridge Brands Co.
 
Consumer Goods: Non-Durable
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
6/30/2022
 
1,820,455

 
1,802,712

 
1,694,479

 
1.9
%
 
 
 
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
6/30/2022
 
12,358

 
12,238

 
11,503

 
0.0
%
 
 
 
 
 
 
 
 
1,832,813

 
1,814,950

 
1,705,982

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Highline Aftermarket Acquisitions, LLC
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 3.50%, 1.00% LIBOR Floor)(1)
 
4/26/2025
 
4,107,353

 
4,094,567

 
4,114,746

 
4.6
%
 
 
 
 
 
 
 
 
4,107,353

 
4,094,567

 
4,114,746

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Imagine Group, LLC
 
Media: Advertising, Printing & Publishing
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
 
6/21/2022
 
7,880,000

 
7,820,824

 
7,437,932

 
8.3
%
 
 
 
 
 
 
 
 
7,880,000

 
7,820,824

 
7,437,932

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Infogroup, Inc.
 
Services: Business
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
4/3/2023
 
4,925,000

 
4,887,744

 
4,905,300

 
5.5
%
 
 
 
 
 
 
 
 
4,925,000

 
4,887,744

 
4,905,300

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intermedia Holdings, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
7/21/2025
 
3,000,000

 
2,970,580

 
2,970,000

 
3.3
%
 
 
 
 
 
 
 
 
3,000,000

 
2,970,580

 
2,970,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Isagenix International, LLC
 
Consumer Goods: Durable
 
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1)
 
6/16/2025
 
2,937,813

 
2,922,007

 
2,894,920

 
3.2
%
 
 
 
 
 
 
 
 
2,937,813

 
2,922,007

 
2,894,920

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jackson Hewitt Tax Services Inc.
 
Services: Consumer
 
Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)(1)
 
5/31/2023
 
6,000,000

 
6,000,000

 
6,000,000

 
6.7
%
 
 
 
 
 
 
 
 
6,000,000

 
6,000,000

 
6,000,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Keystone Acquisition Corp.
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
5/1/2024
 
6,225,584

 
6,131,648

 
6,194,456

 
6.9
%
 
 
 
 
 
 
 
 
6,225,584

 
6,131,648

 
6,194,456

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
KNB Holdings Corporation
 
Consumer Goods: Durable
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
 
4/26/2024
 
4,999,557

 
4,919,799

 
4,960,560

 
5.5
%
 
 
 
 
 
 
 
 
4,999,557

 
4,919,799

 
4,960,560

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LifeMiles Ltd.
 
Services: Consumer
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
 
8/18/2022
 
5,423,077

 
5,400,078

 
5,450,192

 
6.1
%
 
 
 
 
 
 
 
 
5,423,077

 
5,400,078

 
5,450,192

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loparex International B.V.
 
Containers, Packaging and Glass
 
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
 
4/11/2025
 
6,650,000

 
6,615,014

 
6,716,500

 
7.5
%
 
 
 
 
 
 
 
 
6,650,000

 
6,615,014

 
6,716,500

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-42



Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manna Pro Products, LLC
 
Consumer Goods: Non-Durable
 
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
 
12/8/2023
 
3,060,208

 
3,060,208

 
3,049,498

 
3.4
%
 
 
 
 
Delayed Draw Term Loan (LIBOR + 6.00%)(1)
 
12/8/2023
 
376,167

 
376,167

 
374,850

 
0.4
%
 
 
 
 
 
 
 
 
3,436,375

 
3,436,375

 
3,424,348

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midcoast Energy, LLC
 
Energy: Oil & gas
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
 
8/1/2025
 
4,000,000

 
3,960,877

 
4,005,200

 
4.5
%
 
 
 
 
 
 
 
 
4,000,000

 
3,960,877

 
4,005,200

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Media Holdings II LLC
 
Media: Advertising, Printing & Publishing
 
Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)(1)
 
7/14/2022
 
4,557,382

 
4,549,251

 
4,557,382

 
5.1
%
 
 
 
 
 
 
 
 
4,557,382

 
4,549,251

 
4,557,382

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Northern Star Industries, Inc.
 
Capital Equipment
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
 
3/28/2025
 
4,228,750

 
4,209,044

 
4,207,606

 
4.7
%
 
 
 
 
 
 
 
 
4,228,750

 
4,209,044

 
4,207,606

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Peraton Corp.
 
Aerospace and Defense
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
4/29/2024
 
3,441,288

 
3,427,525

 
3,441,288

 
3.8
%
 
 
 
 
 
 
 
 
3,441,288

 
3,427,525

 
3,441,288

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PetroChoice Holdings, Inc.
 
Chemicals, Plastics and Rubber
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
8/19/2022
 
4,911,410

 
4,911,410

 
4,911,410

 
5.5
%
 
 
 
 
 
 
 
 
4,911,410

 
4,911,410

 
4,911,410

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Port Townsend Holdings Company, Inc.
 
Forest Products & Paper
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
 
4/3/2024
 
6,160,625

 
6,103,585

 
6,099,019

 
6.8
%
 
 
 
 
 
 
 
 
6,160,625

 
6,103,585

 
6,099,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PT Network, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
 
11/30/2021
 
4,875,423

 
4,875,423

 
4,807,655

 
5.4
%
 
 
 
 
 
 
 
 
4,875,423

 
4,875,423

 
4,807,655

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PVHC Holding Corp
 
Containers, Packaging and Glass
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
 
8/3/2024
 
1,992,273

 
1,982,463

 
1,982,311

 
2.2
%
 
 
 
 
 
 
 
 
1,992,273

 
1,982,463

 
1,982,311

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded Books Inc.
 
Media: Diversified & Production
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%)(1)
 
8/29/2025
 
4,000,000

 
3,960,299

 
3,960,299

 
4.4
%
 
 
 
 
 
 
 
 
4,000,000

 
3,960,299

 
3,960,299

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rough Country, LLC
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)(1)
 
5/25/2023
 
5,205,684

 
5,173,271

 
5,212,452

 
5.8
%
 
 
 
 
 
 
 
 
5,205,684

 
5,173,271

 
5,212,452

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Safe Fleet Holdings LLC
 
Automotive
 
Senior Secured First Lien Term Loan (LIBOR + 3.00%, 1.00% LIBOR Floor)(1)
 
2/3/2025
 
3,457,625

 
3,449,777

 
3,457,625

 
3.9
%
 
 
 
 
 
 
 
 
3,457,625

 
3,449,777

 
3,457,625

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salient CRGT Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1)
 
2/28/2022
 
2,720,536

 
2,683,070

 
2,720,808

 
3.0
%
 
 
 
 
 
 
 
 
2,720,536

 
2,683,070

 
2,720,808

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SCS Holdings I Inc.
 
Wholesale
 
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
 
10/30/2022
 
3,904,564

 
3,873,416

 
3,904,564

 
4.4
%

F-43



Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,904,564

 
3,873,416

 
3,904,564

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shift4 Payments, LLC
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
11/29/2024
 
9,925,000

 
9,881,191

 
9,925,000

 
11.1
%
 
 
 
 
 
 
 
 
9,925,000

 
9,881,191

 
9,925,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sierra Enterprises, LLC
 
Beverage & Food
 
Senior Secured First Lien Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)(1)
 
11/11/2024
 
5,211,928

 
5,196,997

 
5,191,602

 
5.8
%
 
 
 
 
 
 
 
 
5,211,928

 
5,196,997

 
5,191,602

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SMB Shipping Logistics, LLC
 
Transportation: Cargo
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
 
2/5/2024
 
2,493,671

 
2,469,513

 
2,468,735

 
2.8
%
 
 
 
 
 
 
 
 
2,493,671

 
2,469,513

 
2,468,735

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Starfish Holdco, LLC
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
8/16/2024
 
3,955,025

 
3,921,489

 
3,955,025

 
4.4
%
 
 
 
 
 
 
 
 
3,955,025

 
3,921,489

 
3,955,025

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Syniverse Holdings, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
 
3/9/2023
 
4,975,000

 
4,930,568

 
4,975,000

 
5.6
%
 
 
 
 
 
 
 
 
4,975,000

 
4,930,568

 
4,975,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The KEYW Corporation
 
Aerospace and Defense
 
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
 
5/8/2024
 
3,337,209

 
3,321,534

 
3,305,172

 
3.7
%
 
 
 
 
 
 
 
 
3,337,209

 
3,321,534

 
3,305,172

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Octave Music Group, Inc.
 
Media: Diversified & Production
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
 
5/28/2021
 
4,923,664

 
4,923,664

 
4,923,664

 
5.5
%
 
 
 
 
 
 
 
 
4,923,664

 
4,923,664

 
4,923,664

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ThoughtWorks, Inc.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
 
10/11/2024
 
4,987,500

 
4,974,219

 
5,001,965

 
5.6
%
 
 
 
 
 
 
 
 
4,987,500

 
4,974,219

 
5,001,965

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tortoise Borrower LLC
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
 
1/31/2025
 
2,462,625

 
2,451,451

 
2,462,625

 
2.7
%
 
 
 
 
 
 
 
 
2,462,625

 
2,451,451

 
2,462,625

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Road Services, Inc.
 
Transportation: Cargo
 
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
 
9/1/2024
 
3,880,000

 
3,863,202

 
3,880,000

 
4.3
%
 
 
 
 
 
 
 
 
3,880,000

 
3,863,202

 
3,880,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vertex Aerospace Services Corp.
 
Aerospace and Defense
 
Senior Secured First Lien Term Loan (LIBOR + 4.75%)(1)
 
6/29/2025
 
1,496,250

 
1,488,975

 
1,511,213

 
1.7
%
 
 
 
 
 
 
 
 
1,496,250

 
1,488,975

 
1,511,213

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wheels Up Partners LLC
 
Aerospace and Defense
 
Senior Secured First Lien Term Loan (LIBOR + 8.55%, 1.00% LIBOR Floor)(1)
 
10/15/2021
 
4,437,529

 
4,333,078

 
4,380,729

 
4.9
%
 
 
 
 
 
 
 
 
4,437,529

 
4,333,078

 
4,380,729

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Xebec Global Holdings, LLC
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
 
2/12/2024
 
8,217,063

 
8,217,063

 
8,217,063

 
9.2
%
 
 
 
 
 
 
 
 
8,217,063

 
8,217,063

 
8,217,063

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-44



Company
 
Industry
 
Type of Investment
 
Maturity
 
Par
Amount
 
Cost
 
Fair
Value(2)
 
% of
Net Assets(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Z Medica, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
 
9/29/2022
 
2,625,500

 
2,625,500

 
2,622,349

 
2.9
%
 
 
 
 
 
 
 
 
2,625,500

 
2,625,500

 
2,622,349

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Investments, September 30, 2018
 
 
 
 
 
$
256,547,053

 
$
252,887,053

 
$
251,913,920

 
281.2
%

(1)
Represents the annual current interest rate as of September 30, 2018. All interest rates are payable in cash, unless otherwise noted.
(2)
Represents the fair value in accordance with ASC 820 as reported by MCC JV. The determination of such fair value is not included in the Company’s board of directors’ valuation process described elsewhere herein.
(3)
This investment was on non-accrual status as of September 30, 2018.
(4)
Percentage is based on MCC JV's net assets of $89,580,037 as of September 30, 2018.

Below is certain summarized financial Information for MCC JV as of September 30, 2019 and 2018, and for the years ended September 30, 2019, 2018 and 2017:
 
September 30, 2019
 
September 30, 2018
Selected Consolidated Statement of Assets and Liabilities Information:
 

 
 

Investments in loans at fair value (amortized cost of $259,371,480 and $252,887,053, respectively)
$
249,342,871

 
$
251,913,920

Cash
8,007,466

 
14,035,722

Other assets
1,466,352

 
2,614,208

Total assets
$
258,816,689


$
268,563,850

 
 
 
 
Line of credit (net of debt issuance costs of $1,552,067 and $1,408,462, respectively)
$
177,694,223

 
$
177,871,538

Other liabilities
472,737

 
379,030

Interest payable
708,049

 
733,245

Total liabilities
178,875,009


178,983,813

Members' capital
79,941,680

 
89,580,037

Total liabilities and members' capital
$
258,816,689


$
268,563,850

 
For the years ended September 30
 
2019
 
2018
 
2017
Selected Consolidated Statement of Operations Information:
 
 
 
 
 
Total revenues
$
20,351,843

 
$
17,017,831

 
$
10,359,041

Total expenses
(10,962,484
)
 
(9,054,415
)
 
(5,239,634
)
Net unrealized appreciation/(depreciation)
(9,055,476
)
 
(1,358,880
)
 
(181,485
)
Net realized gain/(loss)
(772,239
)
 
1,048,233

 
852,684

Net income/(loss)
$
(438,356
)
 
$
7,652,769

 
$
5,790,606


Unconsolidated Significant Subsidiaries

In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, the Company must determine which of its unconsolidated Control Investments, if any, are considered “significant subsidiaries.” In evaluating these investments, there are three tests utilized to determine if any Controlled Investments are considered significant subsidiaries: the investment test, the asset test and the income test. Rule 3-09 of Regulation S-X requires the Company to include separate audited financial statements of any unconsolidated majority-owned subsidiary (Control Investments in which the Company owns greater than 50% of the voting securities) in an annual report if any of the three tests exceed 20%. Rule 4-08(g) of Regulation S-X requires summarized financial information of Control Investments in an annual report if any of the three tests exceeds 10%, and summarized financial information in a quarterly report if any of the three tests exceeds 20% pursuant to Rule 10-01(b)(1) of Regulation S-X.

For the year ended September 30, 2019, the Company had no single Control Investment which would be deemed to be a significant subsidiary pursuant to Rules 3-09 and 4-08(g) of Regulation S-X.

After performing the income analysis for the year ended September 30, 2018, our investment in OmniVere, LLC exceeded the 10% threshold under Rule 4-08(g). Accordingly, the following tables show summarized unaudited financial information for OmniVere, LLC:

F-45



 
September 30, 2018
 
September 30, 2017
Balance Sheet Data(1)(2)
 
 
 

Current assets
$
4,382,427

 
$
9,835,601

Non-current assets
$
43,058,791

 
$
49,299,270

Current liabilities
$
4,443,543

 
$
8,500,669

Non-current liabilities
$
116,088,427

 
$
99,679,770

 
For the twelve months ended September 30, 2018
 
For the twelve months ended September 30, 2017
 
For the twelve months ended September 30, 2016
Summary of Operations(1)(2)
 
 
 
 
 
Total revenues
$
16,576,365

 
$
32,339,457

 
$
37,064,767

Cost of sales
12,020,480

 
22,178,656

 
29,211,587

Operating expenses
15,902,280

 
23,831,050

 
18,130,485

Other expenses
12,709,467

 
10,875,720

 
11,050,052

Net loss
$
(24,055,862
)
 
$
(24,545,969
)
 
$
(21,327,357
)

After performing the income analysis for the year ended September 30, 2017, our investment in NVTN LLC exceeded the 10% threshold under Rule 4-08(g). Accordingly, the following tables show summarized unaudited financial information for NVTN LLC:
 
September 30, 2019
 
September 30, 2018
Balance Sheet Data(1)
 
 
 

Current assets
$
3,008,546

 
$
3,615,917

Non-current assets
$
27,527,487

 
$
33,770,103

Current liabilities
$
2,651,531

 
$
2,550,219

Non-current liabilities
$
36,998,068

 
$
32,474,480

 
For the twelve months ended September 30, 2019
 
For the twelve months ended September 30, 2018
 
Period from November 9, 2016 through September 30, 2017
Summary of Operations(1)
 
 
 
 
 
Total revenues
$
32,392,716

 
$
31,260,430

 
$
38,347,251

Cost of sales
8,175,612

 
7,920,057

 
9,289,103

Operating expenses
23,908,837

 
22,637,032

 
27,105,300

Other expenses
5,169,770

 
4,267,307

 
6,707,925

Net loss
$
(4,861,503
)
 
$
(3,563,966
)
 
$
(4,755,077
)

(1)
All amounts are unaudited.
(2)
Omnivere, LLC was liquidated in December of 2018. As such, summary financials are only posted through September 30, 2018.

The Company also determined that the assets of MCC JV represented greater than 10% of its total assets and also generated more than 10% of the Company’s total income primarily due to dividend income. Accordingly, the related summary financial information is presented in the “MCC Senior Loan Strategy JV I LLC” heading above.

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.

F-46




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 the 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. During the year ended September 30 2019, none of our investments transferred in or out of Level 3.

The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of September 30, 2019 (dollars in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Senior Secured First Lien Term Loans
$

 
$

 
$
192,770

 
$
192,770

Senior Secured Second Lien Term Loans

 

 
36,508

 
36,508

Senior Secured First Lien Notes

 

 

 

Unsecured Debt

 

 
2,653

 
2,653

Equity/Warrants
13,850

 

 
78,329

 
92,179

Total
$
13,850

 
$

 
$
310,260

 
$
324,110

Investments measured at net asset value(1)
 

 
 

 
 

 
72,779

Total Investments, at fair value
 

 
 

 
 

 
$
396,889


The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of September 30, 2018 (dollars in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Senior Secured First Lien Term Loans
$

 
$

 
$
395,015

 
$
395,015

Senior Secured Second Lien Term Loans

 

 
48,890

 
48,890

Senior Secured First Lien Notes

 

 
19,268

 
19,268

Unsecured Debt

 

 
3,381

 
3,381

Equity/Warrants

 
50

 
107,955

 
108,005

Total
$


$
50


$
574,509


$
574,559

Investments measured at net asset value(1)
 

 
 

 
 

 
80,871

Total Investments, at fair value
 

 
 

 
 

 
$
655,430


(1)
Certain investments that are measured at fair value using NAV have not been categorized in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amount presented in the Consolidated Statements of Assets and Liabilities.
 
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended September 30, 2019 (dollars in thousands): 
 
Senior
Secured
First Lien
Term
Loans
 
Senior
Secured
Second
Lien Term
Loans
 
Senior
Secured
First Lien
Notes
 
Unsecured
Debt
 
Equities/Warrants
 
Total
Balance as of September 30, 2018
$
395,015

 
$
48,890

 
$
19,268

 
$
3,381

 
$
107,955

 
$
574,509

Purchases and other adjustments to cost
7,116

 
1,801

 

 
(647
)
 
(9,783
)
 
(1,513
)
Originations
58,386

 
2,000

 

 

 
387

 
60,773

Sales
(144,081
)
 
(11,828
)
 

 

 

 
(155,909
)
Settlements
(56,346
)
 
(2,161
)
 
(20,000
)
 
(22
)
 
(25,501
)
 
(104,030
)
Net realized gains/(losses) from investments
(97,534
)
 
114

 

 
(22,787
)
 
7,333

 
(112,874
)
Net transfers in and/or out of Level 3

 

 

 

 

 

Net unrealized gains/(losses)
30,214

 
(2,308
)
 
732

 
22,728

 
(2,062
)
 
49,304

Balance as of September 30, 2019
$
192,770


$
36,508


$


$
2,653


$
78,329


$
310,260

  
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended September 30, 2018 (dollars in thousands):

F-47



 
Senior
Secured
First Lien
Term
Loans
 
Senior
Secured
Second
Lien Term
Loans
 
Senior
Secured
First Lien
Notes
 
Unsecured
Debt
 
Equities/Warrants
 
Total
Balance as of September 30, 2017
$
537,163

 
$
135,826

 
$
20,478

 
$

 
$
80,260

 
$
773,727

Purchases and other adjustments to cost
25,218

 
1,028

 
6

 
3,381

 
6,344

 
35,977

Originations
106,664

 
17,093

 

 

 
20,245

 
144,002

Sales
(29,291
)
 
(17,714
)
 
(7,013
)
 

 

 
(54,018
)
Settlements
(135,524
)
 
(75,460
)
 

 

 

 
(210,984
)
Net realized gains/(losses) from investments
(50,726
)
 
(37,670
)
 
239

 

 
(1,174
)
 
(89,331
)
Net transfers in and/or out of Level 3

 

 
7,067

 

 
59

 
7,126

Net unrealized gains/(losses)
(58,489
)
 
25,787

 
(1,509
)
 

 
2,221

 
(31,990
)
Balance as of September 30, 2018
$
395,015


$
48,890


$
19,268


$
3,381


$
107,955


$
574,509

 
Net change in unrealized loss included in earnings related to investments still held as of September 30, 2019 and 2018, was approximately $43.4 million and $72.1 million, respectively.
 
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.
 
Settlements represent principal paydowns received.

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. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. During the year ended September 30, 2019, none of our investments transferred in or out of Level 3. During the year ended September 30, 2018, one of our senior secured first lien notes with a fair value of $7.1 million, and one of our warrant positions with a fair value of $0 transferred from Level 2 to Level 3 because of the decrease in availability of the transaction data or the inputs to the valuation.

The following table presents the quantitative information about Level 3 fair value measurements of our investments, as of September 30, 2019 (dollars in thousands):
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
 
 
 
 
 
 
 
Senior Secured First Lien Term Loans
$
141,337

 
Income Approach (DCF)
 
Market yield
 
6.38% - 16.98% (10.49%)
Senior Secured First Lien Term Loans
43,960

 
Market Approach (Guideline Comparable)/Market Approach (Comparable Transactions)/Income Approach (DCF)/ Enterprise Value Analysis
 
Revenue Multiple(1)
EBITDA Multiple(1)
Discount rate
Expected Proceeds
 
0.25x - 0.25x (0.25x)
3.50x - 6.00x (4.95x)
9.00% - 18.70% (16.53%)
$9.0M - $16.2M ($9.0M)
Senior Secured First Lien Term Loans
7,473

 
Recent Arms-Length Transaction
 
Recent Arms Length Transaction
 
N/A
Senior Secured Second Lien Term Loan
17,250

 
Income Approach (DCF)
 
Market yield
 
9.78% - 29.76% (14.66%)
Senior Secured Second Lien Term Loans
19,258

 
Market Approach (Guideline Comparable)/Income Approach (DCF)
 
EBITDA Multiple(1)
Discount Rate
 
4.50x - 6.00x (5.97x)
16.40% - 16.40% (16.40%)
Unsecured Debt
850

 
Income Approach (DCF)
 
Market yield
 
7.43%
Unsecured Debt
1,803

 
Market Approach (Guideline Comparable)
 
EBITDA Multiple(1)
 
4.00x - 7.00x (6.54x)
Equity
75,983

 
Market Approach (Guideline Comparable)/Market Approach (Comparable Transactions)/Income Approach (DCF)/Enterprise Value Analysis
 
Revenue Multiple(1)
EBITDA Multiple(1)
Discount rate
Expected Proceeds
 
0.88x - 0.88x (0.69x)
3.50x - 9.50x (8.72x)
9.00% - 22.50% (14.68%)
$16.2M - $47.5M ($53.1M)
Equity
2,346

 
Recent Arms-Length Transaction
 
Recent Arms Length Transaction
 
N/A
Total
$
310,260

 
 
 
 
 
 

The following table has been modified to conform to the current year presentation, and presents the quantitative information about Level 3 fair value measurements of our investments, as of September 30, 2018 (dollars in thousands):

F-48



 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
 
 
 
 
 
 
 
Senior Secured First Lien Term Loans
$
175,233

 
Income Approach (DCF)
 
Market Yield
 
7.18% - 16.87% (10.80%)
Senior Secured First Lien Term Loans
113,178

 
Market Approach (Guideline Comparable)/Market Approach (Comparable Transactions)/Income Approach (DCF)/ Enterprise Value Analysis
 
Revenue Multiple(1)
EBITDA Multiple(1)
Discount Rate
Expected Proceeds
 
0.75x - 1.35x (0.87x)
3.50x - 7.00x (5.93x)
10.00% - 18.00% (16.77%)
$0.0M - $127.5M ($76.8M)
Senior Secured First Lien Term Loans
106,604

 
Recent Arms-Length Transaction
 
Recent Arms Length Transaction
 
N/A
Senior Secured First Lien Notes
19,268

 
Income Approach (DCF)
 
Market Yield
 
14.17%
Senior Secured Second Lien Term Loans
33,376

 
Income Approach (DCF)
 
Market Yield
 
8.99% - 14.17% (11.29%)
Senior Secured Second Lien Term Loans
15,113

 
Market Approach (Guideline Comparable)/Income Approach (DCF)
 
Revenue Multiple(1)
EBITDA Multiple(1)
Discount Rate
 
0.60x - 0.80x (0.70x)
6.75x - 7.75x (7.25x)
15.50% - 17.50% (16.50%)
Senior Secured Second Lien Term Loans
401

 
Recent Arms-Length Transaction
 
Recent Arms Length Transaction
 
N/A
Unsecured Debt

 
Enterprise Value Analysis
 
Expected Proceeds
 
$0.0M - $0.0M ($0.0M)
Unsecured Debt
3,381

 
Recent Arms-Length Transaction
 
Recent Arms Length Transaction
 
N/A
Equity
6,678

 
Income Approach (DCF)
 
Market Yield
 
8.75%
Equity
97,107

 
Market Approach (Guideline Comparable)/Market Approach (Comparable Transactions)/Income Approach (DCF)/Enterprise Value Analysis
 
Revenue Multiple(1)
EBITDA Multiple(1)
Discount Rate
Expected Proceeds
 
0.70x - 1.35x (0.69x)
4.50x - 13.00x (9.60x)
10.00% - 21.50% (14.79%)
$0.0M - $5.7M ($0.0M)
Equity
4,170

 
Recent Arms-Length Transaction
 
Recent Arms Length Transaction
 
N/A
Total
$
574,509

 
 
 
 
 
 

(1)
Represents inputs used when the Company has determined that market participants would use such multiples when measuring the fair value of these investments.

Increases or decreases in any of the above unobservable inputs in isolation would result in a lower or higher fair value measurement for such assets.

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 3.8% membership interest in Global Accessories, which is included in the Consolidated Schedule of Investments. As part of the agreement, the Company is entitled to contingent consideration in the form of cash payments (“Earnout”), as well as up to an additional 5% membership interest (“AMI”), provided Global Accessories achieves certain financial benchmarks over specified time frames. The Earnout and AMI were initially recorded an aggregate fair value of $2.4 million on the transaction date using the Income Approach and were included on the Consolidated Statements of Assets and Liabilities in other assets. The contingent consideration will be remeasured to fair value at each reporting date until the contingency is resolved. Any changes in fair value will be recognized in earnings. As of September 30, 2019, the fair value of the contingent consideration was $1.8 million. As of September 30, 2018 the Earnout and AMI had an aggregate fair value of $2.4 million.

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 200% after giving effect to such leverage. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing.

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 200% to 150%, if certain requirements under the 1940 Act are met. Under the 1940 Act, we are allowed to increase our leverage capacity if stockholders representing at least a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive stockholder approval, we would be allowed to increase our leverage capacity on the first day after such approval. Alternatively, the 1940 Act allows the majority of our independent directors to approve an increase in our leverage capacity, and such approval would become effective after the one-year anniversary of such approval. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage.

As of September 30, 2019, the Company’s asset coverage was 184.2% after giving effect to leverage and therefore the Company’s asset coverage is below 200%, the minimum asset coverage requirement under the 1940 Act. As a result, the Company is prohibited from making distributions to stockholders, including the payment of any dividend, and may not employ further leverage until the Company’s asset coverage is at least 200% after giving effect to such leverage.

F-49




The Company’s outstanding debt excluding debt issuance costs as of September 30, 2019 and 2018 was as follows (dollars in thousands):
 
September 30, 2019
 
September 30, 2018
 
Aggregate
Principal
Amount
Available
 
Principal
Amount
Outstanding
 
Carrying
Value
 
Fair
Value
 
Aggregate
Principal
Amount
Available
 
Principal
Amount
Outstanding
 
Carrying
Value
 
Fair
Value
2021 Notes
$
74,013

 
$
74,013

 
$
74,013

 
$
72,473

 
$
74,013

 
$
74,013

 
$
74,013

 
$
74,960

2023 Notes
77,847

 
77,847

 
77,847

 
74,453

 
89,847

 
89,847

 
89,847

 
89,128

Israeli 2021 Notes
105,137

 
105,137

 
105,137

 
104,604

 
121,276

 
121,276

 
121,276

 
112,993

SBA Debentures

 

 

 

 
135,000

 
135,000

 
135,000

 
135,000

Total
$
256,997

 
$
256,997

 
$
256,997

 
$
251,530

 
$
420,136

 
$
420,136

 
$
420,136

 
$
412,081

  
Credit Facilities

Term Loan Facility

The Company had a Senior Secured Term Loan Credit Agreement, as amended (the ‘‘Term Loan Facility’’), that was scheduled to mature on July 28, 2020.

On September 1, 2017, the Company reduced the Term Loan Facility commitment to $102.0 million from $174.0 million. The reduction was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $0.6 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.

On January 31, 2018, the Company voluntarily prepaid the remaining $102.0 million outstanding on the Term Loan Facility in accordance with its terms. The payment was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $0.9 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.

Revolving Credit Facility

The Company had a Senior Secured Revolving Credit Agreement, as amended (the ‘‘Revolving Credit Facility’’ and collectively with the Term Loan Facility, the ‘‘Facilities’’), with ING Capital LLC, as Administrative Agent, in order to borrow funds to make additional investments.

The pricing on the Revolving Credit Facility was LIBOR (with no minimum) plus 2.75% and had a revolving period that was to end July 28, 2019, followed by a one year amortization period and a final maturity on July 28, 2020.

On February 14, 2017, the Company elected to reduce the total commitment of the Revolving Credit Facility to $200.0 million from $343.5 million. The reduction was accounted for as a debt modification to a line-of credit or revolving-debt arrangement in accordance with ASC 470-50, Modifications and Extinguishments, which attributed to an acceleration of debt issuance costs in the amount of $1.3 million and recorded on the Consolidated Statements of Operations as a component of interest and financing expenses.

On February 12, 2018, the Company elected to reduce the total commitment of the Revolving Credit Facility to $150.0 million from $200.0 million. The reduction was accounted for as a debt modification to a line-of credit or revolving-debt arrangement in accordance with ASC 470-50, Modifications and Extinguishments, which attributed to an acceleration of debt issuance costs in the amount of $0.4 million and recorded on the Consolidated Statements of Operations as a component of interest and financing expenses.

On September 28, 2018, the Company voluntarily satisfied and terminated the commitments under the Revolving Credit Facility in accordance with its terms. The termination was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $1.0 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.

The following table shows the components of interest expense, commitment fees related to the Facilities, amortized debt issuance costs, weighted average stated interest rate and weighted average outstanding debt balance for the Facilities for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):
 
For the years ended September 30
 
2019
 
2018
 
2017
Revolving Facility interest
$

 
$
729

 
$
586

Revolving Facility commitment fee

 
1,521

 
2,419

Term Facility interest

 
1,505

 
6,662

Amortization of debt issuance costs

 
1,087

 
2,870

Agency and other fees

 
138

 
77

Total
$


$
4,980

 
$
12,614

Weighted average stated interest rate
%
 
4.4
%
 
4.0
%
Weighted average outstanding balance
$

 
$
50,900

 
$
182,711



F-50



Unsecured Notes

2019 Notes

On March 21, 2012, the Company issued $40.0 million in aggregate principal amount of 7.125% unsecured notes which were scheduled to mature on March 30, 2019 (the "2019 Notes"). The 2019 Notes bore interest at a rate of 7.125% per year, and were payable quarterly on March 30, June 30, September 30 and December 30 of each year, beginning June 30, 2012. The 2019 Notes were listed on the NYSE and traded thereon under the trading symbol “MCQ”. On February 22, 2017, the 2019 Notes were redeemed at par plus accrued and unpaid interest. 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 $0.5 million and was
recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.

2021 Notes

On December 17, 2015, the Company issued $70.8 million in aggregate principal amount of 6.50% unsecured notes that mature on January 30, 2021 (the “2021 Notes”). On January 14, 2016, the Company closed an additional $3.25 million in aggregate principal amount of the 2021 Notes, pursuant to the partial exercise of the underwriters’ option to purchase additional notes. The 2021 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after January 30, 2019. The 2021 Notes bear interest at a rate of 6.50% per year, payable quarterly on January 30, April 30, July 30 and October 30 of each year, beginning January 30, 2016. The 2021 Notes are listed on the NYSE and trade thereon under the trading symbol “MCX”.

2023 Notes

On March 18, 2013, the Company issued $60.0 million in aggregate principal amount of 6.125% unsecured notes that mature on March 30, 2023 (the “2023 Notes,” and together with the 2021 Notes, the "U.S. Notes”). On March 26, 2013, the Company closed an additional $3.5 million in aggregate principal amount of the 2023 Notes, pursuant to the partial exercise of the underwriters’ option to purchase additional 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. The 2023 Notes bear 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. The 2023 Notes are listed on the NYSE and trade thereon under the trading symbol “MCV”.

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.

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.

Secured Notes

Israeli 2021 Notes

On January 26, 2018, the Company priced a debt offering in Israel of $121.3 million Israeli 2021 Notes (collectively with the U.S. Notes, the "Notes"). The Israeli 2021 Notes are listed on the TASE and denominated in New Israeli Shekels, but linked to the US Dollar at a fixed exchange rate which mitigates any currency exposure to the Company. The Israeli 2021 Notes have not been and will not be registered under the Securities Act of 1933, and may not be offered or sold in the United States absent registration under the Securities Act or in transactions exempt from, or not subject to, such registration requirements. In connection with this offering, we have dual listed our common stock on the TASE.

On August 12, 2019, the Company and its wholly owned subsidiaries, Medley Small Business Fund, LP (formerly known as Medley SBIC, LP) (“Medley Small Business Fund”) and Medley SLF Funding I LLC (“Medley SLF”), on the one hand, and the Trustee, on the other hand, entered into an amendment to the deed of trust (the “Deed”) governing the Israeli 2021 Notes (the “Amendment”). The Amendment amends the Deed by, among other things: (a) modifying Section 2.2 of the Deed to provide for full repayment of the Israeli 2021 Notes in eight (8) equal installments, each comprising twelve and one-half percent (12.5%) of the principal amount of the Israeli 2021 Notes, beginning on August 12, 2019 (the “Effective Date”) and ending on January 31, 2021, rather than four (4) equal annual installments, each comprising twenty five percent (25%) of the principal amount of the Israeli 2021 Notes, that were payable on February 27 of each of the years 2021-2024 (inclusive); (b) changing the interest payment dates for the Israeli 2021 Notes from semi-annual to quarterly except for the initial interest payment, which was paid on the Effective Date, and the final interest payment, which will be paid on January 31, 2021; (c) decreasing the annual interest rate on the Israeli 2021 Notes by 0.25% per annum on the Effective Date and further decreasing the annual interest rate on the Israeli 2021 Notes by 0.50% per annum if  the Mergers close, which further decrease will be effective upon the closing of the Mergers; (d) decreasing the minimum Total Net Asset covenant in Section 6.1.1 of the Deed from $275 million to $215 million; (e) modifying the acceleration event in Section 10.1.25 of the Deed to provide that it will occur if the credit rating on the Israeli 2021 Notes drops below (i) il/B of Maalot before November 30, 2019, (ii) il/BB- of Maalot during the period between December 1, 2019 and April 1, 2020, and (iii) il/BBB- of Maalot on or after April 1, 2020; (f) waiving the make-whole and market value payment requirements of Section 9.1.7 of the Deed for all early redemption payments on the Israeli 2021 Notes within eighteen (18) months following the Effective Date; (g) requiring each of Medley Small Business Fund and Medley SLF to guarantee all of the Company’s obligations under the Deed (including the Amendment) and the Israeli 2021 Notes and to grant security interests on all of their assets (the “Collateral”) to secure such guaranties and providing for the termination of the Medley SLF guaranty and release of the security interests in Medley SLF’s assets upon the closing of the Mergers, subject to certain limitations; (h) that the Company use principal collections from the

F-51



Collateral to make early redemption payments on the Israeli 2021 Notes, which payments will be applied in inverse order of the maturity of the required principal installment payments on the Israeli 2021 Notes; (i) providing for a waiver by the Trustee and the holders of the Israeli 2021 Notes of any right to accelerate the full balance of the amount due to the holders of the Israeli 2021 Notes based on any claims, allegations, actions, and/or rights that were raised, and/or resulting or deriving from certain claims or allegations as set forth in Section 19.1 of the Amendment; (j) providing for a waiver by the Trustee and the holders of the Israeli 2021 Notes of certain claims, demands, rights, and/or actions against and/or relating to the Company, its subsidiaries and/or affiliates and their respective employees (including their respective directors, officers, members of the Company’s board of directors, employees, stockholders, stakeholders and advisors); and (k) adding other definitions, representations and covenants to the Deed and making related conforming changes to the Deed. Pursuant to the Amendment, no prepayment penalties were due or payable in connection with the payment of principal made by the Company on the Effective Date.

The Deed (including the Amendment) includes certain customary covenants, including minimum net assets of $215 million and a maximum debt to total assets ratio of 70%. The date for determining compliance with these financial covenants is the date that the Company publishes its financial statements (i.e., in a quarterly report on Form 10-Q or an annual report on Form 10-K) with the SEC. If the Company does not satisfy these financial covenants for two consecutive quarters, it is an event of default under the Deed. If this event of default is expected to occur, the Company has the right to request the trustee for the Israeli 2021 Notes (the “Trustee”) to appoint an emergency committee of the three largest noteholders for the purpose of obtaining a one-quarter extension of time to satisfy the financial covenants. If the Company does not make this request and the breach occurs, or if the emergency committee does not grant the extension, then the Trustee is required to convene a meeting of the noteholders as described below.

In addition to not complying with the financial covenants as described above, the events of default include: (i) a change of control of the Company (defined in the Deed as MCC Advisors’ ceasing to provide investment management or advisory services to the Company); (ii) the Company not publishing a tender offer for the purchase of all of the Israeli 2021 Notes within 45 days; (iii) the Company not paying any amount due and payable to the holders of the Israeli 2021 Notes within seven business days after the payment due date; (iv) certain insolvency and receivership events with respect to the Company or with respect to all or substantially all of its assets, and (v) the Israeli 2021 Notes being delisted from the TASE or the TASE’s suspension of trading of the Israeli 2021 Notes for more than 60 days.

If an event of default occurs under the Deed, there is no automatic acceleration or mandatory redemption of the Israeli 2021 Notes. Rather, the Trustee is required to convene a meeting of the noteholders for a vote on whether to accelerate the Israeli 2021 Notes. Noteholders holding at least 50% of the principal amount of the Israeli 2021 Notes must be present at the meeting for a quorum to exist, and if a quorum exists, then the vote of a majority of the noteholders present at the meeting controls.

As of September 30, 2019, we have net assets of $216.4 million a maximum debt to total assets ratio of below 70%. Therefore, as of September 30, 2019, we were in compliance with the minimum net assets covenant under the Israeli 2021 Notes. However, if we experience realized losses or unrealized declines in the fair value of the Company’s portfolio investments due to either portfolio company specific or macro-economic factors, it is reasonably likely, absent injection of capital or waivers or an amendment to the covenants set forth in the Deed (including the Amendment), that we could not satisfy the minimum net assets covenant under the Israeli 2021 Notes as early as the date we publish financial statements for the quarter ending December 31, 2019, which would be no later than February 21, 2020. While there are no immediate consequences to breaching this financial covenant for a single period, if the Company reports net assets of less than $215 million for two consecutive quarters and does not obtain a one-quarter extension of time as described above, the holders of the Israeli 2021 Notes can require the Trustee to accelerate the Israeli 2021 Notes. In that regard, if the Company’s net assets are below $215 million as of December 31, 2019, and the Company’s net assets remain below $215 million as of March 31, 2020, and the Company does not obtain an extension of time for compliance as described above or an adequate waiver or amendment, then an event of default on the Israeli 2021 Notes will occur on the date that the Company publishes its quarterly report on Form 10-Q for the fiscal quarter ending March 31, 2020, which would be no later than May 11, 2020.

As of September 30, 2019, the Company’s net assets are $216.4 million, resulting in a cushion of approximately $1.4 million. It is reasonably likely that the Company’s net assets could decline by more than $1.4 million by December 31, 2019, which would result in a breach of the financial covenant described above.  To address these matters, we may pursue alternatives which could include discussions with the Trustee and holders of the Israeli 2021 Notes regarding potential waivers and/or an amendment to the covenants set forth in the Deed. Any such waivers or an amendment may be subject to conditions that may not be satisfied. If market or other conditions are not favorable, or if such discussions do not result in a favorable outcome, we may be unable to take any such actions or obtain waivers or an amendment from the trustee or holders of the Israeli 2021 Notes. In addition, the Company is also exploring the possibility of raising additional capital, which will have the effect of increasing the Company’s net assets, as another means to cure any future non-compliance with the financial covenants of the Deed. The Company continues to actively pursue the Mergers. If the Mergers are consummated, we expect it would result in the Company’s ability to comply with the financial covenants described above as the Combined Company is projected to have net assets well in excess of $215 million and debt to total assets ratio well below 70%. Alternatively, we believe we have the ability to sell certain portfolio investments and reduce other controllable cash outflows in order to increase our liquidity to levels sufficient to meet our debt obligations under the Israeli 2021 Notes and any other anticipated cash needs to meet our obligations as they become due.

The foregoing description of the terms of Israeli 2021 Notes, the Deed, and the Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of each of the Deed and the Amendment incorporated by reference as an exhibit to this annual report on Form 10-K.

As described above, the following is a summary of the Collateral to secure the guarantee of all of the Company’s obligations under the Deed (including the Amendment) and the Israeli 2021 Notes by Medley Small Business Fund and Medley SLF as of September 30, 2019.


Company
 
Industry
 
Type of Investment
 
Maturity
 
Par Amount
 
Cost
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Medley SLF Funding I LLC
 
 
 
 
 
 
 
 

F-52



 
 
 
 
 
 
 
 
 
 
 
 
 
Alpine SG, LLC
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.50% Cash, 1.00% LIBOR Floor)
 
11/16/2022
 
$
5,061,750

 
$
5,061,750

 
$
5,020,244

 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 5.50% Cash, 1.00% LIBOR Floor)
 
11/16/2022
 
2,444,350

 
2,444,350

 
2,424,306

 
 
 
 
 
 
 
 
7,506,100

 
7,506,100

 
7,444,550

 
 
 
 
 
 
 
 
 
 
 
 
 
Barry's Bootcamp Holdings, LLC
 
Services:  Consumer
 
Revolving Credit Facility (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)
 
7/14/2022
 
4,400,000

 
4,400,000

 
4,400,000

 
 
 
 
 
 
 
 
4,400,000

 
4,400,000

 
4,400,000

 
 
 
 
 
 
 
 
 
 
 
 
 
DataOnline Corp.
 
High Tech Industries
 
Senior Secured First Lien Term Loan (LIBOR + 5.75% Cash, 1.00% LIBOR Floor)
 
7/31/2025
 
6,084,750

 
6,084,750

 
5,995,304

 
 
 
 
 
 
 
 
6,084,750

 
6,084,750

 
5,995,304

 
 
 
 
 
 
 
 
 
 
 
 
 
L & S Plumbing Partnership, Ltd.
 
Construction & Building
 
Senior Secured First Lien Term Loan (LIBOR + 7.50% Cash, 1.00% LIBOR Floor)
 
2/15/2022
 
3,070,180

 
3,070,180

 
3,070,180

 
 
 
 
 
 
 
 
3,070,180

 
3,070,180

 
3,070,180

 
 
 
 
 
 
 
 
 
 
 
 
 
Starfish Holdco, LLC
 
High Tech Industries
 
Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)
 
8/18/2025
 
2,000,000

 
1,975,691

 
1,977,000

 
 
 
 
 
 
 
 
2,000,000

 
1,975,691

 
1,977,000

 
 
 
 
 
 
 
 
 
 
 
 
 
US Multifamily, LLC
 
Banking, Finance, Insurance & Real Estate
 
Senior Secured First Lien Term Loan (10.00% Cash)
 
6/17/2021
 
6,670,000

 
6,670,000

 
6,670,000

 
 
 
 
 
 
 
 
6,670,000

 
6,670,000

 
6,670,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal Medley SLF Funding I LLC Investments
 
 
 
$
29,731,030

 
$
29,706,721

 
$
29,557,034

 
 
 
 
 
 
 
 
 
 
 
 
 
Medley Small Business Fund, LP
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Barry's Bootcamp Holdings, LLC
 
Services:  Consumer
 
Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)
 
7/14/2022
 
$
7,609,499

 
$
7,609,499

 
$
7,609,499

 
 
 
 
 
 
 
 
7,609,499

 
7,609,499

 
7,609,499

 
 
 
 
 
 
 
 
 
 
 
 
 
Black Angus Steakhouses, LLC
 
Hotel, Gaming & Leisure
 
Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)
 
4/24/2020
 
7,341,518

 
7,341,518

 
7,307,747

 
 
 
 
 
 
 
 
7,341,518

 
7,341,518

 
7,307,747

 
 
 
 
 
 
 
 
 
 
 
 
 
Dermatologists of Southwestern Ohio, LLC
 
Healthcare & Pharmaceuticals
 
Senior Secured First Lien Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)
 
4/20/2022
 
1,065,457

 
1,065,457

 
1,056,614

 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)
 
4/20/2022
 
404,248

 
404,248

 
400,893

 
 
 
 
 
 
 
 
1,469,705

 
1,469,705

 
1,457,507

 
 
 
 
 
 
 
 
 
 
 
 
 
FKI Security Group, LLC
 
Capital Equipment
 
Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)
 
3/30/2020
 
10,906,250

 
10,906,250

 
10,680,491

 
 
 
 
 
 
 
 
10,906,250

 
10,906,250

 
10,680,491

 
 
 
 
 
 
 
 
 
 
 
 
 
Impact Group, LLC
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)
 
6/27/2023
 
3,254,623

 
3,254,623

 
3,104,911


F-53



 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)
 
6/27/2023
 
9,430,010

 
9,430,010

 
8,996,229

 
 
 
 
 
 
 
 
12,684,633

 
12,684,633

 
12,101,140

 
 
 
 
 
 
 
 
 
 
 
 
 
InterFlex Acquisition Company, LLC
 
Containers, Packaging & Glass
 
Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)
 
8/18/2022
 
8,839,450

 
8,839,450

 
8,424,880

 
 
 
 
 
 
 
 
8,839,450

 
8,839,450

 
8,424,880

 
 
 
 
 
 
 
 
 
 
 
 
 
RateGain Technologies, Inc.
 
Hotel, Gaming & Leisure
 
Unsecured Debt
 
7/31/2020
 
304,735

 
304,735

 
304,735

 
 
 
 
Unsecured Debt
 
7/31/2021
 
304,735

 
304,735

 
304,735

 
 
 
 
 
 
 
 
609,470

 
609,470

 
609,470

 
 
 
 
 
 
 
 
 
 
 
 
 
SFP Holding, Inc.
 
Construction & Building
 
Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)
 
9/1/2022
 
4,820,605

 
4,820,605

 
4,775,291

 
 
 
 
Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)
 
9/1/2022
 
1,871,234

 
1,871,234

 
1,853,644

 
 
 
 
Equity - 73,113.54 Common Units in CI (Summit) Investment Holdings LLC
 
 
 

 
736,905

 
658,022

 
 
 
 
 
 
 
 
6,691,839

 
7,428,744

 
7,286,957

 
 
 
 
 
 
 
 
 
 
 
 
 
Ship Supply Acquisition Corporation
 
Services:  Business
 
Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)
 
7/31/2020
 
7,330,098

 
7,136,156

 

 
 
 
 
 
 
 
 
7,330,098

 
7,136,156

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Walker Edison Furniture Company LLC
 
Consumer goods:  Durable
 
Senior Secured First Lien Term Loan (LIBOR + 6.50% Cash, 1.00% LIBOR Floor)
 
9/26/2024
 
3,611,900

 
3,611,900

 
3,611,900

 
 
 
 
 
 
 
 
3,611,900

 
3,611,900

 
3,611,900

 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal Medley Small Business Fund, LP Investments
 
 
 
$
67,094,362

 
$
67,637,325

 
$
59,089,591

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Medley SLF Funding I LLC and Medley SLF Funding I LLC Investments
 
$
96,825,392

 
$
97,344,046

 
$
88,646,625


On June 5, 2018, the Company announced that on June 1, 2018, its board of directors authorized the Company to repurchase and retire up to $20 million of the Company’s outstanding Israel 2021 Notes on the TASE. Execution of the repurchase plan is subject to an open trading window for the Company and continued liquidity at that time and is expected to continue until the full authorized amount is purchased or market conditions change. The repurchase of the Israel 2021 Notes is not expected to result in any material tax consequences to the Company or its note holders.

During the quarter ended December 31, 2018, the Company exchanged $1.0 million United States Dollars to New Israeli Shekels at a rate of 3.73 USD/NIS in order to repurchase the Israel 2021 Notes on the TASE. As the Israel 2021 Notes were trading below par at the time of the repurchase, and the USD/NIS (foreign currency) spot rate was higher than the fixed exchange rate agreed upon in the deed of trust, the Company was able to repurchase and retire 3,812,000 units, which resulted in $1,119,201 aggregate principal amount of the Israel 2021 Notes being retired. The redemption was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized gain of $0.1 million and was recorded on the Consolidated Statements of Operations as a gain on extinguishment of debt.

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 September 30, 2019 and 2018, the Notes would be deemed to be Level 1 in the fair value hierarchy, as defined in Note 4.

In accordance with ASU 2015-03, the debt issuance costs related to the Notes are reported on the Consolidated Statements of Assets and Liabilities as a direct deduction from the face amount of the Notes. As of September 30, 2019 and 2018, debt issuance costs related to the Notes were as follows (dollars in thousands): 

F-54



 
September 30, 2019
 
September 30, 2018
 
2021
Notes
 
2023
Notes
 
Israeli 2021
Notes
 
Total
 
2021
Notes
 
2023
Notes
 
Israeli 2021
Notes
 
Total
Total Debt Issuance Costs
$
3,226

 
$
3,102

 
$
6,287

 
$
12,615

 
$
3,226

 
$
3,102

 
$
6,287

 
$
12,615

Amortized Debt Issuance Costs
2,385

 
2,127

 
2,829

 
7,341

 
1,756

 
1,656

 
965

 
4,377

Unamortized Debt Issuance Costs
$
841

 
$
975

 
$
3,458

 
$
5,274

 
$
1,470

 
$
1,446

 
$
5,322

 
$
8,238


For the years ended September 30, 2019, 2018 and 2017, the components of interest expense, amortized debt issuance costs, weighted average stated interest rate and weighted average outstanding debt balance for the Notes were as follows (dollars in thousands):
 
For the years ended September 30
 
2019
 
2018
 
2017
2019 Notes interest
$

 
$

 
$
1,116

2021 Notes interest
4,811

 
4,811

 
4,811

2023 Notes interest
4,954

 
5,857

 
5,686

2023 Notes premium
(3
)
 
(3
)
 
(2
)
Israeli 2021 Notes interest
6,817

 
4,366

 
N/A

Amortization of debt issuance costs
2,735

 
1,936

 
1,040

Total
$
19,314


$
16,967

 
$
12,651

Weighted average stated interest rate
6.1
%
 
6.0
%
 
6.4
%
Weighted average outstanding balance
$
273,211

 
$
251,924

 
$
182,016


SBA Debentures

On March 26, 2013, SBIC LP received a SBIC license from the SBA. The SBIC license allowed SBIC LP to obtain leverage by issuing SBA-guaranteed debentures (“SBA Debentures”), subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA Debentures were non-recourse, interest only debentures with interest payable semi-annually and had a ten year maturity. The principal amount of SBA Debentures were not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA Debentures were fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, had a superior claim to the SBIC LP’s assets over our stockholders in the event we liquidated the SBIC LP or the SBA exercised its remedies under the SBA Debentures issued by the SBIC LP upon an event of default.

On September 1, 2018, the Company repaid $15.0 million in aggregate principal amount of the SBA Debentures. The repayment 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.

SBIC LP received a letter from the SBA (the “SBA Letter”), dated March 14, 2019, informing SBIC LP of certain alleged regulatory issues constituting a default under the terms of the SBIC LP’s outstanding SBA Debentures. The SBA Letter stated that SBIC LP had until March 29, 2019, fifteen (15) days from the date of the SBA Letter, to provide the SBA with certain additional information regarding the alleged regulatory issues, unless extended by the SBA. SBIC LP’s management submitted an orderly wind-down plan to the SBA to prepay the remaining $135.0 million of outstanding SBA Debentures using available cash at SBIC LP as well as the sale of assets to third parties or affiliates of SBIC LP. On March 28, 2019, SBIC LP agreed and made a repayment of $50.0 million of outstanding SBA Debentures by April 3, 2019 using available cash at SBIC LP and the cure period was extended to April 19, 2019. On April 18, 2019, SBIC LP agreed and made a repayment of $20.0 million of outstanding SBA Debentures on April 23, 2019 and an additional $30.0 million of outstanding SBA Debentures on April 30, 2019 using proceeds from the sale of certain assets and the cure period was extended to May 10, 2019. On May 10, 2019, SBIC LP made the final repayment of the remaining $35.0 million of outstanding SBA Debentures using proceeds from the sale of certain assets. In connection therewith, effective July 1, 2019, SBIC LP surrendered its SBIC license and operates as Medley Small Business Fund.

The $135.0 million in aggregate repayments made in connection with the orderly wind-down plan was accounted for as debt extinguishments in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a cumulative realized loss of $1.8 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.

The Company believes the wind-down plan of SBIC LP will not have a material impact on the Company’s net investment income per share. In addition, the Company believes the wind-down will not have an adverse impact on the Company’s other operations. The Company has received the necessary consents and waivers under the MCC Merger Agreement to permit the repayment of the outstanding SBA Debentures.

As of September 30, 2019, Medley Small Business Fund did not have any SBA Debentures outstanding. As of September 30, 2018, SBIC LP had $75.0 million in regulatory capital and had $135.0 million SBA Debentures outstanding that mature between March 2024 and September 2025.

Our fixed-rate SBA Debentures as of September 30, 2019 and 2018 were as follows (dollars in thousands):

F-55



 
September 30, 2019
 
September 30, 2018
Rate Fix Date
Debenture
Amount
 
Fixed All-in
Interest Rate
 
Debenture
Amount
 
Fixed All-in
 Interest Rate
March 2014
$

 
%
 
$
29,000

 
3.951
%
September 2014

 

 
50,000

 
3.370

September 2014

 

 
6,000

 
3.775

September 2015

 

 
50,000

 
3.571

Weighted Average Rate/Total
$

 
%
 
$
135,000

 
3.587
%

The fair values of the SBA Debentures 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 SBA Debentures are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At September 30, 2018, the SBA Debentures were deemed to be Level 3 in the fair value hierarchy, as defined in Note 4.

In accordance with ASU 2015-03, the debt issuance costs related to the SBA Debentures are reported on the Consolidated Statements of Assets and Liabilities as a direct deduction from the face amount of the SBA Debentures. As of September 30, 2019 and 2018, debt issuance costs related to the SBA Debentures were as follows (dollars in thousands):
 
September 30, 2019
 
September 30, 2018
Total Debt Issuance Costs
$
5,138

 
$
5,138

Amortized Debt Issuance Costs
5,138

 
3,042

Unamortized Debt Issuance Costs
$


$
2,096


For the years ended September 30, 2019, 2018 and 2017, the components of interest, amortized debt issuance costs, weighted average stated interest rate and weighted average outstanding debt balance for the SBA Debentures were as follows (dollars in thousands):
 
For the years ended September 30
 
2019
 
2018
 
2017
SBA Debentures interest
$
4,445

 
$
5,408

 
$
5,458

Amortization of debt issuance costs
290

 
563

 
679

Total
$
4,735


$
5,971

 
$
6,137

Weighted average stated interest rate
5.9
%
 
3.6
%
 
3.6
%
Weighted average outstanding balance
$
74,781

 
$
148,767

 
$
150,000


Note 6. Agreements

Investment Management Agreement

We entered into an investment management agreement with MCC Advisors. Mr. Brook Taube, our Chairman and Chief Executive Officer, is a managing partner and senior portfolio manager of MCC Advisors, and Mr. Seth Taube, one of our directors, is a managing partner of MCC Advisors.

Under the terms of our investment management agreement, MCC Advisors:

determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;

identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and

executes, closes, monitors and administers the investments we make, including the exercise of any voting or consent rights.

MCC Advisors’ services under the investment management agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired.

Pursuant to our investment management agreement, we pay MCC Advisors a fee for investment advisory and management services consisting of a base management fee and a two-part incentive fee.

On December 3, 2015, MCC Advisors recommended and, in consultation with the Board, agreed to reduce fees under the investment management agreement. Beginning January 1, 2016, the base management fee was reduced to 1.50% on gross assets above $1 billion. In addition, MCC Advisors reduced its incentive fee from 20% on pre-incentive fee net investment income over an 8% hurdle, to 17.5% on pre-incentive fee net investment income over a 6% hurdle. Moreover, the revised incentive fee includes a netting mechanism and is subject to a rolling three-year look back from January 1, 2016 forward. Under no circumstances will the new fee structure result in higher fees to MCC Advisors than fees under the prior investment management agreement.

The following discussion of our base management fee and two-part incentive fee reflect the terms of the fee waiver agreement executed by MCC Advisors on February 8, 2016 (the “Fee Waiver Agreement”). The terms of the Fee Waiver Agreement are effective as of January 1, 2016, and are a permanent

F-56



reduction in the base management fee and incentive fee on net investment income payable to MCC Advisors for the investment advisory and management services it provides under the investment management agreement. The Fee Waiver Agreement does not change the second component of the incentive fee, which is the incentive fee on capital gains.

Base Management Fee

For providing investment advisory and management services to us, MCC Advisors receives a base management fee. The base management fee is calculated at an annual rate of 1.75% (0.4375% per quarter) of up to $1.0 billion of the Company’s gross assets and 1.50% (0.375% per quarter) of any amounts over $1.0 billion of the Company’s gross assets, and is payable quarterly in arrears. The base management fee will be calculated based on the average value of the Company’s gross assets at the end of the two most recently completed calendar quarters and will be appropriately pro-rated for any partial quarter. On May 4, 2018, MCC Advisors voluntarily elected to waive $380,000 of the base management fee payable for the quarter ended March 31, 2018, which is shown on the Consolidated Statements of Operations.

Incentive Fee

The incentive fee has two components, as follows:

Incentive Fee Based on Income

The first component of the incentive fee is payable quarterly in arrears and is based on our pre-incentive fee net investment income earned during the calendar quarter for which the incentive fee is being calculated. MCC Advisors is entitled to receive the incentive fee on net investment income from us if our Ordinary Income (as defined below) exceeds a quarterly “hurdle rate” of 1.5%. The hurdle amount is calculated after making appropriate adjustments to the Company’s net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter.

Beginning with the calendar quarter that commenced on January 1, 2016, the incentive fee on net investment income is determined and paid quarterly in arrears at the end of each calendar quarter by reference to our aggregate net investment income, as adjusted as described below, from the calendar quarter then ending and the eleven preceding calendar quarters (or if shorter, the number of quarters that have occurred since January 1, 2016). We refer to such period as the “Trailing Twelve Quarters.”

The hurdle amount for the incentive fee on net investment income is determined on a quarterly basis, and is equal to 1.5% multiplied by the Company’s net asset value at the beginning of each applicable calendar quarter comprising the relevant Trailing Twelve Quarters. The hurdle amount is calculated after making appropriate adjustments to the Company’s net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter. The incentive fee for any partial period will be appropriately pro-rated. Any incentive fee on net investment income will be paid to MCC Advisors on a quarterly basis, and will be based on the amount by which (A) aggregate net investment income (“Ordinary Income”) in respect of the relevant Trailing Twelve Quarters exceeds (B) the hurdle amount for such Trailing Twelve Quarters. The amount of the excess of (A) over (B) described in this paragraph for such Trailing Twelve Quarters is referred to as the “Excess Income Amount.” For the avoidance of doubt, Ordinary Income is net of all fees and expenses, including the reduced base management fee but excluding any incentive fee on Pre-Incentive Fee net investment income or on the Company’s capital gains.

Determination of Quarterly Incentive Fee Based on Income

The incentive fee on net investment income for each quarter is determined as follows:

No incentive fee on net investment income is payable to MCC Advisors for any calendar quarter for which there is no Excess Income Amount;

100% of the Ordinary Income, if any, that exceeds the hurdle amount, but is less than or equal to an amount, which we refer to as the “Catch-up Amount,” determined as the sum of 1.8182% multiplied by the Company’s net assets at the beginning of each applicable calendar quarter, as adjusted as noted above, comprising the relevant Trailing Twelve Quarters is included in the calculation of the incentive fee on net investment income; and

17.5% of the Ordinary Income that exceeds the Catch-up Amount is included in the calculation of the incentive fee on net investment income.

The amount of the incentive fee on net investment income that will be paid to MCC Advisors for a particular quarter will equal the excess of the incentive fee so calculated minus the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters but not in excess of the Incentive Fee Cap (as described below).

The incentive fee on net investment income that is paid to MCC Advisors for a particular quarter is subject to a cap (the “Incentive Fee Cap”). The Incentive Fee Cap for any quarter is an amount equal to (a) 17.5% of the Cumulative Net Return (as defined below) during the relevant Trailing Twelve Quarters minus (b) the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters.

“Cumulative Net Return” means (x) the Ordinary Income in respect of the relevant Trailing Twelve Quarters minus (y) any Net Capital Loss (as described below), if any, in respect of the relevant Trailing Twelve Quarters. If, in any quarter, the Incentive Fee Cap is zero or a negative value, the Company will pay no incentive fee on net investment income to MCC Advisors for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is a positive value but is less than the incentive fee on net investment income that is payable to MCC Advisors for such quarter (before giving effect to the Incentive

F-57



Fee Cap) calculated as described above, the Company will pay an incentive fee on net investment income to MCC Advisors equal to the Incentive Fee Cap for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is equal to or greater than the incentive fee on net investment income that is payable to MCC Advisors for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Company will pay an incentive fee on net investment income to MCC Advisors, calculated as described above, for such quarter without regard to the Incentive Fee Cap.

“Net Capital Loss” in respect of a particular period means the difference, if positive, between (i) aggregate capital losses, whether realized or unrealized, and dilution to the Company’s net assets due to capital raising or capital actions, in such period and (ii) aggregate capital gains, whether realized or unrealized and accretion to the Company’s net assets due to capital raising or capital action, in such period.

Dilution to the Company’s net assets due to capital raising is calculated, in the case of issuances of common stock, as the amount by which the net asset value per share was adjusted over the transaction price per share, multiplied by the number of shares issued. Accretion to the Company’s net assets due to capital raising is calculated, in the case of issuances of common stock (including issuances pursuant to our dividend reinvestment plan), as the excess of the transaction price per share over the amount by which the net asset value per share was adjusted, multiplied by the number of shares issued. Accretion to the Company’s net assets due to other capital action is calculated, in the case of repurchases by the Company of its own common stock, as the excess of the amount by which the net asset value per share was adjusted over the transaction price per share multiplied by the number of shares repurchased by the Company.

Incentive Fee Based on Capital Gains

The second component of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment management agreement as of the termination date) and equals 20.0% of our cumulative aggregate realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the investment adviser.

Under GAAP, the Company calculates the second component of the incentive fee as if the Company had realized all assets at their fair values as of the reporting date. Accordingly, when applicable, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional capital gains incentive fee is subject to the performance of investments until there is a realization event, the amount of the provisional capital gains incentive fee accrued at a reporting date may vary from the capital gains incentive that is ultimately realized and the differences could be material.

Base Management Fee - Prior to Fee Waiver Agreement

Prior to January 1, 2016, the base management fee was calculated at an annual rate of 1.75% of our gross assets (which is defined as all the assets of the Company, including those acquired using borrowings for investment purposes), and was payable quarterly in arrears. The base management fee was based on the average value of our gross assets at the end of the two most recently completed calendar quarters.

Incentive Fee - Prior to Fee Waiver Agreement

Prior to January 1, 2016, the incentive fee based on net investment income was calculated as 20.0% of the amount, if any, by which our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets calculated as of the end of the calendar quarter immediately preceding the calendar quarter for which the incentive fee is being calculated, exceeds a 2.0% (which is 8.0% annualized) hurdle rate but also includes a “catch-up” provision. Under this provision, in any calendar quarter, our investment adviser receives no incentive fee until our net investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up”, 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, our investment adviser will receive 20% of our pre-incentive fee net investment income as if the hurdle rate did not apply. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies accrued during the calendar quarter, minus our operating expenses for the quarter including the base management fee, expenses payable under the administration agreement, and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash.

For the avoidance of doubt, the purpose of the new incentive fee calculation under the Fee Waiver Agreement is to permanently reduce aggregate fees payable to MCC Advisors by the Company, effective as of January 1, 2016. In order to ensure that the Company will pay MCC Advisors lesser aggregate fees on a cumulative basis, as calculated beginning January 1, 2016, we will, at the end of each quarter, also calculate the base management fee and incentive fee on net investment income owed by the Company to MCC Advisors based on the formula in place prior to January 1, 2016. If, at any time beginning January 1, 2016, the aggregate fees on a cumulative basis, as calculated based on the formula in place after January 1, 2016, would be greater than the aggregate fees on a cumulative basis, as calculated based on the formula in place prior to January 1, 2016, MCC Advisors shall only be entitled to the lesser of those two amounts.

For the years ended September 30, 2019, 2018 and 2017, the Company incurred base management fees to MCC Advisors of $11.2 million, $14.7 million, and $17.8 million, respectively.

For the year ended September 30, 2019, the Company did not waive any management fees under the Fee Waiver Agreement. For the year ended September 30, 2018, base management fees, net of the voluntary $0.4 million waiver, was $14.3 million. For the year ended September 30, 2017, base management fees, net of $47,941 waived under the Fee Waiver Agreement, was $17.7 million.


F-58



The incentive fees shown in the Consolidated Statements of Operations are calculated using the fee structure set forth in investment management agreement, and then adjusted to reflect the terms of the Fee Waiver Agreement. Pursuant to the investment management agreement, pre-incentive fee net investment income is compared to a hurdle rate of 2.0% of the net asset value at the beginning of the period and is calculated as follows:

1)
No incentive fee is recorded during the quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;

2)
100% of pre-incentive fee net investment income that exceeds the hurdle rate but is less than 2.5% in the quarter; and

3)
20.0% of the amount of pre-incentive fee net investment income, if any, that exceeds 2.5% of the hurdle rate.

For purposes of implementing the fee waiver under the Fee Waiver Agreement, we calculate the incentive fee based upon the formula that exists under the investment management agreement, and then apply the terms of waiver set forth in the Fee Waiver Agreement, if applicable.

For the years ended September 30, 2019 and 2018, the Company did not incur any incentive fees on net investment income because pre-incentive fee net investment income did not exceed the hurdle amount under the formula that exists under the investment management agreement. For the year ended September 30, 2017, the Company incurred $0.9 million of incentive fees related to pre-incentive fee net investment income. For the year ended September 30, 2017, incentive fees, net of $43,663 waived under the Fee Waiver Agreement was $0.9 million.

As of September 30, 2019 and 2018, $2.2 million and $3.3 million, respectively, were included in “management and incentive fees payable” in the accompanying Consolidated Statements of Assets and Liabilities.

Administration Agreement

On January 19, 2011, the Company entered into an administration agreement with MCC Advisors. Pursuant to the administration agreement, MCC Advisors furnishes us with office facilities and equipment, clerical, bookkeeping, recordkeeping and other administrative services related to the operations of the Company. We reimburse MCC Advisors for our allocable portion of overhead and other expenses incurred by it performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. From time to time, our administrator may pay amounts owed by us to third-party service providers and we will subsequently reimburse our administrator for such amounts paid on our behalf. For the years ended September 30, 2019, 2018 and 2017, we incurred $3.3 million, $3.6 million, and $3.8 million in administrator expenses, respectively.

As of September 30, 2019 and 2018, $0.9 million and $0.8 million, respectively, were included in “administrator expenses payable” in the accompanying Consolidated Statements of Assets and Liabilities.

Note 7. Related Party Transactions

Due to Affiliate

Due to affiliate consists of certain general and administrative expenses paid by an affiliate on behalf of the Company.

Other Related Party Transactions

Certain affiliates of MCC Advisors, Medley Capital LLC, their respective affiliates and some of their employees purchased in the IPO an aggregate of 833,333 shares of common stock at the IPO price per share of $12.00. The Company received the full proceeds from the sale of these shares, and no underwriting discounts or commissions were paid in respect of these shares.

Opportunities for co-investments may arise when MCC Advisors or an affiliated investment adviser becomes aware of investment opportunities that may be appropriate for the Company, other clients, or affiliated funds. On November 25, 2013, the Company obtained an exemptive order from the SEC that permits us to participate in negotiated co-investment transactions with certain affiliates, each of whose investment adviser is Medley, LLC or an investment adviser controlled by Medley, LLC in a manner consistent with our investment objective, strategies and restrictions, as well as regulatory requirements and other pertinent factors (the “Prior Exemptive Order”). On March 29, 2017, the Company, MCC Advisors and certain other affiliated funds and investment advisers received an exemptive order (the “Exemptive Order”) that supersedes the Prior Exemptive Order and allows affiliated registered investment companies to participate in co-investment transactions with us that would otherwise have been prohibited under Section 17(d) and 57(a)(4) of the 1940 Act and Rule 17d-1 thereunder. On October 4, 2017, the Company, MCC Advisors and certain of our affiliates received an exemptive order that supersedes the Exemptive Order (the “Current Exemptive Order”) and allows, in addition to the entities already covered by the Exemptive Order, Medley LLC and its subsidiary, Medley Capital LLC, to the extent they hold financial assets in a principal capacity, and any direct or indirect, wholly or majority owned subsidiary of Medley LLC that is formed in the future, to participate in co-investment transactions with us that would otherwise be prohibited by either or both of Sections 17(d) and 57(a)(4) of the 1940 Act. If the Mergers are successfully consummated, Sierra and certain of its affiliates will not be able to rely on the Current Exemptive Order. In this regard, on November 19, 2018, Sierra and certain of its affiliates have submitted an exemptive application to the SEC for an exemptive order that would supersede the Current Exemptive Order (the “Superseding Exemptive Order”) and would permit Sierra to participate in negotiated co-investment transactions with certain affiliates that would otherwise be prohibited by either or both of Sections 17(d) and 57(a)(4) of the 1940 Act. There can be no assurance if and when Sierra will receive the Superseding Exemptive Order. The terms of the Superseding Exemptive Order, if received, would be substantially similar to the Current Exemptive Order. Co-investment under the Superseding Exemptive Order is subject to certain conditions therein, including the condition that, in the case of each co-investment transaction, the board of directors determines that it would be in Sierra’s best interest to participate in the transaction. The Current Exemptive Order will remain in effect unless and until the Mergers are completed and the Superseding Exemptive Order is granted by the SEC. However, neither we nor the affiliated funds are obligated to invest or co-invest when investment opportunities are referred to us or them.

Note 8. Commitments

F-59



 
Guarantees

The Company has a guarantee to issue up to $7.0 million in standby letters of credit through a financial intermediary on behalf of a certain portfolio company. Under this arrangement, if the standby letters of credit were to be issued, the Company would be required to make payments to third parties if the portfolio company was to default on its related payment obligations. The guarantee will renew annually until cancellation. As of September 30, 2019 and 2018, the Company had not issued any standby letters of credit under the commitment on behalf of the portfolio company.

Unfunded commitments

As of September 30, 2019 and 2018, we had commitments under loan and financing agreements to fund up to $8.9 million to seven portfolio companies and $36.1 million to 17 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 September 30, 2019 and 2018 is shown in the table below (dollars in thousands):
 
September 30, 2019
 
September 30, 2018
Dynamic Energy Services International LLC - Revolver
$
3,255

 
$

DataOnline Corp. - Revolver
1,890

 
1,890

Alpine SG, LLC - Revolver
1,000

 
1,000

Kemmerer Operations, LLC - Delayed Draw Term Loan
908

 

Black Angus Steakhouses, LLC - Delayed Draw Term Loan
893

 
893

Redwood Services Group, LLC - Revolver
875

 
1,750

Access Media Holdings, LLC - Series AAA Preferred Equity
101

 
173

1888 Industrial Services, LLC - Revolver(1)

 
719

Black Angus Steakhouses, LLC - Revolver(1)

 
625

Impact Group, LLC - Delayed Draw Term Loan

 
8,567

Redwood Services Group, LLC - Delayed Draw Term Loan

 
4,839

SFP Holding, Inc. - Delayed Draw Term Loan

 
2,765

Accupac, Inc. - Delayed Draw Term Loan

 
2,612

SMART Financial Operations, LLC - Delayed Draw Term Loan

 
2,400

RMS Holding Company, LLC - Revolver

 
2,327

Barry's Bootcamp Holdings, LLC - Revolver

 
2,200

Barry's Bootcamp Holdings, LLC - Delayed Draw Term Loan

 
1,271

Trans-Fast Remittance LLC - Delayed Draw Term Loan

 
1,057

Manna Pro Products, LLC - Delayed Draw Term Loan

 
429

Brook & Whittle Holding Corp. - Delayed Draw Term Loan

 
310

Central States Dermatology Services, LLC - Delayed Draw Term Loan

 
137

SavATree, LLC - Delayed Draw Term Loan

 
123

Total
$
8,922


$
36,087


(1)
The revolving credit facility was fully drawn as of September 30, 2019.

Legal Proceedings

The Company is subject to a number of other lawsuits, arbitrations, claims and other legal proceedings in connection with its business. Some of these legal actions include claims for substantial or unspecified compensatory and/or punitive damages. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions. ASC 450, Loss Contingencies, governs the recognition and disclosure of loss contingencies, including potential losses from legal and regulatory matters. ASC 450 categorizes loss contingencies using three terms based on the likelihood of occurrence of events that result in a loss: "probable" means that "the future event or events are likely to occur;" "remote" means that "the chance of the future event or events occurring is slight;" and "reasonably possible" means that "the chance of the future event or events occurring is more than remote but less than likely." Under ASC 450, the Company accrues for losses that are considered both probable and reasonably estimable.

On April 15, 2019, certain parties reached agreement on the principal terms of a settlement of the FrontFour Action, which were contained in a term sheet, dated April 15, 2019 (the “Settlement Term Sheet”). On July 29, 2019, MCC entered into a Stipulation of Settlement (and, as amended on August 8, 2019, the “Stipulation”) by and among the Company, Brook Taube, Seth Taube, Jeff Tonkel, Mark Lerdal, Karin Hirtler-Garvey, John E. Mack, Arthur S. Ainsberg, MDLY, MCC Advisors, Medley LLC, and Medley Group LLC (the “Medley Parties”), on the one hand, and FrontFour, on behalf of itself and a class of similarly situated stockholders of the Company, on the other hand, in connection with the FrontFour Action.

The Stipulation provides for the settlement of all claims brought against the Medley Parties in the FrontFour Action. Under the Stipulation, the Company agreed to seek the agreement and/or consent of Sierra to effect certain amendments to (i) the MCC Merger Agreement and (ii) the MDLY Merger Agreement (together with the MCC Merger Agreement, the “Merger Agreements”), which have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. The Stipulation also provides for, if the MCC Merger is consummated, the creation of a settlement fund, consisting

F-60



of $17 million in cash and $30 million of Sierra stock, with the number of shares of Sierra stock to be calculated using the pro forma net asset value reported in the future proxy supplement describing the amendments to the MCC Merger Agreement, which will be distributed to eligible members of the Settlement Class (as defined in the Stipulation). Under the Stipulation, MDLY also consented to certain amendments to the Merger Agreements that have been reflected in the amended and restated Merger Agreements annexed to the Stipulation. In addition, in connection with the Stipulation, on July 29, 2019, the Company entered into a Governance Agreement with FrontFour Capital Group LLC, FrontFour Master Fund, Ltd., FrontFour Capital Corp., FrontFour Opportunity Fund, David A. Lorber, Stephen E. Loukas and Zachary R. George, pursuant to which, among other matters, FrontFour is subject to customary standstill restrictions and required to vote in favor of the MCC Merger at a meeting of stockholders to approve the Amended MCC Merger Agreement.

The Stipulation also provides for mutual releases between and among FrontFour and the Settlement Class, on the one hand, and the Medley Parties, on the other hand, of all claims that were or could have been asserted in the FrontFour Action. The Medley Parties will also release all claims arising out of or relating to the prosecution and settlement of the FrontFour Action and all claims that were or could have been asserted (other than claims against the Highland Parties, as defined in the Stipulation) in the litigation pending in the United States District Court for the Southern District of New York captioned Medley Capital Corporation v. FrontFour Capital Group LLC, et al., No. 1:19-cv-02055-LTS (S.D.N.Y.) (the “Federal Action”), and FrontFour and the Settlement Class will release all claims arising out of or relating to the prosecution and settlement of the Federal Action.

The Stipulation further provides that the Company and FrontFour shall work together in good faith to agree to supplemental disclosures relating to the transactions contemplated by the Merger Agreements consistent with the Decision.

The Stipulation is subject to the approval of the Court. On September 26, 2019, FrontFour filed a motion seeking an order approving the Stipulation, and also moved for the Court to award plaintiffs’ counsel attorneys’ fees in the amount of $22 million and expenses in the amount of $420,334.97 (the “Fee Application”). The Court held a hearing to consider the Stipulation and the Fee Application on October 24, 2019.

On November 19, 2019, the Court issued a bench ruling approving the Stipulation. The Court also awarded attorney’s fees as follows: (i) an award of $3,000,000 to lead plaintiffs’ counsel and $75,000 to counsel to plaintiff Stephen Altman (the “Therapeutics Fee Award”) and (ii) an award in an amount equal to 26% of the nominal value of the settlement fund, grossed up to include the amount of the lead plaintiffs’ counsel’s attorney’s fees, and excluding the portion of the fees borne by the class under the Amended MCC Merger Agreement, as well as an award of $100,000 relating to the composition of the board of directors of the post-Merger company (the “Contingent Fee Award” and, together with the Therapeutics Fee Award, the “Fee Awards”). The parties disagreed as to how to apply the formula that the Court indicated will be used to calculate the Contingent Fee Award. Accordingly, the parties submitted different forms of the proposed form of order and final judgment, as applicable, for review and entry by the Court, together with letter briefs setting forth their respective interpretations of the Court’s November 19, 2019 bench ruling. The Plaintiff contends that the amount of the Contingent Fee Award is fixed at $14,540,888. Defendants contend that the amount will be less than $14,540,888, but the actual amount cannot be determined prior to closing. The Therapeutics Fee Award will be payable within five (5) business days of the entry of an order and judgment by the Court. The Contingent Fee Award is contingent upon the closing of the MCC Merger, and will be due within five (5) business days of the closing of the MCC Merger and establishment of the Settlement Fund. The Fee Awards will be paid by MCC or its successor.

The Company has determined, based on the Court’s award of attorneys’ fees and expenses in the amount of $3.5 million payable within five business days following entry of the order, a material loss in the amount of $3.5 million is presently probable and as such, the Company has recorded an accrual for this loss contingency on its consolidated statement of operations.

With respect to the Company’s contingent obligations under the Stipulation and pursuant to the Court’s bench ruling to (i) fund the Settlement Fund with $17 million in cash and $30 million of Sierra stock, and (ii) to pay up to $14,540,888 million for the Contingent Fee Award, as well as an award of $100,000 relating to the composition of the board of directors of the post-Merger company, we note that all of these obligations are contingent upon closing of the proposed merger transactions. The Company has determined the likelihood of a material loss from the Settlement Fund and Contingent Fee Award to be reasonably possible (as opposed to probable and reasonably estimable) under ASC 450 and thus has not made an accrual in its statement of operations.

Note 9. Fee Income

Fee income consists of origination/closing fee, amendment fee, prepayment penalty, administrative agent fee, and other miscellaneous fees. The following tables summarize the Company’s fee income for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):
 
For the years ended September 30
 
2019
 
2018
 
2017
Prepayment fee
$
1,281

 
$
220

 
$
804

Origination fee
345

 
2,780

 
3,078

Administrative agent fee
316

 
610

 
625

Amendment fee
306

 
579

 
1,323

Other fees
56

 
285

 
790

Fee income
$
2,304


$
4,474


$
6,620


Note 10. Directors Fees

The Company's independent directors each receive an annual fee of $90,000. They also receive $3,000, plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting, and $2,500, plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee meeting. The chair of the Audit Committee receives an annual fee of $25,000 and the chair of the Nominating and Corporate Governance Committee and the Compensation Committee receives an annual fee of $10,000 for their additional services in these capacities. In addition, other members of the Audit Committee receive an annual fee of $12,500, and other members of the Nominating and Corporate Governance Committee and the Compensation Committee receive an annual fee of $6,000.

On January 26, 2018, the board of directors established the MCC Special Committee, for the purpose of assessing the merits of various proposed strategic transactions. As compensation for serving on the MCC Special Committee, each independent director received a one-time retainer of $25,000 plus reimbursement of out-of-pocket expenses, consistent with the Company’s policies for reimbursement of members of the board of directors. In addition, the chairman of the MCC Special Committee receives a monthly fee of $15,000 and other members receive a monthly fee of $10,000.

Pursuant to the Settlement Term Sheet, on April 15, 2019, the board of directors appointed David A. Lorber and Lowell W. Robinson to the Board to fill the vacancies on the Board created by the resignations of Mark Lerdal and John E. Mack, respectively. In addition, the board of directors added: (i) Messrs. Lorber and Robinson to the MCC Special Committee, with Mr. Lorber serving as Chair of the MCC Special Committee; (ii) Mr. Lorber to the Nominating and Corporate Governance Committee and the Compensation Committee; and Mr. Robinson to the Audit Committee. In addition to the compensation described above, each of Mr. Lorber and Mr. Robinson received the one-time retainer of $25,000 plus reimbursement of out-of-pocket expenses, consistent with the Company's policies for reimbursement of members of the board of directors.

No compensation is paid to directors who are ‘‘interested persons’’ of the Company (as such term is defined in the 1940 Act). For the years ended September 30, 2019, 2018 and 2017, we accrued $1.3 million, $1.3 million, and $0.6 million for directors’ fees expense, respectively.

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 September 30, 2019.

The following information sets forth the computation of the weighted average basic and diluted net increase/(decrease) in net assets per share from operations for the September 30, 2019, 2018 and 2017 (dollars in thousands, except share and per share amounts):
 
For the years ended September 30
 
2019
 
2018
 
2017
Basic and diluted:
 

 
 

 
 

Net increase/(decrease) in net assets from operations
$
(96,575
)
 
$
(110,924
)
 
$
(15,077
)
Weighted average common shares outstanding
54,474,211

 
54,474,211

 
54,474,211

Earnings per common share-basic and diluted
$
(1.77
)
 
$
(2.04
)
 
$
(0.28
)


F-61



Note 12. Financial Highlights
 
The following is a schedule of financial highlights for the years ended September 30, 2019, 2018, 2017, 2016 and 2015:
 
For the years ended September 30
 
2019
 
2018
 
2017
 
2016
 
2015
Per share data(1):
 
 
 
 
 
 
 
 
 
Net asset value per share at beginning of year
$
5.90

 
$
8.45

 
$
9.49

 
$
11.00

 
$
12.43

 
 
 
 
 
 
 
 
 
 
Net investment income/(loss)(2)
(0.38
)
 
0.23

 
0.67

 
0.97

 
1.27

Net realized gains/(losses) on investments
(2.06
)
 
(1.64
)
 
(1.34
)
 
(0.71
)
 
(1.06
)
Net unrealized appreciation/(depreciation) on investments
0.71

 
(0.59
)
 
0.39

 
(0.76
)
 
(0.46
)
Change in provision for deferred taxes on unrealized appreciation/(depreciation) on investments

 
0.01

 
0.02

 

 
(0.01
)
Loss on extinguishment of debt
(0.04
)
 
(0.04
)
 
(0.02
)
 

 

Net increase/(decrease) in net assets
(1.77
)
 
(2.03
)
 
(0.28
)
 
(0.50
)
 
(0.26
)
 
 
 
 
 
 
 
 
 
 
Distributions from net investment income
(0.15
)
 
(0.40
)
 
(0.76
)
 
(1.12
)
 
(1.27
)
Distributions from tax return of capital

 
(0.12
)
 

 

 

Distributions from net realized gains

 

 

 

 
0.00

Issuance of common stock, net of underwriting costs

 

 

 

 

Repurchase of common stock under stock repurchase program

 

 

 
0.11

 
0.12

Offering costs

 

 

 

 

Other(5)

 

 

 

 
(0.02
)
Net asset value per share at end of year
$
3.97

 
$
5.90

 
$
8.45

 
$
9.49

 
$
11.00

 
 
 
 
 
 
 
 
 
 
Net assets at end of year
$
216,432,530

 
$
321,178,727

 
$
460,429,317

 
$
516,919,142

 
$
619,920,384

Shares outstanding at end of year
54,474,211

 
54,474,211

 
54,474,211

 
54,474,211

 
56,337,152

 
 
 
 
 
 
 
 
 
 
Per share market value at end of year
$
2.59

 
$
3.82

 
$
5.97

 
$
7.63

 
$
7.44

Total return based on market value(3)
(29.91
)%
 
(27.82
)%
 
(12.73
)%
 
19.37
%
 
(27.56
)%
Total return based on net asset value(4)
(29.47
)%
 
(21.29
)%
 
(0.68
)%
 
0.42
%
 
1.76
 %
Portfolio turnover rate
11.93
 %
 
26.46
 %
 
26.01
 %
 
8.86
%
 
18.33
 %
  


F-62



The following is a schedule of ratios and supplemental data for the years ended September 30, 2019, 2018, 2017, 2016, and 2015:
 
For the years ended September 30
 
2019
 
2018
 
2017
 
2016
 
2015
Ratios:
 

 
 

 
 

 
 

 
 

Ratio of net investment/(loss) income to average net assets after waivers(6)
(7.96
)%
 
3.37
%
 
7.50
%
 
9.97
%
 
11.00
%
Ratio of total expenses to average net assets after waivers(6)
25.62
 %
 
14.77
%
 
12.35
%
 
12.49
%
 
11.51
%
Ratio of incentive fees to average net assets after waivers(6)
 %
 
%
 
0.18
%
 
1.49
%
 
2.75
%
 
 
 
 
 
 
 
 
 
 
Supplemental Data:
 
 
 
 
 

 
 

 
 

Ratio of net operating expenses and credit facility related expenses to average net assets(6)(12)
25.62
 %
 
14.77
%
 
12.17
%
 
11.00
%
 
8.75
%
Percentage of non-recurring fee income(7)
4.29
 %
 
5.78
%
 
6.23
%
 
5.61
%
 
6.80
%
Average debt outstanding(8)
$
347,991,878

 
$
451,590,779

 
$
514,726,703

 
$
553,012,824

 
$
568,202,466

Average debt outstanding per common share
$
6.39

 
$
8.29

 
$
9.45

 
$
9.98

 
$
9.86

Asset coverage ratio per unit(9)
1,842

 
2,126

 
2,327

 
2,414

 
2,318

Total Debt Outstanding(13):
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
$

 
$

 
$
68,000,000

 
$
14,000,000

 
$
192,700,000

Term Loan Facility
$

 
$

 
$
102,000,000

 
$
174,000,000

 
$
174,000,000

2019 Notes
$

 
$

 
$

 
$
40,000,000

 
$
40,000,000

2021 Notes
$
74,012,825

 
$
74,012,825

 
$
74,012,825

 
$
74,012,825

 
$

2023 Notes
$
77,846,800

 
$
89,846,800

 
$
102,846,800

 
$
63,500,000

 
$
63,500,000

Israeli 2021 Notes
$
105,136,927

 
$
121,275,690

 
$

 
$

 
$

SBA Debentures
$

 
$
135,000,000

 
$
150,000,000

 
$
150,000,000

 
$
150,000,000

 
 
 
 
 
 
 
 
 
 
Average market value per unit:
 
 
 
 
 

 
 

 
 

Facilities(10)
N/A

 
N/A

 
N/A

 
N/A

 
N/A

SBA debentures(10)
N/A

 
N/A

 
N/A

 
N/A

 
N/A

2019 Notes(11)
N/A

 
N/A

 
$
25.39

 
$
25.44

 
$
25.26

2021 Notes
$
24.82

 
$
25.48

 
$
25.80

 
$
25.48

 
N/A

2023 Notes
$
24.28

 
$
25.02

 
$
25.18

 
$
25.19

 
$
24.79

Israeli 2021 Notes
$
254.43

 
$
273.95

 
N/A

 
N/A

 
N/A

    
(1)
Table may not foot due to rounding.
(2)
Net investment income/(loss) excluding management and incentive fee waivers based on total weighted average common stock outstanding equals $(0.38), $0.23, $0.67, and $0.90 per share for the years ended September 30, 2019, 2018, 2017 and 2016, respectively. Net investment income based on total weighted average common stock outstanding equaled $1.27 for the year ended September 30, 2015.
(3)
Total return is historical and assumes changes in share price, reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales charge for the period.
(4)
Total return is historical and assumes changes in NAV, reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales charge for the period.
(5)
Represents the impact of the different share amounts used in calculating per share data as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.
(6)
For the year ended September 30, 2019, excluding management and incentive fee waivers, the ratio of net investment income/(loss), total expenses, incentive fees, and operating expenses and credit facility related expenses to average net assets is (7.96)%, 25.62%, 0.00%, and 25.62%, respectively. For the year ended September 30, 2018, excluding management and incentive fee waivers, the ratio of net investment income/(loss), total expenses, incentive fees, and operating expenses and credit facility related expenses to average net assets is 3.26%, 14.88%, 0.00%, and 14.88%, respectively. For the year ended September 30, 2017, excluding management and incentive fee waivers, the ratio of net investment income/(loss), total expenses, incentive fees, and operating expenses and credit facility related expenses to average net assets is 7.48%, 12.37%, 0.18%, and 12.18%, respectively. For the year ended September 30, 2016, excluding management and incentive fee waivers, the ratio of net investment income/(loss), total expenses, incentive fees, and operating expenses and credit facility related expenses to average net assets is 9.29%, 13.17%, 2.14%, and 11.03%, respectively.
(7)
Represents the impact of the non-recurring fees as a percentage of total investment income.
(8)
Based on daily weighted average carrying value of debt outstanding during the period.
(9)
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 September 30, 2019, the Company’s asset coverage was 184.2% after giving effect to leverage and therefore the Company’s asset coverage was below 200%, the minimum asset coverage requirement under the 1940 Act. As a result, the Company is prohibited from making distributions to stockholders, including the payment of any dividend, and may not employ further leverage until the Company’s asset coverage is at least 200% after giving effect to such leverage.
(10)
The Facilities and SBA Debentures were not registered for public trading.

F-63



(11)
During the year ended September 30, 2017, the 2019 Notes were redeemed in full and ceased trading on February 17, 2017. The average price for the year ended September 30, 2017 reflects the period from October 1, 2016 through February 17, 2017.
(12)
Excludes incentive fees.
(13)
Total amount of each class of senior securities outstanding at the end of the period excluding debt issuance costs.

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 following table summarizes the Company’s distributions during the years ended September 30, 2019 and 2018:
Date Declared
 
Record Date
 
Payment Date
 
Amount Per Share
During the year ended September 30, 2019
 
 
 
 
 
 

11/16/2018
 
12/5/2018
 
12/20/2018
 
$
0.10

2/10/2019
 
2/22/2019
 
3/12/2019
 
0.05

 
 
 
 
 
 
$
0.15

Date Declared
 
Record Date
 
Payment Date
 
Amount Per Share
During the year ended September 30, 2018
 
 
 
 
 
 

10/31/2017
 
11/22/2017
 
12/22/2017
 
$
0.16

1/30/2018
 
2/21/2018
 
3/23/2018
 
0.16

5/4/2018
 
6/6/2018
 
6/21/2018
 
0.10

8/2/2018
 
9/5/2018
 
9/20/2018
 
0.10

 
 
 
 
 
 
$
0.52

 
Note 14. Stock Repurchase Program
 
The Company had a share repurchase program from February 5, 2015 to December 31, 2017. Under the share repurchase program, the Company repurchased an aggregate of 4,259,073 shares of common stock at an average price of $8.00 per share with a total cost of approximately $34.1 million, and the Company's net asset value per share was increased by approximately $0.23 as a result of the share repurchases.

Note 15. Selected Quarterly Financial Data (Unaudited)

The following tables represent selected unaudited quarterly financial data for the Company during the years ended September 30, 2019, 2018, and 2017 (dollars in thousands, except per share amounts):
 
September 30, 2019
 
June 30, 2019
 
March 31, 2019
 
December 31, 2018
Consolidated Statement of Operations data:
 

 
 

 
 

 
 

Total investment income/(loss)
$
8,116

 
$
11,394

 
$
12,587

 
$
14,202

Net investment income
(8,209
)
 
(3,823
)
 
(10,595
)
 
1,759

Net realized and unrealized gain/(loss)
(23,335
)
 
(24,612
)
 
(14,014
)
 
(11,714
)
Change in provision for deferred taxes on unrealized gain/(loss) on investments

 

 

 

Loss on extinguishment of debt
(104
)
 
(1,806
)
 

 
(123
)
Net increase/(decrease) in net assets resulting from operations
(31,648
)
 
(30,241
)
 
(24,609
)
 
(10,078
)
Earnings per share
(0.58
)
 
(0.56
)
 
(0.45
)
 
(0.18
)
Net asset value per common share at period end
$
3.97

 
$
4.55

 
$
5.11

 
$
5.61

 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
Consolidated Statement of Operations data:
 

 
 

 
 

 
 

Total investment income
$
15,210

 
$
13,945

 
$
17,035

 
$
20,631

Net investment income
741

 
904

 
3,580

 
7,179

Net realized and unrealized gain/(loss)
(23,059
)
 
(27,753
)
 
(31,391
)
 
(39,213
)
Change in provision for deferred taxes on unrealized gain/(loss) on investments

 
194

 
190

 
90

Loss on extinguishment of debt
(1,218
)
 
(11
)
 
(1,158
)
 

Net increase/(decrease) in net assets resulting from operations
(23,536
)
 
(26,666
)
 
(28,779
)
 
(31,944
)
Earnings per share
(0.43
)
 
(0.49
)
 
(0.53
)
 
(0.59
)
Net asset value per common share at period end
$
5.90

 
$
6.43

 
$
7.02

 
$
7.71

 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
 
December 31, 2016
Consolidated Statement of Operations data:
 

 
 

 
 

 
 

Total investment income
$
22,147

 
$
23,696

 
$
24,357

 
$
26,056

Net investment income
8,624

 
9,569

 
8,042

 
10,135

Net realized and unrealized gain/(loss)
(20,446
)
 
(7,353
)
 
(19,834
)
 
(3,809
)
Change in provision for deferred taxes on unrealized gain/(loss) on investments
309

 
783

 

 

Loss on extinguishment of debt
(640
)
 

 
(456
)
 

Net increase/(decrease) in net assets resulting from operations
(12,153
)
 
2,999

 
(12,248
)
 
6,326

Earnings per share
(0.22
)
 
0.06

 
(0.22
)
 
0.12

Net asset value per common share at period end
$
8.45

 
$
8.84

 
$
8.94

 
$
9.39


Note 16. Subsequent Events

Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-K or would be required to be recognized in the Consolidated Financial Statements as of and for the year ended September 30, 2019, except as disclosed below.

On December 12, 2019, the Company notified the TASE that it would be repaying $33.9 million of the Israeli 2021 Notes on December 31, 2019, which consists of an $18.9 million pre-payment in addition to a $15.0 million scheduled amortization payment.



F-64



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A. Controls and Procedures

(a) 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 September 30, 2019. 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 September 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

(b) Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our management’s evaluation under the framework in Internal Control—Integrated Framework, management concluded that our internal controls over financial reporting were effective as of September 30, 2019.

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

(c) Audit Report of the Registered Public Accounting Firm

Our internal controls over financial reporting as of September 30, 2019 have been audited by our independent registered public accounting firm, Ernst & Young LLP, as stated in its report titled "Report of Independent Registered Public Accounting Firm" on page F-2.

(d) Changes in Internal Controls Over Financial Reporting

There has not been any change in our internal controls over financial reporting (as defined in Rule 13a-15 (f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Item 9B. Other Information
 
None.


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PART III
 
Item 10. Directors, Executive Officers and Corporate Governance

Our business and affairs are managed under the direction of our board of directors. The board of directors currently consists of seven members, four of whom are not “interested persons” of the Company as defined in Section 2(a)(19) of the 1940 Act. We refer to these four individuals as our independent directors. Our board of directors elects our officers, who serve at the discretion of the board of directors. The responsibilities of each director include, among other things, oversight of our investment activity, quarterly valuation of our assets, and oversight of our financing arrangements. The board of directors has also established an audit committee, a nominating and corporate governance committee, a compensation committee, and a special committee and may establish additional committees in the future.

Board of Directors and Executive Officers

Pursuant to our charter and bylaws, the board of directors is divided into three classes, designated Class I, Class II, and Class III. Directors are elected for a staggered term of three years each, with a term of office of one of the three classes of directors expiring each year. Each director will hold office for the term to which he or she is elected or until his successor is duly elected and qualified.

Directors

Information regarding the board of directors is as follows:
Name, Address, and Age(1)
 
Position(s) Held with Company
 
Terms of Office and Length of Time Served
 
Principal Occupation(s) 
During Past 5 Years
 
Other Directorships Held by Director
 
 
 
 
 
 
 
 
 
Interested Directors
 
 
 
 
 
 
 
 
Brook Taube(2), 49
 
Director; Chairman of the Board; President; and Chief Executive Officer
 
Class III Director since 2011; Term expires 2020
 
Co-Chief Executive Officer and Co-Chairman of the board of directors of Medley Management, Inc.; Managing Partner of MCC Advisors and Senior Portfolio Manager of Medley
 
Director of Sierra Income Corporation; New Amsterdam Symphony Orchestra; and Sierra Total Return Fund
Seth Taube(2),49
 
Director
 
Class II Director since 2011; Term expires 2022
 
Co-Chief Executive Officer of Medley Management, Inc.; Managing Partner of MCC Advisors and Senior Portfolio Manager of the private investment funds managed by Medley; Chief Executive Officer and Chairman of the board of directors of Sierra Income Corporation, a non-traded business development company; previously, a Partner at CN Opportunity Fund
 
Chairman and Director of Sierra Income Corporation and Sierra Total Return Fund
Jeff Tonkel, 49
 
Director
 
Class I Director since 2014; Term expires 2021
 
Previously President of
Medley
Management, Inc. and
Sierra Income
Corporation
 
Director of Medley Management, Inc.
 
 
 
 
 
 
 
 
 
Independent Directors
 
 
 
 
 
 
 
 
Arthur S. Ainsberg, 72
 
Director
 
Class II Director, since 2011; Term expires 2022
 
President of Ainsberg Associates
 
AG Mortgage Investment Trust; former director of Nomura Securities International, Inc.; Nomura Global Financial Products, Inc.; Nomura Holding America, Inc.; and National Financial Partners Corporation

72



Name, Address, and Age(1)
 
Position(s) Held with Company
 
Terms of Office and Length of Time Served
 
Principal Occupation(s) 
During Past 5 Years
 
Other Directorships Held by Director
 
 
 
 
 
 
 
 
 
Karin Hirtler-Garvey, 62
 
Director
 
Class III Director since 2011; Term expires 2020
 
Chief Risk Executive Ally Financial Inc. (formerly GMAC) from May 2009 to December 2011; previously, a principal at a real estate development venture
 
Director of USAA Federal Savings Bank; VA Capital Management; Victory Capital Management; and StarStone. Previously director of ARO Liquidation Inc., the successor company to Aeropostale, Inc.; Aeropostale Inc.; Validus Holdings Ltd.; and Western World Insurance Group
David A. Lorber, 41

 
Director
 
Class I Director since 2019; Term expires 2021

 
Co-Founder and Portfolio Manager of FrontFour Capital; Co-Founder and Principal of FrontFour Corp.

 
Director of FrontFour Capital; Ferro Corporation; Aerojet Rocketdyne Holdings, Inc. (formerly GenCorp Inc.); NY Centurion Foundation; and 166 East 61st Street Corp.
Lowell W. Robinson, 70

 
Director
 
Class III Director since 2019; Term expires 2020

 
See “Other Directorships Held by Director During Past 5 Years”

 
Director of Aratana Therapeutics, Inc.; EVINE Live Inc. (formerly ShopHQ); SITO Mobile, Ltd.; Higher One Holdings, Inc.; Support.com, Inc.; The Jones Group, Inc.; the New York Academy of Science; The Council for Economic Education; and The Metropolitan Opera Guild
(1)
The business address of the directors is c/o Medley Capital Corporation, 280 Park Avenue, 6th Floor East, New York, NY 10017.
(2)
Brook Taube and Seth Taube are brothers.

Brook Taube is an “interested person” of the Company as defined in the 1940 Act due to his positions as Chief Executive Officer and President of the Company, Managing Partner of MCC Advisors and Senior Portfolio Manager of the private investment funds managed by Medley since 2007. In addition to serving on our board of directors, Mr. Brook Taube currently serves on the board of Sierra Income Corporation and on the investment committee for SIC Advisors, the investment adviser to Sierra Income Corporation, as well as serves on the board of Sierra Total Return Fund and on the investment committee of STRF Advisors, the investment adviser to Sierra Total Return Fund. Mr. Taube’s intimate knowledge of the business and operations of MCC Advisors, extensive familiarity with the financial industry and the investment management process in particular, and experience as a director of another business development company not only gives the board of directors valuable insight but also positions him well to continue to serve as the Chairman of our board of directors. Mr. Taube’s positions as Chief Executive Officer of the Company, Managing Partner of MCC Advisors and member of its Investment Committee provides the board with a direct line of communication to, and direct knowledge of the operations of, the Company and MCC Advisors, respectively. Mr. Taube received a B.A. from Harvard University.

We believe that Mr. Taube’s broad and extensive experience in asset and credit management and finance industries and his service as portfolio manager for several Medley affiliates qualify him to serve as a member of our board of directors.

Seth Taube is an “interested person” of the Company as defined in the 1940 Act due to his positions as a Managing Partner of MCC Advisors since our inception and Senior Portfolio Manager of the private investment funds managed by Medley LLC since 2007. In addition, Mr. Taube has served as Chief Executive Officer and Chairman of the board of directors of Sierra Income Corporation, a non-traded business development company, since its inception on June 16, 2011, and previously served as its President. Mr. Taube also has served as the Chief Executive Officer and Chairman of the board of directors of Sierra Total Return Fund, a closed-end management investment company that is operated as an interval fund since its inception on August 18, 2016. Mr. Taube also serves as Chief Executive Officer of SIC Advisors LLC, which serves as the investment adviser to Sierra Income Corporation, as well as serves on the board of Sierra Total Return Fund and on the investment committee of STRF Advisors, the investment adviser to Sierra Total Return Fund. In addition to serving on our board of directors, Mr. Taube currently serves on the board of Sierra Income Corporation. Prior to forming Medley, Mr. Taube was a Partner with T3 Group and Griphon Capital Management. Mr. Taube previously worked with Tiger Management and Morgan Stanley & Co. Through his depth of experience in managerial positions in investment management, leveraged finance and financial services, as well as his intimate knowledge of the business and operations of MCC Advisors and the private investment funds managed by Medley, Mr. Taube brings extensive knowledge of private equity and investment banking. Mr. Taube’s previous service on the Company’s board also provides him with a specific understanding of our Company, its operations, and the business and regulatory issues facing business development companies. Mr. Taube’s position as Managing Partner of MCC Advisors provides the board of directors with a direct line of communication to and valuable insight of an experienced financial manager with direct knowledge of the operations of the Company and MCC Advisors, respectively. Mr. Taube received a B.A. from Harvard University, an M.Litt. in Economics from St. Andrew’s University in Great Britain, where he was a Rotary Foundation Fellow, and an M.B.A. from the Wharton School at the University of Pennsylvania.


73



We believe that Mr. Taube’s broad and extensive experience in asset and credit management and finance industries and his service as portfolio manager for several Medley affiliates qualify him to serve as a member of our board of directors.

Jeff Tonkel is an “interested person” of the Company as defined in the 1940 Act due to his position as senior advisor to the Medley platform. Mr. Tonkel is a Senior Advisor and on the Board of Directors of Medley Management Inc. Mr. Tonkel previously served as President of Medley, Sierra Income Corporation and Sierra Total Return Fund. Prior to Medley, Mr. Tonkel was a Managing Director with J.P. Morgan serving as CFO of a global financing and markets business. Prior to J.P. Morgan, Mr. Tonkel was Managing Director, Principal Investments, with Friedman Billings Ramsey, where he focused on merchant banking and corporate development investments. Mr. Tonkel began his investment career with Summit Partners. Mr. Tonkel received a BA from Harvard University and an MBA from Harvard Business School.

We believe that Mr. Tonkel’s broad and extensive experience in asset and credit management and tenure in the financial services industry qualify him to serve as a member of our board of directors.

Independent Directors

Arthur S. Ainsberg is not an “interested person” of the Company as defined in the 1940 Act. Mr. Ainsberg has over 40 years of experience in the financial services industry and a deep understanding of public and accounting matters for financial service companies. Mr. Ainsberg served as a director, Chairman of the Audit Committee and member of the Compliance Committee of Nomura Securities International, Inc. (the U.S. based broker-dealer of The Nomura Group) from 1996 through December 2014. In September 2012, Mr. Ainsberg was named to the board of directors of Nomura Global Financial Products, Inc., and in July 2013, he was named to the board of directors of Nomura Holding America, Inc., and served on each board through December 2014. In May 2013, Mr. Ainsberg was named to the Board of Directors of AG Mortgage Investment Trust. AG is a NYSE company, structured as a REIT, investing in various types of mortgage investments. From July 2003 through May 2012, Mr. Ainsberg served as a director for National Financial Partners Corporation, an independent financial services distribution company. From August 2009 through June 2011, Mr. Ainsberg served as Chief Operating Officer of Lehman Brothers Inc. in liquidation, the largest and most complex bankruptcy in the United States. Prior to this engagement, Mr. Ainsberg served as the Independent Consultant for Morgan Stanley & Co. from December 2003 until July 2009, under the Global Research Analyst Settlement, and was responsible for selecting and monitoring the providers of independent research for the clients of Morgan Stanley. Previously, Mr. Ainsberg was Chief Operating Officer at two investment partnerships, Brahman Capital Corp. from 1996 to 2000 and Bessent Capital Corp. during 2001. He also served as Chairman of the New York State Board for Public Accountancy from 1999 to 2000 and was a member of that board from 1993 to 2001. From 1998 to 2000, he was also a member of the Board of District 10 of the National Association of Securities Dealers. Mr. Ainsberg is also the author of Shackleton: Leadership Lessons from Antarctica (2008) and the co-author of Breakthrough: Elizabeth Hughes, the Discovery of Insulin, and the Making of a Medical Miracle (2010).

Mr. Arthur S. Ainsberg has extensive experience in the financial services industry and a deep understanding of public and financial accounting matters for financial services companies. He also brings to our board of directors valuable perspective from his experience as a board member of a large U.S. broker-dealer.

Karin Hirtler-Garvey is not an “interested person” of the Company as defined in the 1940 Act. Ms. Hirtler-Garvey has served as a Director of USAA Federal Savings Bank, a privately held consumer bank, where she has served as the Compensation Committee Chair since June 2018, and also served as the Risk Committee Chair from December 2013 to June 2018. She also has served as a Director of StarStone, a specialty insurance company, since December 2019, a Director of VA Capital Management, a privately held annuities firm, since August 2018, and a Director of Victory Capital Holdings, a publicly traded asset management firm, since October 2014, where she chairs the Audit Committee. Ms. Hirtler-Garvey served as a Director of Western World Insurance Group from December 2006 to June 2019, and chaired the Audit Committee from December 2009 to June 2019, and also served as a Member of its Compensation Committee and Pension Committee from April 2011 to September 2014. From August 2017 to August 2018, she served as a Director of Validus Holdings Ltd., the publicly-traded parent company of Western World. Ms. Hirtler-Garvey also served on the board of ARO Liquidation Inc., the successor company to Aeropostale, Inc., where she served as the Chairman of the Board of Directors from February 2012 to May 2016. Ms. Hirtler-Garvey served on the board of Aeropostale from August 2005 to April 2018 where she was the lead independent director and served as a member of the Nominating and Corporate Governance Committee and Chairperson of the Audit Committee. From May 2009 to December 2011, Ms. Hirtler-Garvey was the Chief Risk Executive for Ally Financial Inc. From June 2008 to June 2009, Ms. Hirtler-Garvey also served as a Director for Residential Capital LLC, a subsidiary of GMAC. From March 2005 to December 2008, Ms. Hirtler-Garvey was a principal in a start-up real estate development venture based in New Jersey. From 1995 to 2005, Ms. Hirtler-Garvey held various senior level management positions at Bank of America, including Chief Operating Officer, Global Markets, President of Trust and Credit Banking Products, and Chief Financial Officer/Chief Operating Officer for the Wealth and Investment Management division. Ms. Hirtler-Garvey is a C.P.A.

We believe that Ms. Hirtler-Garvey’s tenure in the financial services industry and extensive experience in senior management positions support her appointment to our board of directors.

David A. Lorber is a Co-Founder of FrontFour Capital, an investment adviser, and has served as a Portfolio Manager since January 2007. He is also a Co-Founder of FrontFour Corp., an investment adviser, and has been a Principal since January 2011. Previously, Mr. Lorber was a Senior Investment Analyst at Pirate Capital LLC, a hedge fund, from 2003 to 2006. He was an Analyst at Vantis Capital Management LLC, a money management firm and hedge fund, from 2001 to 2003 and an Associate at Cushman & Wakefield, Inc., a global real estate firm, from 2000 to 2001. Mr. Lorber has served as a director of Ferro Corporation (NYSE:FOE), a leading producer of specialty materials and chemicals for manufacturers, since May 2013, where he is also Lead Director, Chairman of its Governance & Nomination Committee and a member of its Compensation Committee. From April 2006 until December 2014, Mr. Lorber served as a director of Aerojet Rocketdyne Holdings, Inc. (formerly GenCorp Inc.) (NYSE:AJRD), a technology-based manufacturer of aerospace and defense products and systems with a real estate segment. He also previously served as a director of Huntingdon Capital Corp., a real estate company, from January 2010 to May 2013 and was a Trustee for IAT Air Cargo Facilities Income Fund, a real estate company, from January 2009 to December 2009. He also served as a director of Fisher Communications Inc. (formerly NASDAQ:FSCI), an integrated media company, from April 2009 to March 2012. Mr. Lorber earned his B.S. from Skidmore College.

Mr. Lorber’s significant financial and investment industry background as well as his board experience and corporate governance awareness from his current and past service as a director allow him to provide valuable advice and guidance to our board of directors.

74




Lowell W. Robinson is an experienced executive with over thirty years of senior global strategic, financial, M&A, operational, turnaround and governance experience. From 2007 through 2009, Mr. Lowell served as the Chief Financial Officer and Chief Operating Officer of MIVA, Inc. (formerly NASDAQ:MIVA), an online advertising network, after initially joining the company in 2006 as its Chief Financial Officer and Chief Administrative Officer. Prior to that, Mr. Robinson served as the President of LWR Advisors, LLC, a strategic and financial consulting services firm, from 2002 to 2006. Previously, from 2000 to 2002, he served as the Chief Financial Officer and Chief Administrative Officer at HotJobs.com Ltd. (formerly NASDAQ:HOTJ), an online recruiting and job search engine that was sold to Yahoo! Inc. Mr. Robinson was the Chief Financial Officer and Chief Administrative Officer at PRT Group Inc. (formerly NASDAQ:PRTG), a software and IT services company that he helped take public, from 1997 through 1999. Mr. Robinson also previously held senior financial positions at Advo, Inc. (formerly NYSE:AD), a direct-mail and marketing services company (1994 to 1997), Citigroup Inc. (NYSE:C), a multinational diversified financial services corporation (1986 to 1993), Uncle Bens Inc., a leading marketer of rice and a subsidiary of Mars, Incorporated (1983 to 1986), and Kraft Foods Inc. (formerly NYSE:KFT), at the time one of the world’s largest food companies (1973 to 1983). He previously served as a director of each of Aratana Therapeutics, Inc. (NASDAQ: PETX), a commercial-stage biopharma company focused on pet products (May 2018 to July 2019), EVINE Live Inc. (NASDAQ:EVLV) (f/k/a ShopHQ), a digital omnichannel home shopping network (March 2014 to June 2018), SITO Mobile, Ltd. (NASDAQ:SITO), a leading mobile engagement platform provider (April 2017 to June 2017), Higher One Holdings, Inc. (formerly NYSE:ONE), a financial technology company focused on providing cost-saving solutions (June 2014 to August 2016), Support.com, Inc. (NASDAQ:SPRT), a leading provider of cloud-based software and services (March 2016 to June 2016), The Jones Group, Inc. (formerly NYSE:JNY), an American designer, marketer and wholesaler of branded clothing, shoes and accessories (2005 to April 2014), and International Wire Group, Inc. (OTCMKTS:ITWG), a manufacturer and marketer of wire products (2003 to 2009). Mr. Robinson’s prior board experience also includes serving as a director of each of Independent Wireless One Corp., Diversified Investment Advisors Inc. and Edison Schools Inc. Since September 2018, Mr. Robinson has served on the board of directors of The New York Academy of Science, a not-for-profit organization dedicated to driving innovative solutions to society’s challenges by advancing scientific research, education and policy. He previously was on the boards of The Council for Economic Education, The Metropolitan Opera Guild, the Smithsonian Libraries and the University of Wisconsin School of Business, where he currently is on the Advisory Board for its Department of Economics. Mr. Robinson earned his M.B.A. from Harvard Business School and B.A. in Economics from the University of Wisconsin.

Mr. Robinson’s broad diversified expertise in various industries, including corporate finance, M&A and turnaround experience, as well as his experience serving as a director of numerous public companies makes him well qualified to serve on our board of directors.

Executive Officers

Information regarding our executive officers who are not directors of the Company are as follows:
Name, Address, and Age(1)
 
Position(s) Held with Company
 
Principal Occupation(s) 
During Past 5 Years
 
 
 
 
 
Richard T. Allorto, Jr., 48
 
Chief Financial Officer and Secretary
 
Chief Financial Officer of Medley Management, Inc.; Chief Financial Officer, Treasurer and Secretary of Sierra Income Corporation; previously, Chief Compliance Officer of Medley Capital Corporation; Chief Financial Officer, Chief Compliance Officer (previously) of Sierra Income Corporation; Chief Financial Officer of MCC Advisors; previously Chief Financial Officer of GSC Investment Corp.
John D. Fredericks, 55
 
Chief Compliance Officer
 
General Counsel of Medley Management, Inc.; Chief Compliance Officer of Sierra Income Corporation; previously, a Partner at Winston & Strawn, LLP.
(1)
The business address of the executive officers is c/o Medley Capital Corporation, 280 Park Avenue, 6th Floor East, New York, NY 10017.

Richard T. Allorto, Jr. is the Chief Financial Officer and Secretary of the Company. Mr. Allorto has also served as the Chief Financial Officer, Treasurer and Secretary of Sierra from April 2012 until November 2016 and was re-appointed to such positions in July 2018. Mr. Allorto is also the Chief Financial Officer of Medley and is responsible for the financial operations of the various private funds managed by Medley. Mr. Allorto received a B.S. in Accounting from Seton Hall University and is a licensed CPA.

John D. Fredericks is the Chief Compliance Officer of the Company. Mr. Fredericks is also the Chief Compliance Officer of Sierra Income Corporation and Sierra Total Return Fund, as well as General Counsel of Medley Management, Inc. Prior to joining Medley, Mr. Fredericks was a partner with Winston & Strawn, LLP, where he was a member of the firm’s restructuring and insolvency and corporate lending groups. Before joining Winston & Strawn, LLP, Mr. Fredericks was a partner with Murphy Sheneman Julian & Rogers and an associate at Murphy, Weir & Butler. Mr. Fredericks was admitted to the California State Bar in 1993. Mr. Fredericks received a BA from the University of California Santa Cruz and a J.D. from University of San Francisco.

Board Leadership Structure

Our board of directors monitors and performs an oversight role with respect to the business and affairs of the Company, including with respect to investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of service providers to the Company. Among other things, our board of directors approves the appointment of our investment adviser and officers, reviews and monitors the services and activities performed by our investment adviser and executive officers and approves the engagement, and reviews the performance of, our independent registered public accounting firm.


75



Under the Company’s bylaws, our board of directors may designate a Chairman to preside over the meetings of the board of directors and meetings of the stockholders and to perform such other duties as may be assigned to him or her by the board of directors. We do not have a fixed policy as to whether the Chairman of the board of directors should be an independent director and believe that we should maintain the flexibility to select the Chairman and reorganize the leadership structure, from time to time, based on the criteria that is in the best interests of the Company and its stockholders at such times.

Presently, Mr. Brook Taube serves as the Chairman of our board of directors. Mr. Brook Taube is an “interested person” (as defined in Section 2(a)(19) of the 1940 Act) of the Company because he is Chief Executive Officer and President of the Company, serves on the Investment Committee and is the Managing Member of MCC Advisors. We believe that Mr. Taube’s history with the Company, familiarity with its investment platform, and extensive knowledge of the financial services industry qualify him to serve as the Chairman of our board of directors. We believe that the Company is best served through this existing leadership structure, as Mr. Taube’s relationship with MCC Advisors provides an effective bridge and encourages an open dialogue between management and the board of directors, ensuring that both groups act with a common purpose.

The currently designated lead independent director of our board of directors is Arthur Ainsberg. We are aware of the potential conflicts that may arise when a non-independent director is Chairman of the board of directors, but believe these potential conflicts are offset by our strong corporate governance policies. Our corporate governance policies include regular meetings of the independent directors in executive session without the presence of interested directors and management, the establishment of the Audit Committee, the Nominating and Corporate Governance Committee, the Compensation Committee, and the MCC Special Committee comprised solely of independent directors, and the appointment of a Chief Compliance Officer, with whom the independent directors meet regularly without the presence of interested directors and other members of management, for administering our compliance policies and procedures. In addition, our independent directors are advised by independent counsel.

We recognize that different board leadership structures are appropriate for companies in different situations. We re-examine our corporate governance policies on an ongoing basis to ensure that they continue to meet the Company’s needs.

Board of Directors Role in Risk Oversight

Our board of directors performs its risk oversight function primarily through (a) its three standing committees, which report to the entire board of directors and are comprised solely of independent directors, and (b) active monitoring of our Chief Compliance Officer and our compliance policies and procedures.

As described below in more detail under “Committees of the Board of Directors,” the Audit Committee and the Nominating and Corporate Governance Committee assist the board of directors in fulfilling its risk oversight responsibilities. The Audit Committee’s risk oversight responsibilities include overseeing the Company’s accounting and financial reporting processes, the Company’s systems of internal controls regarding finance and accounting, and audits of the Company’s financial statements. The Nominating and Corporate Governance Committee’s risk oversight responsibilities include selecting, researching and nominating directors for election by our stockholders, developing and recommending to the board of directors a set of corporate governance principles, and overseeing the evaluation of the board of directors and our management.

Our board of directors also performs its risk oversight responsibilities with the assistance of the Chief Compliance Officer. Every quarter, the board of directors reviews a written report from the Chief Compliance Officer discussing the adequacy and effectiveness of the compliance policies and procedures of the Company and its service providers. The Chief Compliance Officer’s quarterly report addresses the following: (a) the operation of the compliance policies and procedures of the Company and its service providers since the last report; (b) any material changes to such policies and procedures since the last report; (c) any recommendations for material changes to such policies and procedures as a result of the Chief Compliance Officer’s quarterly review; and (d) any compliance matter that has occurred since the date of the last report about which the board of directors would reasonably need to know to oversee our compliance activities and risks. In addition, the Chief Compliance Officer meets separately in executive session with the independent directors at least once each year.

We believe that our board of directors' role in risk oversight is effective and appropriate given the extensive regulation to which we are already subject as a BDC. As a BDC, we are required to comply with certain regulatory requirements that control the levels of risk in our business and operations. For example, our ability to incur indebtedness is limited such that our asset coverage must equal at least 200% (or 150% if, pursuant to the 1940 Act, certain requirements are met) immediately after each time we incur indebtedness, we generally have to invest at least 70% of our total assets in “qualifying assets” and we are not generally permitted to invest in any portfolio company in which one of our affiliates currently has an investment.

We recognize that different board roles in risk oversight are appropriate for companies in different situations. We re-examine the manner in which the board of directors administers its oversight function on an ongoing basis to ensure that it continues to meet the Company’s needs.

Committees of the Board of Directors

An Audit Committee, a Nominating and Corporate Governance Committee, a Compensation Committee, and a Special Committee have been established by our board of directors. During the fiscal year of 2019, our board of directors held 37 board meetings, six Audit Committee meetings, seven Nominating and Corporate Governance Committee meetings, one Compensation Committee meeting, and 55 MCC Special Committee meetings. All directors attended at least 75% of the aggregate number of meetings of the board of directors and of the respective committees on which they serve. We require each director to make a diligent effort to attend all board and committee meetings as well as each annual meeting of our stockholders.

Audit Committee.  The Audit Committee operates pursuant to a charter approved by our board of directors, a copy of which is available on our website at http://www.medleycapitalcorp.com. The charter sets forth the responsibilities of the Audit Committee. The Audit Committee’s responsibilities include selecting the independent registered public accounting firm for the Company, reviewing with such independent registered public accounting firm the planning, scope and results of its audit of the Company’s financial statements, pre-approving the fees for services performed, reviewing with the independent registered public accounting firm the adequacy of internal control systems, reviewing the Company’s annual financial statements and periodic filings and receiving the Company’s audit reports and financial statements. The Audit Committee also establishes guidelines and makes recommendations to our board of directors regarding the valuation of our investments. The Audit Committee is responsible for aiding our board of directors in determining the fair value of debt and equity securities that are not publicly traded or for which current market values are not readily available. The board of directors

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and the Audit Committee utilize the services of nationally recognized third-party valuation firms to help determine the fair value of these securities. The Audit Committee is currently composed of Karin Hirtler-Garvey, Arthur S. Ainsberg, and Lowell W. Robinson, each of whom is independent as set forth in the NYSE Listed Company Manual and is not an “interested person” (as that term is defined in Section 2(a)(19) of the 1940 Act) of the Company. Karin Hirtler-Garvey serves as Chair of the Audit Committee. Our board of directors has determined that each of Karin Hirtler-Garvey, Arthur S. Ainsberg, and Lowell W. Robinson is an “audit committee financial expert” as that term is defined under Item 407 of Regulation S-K, as promulgated under the Exchange Act. Each of Karin Hirtler-Garvey, Arthur S. Ainsberg, and Lowell W. Robinson meets the current independence and experience requirements of Rule 10A-3 of the Exchange Act.

Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee operates pursuant to a charter approved by our board of directors, a copy of which is available on our website at http://www.medleycapitalcorp.com. The Nominating and Corporate Governance Committee is responsible for selecting, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on the board of directors or a committee thereof, developing and recommending to the board of directors a set of corporate governance principles and overseeing the evaluation of the board of directors and our management. The Nominating and Corporate Governance Committee currently does not consider nominees recommended by our stockholders.

The Nominating and Corporate Governance Committee seeks candidates who possess the background, skills and expertise to make a significant contribution to the board of directors, the Company and its stockholders. In considering possible candidates for election as a director, the Nominating and Corporate Governance Committee takes into account, in addition to such other factors as it deems relevant, the desirability of selecting directors who:

are of high character and integrity;

are accomplished in their respective fields, with superior credentials and recognition;

have relevant expertise and experience upon which to be able to offer advice and guidance to management;

have sufficient time available to devote to the affairs of the Company;

are able to work with the other members of the board of directors and contribute to the success of the Company;

can represent the long-term interests of the Company’s stockholders as a whole; and

are selected such that with the other members of the board of directors represent a range of backgrounds and experience.

The Nominating and Corporate Governance Committee has not adopted a formal policy with regard to the consideration of diversity in identifying director nominees. In determining whether to recommend a director nominee, the Nominating and Corporate Governance Committee considers and discusses diversity, among other factors, with a view toward the needs of the board of directors as a whole. The Nominating and Corporate Governance Committee generally conceptualizes diversity expansively to include, without limitation, concepts such as race, gender, national origin, differences of viewpoint, professional experience, education, skill and other qualities that contribute to the board of directors, when identifying and recommending director nominees. The Nominating and Corporate Governance Committee believes that the inclusion of diversity as one of many factors considered in selecting director nominees is consistent with the Nominating and Corporate Governance Committee’s goal of creating a board of directors that best serves the needs of the Company and the interest of its stockholders. The Nominating and Corporate Governance Committee is currently composed of Arthur S. Ainsberg, Karin Hirtler-Garvey, and David A. Lorber, each of whom is independent as set forth in the NYSE Listed Company Manual and is not an “interested person” (as defined in Section 2(a)(19) of the 1940 Act) of the Company. Mr. Ainsberg serves as Chairman of the Nominating and Corporate Governance Committee.

Compensation Committee.  The Compensation Committee operates pursuant to a charter approved by our board of directors, a copy of which is available on our website at http://www.medleycapitalcorp.com. The Compensation Committee is responsible for reviewing and approving the reimbursement by the Company of the compensation of the Company’s Chief Financial Officer, the Company’s Chief Compliance Officer and their respective staffs. As discussed below, none of our executive officers are compensated by the Company. The Compensation Committee is currently composed of Karin Hirtler-Garvey, Arthur S. Ainsberg, and David A. Lorber, each of whom is independent as set forth in the NYSE Listed Company Manual and is not an “interested person” (as defined in Section 2(a)(19) of the 1940 Act) of the Company. Ms. Hirtler-Garvey serves as the Chair the Compensation Committee.

MCC Special Committee. The MCC Special Committee was granted the authority to, among other things, evaluate and review the terms and conditions of the Mergers or any alternative thereto and determine whether the Mergers or any alternative thereto is advisable and is fair to, and in the best interests of, the Company and its stockholders (or any subset of its stockholders that the MCC Special Committee determines to be appropriate) in connection with the Mergers. The MCC Special Committee has the authority to select and retain, in its sole discretion, any advisors that they deem appropriate, including their own independent financial and legal advisors. The MCC Special Committee is currently composed of Arthur S. Ainsberg, Karin Hirtler-Garvey, David A. Lorber, and Lowell W. Robinson, each of whom is independent as set forth in the NYSE Listed Company Manual and is not an “interested person” (as defined in Section 2(a)(19) of the 1940 Act) of the Company. Mr. Lorber serves as the chair of the MCC Special Committee. Messrs. Mack and Lerdal had been members of the MCC Special Committee prior to their resignation from the Board, effective as of March 18, 2019.

Communication with the Board of Directors

Stockholders with questions about the Company are encouraged to contact the Company’s investor relations department. However, if stockholders believe that their questions have not been addressed, they may communicate with the Company’s board of directors by sending their communications to Investor Relations, c/o Medley Capital Corporation, 280 Park Avenue, 6th Floor East, New York, NY 10017. All stockholder communications received in this manner will be delivered to one or more members of the board of directors.

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Delinquent Section 16(a) Reports

Pursuant to Section 16(a) of the Exchange Act, the Company’s directors and executive officers, and any persons holding more than 10% of its common stock, are required to report their beneficial ownership and any changes therein to the SEC and the Company. Specific due dates for those reports have been established, and the Company is required to report herein any failure to file such reports by those due dates. Based solely on a review of the copies of such reports and written representations delivered to the Company by such persons, we believe that there were no violations of Section 16(a) by such persons during the Company’s fiscal year ended September 30, 2019.

Code of Ethics

The Company has adopted a Code of Ethics which applies to, among others, our senior officers, including our Chief Executive Officer and our Chief Financial Officer, as well as every officer, director, employee and access person (as defined within the Company’s Code of Ethics) of the Company. The Company’s Code of Ethics can be accessed via our website at http://www.medleycapitalcorp.com. The Company intends to disclose any amendments to or waivers from any required provision of the Code of Ethics on Form 8-K.

Item 11. Executive Compensation

Compensation of Directors

The following table sets forth compensation of the Company’s directors, for the year ended September 30, 2019:
Name
 
Fees Earned or
Paid in Cash
(1)
 
Stock
Awards
(2)
 
All Other
Compensation
 
Total
Interested Directors
 
 
 
 
 
 
 
 
Brook Taube
 

 

 

 

Seth Taube
 

 

 

 

Jeff Tonkel
 

 

 

 

Independent Directors
 
 
 
 
 
 
 
 
Arthur S. Ainsberg
 
$
406,000

 

 

 
$
406,000

Karin Hirtler-Garvey
 
$
382,250

 

 

 
$
382,250

David A. Lorber(3)
 
$
204,577

 

 

 
$
204,577

Lowell W. Robinson(3)
 
$
177,308

 

 

 
$
177,308

John E. Mack(4)
 
$
175,000

 

 

 
$
175,000

Mark Lerdal(5)
 
$
160,250

 

 

 
$
160,250


(1)
For a discussion of the independent directors’ compensation, see below.
(2)
We do not maintain a stock or option plan, non-equity incentive plan or pension plan for our directors. However, our independent directors have the option to receive all or a portion of the directors’ fees to which they would otherwise be entitled in the form of shares of our common stock issued at a price per share equal to the greater of our then current net asset value per share or the market price at the time of payment. No shares were issued to any of our independent directors in lieu of cash during the fiscal year ended 2019.
(3)
On April 15, 2019, in connection with the execution of the Settlement Term Sheet, our board of directors appointed David A. Lorber and Lowell W. Robinson to our board of directors to fill the vacancies on our board of directors created by the resignations of Mark Lerdal and John E. Mack, respectively.
(4)
On March 18, 2019, John E. Mack informed our board of directors of his resignation as a director of the Company, effective as of that date.
(5)
On March 18, 2019, Mark Lerdal informed our board of directors of his resignation as a director of the Company, effective as of that date.

As compensation for serving on our board of directors, each independent director receives an annual fee of $90,000. Independent directors also receive $3,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee meeting. In addition, the Chairman of the Audit Committee receives an annual fee of $25,000 and each chairperson of the Nominating and Corporate Governance Committee, and the Compensation Committee receives an annual fee of $10,000, and other members of the Audit Committee, the Nominating and Corporate Governance Committee, and the Compensation Committee receive an annual fee of $12,500, $6,000, and $6,000, respectively, for their additional services in these capacities. On January 26, 2018, the board of directors established a special committee comprised solely of its independent directors for the purpose of assessing the merits of various proposed strategic transactions. As compensation for serving on the MCC Special Committee, each independent director received a one-time retainer of $25,000 plus reimbursement of out-of-pocket expenses, consistent with the Company’s policies for reimbursement of members of the board of directors. In addition, the chairman of the MCC Special Committee receives a monthly fee of $15,000 and other members receive a monthly fee of $10,000.

Our independent directors also have the option to receive all or a portion of the directors’ fees to which they would otherwise be entitled in the form of shares of our common stock issued at a price per share equal to the greater of our then current net asset value per share or the market price at the time of payment. No shares were issued to any of our independent directors in lieu of cash during the year ended September 30, 2019. In addition, no compensation was paid to directors who are “interested persons” of the Company as that term is defined in Section 2(a)(19) of the 1940 Act.

Compensation of Executive Officers


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None of our officers will receive direct compensation from us. The compensation of our Chief Financial Officer and Chief Compliance Officer is paid by our administrator, subject to reimbursement by the Company of an allocable portion of such compensation for services rendered by them to us.

Indemnification Agreements

We have entered into indemnification agreements with our directors. The indemnification agreements are intended to provide our directors the maximum indemnification permitted under Delaware law and the 1940 Act. Each indemnification agreement provides that the Company shall indemnify the director who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, to the maximum extent permitted by Delaware law and the 1940 Act.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth, as of December 16, 2019, the beneficial ownership of our directors, our executive officers, each person known to us to beneficially own 5% or more of the outstanding shares of our common stock, and the executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Ownership information for those persons who beneficially own 5% or more of our shares of common stock is based upon reports filed by such persons with the SEC and other information obtained from such persons, if available.

Unless otherwise indicated, the Company believes that each beneficial owner set forth in the table below has sole voting and investment power and has the same address as the Company. The Company’s directors are divided into two groups - interested directors and independent directors. Interested directors are “interested persons” of the Company as defined in Section 2(a)(19) of the 1940 Act. The address of all executive officers and directors is c/o Medley Capital Corporation, 280 Park Avenue, 6th Floor East, New York, NY 10017.
Name and Address of Beneficial Owner
 
Number of Shares Owned Beneficially(1)
 
Percentage of Class(2)
 
 
 
 
 
Fortress Investment Group LLC(3)
 
7,756,938

 
14.2%

Interested Directors
 
 
 
 
Brook Taube
 
190,000

(4) 
*%

Seth Taube
 
177,510

(5) 
*%

Jeff Tonkel
 
15,000

 
*%

Independent Directors
 
 
 
 
Arthur S. Ainsberg
 
3,000

 
*%

Karin Hirtler-Garvey
 
3,000

 
*%

David A. Lorber
 
1,674,962

(6) 
3.1%

Lowell W. Robinson
 

 

Executive Officers
 
 
 
 
Richard T. Allorto, Jr.
 
20,000

 
*%

John D. Fredericks
 
4,000

 
*%

All executive officers and directors as a group (9 persons)
 
2,087,472

 
3.9
%
* Represents less than one percent.

(1)
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Assumes the beneficial owners have made no other purchases or sales of our common stock since the most recently available SEC filings. This assumption has been made under the rules and regulations of the SEC and does not reflect any knowledge that we have with respect to the present intent of the beneficial owners of our common stock listed in this table.
(2)
Based on a total of 54,474,211 shares of the Company’s common stock issued and outstanding on December 16, 2019.
(3)
Based on information included in the Schedule 13G filed by Fortress Investment Group LLC with the SEC on November 4, 2019. The address of Fortress Investment Group LLC, 1345 Avenue of the Americas, 46th Floor, New York, New York 10105.
(4)
The reported shares are held by a trust for the benefit of Brook Taube's family, for which he serves as a trustee. Brook Taube disclaims beneficial ownership of such shares of common stock except to the extent of his pecuniary interest therein.
(5)
142,510 of the reported shares are held by a trust for the benefit of Seth Taube's family, for which he serves as a trustee, and 35,000 of the reported shares are held by The Seth and Angie Taube Foundation, Inc., which is a 501(c)(3) charitable organization. Seth Taube disclaims beneficial ownership of such shares of common stock except to the extent of his pecuniary interest therein.
(6)
FrontFour Master Fund, Ltd., an exempted company formed under the laws of the Cayman Islands (“FrontFour Master Fund”), beneficially owns 1,633,248.329 of the reported shares. FrontFour Opportunity Fund, a mutual fund trust formed under the laws of British Columbia, Canada (“FrontFour Opportunity Fund”), beneficially owns 41,714 of the reported shares. Each of David A. Lorber, Stephen E. Loukas, and Zachary R. George is a managing member and principal owner of FrontFour Capital Group LLC (“FrontFour Capital”), which serves as an investment manager of FrontFour Master Fund, and a principal owner of FrontFour Capital Corp. (“FrontFour Corp.”), which serves as an investment manager to FrontFour Opportunity Fund. David A. Lorber disclaims beneficial ownership of such shares of common stock except to the extent of his pecuniary interest therein.
The following table sets forth any direct or indirect interest David A. Lorber may be deemed to have had during the past five years in MDLY’s Class A common stock through certain short positions on the accounts of FrontFour Capital Group LLC, FrontFour Master Fund, Ltd., and FrontFour Opportunity Fund. On May 9, 2019, Mr. Lorber informed MCC that, effective as of the date of his appointment to our board of directors, (i) Mr. Lorber irrevocably

79



relinquished his investment authority with respect to such short positions and (ii) Mr. Lorber waived any direct or indirect pecuniary interest that he had in such short positions, including, without limitation, the opportunity, directly or indirectly, to profit or share in any profit derived from such short positions and (iii) it was agreed that Mr. Lorber shall not have any other economic interest in such short positions, including, without limitation, the obligation, directly or indirectly, to incur or share in any loss derived from such short positions in each case in Mr. Lorber’s capacity as a managing member, principal, owner, partner, investor, officer or employee of FrontFour or otherwise. During the past five years, no other directors whom are not “interested persons” (as such term is defined in Section 2(a)(19) of the 1940 Act) of MCC or their respective “Immediate Family Members” (as such term is defined in the Exchange Act) have any direct or indirect interest, the value of which exceeds $120,000, in MCC Advisors or its affiliates.
Name of Director or Nominee
 
Name of Owners and 
Relationships to Director
or Nominee
 
Company
 
Title of Class
 
Value of Securities(1)
 
Percent of Class
Independent Director
 
 
 
 
 
 
 
 
 
 
David A. Lorber
 
FrontFour Capital Group LLC(2)
 
MDLY
 
MDLY Class A Common Stock
 
$

(3) 
N/A
 
 
FrontFour Master Fund Ltd.(4)
 
MDLY
 
MDLY Class A Common Stock
 
$
96,356

 
N/A
 
 
FrontFour Opportunity Fund(5)
 
MDLY
 
MDLY Class A Common Stock
 
$
2,523

 
N/A

(1)    The value of securities reflects the market value of the short positions on each of the accounts of FrontFour Capital Group LLC, FrontFour Master Fund, Ltd. and FrontFour Opportunity Fund, as applicable, with respect to short positions in the MDLY Class A common stock as of May 8, 2019. As of May 8, 2019, the closing price of MDLY’s Class A common stock was $2.88 on the NYSE.
(2)    Each of David A. Lorber, Stephen E. Loukas, and Zachary R. George is a managing member and principal owner of FrontFour Capital Group LLC. FrontFour Capital Group LLC sold short shares of the MDLY Class A common stock for separately managed account of which FrontFour Capital Group LLC served as the investment manager. On behalf of the separately managed accounts, FrontFour Capital Group LLC sold short shares of the MDLY Class A common stock for the net trading proceeds of $9,489.58, $6,345.59, $3,080.23, $4,864.06, $2,642.21, and $10,023.89 on December 7, 2018, December 10, 2018, December 11, 2018, December 12, 2018, December 13, 2018, and January 2, 2019, respectively.
(3)    On February 8, 2019, FrontFour Capital Group LLC ceased to serve as the investment manager of the separately managed accounts and, as a result of the foregoing, David A. Lorber no longer can be deemed to have an indirect interest in the MDLY Class A common stock through the separately managed accounts.
(4)    Each of David A. Lorber, Stephen E. Loukas, and Zachary R. George is a managing member and principal owner of FrontFour Capital Group LLC, which serves as the investment manager of FrontFour Master Fund, Ltd. FrontFour Master Fund, Ltd. sold short shares of the MDLY Class A common stock for the net trading proceeds of $46,708.81, $30,996.33, $15,006.05, $23,977.73, $13,149.31, and $19,317.35 on December 7, 2018, December 10, 2018, December 11, 2018, December 12, 2018, December 13, 2018, and January 2, 2019, respectively.
(5)    Each of David A. Lorber, Stephen E. Loukas, and Zachary R. George is a principal owner of FrontFour Corp., which serves as the investment manager of FrontFour Opportunity Fund. FrontFour Opportunity Fund sold short shares of the MDLY Class A Common Stock for the net trading proceeds of $1,163.56, $799.42, $359.21, $599.56, $330.83, and $625.57 on December 7, 2018, December 10, 2018, December 11, 2018, December 12, 2018, December 13, 2018, and January 2, 2019, respectively.

Set forth below is the dollar range of equity securities beneficially owned by each of our directors as of December 16, 2019. We are not part of a “family of investment companies,” as that term is defined in the 1940 Act.
Name of Director
 
Dollar Range of Equity Securities Beneficially Owned(1)(2)
Interested Directors
 
 
Brook Taube
 
over $100,000
Seth Taube
 
over $100,000
Jeff Tonkel
 
$10,001 – $50,000
Independent Directors
 
 
Arthur S. Ainsberg
 
$1 – $10,000
Karin Hirtler-Garvey
 
$1 – $10,000
David A. Lorber
 
over $100,000
Lowell W. Robinson
 
None

(1)
The dollar ranges are: None, $1 - $10,000, $10,001 - $50,000, $50,001 - $100,000, or over $100,000.
(2)
The dollar range of equity securities beneficially owned in us is based on the closing price for our common stock $2.13 on December 16, 2019 on the NYSE. Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Exchange Act.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Investment Management Agreement. We have entered into an Investment Management Agreement with MCC Advisors, our investment adviser. Mr. Brook Taube, our Chairman, Chief Executive Officer and President, is a Managing Partner of, and has financial and controlling interests in, MCC Advisors. In addition, Messrs. Seth Taube and Jeff Tonkel, members of our board of directors, and Mr. Richard T. Allorto, Jr., our Chief Financial Officer, serve as Managing Partners and Chief Financial Officer, respectively, for MCC Advisors. Messrs. Seth Taube, Jeff Tonkel and Richard T. Allorto, Jr. also have financial interests in MCC Advisors.


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Co-Investment Opportunities. MCC Advisors and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole or in part, with ours. MCC Advisors also focuses on investing primarily in senior secured loans, including first lien, unitranche and second lien debt instruments. MCC Advisors and its affiliates may determine that an investment is appropriate for us and for one or more of its affiliated funds. In such event, depending on the availability of such investment and other appropriate factors, MCC Advisors or its affiliates may determine that we should co-invest with one or more other funds. The Company obtained an exemptive order from the SEC on November 25, 2013 (the “Prior Exemptive Order”). On March 29, 2017, the Company, MCC Advisors and certain other affiliated funds and investment advisers received an exemptive order (the “Exemptive Order”) that supersedes the Prior Exemptive Order and allows affiliated registered investment companies to participate in co-investment transactions with us that would otherwise have been prohibited under Section 17(d) and 57(a)(4) of the 1940 Act and Rule 17d-1 thereunder. On October 4, 2017, the Company, MCC Advisors and certain of our affiliates received an exemptive order that supersedes the Exemptive Order (the “Current Exemptive Order”) and allows, in addition to the entities already covered by the Exemptive Order, Medley LLC and its subsidiary, Medley Capital LLC, to the extent they hold financial assets in a principal capacity, and any direct or indirect, wholly or majority owned subsidiary of Medley LLC that is formed in the future, to participate in co-investment transactions with us that would otherwise be prohibited by either or both of Sections 17(d) and 57(a)(4) of the 1940 Act. If the Mergers are successfully consummated, Sierra and certain of its affiliates will not be able to rely on the Current Exemptive Order. In this regard, on November 19, 2018, Sierra and certain of its affiliates have submitted an exemptive application to the SEC for an exemptive order that would supersede the Current Exemptive Order (the “Superseding Exemptive Order”) and would permit Sierra to participate in negotiated co-investment transactions with certain affiliates that would otherwise be prohibited by either or both of Sections 17(d) and 57(a)(4) of the 1940 Act. There can be no assurance if and when Sierra will receive the Superseding Exemptive Order. The terms of the Superseding Exemptive Order, if received, would be substantially similar to the Current Exemptive Order. Co-investment under the Superseding Exemptive Order is subject to certain conditions therein, including the condition that, in the case of each co-investment transaction, the board of directors determines that it would be in Sierra’s best interest to participate in the transaction. The Current Exemptive Order will remain in effect unless and until the Mergers are completed and the Superseding Exemptive Order is granted by the SEC. However, neither we nor the affiliated funds are obligated to invest or co-invest when investment opportunities are referred to us or them.

We may, however, co-invest with MCC Advisors and its affiliates’ other clients in certain circumstances where doing so is consistent with applicable law and SEC staff interpretations and MCC Advisors’ allocation policy. For example, we may co-invest with such accounts consistent with guidance promulgated by the SEC staff permitting us and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that MCC Advisors, acting on our behalf and on behalf of other clients, negotiates no term other than price.

License Agreement. We have entered into a License Agreement with Medley Capital LLC, pursuant to which Medley Capital LLC has agreed to grant us a non-exclusive, royalty-free license to use the name “Medley.” In addition, pursuant to the terms of an Administration Agreement, MCC Advisors provides us with the office facilities and administrative services necessary to conduct our day-to-day operations.

Director Independence

In accordance with rules of the NYSE, our board of directors annually determines each director’s independence. We do not consider a director independent unless the board of directors has determined that he or she has no material relationship with us. We monitor the relationships of our directors and officers through the activities of our Nominating and Corporate Governance Committee and through a questionnaire each director completes no less frequently than annually and updates periodically as information provided in the most recent questionnaire changes.

Our governance guidelines require any director who has previously been determined to be independent to inform the Chairman of the board of directors and the Chairman of the Nominating and Corporate Governance Committee of any change in circumstance that may cause his or her status as an independent director to change. The board of directors limits membership on the Audit Committee, the Nominating and Corporate Governance Committee, the Compensation Committee, and the MCC Special Committee to independent directors.

In order to evaluate the materiality of any such relationship, the board uses the definition of director independence set forth in the NYSE Listed Company Manual. Section 303A.00 of the NYSE Listed Company Manual provides BDCs, such as the Company, are required to comply with all of the provisions of Section 303A applicable to domestic issuers other than Sections 303A.02, the section that defines director independence. Section 303A.00 provides that a director of a BDC shall be considered to be independent if he or she is not an “interested person” of the Company, as defined in Section 2(a)(19) of the 1940 Act. Section 2(a)(19) of the 1940 Act defines an “interested person” to include, among other things, any person who has, or within the last two years had, a material business or professional relationship with the Company.

The board of directors has determined that each of Arthur Ainsberg, Karin Hirtler-Garvey, David A. Lorber, and Lowell W. Robinson is independent, has no material relationship with the Company, and is a not an interested person (as defined in Section 2(a)(19) of the 1940 Act ) of the Company. Brook Taube, Seth Taube and Jeff Tonkel are interested persons of the Company due to their positions as members of management of MCC Advisors.

On March 18, 2019, in light of the Decision (as described above), John E. Mack informed our board of directors of his resignation as a director of the Company, effective as of that date. Mr. Mack’s decision to resign from our board of directors was not due to any dispute or disagreement with the Company, or on any matter relating to the Company’s operations, policies or practices. In addition, on March 18, 2019, in light of the Decision, Mark Lerdal informed our board of directors of his resignation as a director of the Company, effective as of that date. Mr. Lerdal’s decision to resign from our board of directors was not due to any dispute or disagreement with the Company, or on any matter relating to the Company’s operations, policies or practices. See “Item 3. Legal Proceedings” for a full description of the Decision.

On March 18, 2019, the Company notified the NYSE that, following the resignations of Mr. Mack and Mr. Lerdal, the Company had only two independent directors and Audit Committee members. On March 19, 2019, the Company received a notice from the NYSE that, due to the resignations of Mr. Mack and Mr. Lerdal from our board of directors, the Company no longer satisfies (1) the requirement that listed companies have a majority of independent directors as set forth in Section 303A.01 of the NYSE Listing Company Manual and (2) the requirement that the audit committee of a listed company to have a minimum of three members as set forth in Section 303A.07 of the NYSE Listing Company Manual. On March 20, 2019, the Company filed with the NYSE a written affirmation to notify the NYSE of the deficiencies described above.


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Pursuant to the Settlement Term Sheet, on April 15, 2019, the Nominating and Corporate Governance Committee recommended, and our board of directors approved, the appointment of two independent directors, David A. Lorber and Lowell W. Robinson, to our board of directors fill the vacancies on the MCC Board created by the resignations of Mark Lerdal and John E. Mack, respectively. In addition, the Nominating and Corporate Governance Committee recommended, and our board of directors approved, the appointment of: (a) Messrs. Lorber and Robinson to serve on the MCC Special Committee with Mr. Lorber serving as Chair of the MCC Special Committee, (b) Mr. Robinson to serve as a member of the Audit Committee, and (c) Mr. Lorber to serve as a member of the Nominating and Corporate Governance Committee and the Compensation Committee. As a result of the foregoing, the Company regained compliance with (1) the requirement that listed companies have a majority of independent directors as set forth in Section 303A.01 of the NYSE Listing Company Manual and (2) the requirement that the audit committee of a listed company to have a minimum of three members as set forth in Section 303A.07 of the NYSE Listing Company Manual.

Item 14. Principal Accountant Fees and Services

The Audit Committee and the independent directors of the board of directors have appointed Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending September 30, 2019, subject to ratification or rejection by the stockholders of the Company.

The following table displays fees for professional services by Ernst & Young LLP for the fiscal years ended September 30, 2019 and 2018 (dollars in thousands):
 
 
Fiscal Year Ended September 30, 2019
 
Fiscal Year Ended September 30, 2018
Audit Fees
 
$
985

 
$
1,106

Audit Related Fees
 

 

Tax Fees
 
89

 
88

All Other Fees
 

 

 
 
$
1,074

 
$
1,194


Audit Fees:  Audit fees include fees for services that normally would be provided by Ernst & Young LLP in connection with statutory and regulatory filings or engagements and that generally only an independent registered public accounting firm can provide. In addition to fees for the audit of our annual financial statements, the audit of the effectiveness of our internal control over financial reporting and the review of our quarterly financial statements in accordance with standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), this category contains fees for comfort letters, statutory audits, consents, and assistance with and review of documents filed with the SEC.

Audit-Related Fees:  Audit-related services consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards.

Tax Services Fees:  Tax services fees consist of fees billed for professional tax services. These services also include assistance regarding federal, state and local tax compliance.

All Other Fees:  Other fees would include fees for products and services other than the services reported above.

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PART IV
 
Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this Annual Report:

The following financial statements are set forth in Item 8:

(b) Exhibits:
3.1
 
 
3.2
 
 
3.3
 
 
4.1
 
 
4.2
 
 
4.3
 
 
4.4
 
 
4.5
 
 
4.6
 
 
4.7
 
 
4.8
 
 
10.1
 
 
10.2
 
 
10.3
 
 
10.4

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10.5
 
 
10.6
 
 
10.7
 
 
10.8
 
 
10.9
 
 
10.10
 
 
10.11
 
 
10.12
 
 
10.13
 
 
10.14
 
 
10.15
 
 
10.16
 
 
10.17
 
 
10.18
 
 
10.19
 
 
10.20
 
 

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10.21
 
 
10.22
 
 
10.23
 
 
10.24
 
 
10.25
 
 
10.26
 
 
10.27
 
 
10.28
 
 
10.29
 
 
10.30
 
 
10.31
 
 
10.32
 
 
10.33
 
 
10.34

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10.35
 
 
10.36
 
 
10.37
 
 
10.38
 
 
10.39
 
 
10.40
 
 
10.41
 
 
14.1
 
 
14.2
 
 
21.1
 
 
24.0
Power of attorney (included on the signature page hereto).
 
 
31.1
 
 
31.2
 
 
32.1
 
 
*
Filed herewith.

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated:
December 16, 2019
Medley Capital Corporation
 
 
 
 
By
/s/ Brook Taube
 
 
Brook Taube
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
By
/s/ Richard T. Allorto, Jr.
 
 
Richard T. Allorto, Jr.
 
 
Chief Financial Officer
 
 
(Principal Accounting and Financial Officer)
 
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the following capacities on December 16, 2019.
/s/ Brook Taube
 
Chief Executive Officer and Chairman of the
Brook Taube
 
Board of Directors (Principal Executive Officer)
 
 
 
/s/ Richard T. Allorto, Jr.
 
Chief Financial Officer
Richard T. Allorto, Jr.
 
(Principal Financial and Accounting Officer)
 
 
 
/s/ Seth Taube
 
Director
Seth Taube
 
 
 
 
 
/s/ Jeff Tonkel
 
Director
Jeff Tonkel
 
 
 
 
 
/s/ Arthur S. Ainsberg
 
Director
Arthur S. Ainsberg
 
 
 
 
 
/s/ Karin Hirtler-Garvey
 
Director
Karin Hirtler-Garvey
 
 
 
 
 
/s/ David Lorber
 
Director
David Lorber
 
 
 
 
 
/s/ Lowell Robinson
 
Director
Lowell Robinson
 
 
 



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