SIERRA INCOME CORPORATION 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," refers toSierra Income Corporation . "SIC Advisors " or "Adviser" refers toSIC Advisors LLC , our investment adviser.SIC Advisors is a wholly owned subsidiary ofMedley LLC , which is controlled by Medley Management Inc., a publicly traded asset management firm ("MDLY"), which in turn is controlled byMedley Group LLC , an entity wholly-owned by the senior professionals ofMedley LLC . "Medley" refers, collectively, to the activities and operations of Medley Capital LLC,Medley LLC , Medley Management Inc.,Medley Group LLC ,SIC Advisors , associated investment funds and their respective affiliates. 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, but not limited to, statements as to: •our future operating results; •our business prospects and the prospects of our portfolio companies; •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; •risks associated with possible disruptions in our operations or the economy generally; •the risk that, if the current period of capital markets disruption and instability continues for an extended period of time, that our stockholders may not receive distributions, if any, or at historical levels and that a portion of our distribution in the future may be a return of capital; •the effect of investments that we expect to make; •our contractual arrangements and relationships with third parties; •actual and potential conflicts of interest withSIC Advisors and its affiliates; •the dependence of our future success on the general economy and its effect on the industries in which we invest; •the ability of our portfolio companies to achieve their objectives; •the use of borrowed money to finance a portion of our investments; •the adequacy of our financing sources and working capital; •the timing of cash flows, if any, from the operations of our portfolio companies; •the ability ofSIC Advisors to locate suitable investments for us and to monitor and administer our investments; •the ability ofSIC Advisors and its affiliates to attract and retain highly talented professionals; •our ability to maintain our qualification as a RIC and as a BDC; •the effect of changes in laws or regulations affecting our operations; •uncertainties associated with the impact from the COVID-19 pandemic, including: its impact on the global andU.S. capital markets, and the global andU.S. economy; the length and duration of the COVID-19 outbreak inthe United States as well as worldwide and the magnitude of the economic impact of that outbreak; the effect of the COVID-19 pandemic on our business prospects and the operational and financial performance of our portfolio companies, including our and their ability to achieve their respective objectives; the effect of the disruptions caused by the COVID-19 pandemic on our ability to continue to effectively manage our business and our use of borrowed money to finance a portion of our investments; and •the impact of the termination of the Amended MCC Merger Agreement (as defined below) and the Amended MDLY Merger Agreement (as defined below) on our business, financial results, and ability to pay dividends and distributions, if any, to our stockholders. Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words "trend," "opportunity," "pipeline," "believe," "comfortable," "expect," "anticipate," "current," "intention," "estimate," "position," "assume," "potential," "outlook," "continue," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may," or similar expressions. The forward-looking statements contained in this quarterly report involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including due to the factors set forth in "Risk Factors" in this quarterly report on Form 10-Q and in Item 1A "Risk Factors" in Part 1 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . 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 1 -------------------------------------------------------------------------------- Table of Contents 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 theSEC , including quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K.
COVID-19 Developments
OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19") as a pandemic, and, onMarch 13, 2020 ,the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, includingthe United States , have reacted by instituting quarantines, restricting travel, and temporarily closing or limiting operations at many corporate offices, retail stores, restaurants, fitness clubs and manufacturing facilities and factories in affected jurisdictions. Such actions are creating disruption in global supply chains and adversely impacting a number of industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. We are closely monitoring the impact of the outbreak of COVID-19 on all aspects of our business, including how it will impact our portfolio companies, employees, due diligence and underwriting processes, and financial markets. Given the rapid development and fluidity of this situation, we cannot estimate the long-term impact of COVID-19 on our business, future results of operations, financial position or cash flows at this time. Further, the operational and financial performance of the portfolio companies in which we make investments may be significantly impacted by COVID-19, which may in turn impact the valuation of our investments. We believe our portfolio companies have taken immediate actions to effectively and efficiently respond to the challenges posed by COVID-19 and related orders imposed by state and local governments, including developing liquidity plans supported by internal cash reserves, shareholder support, and, as appropriate, accessing their ability to participate in the recently enacted government Paycheck Protection Program. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown. COVID-19 presents material uncertainty and risks with respect to the underlying value of the Company's portfolio companies, the Company's business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. We have evaluated subsequent events fromSeptember 30, 2020 through the filing date of this quarterly report on Form 10-Q. However, as the discussion in this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations relates to the Company's financial statements for the quarterly period endSeptember 30, 2020 , the analysis contained herein may not fully account for impacts relating to the COVID-19 pandemic. In that regard, for example, as ofSeptember 30, 2020 , the Company valued its portfolio investments in conformity withU.S. GAAP based on the facts and circumstances known by the Company at that time, or reasonably expected to be known at that time. Due to the overall volatility that the COVID-19 pandemic has caused during the months that followed ourSeptember 30, 2020 valuation, any valuations conducted now or in the future in conformity withU.S. GAAP could result in a lower fair value of our portfolio. The impact to our results going forward will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control. Accordingly, the Company cannot predict the extent to which its financial condition and results of operations will be affected at this time.
Overview
We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. We are externally managed bySIC Advisors , which is an investment adviser registered with theSEC under the Advisers Act.SIC Advisors is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments and monitoring our portfolio on an ongoing basis. In addition, we have elected, and intend to qualify annually to be treated, forU.S. federal income tax purposes, as a RIC under Subchapter M of the Code. Under our Investment Advisory Agreement, we paySIC Advisors a base management fee as well as an incentive fee based on our investment performance. Also, under the Administration Agreement, we reimburse Medley for the allocable portion of overhead and other expenses incurred byMedley Capital LLC in performing its obligations under the Administration Agreement, including 2 -------------------------------------------------------------------------------- Table of Contents our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer and their respective staffs. We intend to meet our investment objective by primarily lending to, and investing in, the debt of privately ownedU.S. middle market companies, which we define as companies with annual revenue between$50 million and$1 billion . We intend to focus primarily on making investments in first lien senior secured debt, second lien secured debt, and to a lesser extent, subordinated debt, of middle market companies in a broad range of industries. We expect that the majority of our debt investments will bear interest at floating interest rates, but our portfolio may also include fixed-rate investments. We will originate transactions sourced throughSIC Advisors' existing network, and, to a lesser extent, expect to acquire debt securities through the secondary market. We may make equity investments in companies that we believe will generate appropriate risk adjusted returns, although we do not expect such investments to be a substantial portion of our portfolio. The level of our investment activity depends on many factors, including the amount of debt and equity capital available to prospective portfolio companies, the level of merger, acquisition and refinancing activity for such portfolio companies, the availability of credit to finance transactions, the general economic environment and the competitive environment for the types of investments we make. The precise timing of our investment activity will depend on the availability of investment opportunities that are consistent with our investment objectives and strategies. 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 publicU.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 certain requirements under the 1940 Act 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. To be eligible for RIC tax treatment under Subchapter M forU.S. federal income tax purposes, we must 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. Termination of the Agreements and Plan of Mergers OnJuly 29, 2019 , the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as ofJuly 29, 2019 (the "Amended MCC Merger Agreement"), by and between Medley Capital Corporation ("MCC") and the Company, pursuant to which MCC would, on the terms and subject to the conditions set forth in the Amended MCC Merger Agreement, merge with and into the Company, with the Company as the surviving company in the merger (the "MCC Merger"). In addition, onJuly 29, 2019 , the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as ofJuly 29, 2019 (the "Amended MDLY Merger Agreement"), by and among MDLY, the Company, andSierra Management, Inc. , a wholly owned subsidiary of the Company ("Merger Sub"), MDLY would, 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 "Proposed Mergers"). Section 9.1(c) of the Amended MCC Merger Agreement and Section 9.1(c) of the Amended MDLY Merger Agreement each permits the Company and either MCC or MDLY, as applicable, to terminate the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement, respectively, if the MCC Merger or the MDLY Merger, as applicable, has not been consummated on or beforeMarch 31, 2020 (the "Outside Date"). OnMay 1, 2020 , the Company terminated both the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement effective as ofMay 1, 2020 as the Outside Date had passed and neither the MCC Merger or the MDLY Merger had been consummated. In determining to terminate the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement, the Company considered a number of factors, including, among other factors, changes in the relative valuations of the Company, MCC, and MDLY, the changed circumstances and the unpredictable economic conditions resulting from the global health crisis caused by the coronavirus (COVID-19) pandemic, and the uncertainty regarding the parties' ability to satisfy the conditions to closing in a timely manner. See Note 2 for more information.
Revenues
We generate revenue in the form of interest on the debt securities that we hold
and distributions and capital gains on other interests that we acquire in our
portfolio companies. We expect that the senior debt we invest in will generally
have stated terms of three to ten years and that the subordinated debt we invest
in will generally have stated terms of five to ten years. Our senior and
subordinated debt investments bear interest at a fixed or floating rate.
Interest on debt securities is generally payable monthly, quarterly or
semiannually. In addition, some of our investments provide for deferred interest
payments or PIK interest. The principal amount of the debt securities and any
accrued but unpaid interest generally will become due at the maturity date. In
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addition, we may generate revenue in the form of commitment and other fees in
connection with transactions. OIDs and market discounts or premiums will be
capitalized, and we will accrete or amortize such amounts as interest income. We
will record prepayment premiums on loans and debt securities as fee income.
Dividend income, if any, will be recognized on an accrual basis to the extent
that we expect to collect such amounts.
Expenses
Our primary annual operating expenses consist of the payment of advisory fees and the reimbursement of expenses under our Investment Advisory Agreement withSIC Advisors and our Administration Agreement withMedley Capital LLC . We bear other expenses, which include, among other things: •corporate, organizational and offering expenses relating to offerings of our common stock, subject to limitations included in our Investment Advisory Agreement; •the cost of calculating our NAV, including the related fees and cost of any third-party valuation services; •the cost of effecting sales and repurchases of shares of our common stock and other securities; •fees payable to third parties relating to, or associated with, monitoring our financial and legal affairs, making investments, and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments; •interest payable on debt, if any, incurred to finance our investments; •transfer agent and custodial fees; •fees and expenses associated with marketing efforts subject to limitations included in the Investment Advisory Agreement; •federal and state registration fees and any stock exchange listing fees; •federal, state and local taxes; •independent directors' fees and expenses, including travel expenses; •costs of director and stockholder meetings, proxy statements, stockholders' reports and notices; •costs of fidelity bonds, directors and officers/errors and omissions liability insurance and other types of insurance; •direct costs, including those relating to printing of stockholder reports and advertising or sales materials, mailing, long distance telephone and staff subject to limitations included in the Investment Advisory Agreement; •fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act of 2002, the 1940 Act and applicable federal and state securities laws; •brokerage commissions for our investments; •all other expenses incurred by us orSIC Advisors in connection with administering our investment portfolio, including expenses incurred bySIC Advisors in performing certain of its obligations under the Investment Advisory Agreement; and •the reimbursement of the compensation of our Chief Financial Officer and Chief Compliance Officer and their respective staffs, whose compensation is paid byMedley Capital LLC , to the extent that each such reimbursement amount is annually approved by our independent director committee and subject to the limitations included in our Administration Agreement. Administrative Services We reimburseMedley Capital LLC for the administrative expenses necessary for its performance of services to us. However, such reimbursement is made at an amount equal to the lower ofMedley Capital LLC's actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location. Also, such costs will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We will not reimburseMedley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person ofMedley Capital LLC . 4
-------------------------------------------------------------------------------- Table of Contents Portfolio and Investment Activity The following table shows the amortized cost and the fair value of our investment portfolio as ofSeptember 30, 2020 : Amortized Cost Percentage Fair Value Percentage Senior secured first lien term loans$ 381,595,466 52.4 %$ 318,936,542 53.7 % Senior secured second lien term loans 94,244,293 13.0 81,120,746 13.6 Senior secured first lien notes 8,473,750 1.2 8,306,054 1.4 Subordinated notes 66,463,686 9.2 44,535,807 7.5 Sierra Senior Loan Strategy JV I LLC 110,050,000 15.2 73,819,863 12.4 Equity/warrants 65,251,030 9.0 67,912,798 11.4 Total$ 726,078,225 100.0 %$ 594,631,810 100.0 % As ofSeptember 30, 2020 , our income-bearing investment portfolio, which represented 82.6% of our total portfolio, had a weighted average yield based upon the cost of our investment portfolio of 7.9%, and 3.7% of our income-bearing portfolio bore interest based on fixed rates, while 96.3% of our income-bearing portfolio bore interest at floating rates, such as LIBOR. As ofSeptember 30, 2020 , the Company held loans it has made directly to 62 investee companies with aggregate principal amounts of$631.0 million . As ofDecember 31, 2019 , the Company held loans it has made directly to 62 investee companies with aggregate principal amounts of$643.5 million . During the three and nine months endedSeptember 30, 2020 , the Company made 7 and 38 loans to investee companies, respectively, with aggregate principal amounts of$21.3 million and$90.5 million , respectively. During the three and nine months endedSeptember 30, 2019 , the Company made 26 and 54 loans to investee companies, respectively, with aggregate principal amounts of$67.0 million and$121.6 million , respectively.
The following table shows the amortized cost and the fair value of our
investment portfolio as of
Amortized Cost Percentage Fair Value Percentage
Senior secured first lien term loans $ 382,580,269 48.0 % $ 328,816,197 48.7 %
Senior secured second lien term loans 157,794,323 19.8 122,817,885 18.2
Senior secured first lien notes 15,217,625 1.9 14,354,825 2.1
Subordinated notes 70,422,851 8.8 63,021,420 9.3
Sierra Senior Loan Strategy JV I LLC 92,050,000 11.5 68,434,389 10.1
Equity/warrants 79,968,093 10.0 78,179,214 11.6
Total $ 798,033,161 100.0 % $ 675,623,930 100.0 %
As of December 31, 2019 , our income-bearing investment portfolio, which
represented 87.2% of our total portfolio, had a weighted average yield based
upon the cost of our investment portfolio of approximately 9.6%, and 4.5% of our
income-bearing portfolio bore interest based on fixed rates, while 95.5% of our
income-bearing portfolio bore interest at floating rates, such as LIBOR.
The following table shows weighted average current yield to maturity based on
fair value as of
September 30, 2020 December 31, 2019
Weighted
Weighted Average Average
Percentage Current Percentage Current
of Total Yield for Total of Total Yield for Total
Investments Investments(1) Investments Investments(1)
Senior secured first lien term loans 53.7 % 8.8 % 48.7 % 10.4 %
Senior secured second lien term loans 13.6 11.7 18.2 11.0
Senior secured first lien notes 1.4 12.3 2.1 29.6 Subordinated notes 7.5 9.0 9.3 10.8 Sierra Senior Loan Strategy JV I LLC 12.4 9.0 10.1 9.6 Equity/warrants 11.4 6.0 11.6 9.7 Total 100.0 % 9.4 % 100.0 % 10.9 %
(1)The weighted average current yield for total investments does not represent the total return to our stockholders.
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The following table shows the portfolio composition by industry classification
based on fair value as of September 30, 2020 :
Investments at Percentage of Total
Industry Classification Fair Value Portfolio
Multi-Sector Holdings $ 118,280,932 20.0 %
High Tech Industries 72,846,899 12.3
Services: Business 73,101,069 12.3
Healthcare & Pharmaceuticals 57,293,321 9.6
Banking, Finance, Insurance & Real Estate 42,764,191 7.2
Construction & Building 35,539,333 6.0
Aerospace & Defense 29,800,155 5.0
Consumer Goods: Durable 38,269,699 6.4
Wholesale 25,354,244 4.3
Automotive 17,268,511 2.9
Containers, Packaging & Glass 15,235,296 2.6
Hotel, Gaming & Leisure 14,516,215 2.4
Chemicals, Plastics & Rubber 8,148,058 1.4
Forest Products & Paper 7,355,937 1.2
Environmental Industries 7,417,142 1.2
Media: Diversified & Production 6,761,379 1.1
Transportation: Consumer 5,975,742 1.0
Transportation: Cargo 5,941,090 1.0
Consumer Goods: Non-durable 4,674,151 0.8
Metals & Mining 3,530,163 0.6
Energy: Oil & Gas 2,592,607 0.4
Retail 1,045,311 0.2
Media: Broadcasting & Subscription 872,593 0.1
Beverage & Food 47,772 0.0
Total $ 594,631,810 100.0 %
6-------------------------------------------------------------------------------- Table of Contents The following table shows the portfolio composition by industry classification based on fair value as ofDecember 31, 2019 :
Investments at Percentage of Total
Industry Classification Fair Value Portfolio
Multi-Sector Holdings $ 130,278,650 19.2 %
High Tech Industries 81,531,661 12.1
Services: Business 81,285,736 12.0
Healthcare & Pharmaceuticals 57,374,851 8.5
Banking, Finance, Insurance & Real Estate 52,049,297 7.7
Construction & Building 39,865,739 5.9
Wholesale 35,186,289 5.2
Aerospace & Defense 34,475,020 5.1
Consumer Goods: Durable 24,214,089 3.6
Hotel, Gaming & Leisure 21,365,163 3.2
Automotive 19,861,655 2.9
Containers, Packaging & Glass 15,655,179 2.3
Transportation: Cargo 12,771,231 1.9
Energy: Oil & Gas 10,007,469 1.5
Chemicals, Plastics & Rubber 9,505,614 1.4
Media: Diversified & Production 9,493,583 1.4
Forest Products & Paper 7,182,914 1.1
Transportation: Consumer 6,877,180 1.0
Capital Equipment 6,537,927 1.0
Environmental Industries 6,414,400 0.9
Consumer Goods: Non-durable 4,721,895 0.7
Metals & Mining 3,258,022 0.5
Media: Broadcasting & Subscription 2,163,218 0.3
Retail 1,846,648 0.3
Media: Advertising, Printing & Publishing 1,700,500 0.3
Total $ 675,623,930 100.0 %
SIC Advisors regularly assesses the risk profile of our portfolio investments
and rates each of them based on the categories set forth below, which we refer
to as SIC Advisors' investment credit rating. Investment credit ratings are
assigned to each of the investments in our portfolio that are directly held by
the Company, but exclude any off-balance sheet interests of the Company:
Investment
Credit Rating Definition
1 Investments that are performing above expectations.
2 Investments that are performing withinexpectations, with risks that are
neutral or favorable compared to risks at the time of origination or
purchase. All new loans are rated '2'.
3 Investments that are performing below expectationsand 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 or purchase.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 sinceorigination or purchase. 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 investment portfolio, not
including cash and cash equivalents, on the 1 to 5 investment credit rating
scale at fair value as of
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September 30, 2020 December 31, 2019
Investment Investments at Investments at
Credit Rating Fair Value Percentage Fair Value Percentage
1 $ 43,535,826 7.3 % $ 58,241,430 8.6 %
2 387,230,409 65.2 455,613,817 67.5
3 113,538,065 19.1 144,141,977 21.3
4 16,266,411 2.7 7,187,740 1.1
5 34,061,099 5.7 10,438,966 1.5
Total $ 594,631,810 100.0 % $ 675,623,930 100.0 %
The COVID-19 pandemic has impacted our investment ratings as of September 30,
2020 , causing downgrades of certain portfolio companies. As the COVID-19
situation continues to evolve, we are maintaining close communications with our
portfolio companies to proactively assess and manage potential risks across our
investment portfolio. We have also increased oversight and analysis of credits
in vulnerable industries in an attempt to improve loan performance and reduce
credit risk.
Results of Operations
The following table shows operating results for the three and nine months ended
September 30, 2020 and 2019:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Total investment income $ 12,935,319 $ 18,160,825 $ 35,811,584 $ 62,977,848
Total expenses 6,854,087 12,403,239 43,674,215 36,566,041
Net investment income/(loss) 6,081,232 5,757,586 (7,862,631) 26,411,807
Net realized gain/(loss) from investments and total return swap
(52,474,635) (19,721,169) (60,522,923) (34,973,608)
Net change in unrealized appreciation/(depreciation) on investments and total return swap
79,481,063 (4,405,963) (9,038,042) (11,948,451)
Change in provision for deferred taxes on unrealized gain on investments
(749,289) (442,842) (802,137) (442,842)
Loss on extinguishment of debt (217,950) - (217,950) -
Net increase/(decrease) in net assets resulting from
operations $ 32,120,421 $ (18,812,388) $ (78,443,683) $ (20,953,094)
Investment Income
Total investment income decreased $5,225,506 , or 28.8%, to $12,935,319 for the
three months ended September 30, 2020 , compared to $18,160,825 for the three
months ended September 30, 2019 . Total investment income consisted primarily of
portfolio interest and dividends, which decreased $4,672,331 , or 26.8%, to
$12,737,019 for the three months ended September 30, 2020 , compared to
$17,409,350 for the three months ended September 30, 2019 . This decrease was
primarily attributable to an increase in the number of portfolio companies on
non-accrual, and to a lesser extent, a decrease in the size of the underlying
portfolio due to reduced leverage utilization.
Total investment income decreased $27,166,264 , or 43.1%, to $35,811,584 for the
nine months ended September 30, 2020 , compared to $62,977,848 for the nine
months ended September 30, 2019 . Total investment income consisted primarily of
portfolio interest and dividends, which decreased $24,859,189 , or 42.4%, to
$33,803,252 for the nine months ended September 30, 2020 , compared to
$58,662,441 for the nine months ended September 30, 2019 . This decrease was
primarily attributable to an increase in the number of portfolio companies on
non-accrual, and to a lesser extent, a decrease in the size of the underlying
portfolio due to reduced leverage utilization.
As of September 30, 2020 , certain investments in fourteen portfolio companies
were on non-accrual status with a combined cost of $107,750,374 , or 14.8% of the
cost of the Company's portfolio, and a combined fair value of $50,838,081 or
8.5% of the fair value of the Company's portfolio. As of September 30, 2019 ,
nine portfolio companies were on non-accrual status with a cost of $76,691,668 ,
or 9.2% of the cost of the Company's portfolio, and a fair value of $24,424,986 ,
or 3.3% of the fair value of the Company's portfolio.
Fee income decreased $151,992 , or 44.8%, to $187,629 for the three months ended
September 30, 2020 , compared to $339,621 for the three months ended September
30, 2019 , primarily due to a decrease in fees associated with loan originations
and loan prepayments.
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Fee income decreased $2,647,245 , or 81.0%, to $622,262 for the nine months ended
September 30, 2020 , compared to $3,269,507 for the nine months ended September
30, 2019 , primarily due to a decrease in fees associated with loan originations
and loan prepayments.
Operating Expenses
The following table shows operating expenses for the three and nine months ended
September 30, 2020 and 2019 :
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Base management fees $ 3,021,491 $
4,180,333
2,106,105 5,078,781 9,848,708 15,744,248
General and administrative expenses 1,680,990 1,556,514 11,959,187 4,076,507
Administrator expenses 431,598 998,134 1,822,255 2,156,557
Incentive Fees - 176,061 - 176,061
Offering costs 30,816 6,322 35,973 42,158
Professional fees (416,913) 407,094 10,790,405 1,412,549
Total expenses $ 6,854,087 $ 12,403,239 $ 43,674,215 $ 36,566,041
Total expenses decreased $5,549,152 , or 44.7%, to $6,854,087 for the three
months ended September 30, 2020 , as compared to $12,403,239 for the three months
ended September 30, 2019 , primarily due to a decrease in interest and financing
expenses and base management fees. Total expenses increased $7,108,174 , or
19.4%, to $43,674,215 for the nine months ended September 30, 2020 , as compared
to $36,566,041 for the nine months ended September 30, 2019 , primarily due to an
increase in professional fees and general and administrative expenses related to
deferred transaction costs (see Note 2), partially offset by a decrease in base
management fees and a decrease in interest and financing expenses.
Base management fees decreased $1,158,842 , or 27.7%, to $3,021,491 for the three
months ended September 30, 2020 , as compared to $4,180,333 for the three months
ended September 30, 2019 , primarily due to a decrease in our gross assets. Base
management fees decreased $3,740,274 , or 28.9%, to $9,217,687 for the nine
months ended September 30, 2020 , as compared to $12,957,961 for the nine months
ended September 30, 2019 , primarily due to a decrease in our gross assets.
Interest and financing expenses decreased $2,972,676 , or 58.5%, to $2,106,105
for the three months ended September 30, 2020 , as compared to $5,078,781 for the
three months ended September 30, 2019 , primarily due to a decrease in the
weighted average interest rate of our credit facilities because of a decrease in
LIBOR rates of 1.8%, or a 32.7% decrease. Interest and financing expenses
decreased $5,895,540 , or 37.4%, to $9,848,708 for the nine months ended
September 30, 2020 , as compared to $15,744,248 for the nine months ended
September 30, 2019 , primarily due to a decrease in the weighted average interest
rate of our credit facilities because of a decrease in LIBOR rates of 1.2%, or a
21.4% decrease.
General and administrative expenses increased $124,476 , or 8.0%, to $1,680,990
for the three months ended September 30, 2020 , as compared to $1,556,514 for the
three months ended September 30, 2019 , primarily due to an increase in insurance
expenses. General and administrative expenses increased $7,882,680 , or 193.4%,
to $11,959,187 for the nine months ended September 30, 2020 , as compared to
$4,076,507 for the nine months ended September 30, 2019 , primarily due to an
increase in expenses related to deferred transaction costs (see Note 2).
Professional fees decreased $824,007 , or 202.4% to ($416,913 ) for the three
months ended September 30, 2020 , as compared to $407,094 for the three months
ended September 30, 2019 , primarily due to a reimbursement of previously
expensed deferred transaction costs (see Note 11). Professional fees increased
$9,377,856 , or 663.9% to $10,790,405 for the nine months ended September 30,
2020 , as compared to $1,412,549 for the nine months ended September 30, 2019 ,
primarily due to an increase in expenses related to deferred transaction costs
(see Note 2).
Net Realized Gains/Losses on 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. For the three and
nine months ended September 30, 2020 , we recognized net realized loss on
investments of $52,474,635 and $60,522,923 , respectively, primarily due to the
sale of investments. For the three and nine months ended September 30, 2019 , we
recognized net realized loss on investments of $19,721,169 and $34,973,608 ,
respectively, primarily due to certain non-cash restructuring transactions and
the wind-down of our TRS facility .
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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 three and months ended September 30, 2020 , the Company recognized a
net loss on extinguishment of debt of $217,950 , which was due to the repayment
of the outstanding obligations under the Revolving Credit Agreement.
Net Unrealized Appreciation/Depreciation on Investments
Net change in unrealized appreciation/depreciation on investments reflects the
net change in the fair value of our investments including the TRS and provision
for deferred taxes. For the three and nine months ended September 30, 2020 , we
recorded a net change in unrealized appreciation, net of tax, of $78,731,774 and
a net change in unrealized depreciation, net of tax, of $9,840,179 . The
unrealized appreciation for the nine months ended September 30, 2020 resulted
from the reversal of previously recorded unrealized depreciation on realized
investments and positive credit-related adjustments.
For the three and nine months ended September 30, 2019 , we recorded a net change
in unrealized depreciation, net of tax, of $4,848,805 and $12,391,293 ,
respectively. The unrealized depreciation resulted from negative credit-related
adjustments that caused a reduction in fair value of certain portfolio
investments.
Changes in Net Assets from Operations
For the three and nine months ended September 30, 2020 , we recorded a net
increase in net assets resulting from operations of $32,120,421 and a net
decrease in net assets resulting from operations of $78,443,683 . Based on
102,742,489 and 102,771,213 weighted average common shares outstanding for the
three and nine months ended September 30, 2020 , our per share net increase in
net assets resulting from operations was $0.31 and our per share net decrease in
net assets resulting from operations was $0.76 , respectively.
For the three and nine months ended September 30, 2019 , we recorded a net
decrease in net assets resulting from operations of $18,812,388 and $20,953,094 ,
respectively, in net assets resulting from operations. Based on 101,035,420 and
100,116,493 weighted average common shares outstanding for the three and nine
months ended September 30, 2019 , our per share net decrease in net assets
resulting from operations was $0.19 and $0.21 , respectively.
Financial Condition, Liquidity and Capital Resources
As a BDC, 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 increasing debt, and funding from operational cash flow.
Our liquidity and capital resources historically have been generated primarily
from the net proceeds of our public offering of common stock, use of our credit
facilities and our TRS. Currently, our primary source of liquidity is derived
from the use of our credit facility.
As of September 30, 2020 and December 31, 2019 , we had $85.6 million and $225.3
million , respectively, in cash and cash equivalents. 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 to make investments
in our targeted asset classes, cash distributions to our stockholders, and other
general corporate purposes.
In order to satisfy the Code requirements applicable to us as a RIC, we intend
to distribute to our stockholders substantially all of our taxable income, but
we may also elect to periodically spillover certain excess undistributed taxable
income from one tax year into the next tax year. In addition, as a BDC, 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 certain requirements under the 1940 Act are
met) at the time of the borrowing or issuance of preferred stock. This
requirement limits the amount that we may borrow.
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Table of Contents The following table shows our net borrowings as ofSeptember 30, 2020 andDecember 31, 2019 : September 30, 2020 December 31, 2019 Total Balance Unused Total Balance Unused Commitment Outstanding Commitment Commitment Outstanding Commitment ING Credit Facility $ - $ - $ -$ 215,000,000 $ 88,100,000 $ 126,900,000 Alpine Credit Facility 300,000,000 180,000,000 120,000,000 300,000,000 240,000,000 60,000,000 Total before deferred 300,000,000 180,000,000 120,000,000 515,000,000 328,100,000 186,900,000 financing costs Unamortized deferred financing - (347,588) - - (2,235,279)
-
costs
Total borrowings outstanding,
$ 120,000,000 $ 515,000,000 $ 325,864,721 $ 186,900,000 net ING Credit Facility OnAugust 12, 2016 , the Company amended its existing senior secured syndicated revolving credit facility (the "ING Credit Facility" as amended from time to time as described below) pursuant to a Senior Secured Revolving Credit Agreement (the "Revolving Credit Agreement" as amended from time to time as described below) with certain lenders party thereto from time to time andING Capital LLC , as administrative agent. The ING Credit Facility was secured by substantially all of the Company's assets, subject to certain exclusions as further set forth in an Amended and Restated Guarantee, Pledge and Security Agreement (the "Security Agreement") entered into in connection with the Revolving Credit Agreement, among the Company, the subsidiary guarantors party thereto,ING Capital LLC , as Administrative Agent, each Financial Agent and Designated Indebtedness Holder party thereto andING Capital LLC , as Collateral Agent. The ING Credit Facility also included usual and customary representations, covenants and events of default for senior secured revolving credit facilities of this nature. OnFebruary 13, 2015 , commitments to the ING Credit Facility were expanded from$150,000,000 to$170,000.000 . OnAugust 12, 2016 , commitments to the ING Credit Facility were expanded from$170,000,000 to$175,000,000 . OnApril 20, 2017 , commitments to the ING Credit Facility were expanded from$175,000,000 to$220,000,000 . OnFebruary 8, 2019 , the Company entered into Amendment No. 1 to the Revolving Credit Agreement that, among other things, permits the transactions contemplated by the MCC Merger Agreement and the MDLY Merger Agreement. OnJuly 25, 2019 , the Company entered into Amendment No. 2 to the Revolving Credit Agreement that among other things, (i) reduced the size of the commitments thereunder from$220.0 million to$215.0 million , (ii) extended the Revolver Termination Date (as defined in the Revolving Credit Agreement) fromAugust 12, 2019 toMarch 31, 2020 and (iii) extended the Maturity Date (as defined in the Revolving Credit Agreement) fromAugust 12, 2020 toMarch 31, 2021 . OnMarch 30, 2020 , the Company entered into Amendment No. 3 to the Revolving Credit Agreement that among other things, extended the Revolver Termination Date fromMarch 31, 2020 toApril 30, 2020 after which the Revolving Credit Facility would enter amortization. OnMay 15, 2020 , the Company entered into Amendment No. 4 to the Revolving Credit Agreement to among other things, (i) shorten the maturity date fromMarch 31, 2021 toSeptember 30, 2020 , (ii) accelerate the amortization of the Revolving Credit Agreement, and (iii) provide for the prepayment of the outstanding loans under the Revolving Credit Agreement in an aggregate principal amount of not less than$20 million . OnJuly 22, 2020 , the Company paid all remaining outstanding obligations under the Revolving Credit Agreement. OnJuly 31, 2020 (the "Termination Date"), the Company terminated the commitments on the Credit Agreement. The repayment of the outstanding obligations under the Revolving Credit Agreement was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which attributed to a realized loss of$217,950 and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt. The ING Credit Facility allowed for us, at our option, to borrow money at a rate of either (i) an alternate base rate plus 1.50% per annum or (ii) LIBOR plus 2.50% per annum. The interest rate margins were subject to certain step-downs upon the satisfaction of certain conditions described in the Revolving Credit Agreement. The alternate base rate was the greatest of (i) theU.S. Prime Rate set forth in theWall Street Journal , (ii) the federal funds effective rate plus 1/2 of 1%, and (iii) three month LIBOR plus 1%. As ofSeptember 30, 2020 andDecember 31, 2019 , the commitment under the ING Credit Facility was$0 and$215,000,000 , respectively. Availability of loans under the ING Credit Facility was linked to the valuation of the collateral pursuant to a borrowing base mechanism. We were also required to pay a commitment fee to the lenders based on the daily unused portion of the aggregate commitments under the ING Credit Facility. The commitment fee was (i) 1.50% if the used portion of the aggregate commitments is less than or equal to 40%, (ii) 0.75% if the used portion of the aggregate commitments is greater than 40% and less than or equal to 65% or 11 -------------------------------------------------------------------------------- Table of Contents (iii) 0.50% if the used portion of the aggregate commitments is greater than 65%. The ING Credit Facility provided that we may use the proceeds of theING Credit Facility for general corporate purposes, including making investments in accordance with our investment objective and strategy. As ofSeptember 30, 2020 andDecember 31, 2019 , our borrowings under the ING Facility totaled$0 and$88,100,000 , respectively, and were recorded as part of revolving credit facilities payable on our Consolidated Statements of Assets and Liabilities. Alpine Credit Facility OnSeptember 29, 2017 , the Company's wholly-owned, special purpose financing subsidiary, Alpine, amended its existing revolving credit facility (the "Alpine Credit Facility") pursuant to an Amended and Restated Loan Agreement (the "Amendment") withJPMorgan Chase Bank, National Association ("JPMorgan"), as administrative agent and lender, the Financing Providers from time to time party thereto,SIC Advisors , as the portfolio manager, and the Collateral Administrator, Collateral Agent and Securities Intermediary party thereto (the "Loan Agreement"). The Loan Agreement was amended to, among other things, (i) extend the reinvestment period untilDecember 29, 2020 , (ii) extend the scheduled termination date untilMarch 29, 2022 , (iii) decrease the applicable margin for advances to 2.85% per annum and (iv) increase the compliance condition for net advances to 55% of net asset value. Alpine's obligations to JPMorgan under the Alpine Credit Facility are secured by a first priority security interest in substantially all of the assets of Alpine, including its portfolio of loans. The obligations of Alpine under the Alpine Credit Facility are non-recourse to the Company. Borrowings under the Alpine Credit Facility are subject to compliance with a NAV coverage ratio with respect to the current value of Alpine's portfolio and various eligibility criteria must be satisfied with respect to the initial acquisition of each loan in Alpine's portfolio. Any amounts borrowed under the Alpine Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, onMarch 29, 2022 . As ofSeptember 30, 2020 andDecember 31, 2019 , Alpine's borrowings under the Alpine Credit Facility totaled$180,000,000 and$240,000,000 , respectively, and were recorded as part of revolving credit facilities payable on our Consolidated Statements of Assets and Liabilities. Contractual Obligations The following table shows our payment obligations for repayment of debt, which total our contractual obligations atSeptember 30, 2020 : Payment Due By Period Less than More than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years Alpine Credit Facility$ 180,000,000 $ -
We have entered into certain contracts under which we have material future commitments. OnApril 5, 2012 , we entered into the Investment Advisory Agreement withSIC Advisors in accordance with the 1940 Act. The Investment Advisory Agreement became effective as ofApril 17, 2012 , the date that we met the minimum offering requirement. Pursuant to the 1940 Act, the initial term of the Investment Advisory Agreement was for two years from its effective date, with one-year renewals subject to approval by our board of directors, a majority of whom must be independent directors. Most recently, onApril 3, 2020 , the board of directors approved the renewal of the Investment Advisory Agreement for an additional one-year term at a board meeting.SIC Advisors serves as our investment adviser in accordance with the terms of the Investment Advisory Agreement. Payments under our Investment Advisory Agreement in each reporting period consist of (i) a management fee equal to a percentage of the value of our gross assets and (ii) an incentive fee based on our performance. OnApril 5, 2012 , we entered into the Administration Agreement with Medley Capital LLC with an initial term of two years, pursuant to which Medley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. The Administration Agreement became effective as ofApril 17, 2012 , the date that we met the minimum offering requirement. Most recently, onApril 3, 2020 , the board of directors approved the renewal of the Administration Agreement for an additional one-year term at a board meeting.Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburseMedley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person ofMedley Capital LLC . If any of our contractual obligations discussed above are terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services we expect to receive under the investment advisory agreement and administration agreement. Any new investment advisory agreement would also be subject to approval by our stockholders. 12
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Off-Balance Sheet Arrangements OnAugust 27, 2013 , Arbor, a wholly-owned financing subsidiary of the Company, entered into a TRS with Citibank. OnSeptember 29, 2017 , Arbor entered into the Fifth Amended Confirmation Letter Agreement with Citibank. The Fifth Amended Confirmation Agreement reduced the maximum portfolio notional (determined at the time each such loan becomes subject to the TRS) from$300,000,000 to$180,000,000 , through incremental reductions of$60,000,000 onOctober 3, 2017 and$20,000,000 on each ofNovember 3, 2017 ,December 3, 2017 andJanuary 3, 2018 . The Fifth Amended Confirmation Agreement also decreased the interest rate payable to Citibank from LIBOR plus 1.65% per annum to LIBOR plus 1.60% per annum. Other than the foregoing, the Fifth Amended Confirmation Agreement did not change any of the other material terms of the TRS. OnJuly 22, 2019 , the TRS with Citibank was terminated, and the TRS was fully wound down during the fiscal quarter endedSeptember 30, 2019 . The TRS with Citibank enabled Arbor to obtain the economic benefit of the loans underlying the TRS, despite the fact that such loans were not directly held or otherwise owned by Arbor, in return for an interest-type payment to Citibank. Accordingly, the TRS was analogous to Arbor utilizing leverage to acquire loans and incurring an interest expense to a lender.SIC Advisors acted as the investment manager of Arbor and had discretion over the composition of the basket of loans underlying the TRS. The terms of the TRS were governed by an ISDA 2002 Master Agreement, the Schedule thereto and Credit Support Annex to such Schedule, and the Confirmation exchanged thereunder, between Arbor and Citibank, which collectively established the TRS, and are collectively referred to herein as the "TRS Agreement". There were no transactions in TRS contracts or derivative assets from Citibank during the three and nine months endedSeptember 30, 2020 and the three months endedSeptember 30, 2019 . Transactions in TRS contracts during the nine months endedSeptember 30, 2019 were$9,323,516 in realized losses and$6,524,904 in net unrealized appreciation, which are recorded on the Consolidated Statements of Operations.
The volume of the Company's derivative transactions for the three and nine
months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Average notional amount of contracts(1) $ - $
- $ -
(1)Average notional amount is based on the average month end balances for the three and nine months endedSeptember 30, 2020 and 2019, which is representative of the volume of notional contract amounts held during each year. OnMarch 27, 2015 , the Company and GALIC entered into a limited liability company operating agreement to co-manage Sierra JV. All portfolio and other material decisions regarding Sierra JV must be submitted to Sierra JV's board of managers, which is comprised of four members, two of whom are selected by the Company and the other two are selected by GALIC. The Company has concluded that it does not operationally control Sierra JV. As the Company does not operationally control Sierra JV, it does not consolidate the operations of Sierra JV within the consolidated financial statements. As a practical expedient, the Company uses NAV to determine the fair value of its investment in Sierra JV; therefore, this investment has been presented as a reconciling item within the fair value hierarchy (see Note 4). As ofSeptember 30, 2020 Sierra JV had total capital commitments of$124.6 million , with the Company providing$110.1 million and GALIC providing$14.5 million . As ofDecember 31, 2019 Sierra JV had total capital commitments of$116.0 million , with the Company providing$101.5 million and GALIC providing$14.5 million . As ofSeptember 30, 2020 approximately$124.5 million was funded relating to these commitments of which$110.1 million was from the Company. As ofDecember 31, 2019 approximately$105.2 million was funded relating to these commitments of which$92.1 million was from the Company. The Company does not have the right to withdraw any of their respective capital commitment, unless in connection with a transfer of its membership interests. The Company may transfer full membership interests as long as it is approved by all members and transferred in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, or applicable state securities laws.
Sierra JV entered into a Senior Secured Revolving Credit Facility Agreement, as
amended (the "JV Facility") with Deutsche Bank, AG,
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On
On
OnOctober 28, 2019 , the JV Facility reinvestment period was further extended fromOctober 28, 2019 toMarch 31, 2020 and the interest rate was modified from bearing an interest rate of LIBOR (with a 0.00% floor) + 2.50% per annum to LIBOR (with a 0.00% floor) + 2.75% per annum. OnMarch 31, 2020 , the total commitment under the JV Facility was reduced to$240.0 million from$250.0 million and the reinvestment period was extended fromMarch 31, 2020 toApril 30, 2020 . OnApril 30, 2020 , the total commitment under the JV Facility was reduced to$200.0 million from$240.0 million , the reinvestment period was extended fromApril 30, 2020 toJuly 31, 2020 and the maturity date was extended toJuly 31, 2023 . OnJuly 29, 2020 , the total commitment under the JV Facility was reduced to$175.0 million from$200.0 million , the reinvestment period was extended fromJuly 31, 2020 toApril 30, 2021 and the maturity date was extended toApril 30, 2024 . Additionally, the interest rate was modified from bearing an interest rate of LIBOR (with a 0.00% floor) + 2.75% per annum to LIBOR (with a 0.50% floor) + 3.25% per annum. As ofSeptember 30, 2020 , Sierra JV's portfolio was comprised of 100.0% of senior secured first lien term loans to 54 different portfolio companies with two portfolio companies on non-accrual status. As ofDecember 31, 2019 , Sierra JV's portfolio was comprised of 100% of senior secured first lien term loans to 60 different portfolio companies with one portfolio company on non-accrual status. The JV Facility is secured substantially by all of Sierra JV's assets, subject to certain exclusions set forth in the JV Facility. As ofSeptember 30, 2020 andDecember 31, 2019 , there was$124.7 million and$204.9 million outstanding under the JV Facility, respectively. The Company has determined that Sierra 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 Sierra JV.
Distributions
We have elected, and intend to qualify annually, to be treated forU.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To maintain RIC tax treatment, we must, among others things, distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders. In order to avoid certainU.S. federal excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period generally ending onOctober 31 of the calendar year (unless an election is made by us to use our taxable year) and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid noU.S. 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 currently intend to distribute net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually out of the assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens, you will be treated forU.S. federal income tax purposes as if you had received an actual distribution of the capital gains that we retain and reinvested the net after tax proceeds in us. In this situation, you would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. We can offer no assurance that we will continue to achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. 14
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OnJuly 31, 2020 , our board of directors temporarily suspended the monthly distributions on the shares of the Company's common stock. OnOctober 22, 2020 , our board of directors determined to reinstate the monthly distributions on the shares of the Company's common stock. See "Recent Developments" for more information. Any distributions to our stockholders paid by the Company is subject to our board of directors' discretion and applicable legal restrictions and take into account our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from declaring a distribution. Any distributions to our stockholders will be declared out of assets legally available for distribution. From time to time, but not less than quarterly, we will review our accounts to determine whether distributions to our stockholders are appropriate. We have not established limits on the amount of funds we may use from available sources to make distributions. From the commencement of our offering throughSeptember 30, 2016 , a portion of our distributions were comprised in part of expense support payments made bySIC Advisors that were subject to repayment by us within three years of the date of such support payment. The Expense Support Agreement expired onDecember 31, 2016 and the Company's contingent obligation to repay eligible reimbursements toSIC Advisors expired onSeptember 30, 2019 . The purpose of this arrangement was to cover distributions to stockholders so as to ensure that the distributions did not constitute a return of capital for GAAP purposes. In the future, we may have distributions which could be characterized as a return of capital. Such distributions are not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods. There can be no assurance that we will achieve the performance necessary to make distributions and at historical levels in the future.SIC Advisors has no obligation to enter into a renewed expense support agreement. Our distributions may exceed our earnings, which we refer to as a return of capital. As a result, a portion of the distributions we make may represent a return of capital. Our use of the term "return of capital" merely means distributions in excess of our earnings and as such may constitute a return on your individual investments and does not mean a return on capital. Therefore stockholders are advised that they should be aware of the differences with our use of the term "return of capital" and "return on capital." The following table reflects the cash distributions per share that the Company has declared or paid to its stockholders during 2020 and 2019. Stockholders of record as of each respective record date were entitled to receive the distribution. Record Date Payment Date Amount per share January 25, 2019 January 31, 2019 $ 0.05334 February 11, 2019 February 28, 2019 0.05334 March 11, 2019 March 29, 2019 0.05334 April 29, 2019 April 30, 2019 0.05334 May 30, 2019 May 31, 2019 0.05334 June 27, 2019 June 28, 2019 0.05334 July 30, 2019 July 31, 2019 0.05334 August 29, 2019 August 30, 2019 0.05334 September 27, 2019 September 30, 2019 0.05334 October 30, 2019 October 31, 2019 0.05334 November 28, 2019 November 29, 2019 0.05334 December 30, 2019 December 31, 2019 0.05334 January 30, 2020 January 31, 2020 0.03500 February 27, 2020 February 28, 2020 0.03500 March 30, 2020 March 31, 2020 0.03500 We have adopted an "opt in" distribution reinvestment plan pursuant to which common stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of our common stock. As a result, if we declare a cash distribution, stockholders that have "opted in" to our distribution reinvestment plan will have their distribution automatically reinvested in additional shares of our common stock rather than receiving cash dividends. Stockholderswho 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. Each year a statement on Internal Revenue Service Form 1099-DIV (or such successor form) identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, or a return of capital) will be mailed to our stockholders. The tax basis of shares must be reduced by the amount of any return of capital distributions, which will result in an increase in the amount of any taxable gain (or a reduction in any deductible loss) on the sale of shares. 15
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Related Party Transactions We have entered into an Investment Advisory Agreement withSIC Advisors in which our senior management holds an equity interest and were party to the Expense Support Agreement throughDecember 31, 2016 . Members of our senior management also serve as principals of other investment managers affiliated withSIC Advisors that do, and may in the future, manage investment funds, accounts or other investment vehicles with investment objectives similar to ours. We have entered into an Administration Agreement withMedley Capital LLC , pursuant to whichMedley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations.Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf. We do not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person ofMedley Capital LLC .Medley Capital LLC is an affiliate ofSIC Advisors . We have entered into a license agreement withSIC Advisors under whichSIC Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name "Sierra" for specified purposes in our business. Under the license agreement, we will have a right to use the "Sierra" name, subject to certain conditions, for so long asSIC Advisors or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we will have no legal right to the "Sierra" name.
Management Fee
We pay
The base management fee is calculated at an annual rate of 1.75% of our gross assets and is payable quarterly in arrears. The incentive fee consists of:
•An incentive fee on net investment income ("subordinated incentive fee on
income") is calculated and payable quarterly in arrears and is based upon
pre-incentive fee net investment income for the immediately preceding quarter.
No subordinated incentive fee on income is payable in any calendar quarter in
which pre-incentive fee net investment income does not exceed a quarterly return
to stockholders of 1.75% per quarter on our net assets at the end of the
immediately preceding fiscal quarter, or the preferred quarterly return. All
pre-incentive fee net investment income, if any, that exceeds the preferred
quarterly return, but is less than or equal to 2.1875% of net assets at the end
of the immediately preceding fiscal quarter in any quarter, will be payable to
SIC Advisors . We refer to this portion of our subordinated incentive fee on
income as the catch up. It is intended to provide an incentive fee of 20% on
pre-incentive fee net investment income when pre-incentive fee net investment
income exceeds 2.1875% of net assets at the end of the immediately preceding
quarter in any quarter. For any quarter in which our pre-incentive fee net
investment income exceeds 2.1875% of net assets at the end of the immediately
preceding quarter, the subordinated incentive fee on income shall equal 20% of
the amount of pre-incentive fee net investment income, because the preferred
return and catch up will have been achieved.
•A capital gains incentive fee will be earned on realized investments and shall
be payable in arrears as of the end of each calendar year during which the
Investment Advisory Agreement is in effect. If the Investment Advisory Agreement
is terminated, the fee will become payable as of the effective date of such
termination. The capital gains incentive fee is based on our realized capital
gains on a cumulative basis from inception, computed net of all realized capital
losses and unrealized capital depreciation on a cumulative basis, which we refer
to as "net realized capital gains." The capital gains incentive fee equals 20%
of net realized capital gains, less the aggregate amount of any previously paid
capital gains incentive fee.
Under the terms of the Investment Advisory Agreement, SIC Advisors bears all
organizational and offering expenses on our behalf. Since June 2, 2014 , the date
that we raised $300 million in gross proceeds in connection with the sale of
shares of our common stock, SIC Advisors was no longer obligated to bear, pay or
otherwise be responsible for any ongoing organizational and offering expenses on
our behalf, and we were responsible for paying or otherwise incurring all such
organizational and offering expenses. Pursuant to the terms of the Investment
Advisory Agreement, we had agreed to reimburse SIC Advisors for any such
organizational and offering expenses incurred by SIC Advisors not to exceed
1.25% of the gross subscriptions raised by us over the course of the offering
period, which was initially scheduled to terminate two years from the initial
offering date, unless extended. On July 2, 2018 , the Company's board of
directors determined to terminate the Company's offering effective as of July
31, 2018 .
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On April 5, 2012 , the Company entered into an investment advisory agreement (the
"Investment Advisory Agreement") with SIC Advisors to manage the Company's
investment activities. The Investment Advisory Agreement became effective as of
April 17, 2012 , the date that the Company met its minimum offering requirement.
Pursuant to the 1940 Act, the initial term of the Investment Advisory Agreement
was for two years from its effective date. Unless earlier terminated pursuant to
its terms, the Investment Advisory Agreement will remain in effect from
year-to-year thereafter if approved annually at an in-person meeting of the
Company's board of directors by a majority of the directors who are not
"interested persons" (as defined in Section 2(a)(19) of the 1940 Act) of the
Company or the Adviser, and either the Company's board of directors or the
holders of a majority of the Company's outstanding voting securities. Most
recently, on April 3, 2020 , the Company's board of directors, approved the
renewal of the Investment Advisory Agreement for an additional one-year term,
which will expire on April 17, 2021 .
At its meeting held on April 3, 2020 , the Company's board of directors,
including all of the independent directors, considered the re-approval of the
Investment Advisory Agreement. In advance of that meeting, the independent
directors met separately on multiple occasions with their independent counsel.
At those meetings, the independent directors reviewed a significant amount of
information, which had been furnished by SIC Advisors at the request of
independent counsel on behalf of the independent directors. The independent
directors met on March 19, 2020 with members of SIC Advisors' senior management
to review, among other things, the financial condition of SIC Advisors and its
parent company, and, on March 31, 2020 with SIC Advisors' senior management and
investment team to discuss, among other things, the Company's investment
portfolio and its financing arrangements.
In its considerations, the Company's board of directors focused on information
it had received relating to, among other things: (a) the nature, quality and
extent of the advisory and other services to be provided to the Company by SIC
Advisors ; (b) the Company's investment performance and the investment
performance of the Adviser; (c) comparative data with respect to advisory fees
or similar expenses paid by other BDCs with similar investment objectives and
strategies; (d) the Company's operating expenses and expense ratio compared to
BDCs with similar investment objectives and strategies; (e) any existing and
potential sources of indirect income to SIC Advisors and its affiliates from its
relationships with the Company and the profitability of those relationships; (f)
information about the services to be performed and the personnel performing such
services under the Investment Advisory Agreement; (g) the organizational
capability and financial condition of SIC Advisors and its affiliates; (h)
possible economies of scale arising from the Company's size and/or anticipated
growth; and (i) possible alternative fee structures or bases for determining
fees.
As part of its review, the Company's board of directors evaluated charts that
compared the advisory fees, administrative fees and performance of many BDCs,
including some BDCs that might be considered to be somewhat comparable to the
Company with respect to their investment objective or strategy. The Company's
board of directors took into account that it was difficult to identify BDCs that
are comparable to the Company for this purpose due to several anomalies that
exist in the BDC comparison group regarding apparent loss leader pricing,
post-acquisition temporary fee reductions, lower risk profiles and therefore
generally lower fee structures, and the general difficulty in determining
reasonable comparable peer strategies due to many variables at work in the
private loan market and with private loan credits in general. Based upon this
analysis, the Company's board of directors observed that, in light of the unique
circumstances applicable to the Company, it was difficult to determine which
BDCs were most comparable to the Company in terms of investment objective and
investment strategy. Notwithstanding that difficulty, the Company's board of
directors noted that the Company's investment performance generally appeared to
be below that of the BDCs with somewhat similar investment profiles.
The Company's board of directors also determined that the advisory fees paid by
the Company were within the range of fees paid by such BDCs but generally were
higher than the median of such BDCs. The board of directors considered
management's discussion of the Company's relative investment performance and
expenses. In particular, the Company's board of directors considered the
Company's extensive efforts with respect to the proposed mergers with Medley
Management Inc. and Medley Capital Corporation, which significantly impacted the
Company's operations, both from an investment standpoint and an operational
standpoint. The Company's board of directors weighed all of these factors in its
analysis and decision making.
Pursuant to the Investment Advisory Agreement, SIC Advisors implements the
Company's business strategy on a day-to-day basis and performs certain services
for the Company, subject to oversight by the Company's board of directors. SIC
Advisors is responsible for, among other duties, determining investment
criteria, sourcing, analyzing and executing investment transactions, asset
sales, financings and performing asset management duties. Under the Investment
Advisory Agreement, the Company has agreed to pay SIC Advisors a management fee
for investment advisory and management services consisting of a base management
fee and an incentive fee.
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Critical Accounting Policies
This discussion of our expected operating plans is based upon our expected
consolidated financial statements, which will be prepared in accordance with
U.S. generally accepted accounting principles ("GAAP"). The preparation of these
consolidated financial statements will require our management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Changes in the economic environment, financial markets
and any other parameters used in determining such estimates could cause actual
results to differ. In addition to the discussion below, we will describe our
critical accounting policies in the notes to our future consolidated financial
statements.
Valuation of Investments
We apply 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, we have categorized its financial instruments carried at fair
value, based on the priority of the valuation technique, into a three-level fair
value hierarchy as identified below and discussed in Note 4.
•Level 1 - Quoted prices are available in active markets for identical
investments as of the reporting date. Publicly listed equities and publicly
listed derivatives will be included in Level 1. In addition, securities sold,
but not yet purchased and call options will be included in Level 1. We will not
adjust the quoted price for these investments, even in situations where we hold
a large position and a sale could reasonably affect the quoted price.
•Level 2 - Pricing inputs are other than quoted prices in active markets, which
are either directly or indirectly observable as of the reporting date, and fair
value is determined through the use of models or other valuation methodologies.
In certain cases, debt and equity securities are valued on the basis of prices
from an orderly transaction between market participants provided by reputable
dealers or pricing services. In determining the value of a particular
investment, pricing services may use certain information with respect to
transactions in such investments, quotations from dealers, pricing matrices,
market transactions in comparable investments, and various relationships between
investments. Investments which are generally expected to be included in this
category include corporate bonds and loans, convertible debt indexed to publicly
listed securities, and certain over-the-counter derivatives.
•Level 3 - Pricing inputs are unobservable for the investment and include
situations where there is little, if any, market activity for the investment.
The inputs into the determination of fair value require significant judgment or
estimation. Investments that are expected to be included in this category are
our private portfolio companies.
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,
our 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 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, debt investments with remaining maturities within 60 days that are not
credit impaired are valued at cost plus accreted discount, or minus amortized
premium, which approximates fair value. Investments for which market quotations
are not readily available are valued at fair value as determined by our 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.
We use 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. Based on market
data obtained from the third-party valuation firms, we use a combined market
yield analysis and an enterprise model of valuation. In applying the market
yield analysis, the value of our loans are determined based upon inputs such as
the coupon rate, current market yield, interest rate spreads of similar
securities, the stated value of the loan, and the length to maturity. In
applying the enterprise model, we use 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
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market valuation methods and factors based on the individual circumstances of
the portfolio company in order to estimate the enterprise value. The
methodologies for performing investments may be based on, among other things:
valuations of comparable public companies, recent sales of private and public
comparable companies, discounting the forecasted cash flows of the portfolio
company, third party valuations of the portfolio company, considering offers
from third parties to buy the company, estimating the value to potential
strategic buyers and considering the value of recent investments in the equity
securities of the portfolio company. 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. We may estimate the fair value
of warrants based on a model such as the Black-Scholes model or simulation
models or a combination thereof.
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 initially valued by the valuation professionals; •conclusions are then documented and discussed with senior management; and •an independent valuation firm engaged by our board of directors prepares an independent valuation report for approximately one third of the portfolio investments each quarter on a rotating quarterly basis on non fiscal year-end quarters, such that each of these investments will be valued by an independent valuation firm at least twice per annum when combined with the fiscal year-end review of all the investments by independent valuation firms, exclusive of any TRS underlying portfolio.
In addition, all of our investments are subject to the following valuation process:
•management reviews preliminary valuations and their own independent assessment; •the audit committee of our board of directors reviews the preliminary valuations of 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 ofSIC 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 significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. In addition, changes in the market environment (including the impact of COVID-19 on the financial market), portfolio company performance, and other events may occur over the lives of the investments that may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. Our investments in subordinated notes are carried at fair value, which is based on a discounted cash flow model. The discounted cash flow model models both the underlying collateral ("assets") and the liabilities of the CLO capital structure. The discounted cash flow model uses a set of assumptions including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated cash flows of the assets. The discounted cash flow model distributes the asset cash flows to the liability structure based on the payment priorities and discounts them back using appropriate market discount rates based on discount rates for comparable CLOs. The assumptions are based on available market data as well as management estimates. Additional data is used to validate the results from the discounted cash flow method, such as analysis of relevant data observed in the CLO market, review of quotes, where available, recent acquisitions and observable transactions in the subordinated notes, among other factors. Revenue Recognition We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities or accounting purposes if we have reason to doubt our ability to collect such interest. Original issue discounts, market discounts, or premiums are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as fee income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount. 19 -------------------------------------------------------------------------------- Table of Contents Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized. Payment-in-Kind Interest We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain RIC tax treatment, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash. Organizational and Offering Expenses We were responsible for all ongoing organizational and offering expenses sinceJune 2, 2014 until the termination of the Company's offering effective as ofJuly 31, 2018 .U.S. Federal Income Taxes We have elected, and intend to qualify annually, to be treated forU.S. federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-levelU.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders from our tax earnings and profits. To obtain and maintain our RIC tax treatment, we must, among other things, meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Recent Developments OnOctober 22, 2020 , our board of directors declared a series of monthly distributions for October, November andDecember 2020 in the amount of$0.01 per share. Stockholders of record as of each respective monthly record date will be entitled to receive the distribution. Below are the details for each respective distribution:
Record Date Payment Date Amount per share
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