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 ofMedley 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 laws and regulations, changes in political, economic or industry
conditions, and changes in the interest rate environment or
other conditions affecting the financial and capital markets, including
with respect to changes resulting from or in response to, or potentially
even the absence of changes as a result of, the impact of the COVID-19
pandemic;
• risks associated with possible disruptions in our operations or the economy
generally including the current economic downturn as a result of the impact
of the COVID-19 pandemic;
• 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 with
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 of
monitor and administer our investments;
• the ability of
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; and
• uncertainties associated with the impact from the COVID-19 pandemic,
including: its impact on the global and
the global and
outbreak in
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 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, 2020 . 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 theSEC , including quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K. 1
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Table of Contents Recent 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 COVID-19 outbreak has been rapidly evolving has led to, and for an unknown period of time will continue to lead to, disruptions in local, regional, national and global markets and economies affected thereby, includingthe United States . The COVID-19 pandemic and restrictive measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, or the re-introduction of business shutdowns, cancellations of events and restrictions on travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and inthe United States . In addition, although theU.S. Food and Drug Administration authorized vaccines for emergency use starting inDecember 2020 , it is unclear how quickly the vaccines will be distributed nationwide and globally or when "herd immunity" will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, theU.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession inthe United States and other major markets. We have been closely monitoring, and will continue to monitor, the COVID-19 pandemic and its impact on all aspects of our business, including how it will impact our portfolio companies, employees, due diligence and underwriting processes, and financial markets. In addition, as a result of the adverse effects of the COVID-19 pandemic and the related disruption and financial distress, certain portfolio companies may seek to modify their loans from us, which could reduce the amount or extend the time for payment of principal, reduce the rate or extend the time of payment of interest, and/or increase the amount of PIK interest we receive with respect to such investment, among other things. The effects of the COVID-19 pandemic have also impeded, and may continue to impede, the ability of certain of our portfolio companies to raise additional capital and/or pursue asset sales or otherwise execute strategic transactions, which could have a material adverse effect on the valuation of our investments in such companies. Portfolio companies operating in certain industries may be more susceptible to these risks than other portfolio companies in other industries in light of the effects of the COVID-19 pandemic. 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, and continue to take, 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 government Paycheck Protection Program, including the second draw Paycheck Protection Program loans. 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 guidance fromU.S. and international authorities, including federal, state and local public health authorities. 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 fromMarch 31, 2021 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 endMarch 31, 2021 , the analysis contained herein may not fully account for impacts relating to the COVID-19 pandemic. In that regard, for example, as ofMarch 31, 2021 , 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 time that followed ourMarch 31, 2021 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 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 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. 2
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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. 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 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 or
administering our investment portfolio, including expenses incurred by
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 by
reimbursement amount is annually approved by our independent director
committee and subject to the limitations included in our Administration
Agreement.
Subsequent to quarter end, on
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 . 3
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Portfolio and Investment Activity
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$ 381,912,061 54.0 %$ 329,702,491 52.7 % Senior secured first lien notes 1,000,000 0.1 1,000,000 0.2 Senior secured second lien term loans 102,846,359 14.5 95,842,868 15.3 Subordinated notes 64,163,761 9.1 55,305,642 8.8 Sierra Senior Loan Strategy JV I LLC 110,050,000 15.5 85,279,888 13.6 Equity/warrants 48,309,834 6.8 59,155,584 9.4 Total$ 708,282,015 100.0 %$ 626,286,473 100.0 % As ofMarch 31, 2021 , our income-bearing investment portfolio, which represented 86.9% of our total portfolio, had a weighted average yield based upon the cost of our investment portfolio of 7.9%, and 2.0% of our income-bearing portfolio bore interest based on fixed rates, while 98.0% of our income-bearing portfolio bore interest at floating rates, such as LIBOR. As ofMarch 31, 2021 , the Company held loans it has made directly to 67 investee companies with aggregate principal amounts of$575.6 million . As ofDecember 31, 2020 , the Company held loans it has made directly to 67 investee companies with aggregate principal amounts of$541.1 million . During the three months endedMarch 31, 2021 , the Company made 26 loans to investee companies with aggregate principal amounts of$38.5 million . During the three months endedMarch 31, 2020 , the Company made 12 loans to investee companies with aggregate principal amounts of$35.1 million .
The following table shows the amortized cost and the fair value of our
investment portfolio as of
Amortized Cost Percentage Fair Value Percentage Senior secured first lien term loans$ 369,385,810 52.7 %$ 315,490,601 52.3 % Senior secured first lien notes 8,473,750 1.2 8,548,755 1.4 Senior secured second lien term loans 103,081,287 14.7 93,794,917 15.5 Subordinated notes 65,561,840 9.4 50,039,500 8.3 Sierra Senior Loan Strategy JV I LLC 110,050,000 15.7 81,788,964 13.5 Equity/warrants 44,451,252 6.3 54,323,743 9.0 Total$ 701,003,939 100.0 %$ 603,986,480 100.0 % As ofDecember 31, 2020 , 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 8.0%, and 3.5% of our income-bearing portfolio bore interest based on fixed rates, while 96.5% 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
March 31, 2021 December 31, 2020 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
52.7 % 8.9 % 52.7 % 9.3 % Senior secured first lien notes 0.2 5.7 % 1.2 11.0 % Senior secured second lien term loans 15.3 12.0 % 14.7 10.9 % Subordinated notes 8.8 8.8 % 9.4 8.8 % Sierra Senior Loan Strategy JV I LLC 13.6 9.0 % 15.7 9.0 % Equity/warrants 9.4 10.0 % 6.3 6.0 % Total 100.0 % 9.4 % 100.0 % 9.5 %
(1) The weighted average current yield for total investments does not represent
the total return to our stockholders. 4
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The following table shows the portfolio composition by industry classification
based on fair value as of
Industry Classification Amortized Cost Percentage Fair Value Percentage Multi-Sector Holdings$ 173,297,636 24.5 %$ 140,549,930 22.4 % Services: Business 77,589,397 11.0 72,374,640 11.6 High Tech Industries 70,777,964 10.0 67,671,641 10.8 Healthcare & Pharmaceuticals 66,877,968 9.4 55,820,413 8.9 Consumer Goods: Durable 38,969,557 5.5 48,736,948 7.8 Construction & Building 50,129,735 7.1 46,910,019 7.5 Aerospace & Defense 33,559,759 4.7 30,354,609 4.8 Banking, Finance, Insurance & Real Estate 18,508,091 2.6 28,925,600 4.6 Hotel, Gaming & Leisure 36,985,435 5.2 24,540,275 3.9 Automotive 20,463,356 2.9 18,995,368 3.0 Environmental Industries 12,509,905 1.8 17,526,126 2.8 Containers, Packaging & Glass 15,026,906 2.1 14,976,939 2.4 Services: Consumer 9,706,346 1.4 9,950,000 1.6 Chemicals, Plastics & Rubber 10,054,153 1.4 9,162,091 1.5 Forest Products & Paper 6,395,222 0.9 7,887,158 1.3 Media: Diversified & Production 15,409,378 2.2 7,106,207 1.1 Transportation: Cargo 6,662,530 0.9 6,622,355 1.1 Transportation: Consumer 8,862,257 1.3 7,010,032 1.1 Metals & Mining 3,451,030 0.5 3,451,073 0.6 Energy: Oil & Gas 20,857,246 2.9 2,723,805 0.4 Capital Equipment 2,496,263 0.4 2,496,289 0.4 Wholesale 1,714,131 0.2 1,284,015 0.2 Retail 7,934,890 1.1 1,166,129 0.2 Beverage & Food 42,860 0.0 44,811 0.0 Total$ 708,282,015 100.0 %$ 626,286,473 100.0 %
The following table shows the portfolio composition by industry classification
based on fair value as of
Industry Classification Amortized Cost Percentage Fair Value Percentage Multi-Sector Holdings$ 174,660,001 24.9 %$ 131,792,864 21.8 % Services: Business 79,260,551 11.3 73,716,395 12.2 High Tech Industries 75,519,344 10.8 71,792,022 11.9 Healthcare & Pharmaceuticals 68,599,968 9.8 58,275,198 9.6 Consumer Goods: Durable 32,045,028 4.6 41,016,292 6.8 Construction & Building 42,928,750 6.1 38,356,358 6.4 Banking, Finance, Insurance & Real Estate 27,848,664 4.0 37,620,161 6.2 Aerospace & Defense 33,558,896 4.8 29,723,725 4.9 Hotel, Gaming & Leisure 36,326,705 5.2 24,013,769 4.0 Automotive 18,886,756 2.7 17,404,476 2.9 Containers, Packaging & Glass 15,206,840 2.2 15,120,424 2.5 Environmental Industries 5,041,430 0.7 10,052,691 1.7 Services: Consumer 9,700,000 1.4 9,725,000 1.6 Chemicals, Plastics & Rubber 10,060,861 1.4 9,063,498 1.5 Forest Products & Paper 6,477,887 0.9 7,770,704 1.3 Media: Diversified & Production 15,474,145 2.2 6,780,000 1.1 Transportation: Cargo 6,877,294 1.0 6,770,781 1.1 Transportation: Consumer 7,975,416 1.1 6,068,082 1.0 Metals & Mining 3,492,436 0.5 3,492,479 0.6 Energy: Oil & Gas 20,868,832 3.0 2,625,018 0.4 Wholesale 2,212,919 0.3 1,746,044 0.3 Retail 7,934,347 1.1 1,012,358 0.2 Beverage & Food 46,869 0.0 48,141 0.0 Total$ 701,003,939 100.0 %$ 603,986,480 100.0 % 5
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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 asSIC 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 within expectations, 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 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 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 since origination 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
March 31, 2021 December 31, 2020 Investment Investments at Investments at Credit Rating Fair Value Percentage Fair Value Percentage 1$ 76,810,986 12.3 %$ 51,481,987 8.5 % 2 399,751,121 63.9 410,310,087 67.9 3 118,878,701 19.0 110,668,216 18.3 4 14,743,783 2.4 13,500,546 2.3 5 16,101,882 2.6 18,025,644 3.0 Total$ 626,286,473 100.0 %$ 603,986,480 100.0 % The COVID-19 pandemic has impacted our investment ratings as ofMarch 31, 2021 , causing downgrades of certain portfolio companies. As the COVID-19 pandemic continues to evolve, we are continuing to maintain 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 months endedMarch 31, 2021 and 2020: For the Three Months Ended March 31, 2021 2020 Total investment income$ 11,924,655 $ 11,176,811 Total expenses 7,732,885 10,353,011 Income Tax Expense 1,253,011 - Net investment income/(loss) 2,938,759
823,800
Net realized gain/(loss) from investments 70,795
217,479
Net change in unrealized appreciation/(depreciation) on investments
15,020,724
(120,523,220 ) Change in provision for deferred taxes on unrealized gain on investments
807,969
240,935
Net increase/(decrease) in net assets resulting from operations$ 18,838,247 $ (119,241,006 ) Investment Income Total investment income increased$747,844 , or 6.7%, to$11,924,655 for the three months endedMarch 31, 2021 , compared to$11,176,811 for the three months endedMarch 31, 2020 . Total investment income consisted primarily of portfolio interest and dividends, which increased$1,738,492 , or 17.7%, to$11,562,230 for the three months endedMarch 31, 2021 , compared to$9,823,728 for the three months endedMarch 31, 2020 . This increase was primarily attributable to a decrease in the number of portfolio companies on non-accrual. As ofMarch 31, 2021 , certain investments in twelve portfolio companies were on non-accrual status with a combined cost of$83,305,613 , or 11.8% of the cost of the Company's portfolio, and a combined fair value of$30,247,740 or 4.8% of the fair value of the Company's portfolio. As ofMarch 31, 2020 , certain investments in sixteen portfolio companies were on non-accrual status with a combined cost of$140,738,101 , or 17.3% of the cost of the Company's portfolio, and a combined fair value of$32,030,369 , or 5.6% of the fair value of the Company's portfolio. As ofMarch 31, 2020 , certain investments in two portfolios were on partial non-accrual status with a combined cost of$18,617,271 , or 2.3%, and a combined fair value of$17,420,745 , or 3.1% of the fair value of the Company's portfolio. Fee income increased$235,060 , or 193.2%, to$356,758 for the three months endedMarch 31, 2021 , compared to$121,698 for the three months endedMarch 31, 2020 , primarily due to an increase in fees associated with loan originations and loan amendments. 6
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Table of Contents Operating Expenses The following table shows operating expenses for the three months endedMarch 31, 2021 and 2020: For the Three Months Ended March 31, 2021 2020 Base management fees$ 3,066,397 $ 3,251,451 Interest and financing expenses 1,687,059 4,287,663 General and administrative expenses 1,611,627 1,970,968 Administrator expenses 643,620 721,632 Offering costs - 3,243 Professional fees 724,182 118,054 Total expenses$ 7,732,885 $ 10,353,011
Total expenses decreased
Base management fees decreased
Interest and financing expenses decreased$2,600,604 , or 60.7%, to$1,687,059 for the three months endedMarch 31, 2021 , as compared to$4,287,663 for the three months endedMarch 31, 2020 , primarily due to the wind-down and termination of the ING Credit Facility (as defined below) fromMay 2020 throughJuly 2020 , as well as the repayment of$35,000,000 of the outstanding balance of its Alpine Credit Facility (as defined below). General and administrative expenses decreased$359,341 , or 18.2%, to$1,611,627 for the three months endedMarch 31, 2021 , as compared to$1,970,968 for the three months endedMarch 31, 2020 , primarily due to a decrease in transfer agent expenses. Professional fees increased$606,128 or 513.4% to$724,182 for the three months endedMarch 31, 2021 , as compared to$118,054 for the three months endedMarch 31, 2020 , primarily due to a an increase in legal expenses, audit expenses, consulting expenses and valuation expenses.
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 months endedMarch 31, 2021 , we recognized net realized gain on investments of$70,795 , primarily due to the sale of investments. For the three months endedMarch 31, 2020 , we recognized net realized gain on investments of$217,479 , primarily due to the sale of investments.
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 provision for deferred taxes. For the three months endedMarch 31, 2021 , we recorded a net change in unrealized appreciation, net of tax, of$15,828,693 . The unrealized appreciation for the three months endedMarch 31, 2021 resulted from positive market and credit-related adjustments. For the three months endedMarch 31, 2020 , we recorded a net change in unrealized depreciation of$120,282,285 . The unrealized depreciation was, in part, due to negative credit-related adjustments that caused a reduction in fair value of certain watch-list securities and portfolio investments on non-accrual status. In part, the net change in unrealized depreciation reflected widening credit spreads as market participants expected a higher yield on similar investments given the significant market volatility generated by the COVID-19 pandemic and, to some extent, other factors such as specific industry concerns, uncertainty about the duration of business shutdowns and near-term liquidity needs of certain of our portfolio investments.
Changes in Net Assets from Operations
For the three months endedMarch 31, 2021 , we recorded a net increase in net assets resulting from operations of$18,838,247 . Based on 102,771,859 weighted average common shares outstanding for the three months endedMarch 31, 2021 , our per share net increase in net assets resulting from operations was$0.18 . For the three months endedMarch 31, 2020 , we recorded a net decrease in net assets resulting from operations of$119,241,006 . Based on 102,715,153 weighted average common shares outstanding for the three months endedMarch 31, 2020 , our per share net decrease in net assets resulting from operations was$1.16 .
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. Currently, our primary source of liquidity is derived from the use of the Alpine Credit Facility. 7
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As ofMarch 31, 2021 andDecember 31, 2020 , we had$66.6 million and$65.3 million , respectively, in cash and cash equivalents. In the future, we may generate cash from future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash inU.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is to make investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes. In order to satisfy the Code requirements applicable to us as a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200% (or 150% if certain requirements under the 1940 Act are met) at the time of the borrowing or issuance of preferred stock. This requirement limits the amount that we may borrow. The following table shows our net borrowings as ofMarch 31, 2021 andDecember 31, 2020 : March 31, 2021 December 31, 2020 Total Balance Unused Total Balance Unused Commitment Outstanding
Commitment Commitment Outstanding Commitment
Alpine Credit Facility
180,000,000 145,000,000 35,000,000 180,000,000 145,000,000 35,000,000 Unamortized deferred financing costs - (229,310 ) - - (659,266 ) - Total borrowings outstanding, net of deferred financing costs$ 180,000,000 $ 144,770,690 $
35,000,000$ 180,000,000 $ 144,340,734 $ 35,000,000 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. 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 Company was 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 (iii) 0.50% if the used portion of the aggregate commitments is greater than 65%. The ING Credit Facility provided that the Company may use the proceeds of theING Credit Facility for general corporate purposes, including making investments in accordance with the Company's investment objective and strategy. Borrowings under the Revolving Credit Agreement were subject to, among other things, a minimum borrowing base. Substantially all of the Company's assets were pledged as collateral under the Revolving Credit Agreement. The ING Credit Facility required the Company to, among other things (i) make representations and warranties regarding the collateral as well the Company's business and operations, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants. The documents for the Revolving Credit Agreement also included default provisions, such as the failure to make timely payments under the Revolving Credit Agreement, the occurrence of a change in control, and the failure by the Company to materially perform under the operative agreements governing the Revolving Credit Agreement, which, if not complied with, could have accelerated repayment under the Revolving Credit Agreement, thereby materially and adversely affecting the Company's liquidity, financial condition and results of operations. In connection with the security interest established under the Security Agreement, the Company,ING Capital LLC , in its capacity as collateral agent, andState Street Bank and Trust Company , in its capacity as the Company's custodian, entered into a control agreement dated as ofDecember 4, 2013 , in order to, among other things, perfect the security interest granted pursuant to the Security Agreement in, and provide for control over, the related collateral. As a result of the termination of the Revolving Credit Agreement, the Security Agreement was terminated effective as of the Termination Date.
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 "Loan Agreement") 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 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 a significant portion 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. OnNovember 18, 2020 , Alpine entered into Amendment No.1 to the Loan Agreement to, among other things, (i) extend the reinvestment period fromDecember 29, 2020 toMay 18, 2021 , (ii) increase the applicable margin for advances from 2.85% to 3.10% per annum, (iii) reduce the amount of maximum borrowings in an aggregate principal amount from$300,000,000 to$180,000,000 on a committed basis, (iv) require the Company to maintain a minimum a cash balance of$20,000,000 in Alpine, and (v) decrease the compliance condition for net advances from 55% to 52.5% of net asset value. The maturity date under the Loan Agreement did not change and therefore any amounts borrowed, as well as all accrued and unpaid interest thereunder, will be due and payable onMarch 29, 2022 . In connection with the Amendment, the Company repaid$35,000,000 of the outstanding balance under the Loan Agreement onNovember 18, 2020 , reducing the outstanding balance from$180,000,000 to$145,000,000 . If Alpine is not able to extend the reinvestment period ofMay 18, 2021 or refinance its existing indebtedness under the Alpine Credit Facility with another lender, the Alpine Credit Facility would enter its amortization period and be payable at maturity onMarch 29, 2022 . 8
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The Alpine Credit Facility provides for borrowings in an aggregate principal amount up to$180,000,000 on a committed basis. 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. Pricing under the Alpine Credit Facility for each one month calculation period is based on LIBOR for an interest period of one month, plus a spread of 3.10% per annum. If LIBOR is unavailable, pricing will be determined at the prime rate offered by JPMorgan or the federal funds effective rate, plus a spread of 3.10% per annum. Interest is payable monthly in arrears. Alpine is also required to pay a commitment fee of 1.00% on the average daily unused amount of the financing commitments to the extent that$180,000,000 has not been borrowed. Borrowings of Alpine are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act, applicable to BDCs. Pursuant to a Sale and Contribution Agreement entered into between the Company and Alpine (the "Sale Agreement") in connection with the Alpine Credit Facility, the Company may sell loans or contribute cash or loans to Alpine from time to time and will retain a residual interest in any assets contributed through its ownership of Alpine or will receive fair market value for any assets sold to Alpine. In certain circumstances the Company may be required to repurchase certain loans sold to Alpine. In addition to the acquisition of loans pursuant to the Sale Agreement, Alpine may purchase additional assets from various sources. Alpine has appointedSIC Advisors to manage its portfolio of assets pursuant to the terms of a Portfolio Management Agreement betweenSIC Advisors and Alpine. As ofMarch 31, 2021 the carrying amount of the Company's borrowings under the Alpine Credit Facility approximated the fair value of the Company's debt obligation. The fair value of the Company's debt obligation is 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 Company's borrowings under the Alpine Credit Facility is estimated based upon market interest rates of the Company's borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. As ofMarch 31, 2021 and 2020, the Alpine Credit Facility would be deemed to be Level 3, as defined in Note 4. Contractual Obligations
The following table shows our payment obligations for repayment of debt, which
total our contractual obligations at
Payment Due By Period Less than More than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years Alpine Credit Facility$ 145,000,000 $ -$ 145,000,000 $ - $ - Total Contractual Obligations$ 145,000,000 $ -$ 145,000,000 $ - $ - 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 15, 2021 , the board of directors approved the renewal of the Investment Advisory Agreement for an additional one-year term, which will expire onApril 17, 2022 .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 withMedley Capital LLC with an initial term of two years, pursuant to whichMedley 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. Pursuant to its terms, and unless earlier terminated as described below, the Administration Agreement will remain in effect from year-to-year if approved annually by a majority of our directorswho are not "interested persons" (as defined in Section 2(a)(19) of the 1940 Act) of the Company orMedley Capital LLC , and either the holders of a majority of our outstanding voting securities or our board of directors. Most recently, onApril 15, 2021 , the board of directors approved the renewal of the Administration Agreement for an additional one-year term, which will expire onApril 17, 2022 .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.
Off-Balance Sheet Arrangements
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). 9
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As ofMarch 31, 2021 andDecember 31, 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 ofMarch 31, 2021 andDecember 31, 2020 , approximately$124.5 million was funded relating to these commitments of which$110.1 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 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,
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.
The reinvestment period of the JV Facility ended on
The JV Facility is secured substantially by all of Sierra JV's assets, subject to certain exclusions set forth in the JV Facility. As ofMarch 31, 2021 andDecember 31, 2020 , there was$124.7 million outstanding under the JV Facility. 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. 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. 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. 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." 10
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The following table reflects the cash distributions per share that the Company has declared or paid to its stockholders during 2021 and 2020. Stockholders of record as of each respective record date were entitled to receive the distribution. Record Date Payment Date Amount per share
0.03500 March 30, 2020 March 31, 2020 0.03500 October 29, 2020 October 30, 2020 0.01000 November 27, 2020 November 30, 2020 0.01000 December 30, 2020 December 31, 2020 0.01000 January 28, 2021 January 29, 2021 0.01000 February 25, 2021 February 26, 2021 0.01000 March 30, 2021 March 31, 2021 0.01000 We have adopted an "opt in" DRIP 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 DRIP 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.
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 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 .Medley Capital LLC is an affiliate ofSIC Advisors . Subsequent to quarter end, onApril 23, 2021 , the Company entered into each of the Incentive Fee Waiver Agreement withSIC Advisors and the Expense Limitation Agreement withMedley Capital LLC , the Company's administrator. See "Recent Developments" for more information. 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
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. 11
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Under the terms of the Investment Advisory Agreement,SIC Advisors bears all organizational and offering expenses on our behalf. SinceJune 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 reimburseSIC Advisors for any such organizational and offering expenses incurred bySIC 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. OnJuly 2, 2018 , the Company's board of directors determined to terminate the Company's offering effective as ofJuly 31, 2018 . 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 paySIC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee. Critical Accounting Policies This discussion of our expected operating plans is based upon our expected consolidated financial statements, which will be prepared in accordance withU.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 participantwho 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. 12
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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 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.
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. 13
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Table of Contents 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.
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.
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 OnApril 23, 2021 , the Company entered into the Incentive Fee Waiver Agreement withSIC Advisors , pursuant to whichSIC Advisors agreed to waive (i) 50% of any incentive fee on income payable toSIC Advisors for any fiscal quarter during the period beginning with the fiscal quarter endingSeptember 30, 2021 and the fiscal quarter endingJune 30, 2022 , and (ii) 50% of any incentive fee on capital gains payable toSIC Advisors for the fiscal year endingDecember 31, 2021 . For the avoidance of doubt, the Incentive Fee Waiver Agreement does not amend the calculation of the incentive fees as set forth in the Investment Advisory Agreement. Other than the waiver contemplated by the Incentive Fee Waiver Agreement, the terms of the Investment Advisory Agreement will remain in full force and effect. Following (i) the fiscal quarter endingJune 30, 2022 with respect to the waiver granted bySIC Advisors on any incentive fee payable on income, and (ii) the fiscal year endingDecember 31, 2021 with respect to the waiver granted bySIC Advisors on any incentive fee payable on capital gains, unless otherwise extended by the Company andSIC Advisors , the Incentive Fee Waiver Agreement will terminate and the original terms of the Investment Advisory Agreement will be in full force and effect. In addition, onApril 23, 2021 , the Company entered into the Expense Limitation Agreement withMedley Capital LLC , the Company's administrator, pursuant to which,Medley Capital LLC agreed that the amount of expenses payable and reimbursable by the Company under the Administration Agreement will be capped at$2.2 million for the fiscal year endingDecember 31, 2021 . For the avoidance of doubt, other than the cap contemplated by the Expense Limitation Agreement, the Expense Limitation Agreement does not amend the allocation of costs and expenses that are payable or reimbursable by the Company under the Administration Agreement. Following the quarter endingDecember 31, 2021 , unless otherwise extended by the Company andMedley Capital LLC , the Expense Limitation Agreement will terminate and the original terms of the Administration Agreement will be in full force and effect. OnApril 28, 2021 , our board of directors declared a series of monthly distributions for April, May andJune 2021 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 April 29, 2021 April 30, 2021 $ 0.01 May 28, 2021 May 31, 2021 0.01 June 29, 2021 June 30, 2021 0.01 In addition, onApril 28, 2021 , our board of directors authorized a share repurchase program, pursuant to which the Company intends to conduct quarterly share repurchases, beginning in the second quarter of 2021, of the lesser of: (i) the number of shares of common stock, par value$0.0001 per share (the "Shares"), that the Company can purchase with the proceeds received under the DRIP from the prior quarter; or (ii) 2.5% of the weighted average number of Shares outstanding in the prior four calendar quarters (the "Share Repurchase Program"). Notwithstanding the foregoing, in connection with the first share repurchase offer for the quarter endingJune 30, 2021 , the Company intends to repurchase the number of Shares that the Company can purchase with the proceeds received under the DRIP from the prior two quarters. The purpose of the Share Repurchase Program is to allow stockholders to sell their Shares back to the Company at a price equal to the most recently disclosed net asset value per share of the Company's common stock immediately prior to the date of such share repurchase. Shares will be purchased from stockholders participating in the Share Repurchase Program on a pro rata basis. The Share Repurchase Program may be suspended, extended, modified or discontinued by our board of directors at any time. 14
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