Quarterly report pursuant to Section 13 or 15(d)

Investments

Investments

6 Months Ended

Jun. 30, 2024

Investments, Debt and Equity Securities [Abstract]

Note 3. INVESTMENTS

The Corporation’s investments are carried at fair value in accordance with FASB Accounting Standards Codification (ASC) 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements.

Loan investments are defined as traditional loan financings typically with no equity features or required equity co-investment. Debt investments are defined as debt financings that include one or more equity features such as conversion rights, stock purchase warrants, and/or stock purchase options. Equity investments are direct investments into a portfolio company and may include preferred stock, common stock, warrants and limited liability company membership interests.

The Corporation uses several approaches to determine the fair value of an investment. The main approaches are:

•

Loan and debt securities are generally valued at cost when representative of the fair value of the investment or sufficient assets or liquidation proceeds are expected to exist from a sale of a portfolio company at its estimated fair value. The valuation may also consider the carrying interest rate versus the related inherent portfolio risk of the investment. A loan or debt instrument may be reduced in value if it is judged to be of poor quality, collection is in doubt or insufficient liquidation proceeds exist.

•

Equity securities may be valued using the:

▪

Cost approach - The cost approach uses estimates of the liquidation value of the portfolio companies’ assets in relation to the cost of the respective security. This approach values the equity at the value remaining after the portfolio company pays off its debt and loan balances and its outstanding liabilities.

▪

Market approach - The market approach uses observable prices and other relevant information generated by similar market transactions. It may include both private and public M&A transactions where the traded price is a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) or another relevant operating metric. It may also include the market value of comparable public companies that are trading in an active market, or the use of market multiples derived from a set of comparables to assist in pricing the investment. Additionally, the Corporation adjusts valuations if a subsequent significant equity financing has occurred that includes a meaningful portion of the financing by a sophisticated, unrelated new investor.

▪

Income approach - The income approach employs valuation techniques to convert future benefits or costs, usually in the form of cash flows, into a present value amount. The measurement is based on value indicated by current market expectations about those future amounts.

ASC 820 classifies the inputs used to measure fair value into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, used in the Corporation’s valuation at the measurement date. Under the valuation policy, the Corporation values unrestricted publicly traded companies, categorized as Level 1 investments, at the closing price on the last trading day of the reporting period.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable and significant inputs to determining the fair value.

Financial assets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Any changes in estimated fair value are recorded in the statement of operations.

At June 30, 2024, 2% of the Corporation’s investments were Level 1 investments and 98% were Level 3 investments. At December 31, 2023, 9% of the Corporation’s investments were Level 1 investments and 91% were Level 3 investments. There were no Level 2 investments at June 30, 2024 or December 31, 2023.

In the valuation process, the Corporation values restricted securities categorized as Level 3 investments, using information from these portfolio companies, which may include:

•

Audited and unaudited statements of operations, balance sheets and operating budgets;

•

Current and projected financial, operational and technological developments of the portfolio company;

•

Current and projected ability of the portfolio company to service its debt obligations;

•

The current capital structure of the business and the seniority of the various classes of equity if a deemed liquidation event were to occur;

•

Pending debt or capital restructuring of the portfolio company;

•

Current information regarding any offers to purchase the investment, or recent financing transactions;

•

Current ability of the portfolio company to raise additional financing if needed;

•

Changes in the economic environment which may have a material impact on the operating results of the portfolio company;

•

Qualitative assessment of key management; and

•

Other factors deemed relevant to assess valuation.

The valuation may be reduced if a portfolio company’s performance and potential have deteriorated significantly. If the factors that led to a reduction in valuation are overcome, the valuation may be readjusted.

Equity Securities

Equity securities may include preferred stock, common stock, warrants and limited liability company membership interests.

The significant unobservable inputs used in the fair value measurement of the Corporation’s equity investments are EBITDA and revenue multiples, where applicable, the financial and operational performance of the business, and the debt and senior equity preferences that may exist in a deemed liquidation event. Standard industry multiples may be used when available; however, the Corporation’s portfolio companies are typically privately-held, lower middle market companies and these industry standards may be adjusted to more closely match the specific financial and operational characteristics of the portfolio company. Due to the nature of certain investments, fair value measurements may be based on other criteria, which may include third party appraisals. Significant changes in any of these unobservable inputs may result in a significantly higher or lower fair value estimate.

Another key factor used in valuing equity investments is a significant recent arms-length equity transaction entered into by the portfolio company with a sophisticated, non-strategic, unrelated, new investor. The terms of these equity transactions may not be identical to the equity transactions between the portfolio company and the Corporation, and the impact of the difference in transaction terms on the market value of the portfolio company may be difficult or impossible to quantify.

When appropriate the Black-Scholes pricing model is used to estimate the fair value of warrants for accounting purposes. This model requires the use of highly subjective inputs including expected volatility and expected life, in addition to variables for the valuation of minority equity positions in small private and early stage companies. Significant changes in any of these unobservable inputs may result in a significantly higher or lower fair value estimate.

For investments made within the last year, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair value inputs are identified causing the Corporation to depart from this basis.

Loan and Debt Securities

The significant unobservable inputs used in the fair value measurement of the Corporation’s loan and debt securities are the financial and operational performance of the portfolio company, similar debt with similar terms with other portfolio companies, as well as the market acceptance for the portfolio company’s products or services. These inputs will likely provide an indicator as to the probability of principal recovery of the investment. The Corporation’s loan and debt investments are often junior secured or unsecured securities. Fair value may also be determined based on other criteria where appropriate. Significant changes to the unobservable inputs may result in a change in fair value. For recent investments, the Corporation generally relies on the cost basis, which is deemed to represent the fair value, unless other fair value inputs are identified causing the Corporation to depart from this basis.

The following table provides a summary of the significant unobservable inputs used to determine the fair value of the Corporation’s Level 3 portfolio investments as of June 30, 2024:


Investment Type	Market Approach EBITDA Multiple		Market Approach Liquidation Seniority		Market Approach Revenue Multiple		Market Approach Transaction Pricing		Totals
Non-Control/Non-Affiliate Equity	$	72,522	$	—	$	700,000	$	364,608	$	1,137,130
Non-Control/Non-Affiliate Loan and Debt		10,801,511		4,473,021		—		2,946,000		18,220,532
Total Non-Control/Non-Affiliate	$	10,874,033	$	4,473,021	$	700,000	$	3,310,608	$	19,357,662
Affiliate Equity	$	18,582,384	$	—	$	8,710,000	$	—	$	27,292,384
Affiliate Loan and Debt		30,646,635		—		2,090,000		1,750,000		34,486,635
Total Affiliate	$	49,229,019	$	—	$	10,800,000	$	1,750,000	$	61,779,019
Control Equity	$	—	$	—	$	—	$	—	$	—
Control Loan and Debt		—		4,598,046		—		—		4,598,046
Total Control	$	—	$	4,598,046	$	—	$	—	$	4,598,046
Total Level 3 Investments	$	60,103,052	$	9,071,067	$	11,500,000	$	5,060,608	$	85,734,727

Range	5X - 12.3X		1X		3X - 3.5X		Not Applicable
Unobservable Input	EBITDA Multiple		Asset Value		Revenue Multiple		Transaction Price
Weighted Average	6.9X		1X		3.0X		Not Applicable

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at June 30, 2024:


			Fair Value Measurements at Reported Date Using
Description	June 30, 2024		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Other Significant Unobservable Inputs (Level 3)
Loan investments	$	16,828,665	$	—	$	—	$	16,828,665
Debt investments		40,476,548		—		—		40,476,548
Equity investments		29,765,754		1,336,240		—		28,429,514
Total	$	87,070,967	$	1,336,240	$	—	$	85,734,727

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at December 31, 2023:


			Fair Value Measurements at Reported Date Using
Description	December 31, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Other Significant Unobservable Inputs (Level 3)
Loan investments	$	12,417,977	$	—	$	—	$	12,417,977
Debt investments		36,861,525		—		—		36,861,525
Equity investments		27,846,210		7,309,650		—		20,536,560
Total	$	77,125,712	$	7,309,650	$	—	$	69,816,062

The following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) for the six months ended June 30, 2024:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Description	Loan Investments			Debt Investments			Equity Investments			Total
Ending balance December 31, 2023, of Level 3 Assets	$	12,417,977		$	36,861,525		$	20,536,560		$	69,816,062
Realized gains (losses) included in net change in net assets from operations:
Knoa Software, Inc. (Knoa)		—			—			(1,229,155	)		(1,229,155	)
Tilson Technology Management, Inc. (Tilson)		—			—			397,264			397,264
Total realized losses, net		—			—			(831,891	)		(831,891	)
Unrealized gains (losses) included in net change in net assets from operations:
Filterworks Acquisition USA, LLC (Filterworks)		—			—			(196,226	)		(196,226	)
Knoa		—			—			1,129,155			1,129,155
Pressure Pro, Inc. (Pressure Pro)		—			—			470,000			470,000
SciAps, Inc. (SciAps)		—			—			5,586,016			5,586,016
Tilson		—			—			1,761,000			1,761,000
Total unrealized gains, net		—			—			8,749,945			8,749,945
Purchases of securities/changes to securities/non-cash conversions:
BMP Food Service Supply Holdco, LLC (FSS)		—			—			107,619			107,619
Caitec, Inc. (Caitec)		283,170			—			—			283,170
FCM Industries Holdco LLC (First Coast Mulch)		—			22,623			—			22,623
Filterworks		—			102,396			—			102,396
GoNoodle, Inc. (GoNoodle)		—			7,139			—			7,139
HDI Acquisition LLC (Hilton Displays)		—			10,646			—			10,646
Highland All About People Holdings, Inc. (All About People)		—			61,973			—			61,973
Inter-National Electronic Alloys LLC (INEA)		—			25,392			—			25,392
ITA Acquisition, LLC (ITA)		449,086			—			—			449,086
Mattison Avenue Holdings LLC (Mattison)		5,572,902			—			—			5,572,902
Mountain Regional Equipment Solutions (MRES)		—			2,946,000			264,545			3,210,545
Pressure Pro		—			37,637			—			37,637
Seybert’s Billiards Corporation (Seybert’s)		—			1,863,507			—			1,863,507
Total purchases of securities/changes to securities/non-cash conversions		6,305,158			5,077,313			372,164			11,754,635
Repayments and sales of securities:
FSS		—			(34,838	)		—			(34,838	)
Mattison		(1,894,470	)		—			—			(1,894,470	)
Pressure Pro		—			(1,427,452	)		—			(1,427,452	)
Tilson		—			—			(397,264	)		(397,264	)
Total repayments and sales of securities		(1,894,470	)		(1,462,290	)		(397,264	)		(3,754,024	)
Ending balance June 30, 2024, of Level 3 Assets	$	16,828,665		$	40,476,548		$	28,429,514		$	85,734,727

Change in unrealized appreciation/depreciation included in earnings related to Level 3 investments still held at reporting date										$	7,620,790

The following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) for the six months ended June 30, 2023:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Description	Loan Investments			Debt Investments			Equity Investments			Total
Ending balance December 31, 2022, of Level 3 Assets	$	14,578,351		$	19,582,616		$	20,935,744		$	55,096,711
Realized gains (losses) included in net change in net assets from operations:
ClearView Social, Inc. (Clearview Social)		—			—			10,432			10,432
DSD Operating, LLC (DSD)		—			—			2,537,765			2,537,765
Microcision, LLC (Microcision)		—			—			58,329			58,329
SocialFlow, Inc. (Social Flow)		—			—			(4,941	)		(4,941	)
Somerset Gas Transmission Company, LLC (Somerset)		—			—			(448,717	)		(448,717	)
Total realized gains, net		—			—			2,152,868			2,152,868
Unrealized gains (losses) included in net change in net assets from operations:
DSD		—			—			(886,698	)		(886,698	)
Open Exchange, Inc. (Open Exchange)		—			—			(701,940	)		(701,940	)
Somerset		—			—			594,097			594,097
Total unrealized losses, net		—			—			(994,541	)		(994,541	)
Purchases of securities/changes to securities/non-cash conversions:
Caitec, Inc. (Caitec)		36,916			—			—			36,916
DSD		31,652			—			—			31,652
Filterworks Acquisition USA, LLC (Filterworks)		—			147,638			—			147,638
BMP Food Service Supply Holdco, LLC (FSS)		—			2,320,000			—			2,320,000
GoNoodle, Inc. (GoNoodle)		—			7,067			—			7,067
HDI Acquisition LLC (Hilton Displays)		—			11,868			—			11,868
Inter-National Electronic Alloys LLC (INEA)		—			3,304,154			1,011,765			4,315,919
ITA Acquisition, LLC (ITA)		495,528			—			—			495,528
Mattison Avenue Holdings LLC (Mattison)		18,716			—			—			18,716
Pressure Pro, Inc. (Pressure Pro)		—			3,013,635			30,000			3,043,635
Seybert’s Billiards Corporation (Seybert’s)		—			62,019			—			62,019
SciAps, Inc. (SciAps)		—			5,000			—			5,000
Social Flow		—			—			4,941			4,941
BMP Swanson Holdco, LLC (Swanson)		49,026			—			—			49,026
Tilson Technology Management, Inc. (Tilson)		—			—			250,000			250,000
Total purchases of securities/changes to securities/non-cash conversions		631,838			8,871,381			1,296,706			10,799,925
Repayments and sales of securities:
Clearview Social		—			—			(10,432	)		(10,432	)
DSD		(3,171,434	)		—			(3,605,265	)		(6,776,699	)
FSS		—			(40,047	)		(210,000	)		(250,047	)
Hilton Displays		—			(300,000	)		—			(300,000	)
Microcision		—			—			(58,329	)		(58,329	)
Somerset		—			—			(270,380	)		(270,380	)
Total repayments and sales of securities		(3,171,434	)		(340,047	)		(4,154,406	)		(7,665,887	)
Ending balance June 30, 2023, of Level 3 Assets	$	12,038,755		$	28,113,950		$	19,236,371		$	59,389,076

Change in unrealized appreciation/depreciation included in earnings related to Level 3 investments still held at reporting date										$	(701,940	)