Quarterly report pursuant to Section 13 or 15(d)

Investments

Investments

9 Months Ended

Sep. 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 September 30, 2024, all of the Corporation’s investments 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 September 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 September 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	$	100,063	$	872,585
Non-Control/Non-Affiliate Loan and Debt		10,957,828		4,476,604		—		2,949,000		18,383,432
Total Non-Control/Non-Affiliate	$	11,030,350	$	4,476,604	$	700,000	$	3,049,063	$	19,256,017
Affiliate Equity	$	18,272,384	$	—	$	—	$	—	$	18,272,384
Affiliate Loan and Debt		30,837,197		—		—		1,750,000		32,587,197
Total Affiliate	$	49,109,581	$	—	$	—	$	1,750,000	$	50,859,581
Control Equity	$	—	$	—	$	—	$	—	$	—
Control Loan and Debt		—		4,919,969		—		—		4,919,969
Total Control	$	—	$	4,919,969	$	—	$	—	$	4,919,969
Total Level 3 Investments	$	60,139,931	$	9,396,573	$	700,000	$	4,799,063	$	75,035,567

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

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


			Fair Value Measurements at Reported Date Using
Description	September 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	$	17,301,482	$	—	$	—	$	17,301,482
Debt investments		38,589,116		—		—		38,589,116
Equity investments		19,144,969		—		—		19,144,969
Total	$	75,035,567	$	—	$	—	$	75,035,567

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 nine months ended September 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:
DSD Operating, LLC (DSD)		—			—			23,699			23,699
Knoa Software, Inc. (Knoa)		—			—			(1,229,155	)		(1,229,155	)
Mezmeriz, Inc. (Mezmeriz)		—			—			(742,850	)		(742,850	)
SciAps, Inc. (SciAps)		—			—			7,699,879			7,699,879
Tilson Technology Management, Inc. (Tilson)		—			—			397,264			397,264
Total realized gains, net		—			—			6,148,837			6,148,837
Unrealized gains (losses) included in net change in net assets from operations:
BMP Food Service Supply Holdco, LLC (FSS)		—			—			(610,000	)		(610,000	)
BMP Swanson Holdco, LLC (Swanson)		—			—			250,000			250,000
Filterworks Acquisition USA, LLC (Filterworks)		—			—			(396,226	)		(396,226	)
Knoa		—			—			1,129,155			1,129,155
Mezmeriz		—			—			742,850			742,850
Mountain Regional Equipment Solutions (MRES)		—			—			(264,545	)		(264,545	)
Pressure Pro, Inc. (Pressure Pro)		—			—			720,000			720,000
Tilson		—			—			1,761,000			1,761,000
Total unrealized gains, net		—			—			3,332,234			3,332,234
Purchases of securities/changes to securities/non-cash conversions:
FSS		—			—			107,619			107,619
Caitec, Inc. (Caitec)		434,064			—			—			434,064
FCM Industries Holdco LLC (First Coast Mulch)		—			34,499			—			34,499
Filterworks		—			193,885			—			193,885
GoNoodle, Inc. (GoNoodle)		—			10,722			—			10,722
HDI Acquisition LLC (Hilton Displays)		—			16,069			—			16,069
Highland All About People Holdings, Inc. (All About People)		—			93,776			—			93,776
Inter-National Electronic Alloys LLC (INEA)		—			33,995			—			33,995
ITA Acquisition, LLC (ITA)		771,009			—			—			771,009
Mattison Avenue Holdings LLC (Mattison)		5,572,902			—			—			5,572,902
MRES		—			2,949,000			264,545			3,213,545
Pressure Pro		—			52,129			—			52,129
Seybert’s Billiards Corporation (Seybert’s)		—			1,895,806			—			1,895,806
Total purchases of securities/changes to securities/non-cash conversions		6,777,975			5,279,881			372,164			12,430,020
Repayments and sales of securities:
DSD		—			—			(23,699	)		(23,699	)
FSS		—			(34,838	)		—			(34,838	)
Mattison		(1,894,470	)		—			—			(1,894,470	)
Pressure Pro		—			(1,427,452	)		—			(1,427,452	)
SciAps		—			(2,090,000	)		(10,823,863	)		(12,913,863	)
Tilson		—			—			(397,264	)		(397,264	)
Total repayments and sales of securities		(1,894,470	)		(3,552,290	)		(11,244,826	)		(16,691,586	)
Ending balance September 30, 2024, of Level 3 Assets	$	17,301,482		$	38,589,116		$	19,144,969		$	75,035,567

Change in unrealized appreciation/depreciation included in earnings related to Level 3 investments still held at reporting date										$	1,460,229

The following table provides a summary of changes in Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) for the nine months ended September 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
Rheonix, Inc. (Rheonix)		—			—			(2,802,731	)		(2,802,731	)
SocialFlow, Inc. (Social Flow)		—			—			(4,941	)		(4,941	)
Somerset Gas Transmission Company, LLC (Somerset)		—			—			(448,717	)		(448,717	)
Total realized losses, net		—			—			(649,863	)		(649,863	)
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	)
Rheonix		—			—			2,802,731			2,802,731
Somerset		—			—			594,097			594,097
Total unrealized gains, net		—			—			1,808,190			1,808,190
Purchases of securities/changes to securities/non-cash conversions:
BMP Food Service Supply Holdco, LLC (FSS)		—			2,320,000			—			2,320,000
BMP Swanson Holdco, LLC (Swanson)		100,115			—			—			100,115
Caitec, Inc. (Caitec)		55,822			—			—			55,822
DSD		31,652			—			—			31,652
FCM Industries Holdco LLC (First Coast Mulch)		—			3,807,147			—			3,807,147
Filterworks Acquisition USA, LLC (Filterworks)		—			204,489			—			204,489
GoNoodle, Inc. (GoNoodle)		—			10,614			—			10,614
HDI Acquisition LLC (Hilton Displays)		—			17,182			—			17,182
Highland All About People Holdings, Inc. (All About People)		—			3,018,000			1,000,000			4,018,000
Inter-National Electronic Alloys LLC (INEA)		—			3,321,071			1,011,765			4,332,836
ITA Acquisition, LLC (ITA)		547,282			—			—			547,282
Mattison Avenue Holdings LLC (Mattison)		28,300			—			—			28,300
Pressure Pro, Inc. (Pressure Pro)		—			3,038,446			30,000			3,068,446
Seybert’s Billiards Corporation (Seybert’s)		—			93,720			—			93,720
SciAps, Inc. (Sciaps)		—			5,000			—			5,000
Social Flow		—			—			4,941			4,941
Tilson Technology Management, Inc. (Tilson)		—			—			250,000			250,000
Total purchases of securities/changes to securities/non-cash conversions		763,171			15,835,669			2,296,706			18,895,546
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 September 30, 2023, of Level 3 Assets	$	12,170,088		$	35,078,238		$	20,236,371		$	67,484,697

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