Quarterly report pursuant to Section 13 or 15(d)

Investments

v3.23.2
Investments
6 Months Ended
Jun. 30, 2023
Investments, Debt and Equity Securities [Abstract]  
Investments

Note 3. INVESTMENTS

The Corporation’s investments are carried at fair value, as determined in good faith by the Board, 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 will be 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 using an asset approach and will be 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 “asset approach”, “market approach” or “income approach.” The asset 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. 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. 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 average closing price for the last three trading days 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, 2023, 11% of the Corporation’s investments were Level 1 investments and 89% were Level 3 investments. At December 31, 2022, 10% of the Corporation’s investments were Level 1 investments and 90% were Level 3 investments. There were no Level 2 investments at June 30, 2023 or December 31, 2022.

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 fundraising 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;
Internal circumstances and events that may have an impact (positive or negative) on the operating performance of the portfolio company;
Qualitative assessment of key management;
Contractual rights, obligations or restrictions associated with the investment; 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 earnings before interest, tax and depreciation and amortization (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 performance 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, 2023:

 



Investment Type

 

Market Approach EBITDA Multiple

 

 

Market Approach Liquidation Seniority

 

 

Market Approach
Revenue Multiple

 

 

Market Approach Transaction Pricing

 

 

Totals

 

Non-Control/Non-Affiliate Equity

 

$

300,000

 

 

$

 

 

$

700,000

 

 

$

200,063

 

 

$

1,200,063

 

Non-Control/Non-Affiliate Loan and Debt

 

 

6,607,700

 

 

 

2,208,779

 

 

 

 

 

 

2,250,000

 

 

 

11,066,479

 

Total Non-Control/Non-Affiliate

 

$

6,907,700

 

 

$

2,208,779

 

 

$

700,000

 

 

$

2,450,063

 

 

$

12,266,542

 

Affiliate Equity

 

$

4,232,324

 

 

$

 

 

$

3,223,984

 

 

$

10,580,000

 

 

$

18,036,308

 

Affiliate Loan and Debt

 

 

18,200,856

 

 

 

 

 

 

2,090,000

 

 

 

4,763,635

 

 

 

25,054,491

 

Total Affiliate

 

$

22,433,180

 

 

$

 

 

$

5,313,984

 

 

$

15,343,635

 

 

$

43,090,799

 

Control Equity

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Control Loan and Debt

 

 

 

 

 

4,031,735

 

 

 

 

 

 

 

 

 

4,031,735

 

Total Control

 

$

 

 

$

4,031,735

 

 

$

 

 

$

 

 

$

4,031,735

 

Total Level 3 Investments

 

$

29,340,880

 

 

$

6,240,514

 

 

$

6,013,984

 

 

$

17,793,698

 

 

$

59,389,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

5X - 7X

 

 

1X

 

 

1X - 4X

 

 

Not Applicable

 

 

 

 

Unobservable Input

 

EBITDA Multiple

 

 

Asset Value

 

 

Revenue Multiple

 

 

Transaction Price

 

 

 

 

Weighted Average

 

5.4X

 

 

1X

 

 

1.7X

 

 

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, 2023:

 

 

 

 

 

 

Fair Value Measurements at Reported Date Using

 




Description

 

June 30, 2023

 

 

Quoted Prices in Active Markets for Identical Assets
(Level 1)

 

 

Significant
Observable Inputs
(Level 2)

 

 

Other Significant
Unobservable
Inputs
(Level 3)

 

Loan investments

 

$

12,038,755

 

 

$

 

 

$

 

 

$

12,038,755

 

Debt investments

 

 

28,113,950

 

 

 

 

 

 

 

 

 

28,113,950

 

Equity investments

 

 

26,639,038

 

 

 

7,402,667

 

 

 

 

 

 

19,236,371

 

Total

 

$

66,791,743

 

 

$

7,402,667

 

 

$

 

 

$

59,389,076

 

 

The following table provides a summary of the components of Level 1, 2 and 3 Assets Measured at Fair Value at December 31, 2022:

 

 

 

 

 

 

Fair Value Measurements at Reported Date Using

 




Description

 

December 31, 2022

 

 

Quoted Prices in Active Markets for Identical Assets
(Level 1)

 

 

Significant
Observable Inputs
(Level 2)

 

 

Other Significant
Unobservable
Inputs
(Level 3)

 

Loan investments

 

$

14,578,351

 

 

$

 

 

$

 

 

$

14,578,351

 

Debt investments

 

 

19,582,616

 

 

 

 

 

 

 

 

 

19,582,616

 

Equity investments

 

 

27,343,292

 

 

 

6,407,548

 

 

 

 

 

 

20,935,744

 

Total

 

$

61,504,259

 

 

$

6,407,548

 

 

$

 

 

$

55,096,711

 

 

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 gains (losses)

 

 

 

 

 

 

 

 

(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

)

 

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, 2022:

 

 

 

Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)

 


Description

 

Loan Investments

 

 

Debt
Investments

 

 

Equity
Investments

 

 

Total

 

Ending Balance December 31, 2021, of Level 3 Assets

 

$

15,503,404

 

 

$

14,030,078

 

 

$

20,633,935

 

 

$

50,167,417

 

Realized gains (losses) included in net change in net assets from
operations:

 

 

 

 

 

 

 

 

 

 

 

 

ClearView Social, Inc. (Clearview Social)

 

 

 

 

 

 

 

 

38,881

 

 

 

38,881

 

Microcision, LLC (Microcision)

 

 

 

 

 

 

 

 

190,000

 

 

 

190,000

 

New Monarch Machine Tool, Inc. (New Monarch)

 

 

 

 

 

 

 

 

(22,841

)

 

 

(22,841

)

SocialFlow, Inc. (Social Flow)

 

 

 

 

 

 

 

 

(1,481,498

)

 

 

(1,481,498

)

Total realized (losses), net

 

 

 

 

 

 

 

 

(1,275,458

)

 

 

(1,275,458

)

Unrealized gains included in net change in net assets from
operations:

 

 

 

 

 

 

 

 

 

 

 

 

Microcision

 

 

 

 

 

 

 

 

25,000

 

 

 

25,000

 

New Monarch

 

 

 

 

 

 

 

 

22,841

 

 

 

22,841

 

Social Flow

 

 

 

 

 

 

 

 

1,628,000

 

 

 

1,628,000

 

Total unrealized gains

 

 

 

 

 

 

 

 

1,675,841

 

 

 

1,675,841

 

Purchases of securities/changes to securities/non-cash
conversions:

 

 

 

 

 

 

 

 

 

 

 

 

Caitec, Inc. (Caitec)

 

 

36,178

 

 

 

 

 

 

 

 

 

36,178

 

DSD Operating, LLC (DSD)

 

 

348,748

 

 

 

 

 

 

 

 

 

348,748

 

Filterworks Acquisition USA, LLC (Filterworks)

 

 

 

 

 

107,559

 

 

 

 

 

 

107,559

 

GoNoodle, Inc. (GoNoodle)

 

 

 

 

 

7,110

 

 

 

 

 

 

7,110

 

HDI Acquisition LLC (Hilton Displays)

 

 

 

 

 

13,117

 

 

 

 

 

 

13,117

 

ITA Acquisition, LLC (ITA)

 

 

34,701

 

 

 

 

 

 

223,810

 

 

 

258,511

 

Mattison Avenue Holdings LLC (Mattison)

 

 

18,341

 

 

 

 

 

 

 

 

 

18,341

 

Seybert’s Billiards Corporation (Seybert’s)

 

 

 

 

 

2,248,118

 

 

 

 

 

 

2,248,118

 

SciAps, Inc. (Sciaps)

 

 

 

 

 

7,500

 

 

 

 

 

 

7,500

 

Total purchases of securities/changes to securities/non-cash
   conversions

 

 

437,968

 

 

 

2,383,404

 

 

 

223,810

 

 

 

3,045,182

 

Repayments and sale of securities:

 

 

 

 

 

 

 

 

 

 

 

 

Clearview Social

 

 

 

 

 

 

 

 

(38,881

)

 

 

(38,881

)

GoNoodle

 

 

 

 

 

(90,175

)

 

 

 

 

 

(90,175

)

Microcision

 

 

 

 

 

 

 

 

(300,000

)

 

 

(300,000

)

Social Flow

 

 

 

 

 

 

 

 

(268,502

)

 

 

(268,502

)

Total repayments and sale of securities

 

 

 

 

 

(90,175

)

 

 

(607,383

)

 

 

(697,558

)

Ending Balance June 30, 2022, of Level 3 Assets

 

$

15,941,372

 

 

$

16,323,307

 

 

$

20,650,745

 

 

$

52,915,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized appreciation/depreciation included in earnings
   related to Level 3 investments still held at reporting date

 

 

 

 

 

 

 

 

 

 

$