FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2020

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 814-00201

 

MVC Capital, Inc.

(Exact name of the registrant as specified in its charter)

 

DELAWARE   94-3346760
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

287 Bowman Avenue    
2nd Floor    
Purchase, New York  
(Address of principal   10577
executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (914) 701-0310

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which
registered
Common Stock MVC New York Stock Exchange
Senior Notes MVCD New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨ Smaller reporting company ¨ Emerging Growth Company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

 

There were 17,725,118 shares of the registrant’s common stock, $.01 par value, outstanding as of September 9, 2020.

 

 

 

 

 

 

MVC Capital, Inc.

(A Delaware Corporation)

Index

 

    Page
     
Part I. Consolidated Financial Information  
     
  Item 1. Consolidated Financial Statements  
              Consolidated Balance Sheets  
              - July 31, 2020 (Unaudited) and October 31, 2019 3
              Consolidated Statements of Operations  
              - For the Nine Month Period Ended July 31, 2020 (Unaudited) and  
              - For the Nine Month Period Ended July 31, 2019 (Unaudited) 4
              Consolidated Statements of Operations  
              - For the Quarter May 1, 2020 to July 31, 2020 (Unaudited) and  
              - For the Quarter May 1, 2019 to July 31, 2019 (Unaudited) 5
              Consolidated Statements of Cash Flows  
              - For the Nine Month Period Ended July 31, 2020 (Unaudited) and  
              - For the Nine Month Period Ended July 31, 2019 (Unaudited) 6
              Consolidated Statements of Changes in Net Assets  
              - For the Nine Month Period Ended July 31, 2020 (Unaudited)  
              - For the Nine Month Period Ended July 31, 2019 (Unaudited) and  
              - For the Year ended October 31, 2019 7
              Consolidated Selected Per Share Data and Ratios  
              - For the Nine Month Period Ended July 31, 2020 (Unaudited)  
              - For the Nine Month Period Ended July 31, 2019 (Unaudited) and  
              - For the Year ended October 31, 2019 8
              Consolidated Schedules of Investments  
              - July 31, 2020 (Unaudited)  
              - October 31, 2019 9
              Notes to Consolidated Financial Statements 13
   Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  45
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 75
  Item 4. Controls and Procedures 92
     
Part II. Other Information 92
   
  Item 1. Legal Proceedings 92
  Item 1A. Risk Factors 92
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 93
  Item 3. Defaults Upon Senior Securities 93
  Item 4. Mine Safety Disclosures 93
  Item 5. Other Information 93
  Item 6. Exhibits 93
     
SIGNATURE 94
     
Exhibits

 

 

 

 

 

Part I. Consolidated Financial Information

 

Item 1. Consolidated Financial Statements

 

CONSOLIDATED FINANCIAL STATEMENTS

 

MVC Capital, Inc.

Consolidated Balance Sheets

 

   July 31,   October 31, 
   2020   2019 
   (Unaudited)     
ASSETS          
           
Assets          
Cash  $172,717   $1,321,648 
Restricted cash (cost $1,500,279 and $0)   1,500,279    - 
Restricted cash equivalents (cost $3,545,234 and $5,009,091)   3,545,234    5,009,091 
Cash equivalents (cost $46,655,085 and $5,368,190)   46,655,085    5,368,190 
Investments at fair value          
Non-control/Non-affiliated investments (cost $175,567,727 and $246,228,806)   146,947,497    229,322,498 
Affiliate investments (cost $82,754,183 and $81,465,911)   42,903,991    61,851,896 
Control investments (cost $79,378,267 and $87,972,462)   30,999,319    49,070,701 
Total investments at fair value (cost $337,700,177 and $415,667,180)   220,850,807    340,245,095 
Escrow receivables, net of reserves   -    1,135,000 
Dividends and interest receivables, net of reserves   6,148,063    4,273,018 
Deferred financing fees   391,832    614,586 
Fee and other receivables   1,912,146    4,013,714 
Prepaid expenses   393,452    182,298 
Prepaid taxes   37    - 
           
Total assets  $281,569,652   $362,162,640 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
           
Liabilities          
Senior notes II, net of deferred financing fees  $93,574,104   $112,703,490 
Revolving credit facility IV   -    15,100,000 
Incentive compensation payable   1,527,849    1,527,849 
Professional fees payable   496,806    241,518 
Management fee payable   679,829    1,038,431 
Accrued expenses and liabilities   228,534    770,205 
Interest payable   263,890    670,163 
Management fee payable - Asset Management   17,219    395,435 
Consulting fees payable   393,998    360,452 
Portfolio fees payable - Asset Management   896,293    668,849 
Guarantees/Letters of Credit   3,025,326    726,649 
Taxes payable   -    915 
Provision for incentive compensation (Note 11)   -    - 
           
Total liabilities   101,103,848    134,203,956 
           
Commitments and Contingencies (Note 9)          
           
Shareholders' equity          
Common stock, $0.01 par value; 150,000,000 shares authorized; 28,304,448 shares issued and 17,725,118 and 17,725,118 shares outstanding as of July 31, 2020 and October 31, 2019, respectively   283,044   283,044
Additional paid-in-capital   406,258,172    406,258,172 
Accumulated overdistributed earnings   (119,562,543)   (72,069,663)
Treasury stock, at cost, 10,579,330 and 10,579,330 shares held, respectively   (106,512,869)   (106,512,869)
           
Total shareholders' equity   180,465,804    227,958,684 
           
Total liabilities and shareholders' equity  $281,569,652   $362,162,640 
           
Net asset value per share  $10.18   $12.86 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3

 

 

MVC Capital, Inc.

Consolidated Statements of Operations

(Unaudited)

 

   For the Nine Month
Period
   For the Nine Month
Period
 
   November 1, 2019 to   November 1, 2018 to 
   July 31, 2020   July 31, 2019 
Operating Income:          
Dividend income          
Non-control/Non-affiliated investments  $-   $395,543 
Affiliate investments (net of foreign taxes withheld of $0 and $154,269, respectively) -     698,107  
Control investments   -    542,693 
           
Total dividend income   -    1,636,343 
           
Payment-in-kind dividend income          
Non-control/Non-affiliated investments   -    1,196,260 
           
Total payment-in-kind dividend income   -    1,196,260 
           
Interest income          
Non-control/Non-affiliated investments   13,917,627    14,347,352 
Affiliate investments   -    - 
Control investments   369,021    325,284 
           
Total interest income   14,286,648    14,672,636 
           
Payment-in-kind/Deferred interest income          
Non-control/Non-affiliated investments   5,573,486    3,307,666 
Affiliate investments   394,836    581,846 
Control investments   262,029    379,338 
           
Total payment-in-kind/Deferred interest income   6,230,351    4,268,850 
           
Fee income          
Non-control/Non-affiliated investments   59,298    89,299 
           
Total fee income   59,298    89,299 
           
Fee income - Asset Management 1          
Portfolio fees   412,915    347,914 
Management fees   224,074    292,243 
           
Total fee income - Asset Management   636,989    640,157 
           
Other income   4,580    - 
           
Total operating income   21,217,866    22,503,545 
           
Operating Expenses:          
Interest and other borrowing costs 2   6,193,860    7,277,321 
Management fee   3,561,308    4,746,192 
Legal fees   1,103,800    401,400 
Consulting fees   783,515    821,389 
Audit & tax preparation fees   714,000    979,980 
Other expenses   411,964    448,596 
Loss on extinguishment of debt6   345,419    - 
Portfolio company expense   327,004    - 
Expenses associated with Settlement Agreement   325,000    - 
Portfolio fees - Asset Management 1   309,686    260,936 
Directors' fees   276,914    282,448 
Insurance   231,068    206,334 
Management fee - Asset Management 1   168,055    219,182 
Administration   123,525    123,411 
Public relations fees   113,198    105,094 
Printing and postage   29,500    53,100 
Net Incentive compensation (Note 11)   -    - 
           
Total operating expenses   15,017,816    15,925,383 
           
Less: Voluntary expense waiver by Adviser 3   (112,500)   (112,500)
Less: Voluntary management fee waiver by Adviser 4   (1,335,491)   (1,779,822)
           
Total waivers   (1,447,991)   (1,892,322)
           
Net operating income before taxes   7,648,041    8,470,484 
           
Tax Expenses:          
Current tax expense   1,452    1,447 
           
Total tax expense   1,452    1,447 
           
Net operating income   7,646,589    8,469,037 
           
Net Realized and Unrealized Gain (Loss) on Investments:                        
           
Net realized gain (loss) on investments          
U.S. Treasury obligations   (85,886)   104,858 
Non-control/Non-affiliated investments   (530,611)   3,226,317 
Affiliate investments   (3,790,411)   (3,727,289)
Control investments   2,033,217    4,965,552 
Foreign currency   -    13,895 
           
Total net realized gain (loss) on investments   (2,373,691)   4,583,333 
           
Net unrealized appreciation (depreciation) on investments          
Non-control/Non-affiliated investments   (11,713,926)   (1,105,525)
Affiliate investments   (12,676,421)   10,356,198 
Control investments   (19,335,619)   (9,043,895)
           
Total unrealized appreciation (depreciation) on investments   (43,725,966)   206,778 
           
Net realized and unrealized gain (loss) on investments   (46,099,657)   4,790,111 
           
Net increase (decrease) in net assets resulting from operations $ (38,453,068 ) $ 13,259,148  
           
Net increase (decrease) in net assets per share resulting from operations    $  (2.17 )    $  0.75   
           
Dividends declared per share 5  $0.510   $0.450 
           
Weighted average number of shares outstanding   17,725,118    17,810,123 

  

1 These items are related to the management of the MVC Private Equity Fund, L.P. ("PE Fund").  Please see Note 10 "Management" for more information.

 

2 Interest and other borrowing costs includes $0 and $262,705 of interest associated with installment sale treatment on the USG&E note. Please see Note 12 "Tax Matters" for more information.

 

3 Reflects the nine month period portion of the TTG Advisers' voluntary waiver of $150,000 of expenses for the 2020 and 2019 fiscal years, that the Company would otherwise be obligated to reimburse TTG Advisers under the Advisory Agreement (the "Voluntary Waiver"). Please see Note 10 "Management" for more information.

 

4 Reflects the nine month period portion of the TTG Advisers' voluntary waiver of the management fee for the 2020 and 2019 Please see Note 10 "Management" for more information.

 

5 Please see Note 13 "Dividends and Distributions to Shareholders, Share Repurchase Program and Tender Offer" for more information.

 

6 Reflects $345,419 in unamortized deferred financing fees related to the Senior Notes II which were expensed at the time $20.0 million of the Senior Notes were redeemed.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4

 

 

 

MVC Capital, Inc.

Consolidated Statements of Operations

(Unaudited)

 

   For the Quarter   For the Quarter 
   May 1, 2020 to   May 1, 2019 to 
   July 31, 2020   July 31, 2019 
Operating Income:          
Dividend income          
Non-control/Non-affiliated investments  $-   $- 
Affiliate investments (net of foreign taxes withheld of $0 and $76,866, respectively)   -    - 
           
Total dividend income   -    - 
           
Payment-in-kind dividend income          
Non-control/Non-affiliated investments   -    - 
           
Total payment-in-kind dividend income   -    - 
           
Interest income          
Non-control/Non-affiliated investments   2,078,707    5,924,050 
Affiliate investments   -    - 
Control investments   108,191    109,618 
           
Total interest income   2,186,898    6,033,668 
           
Payment-in-kind/Deferred interest income          
Non-control/Non-affiliated investments   3,261,417    899,710 
Affiliate investments   134,679    140,621 
Control investments   -    132,648 
           
Total payment-in-kind/Deferred interest income   3,396,096    1,172,979 
           
Fee income          
Non-control/Non-affiliated investments   33,100    38,101 
           
Total fee income   33,100    38,101 
           
Fee income - Asset Management 1          
Portfolio fees   93,420    119,248 
Management fees   69,840    104,944 
           
Total fee income - Asset Management   163,260    224,192 
           
Other income   -    - 
           
Total operating income   5,779,354    7,468,940 
           
Operating Expenses:          
Interest and other borrowing costs 2   1,862,800    2,510,677 
Management fee   1,087,726    1,642,930 
Legal fees   780,000    123,000 
Portfolio company expense   327,004    - 
Expenses associated with Settlement Agreement   325,000    - 
Consulting fees   300,505    334,519 
Other expenses   201,750    140,763 
Audit & tax preparation fees   115,500    151,300 
Directors' fees   86,414    94,000 
Insurance   80,778    69,516 
Portfolio fees - Asset Management 1   70,065    89,436 
Management fee - Asset Management 1   52,379    78,708 
Administration   41,476    41,589 
Public relations fees   30,661    26,000 
Printing and postage   7,100    16,800 
           
Total operating expenses   5,369,158    5,319,238 
           
Less: Voluntary expense waiver by Adviser 3   (37,500)   (37,500)
Less: Voluntary management fee waiver by Adviser 4   (407,898)   (616,099)
           
Total waivers   (445,398)   (653,599)
           
Net operating income before taxes   855,594    2,803,301 
           
Tax Expenses:          
Current tax expense   482    485 
           
Total tax expense   482    485 
           
Net operating income   855,112    2,802,816 
           
Net Realized and Unrealized Gain (Loss) on Investments:          
           
Net realized gain (loss) on investments          
U.S. Treasury obligations   -    84,375 
Non-control/Non-affiliated investments   -    2,910 
Affiliate investments   (3,747,247)   (3,795,709)
Control investments   -    (218,992)
Foreign currency   -    11,733 
           
Total net realized loss on investments   (3,747,247)   (3,915,683)
           
Net unrealized appreciation (depreciation) on investments          
Non-control/Non-affiliated investments   1,061,645    (461,583)
Affiliate investments   5,596,414    3,491,912 
Control investments   (6,303,042)   (1,569,546)
           
Total unrealized appreciation (depreciation) on investments   355,017    1,460,783 
           
Net realized and unrealized gain (loss) on investments   (3,392,230)   (2,454,900)
           
Net increase (decrease) in net assets resulting from operations  $(2,537,118)  $347,916 
           
Net increase (decrease) in net assets per share resulting from operations  $(0.14)  $0.02 
           
Dividends declared per share 5  $0.170   $0.150 
           
Weighted average number of shares outstanding   17,725,118    17,725,118 

  

1 These items are related to the management of the MVC Private Equity Fund, L.P. ("PE Fund").  Please see Note 10 "Management" for more information.

 

2 Interest and other borrowing costs includes $0 and $86,285 of interest associated with installment sale treatment on the USG&E note. Please see Note 12 "Tax Matters" for more information.

 

3 Reflects the quarterly portion of the TTG Advisers' voluntary waiver of $150,000 of expenses for the 2020 and 2019 fiscal years, that the Company would otherwise be obligated to reimburse TTG Advisers under the Advisory Agreement (the "Voluntary Waiver"). Please see Note 10 "Management" for more information.

 

4 Reflects the quarterly portion of the TTG Advisers' voluntary waiver of the management fee for the 2020 and 2019 Please see Note 10 "Management" for more information.

 

5 Please see Note 13 "Dividends and Distributions to Shareholders, Share Repurchase Program and Tender Offer" for more information.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5

 

 

MVC Capital, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Nine Month
Period
   For the Nine Month
Period
 
   November 1, 2019 to   November 1, 2018 to 
   July 31, 2020   July 31, 2019 
Cash flows from Operating Activities:          
Net increase (decrease) in net assets resulting from operations  $(38,453,068)  $13,259,148 
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:                                
Net realized gain   2,373,691    (4,583,333)
Net change in unrealized depreciation (appreciation)   43,725,966    (206,778)
Amortization of discounts and fees   (2,507,789)   (232,955)
Increase in accrued payment-in-kind dividends and interest   (3,629,098)   (5,143,943)
Amortization of deferred financing fees   785,457    968,257 
Loss on extinguishment of debt   345,419    - 
Changes in operating assets and liabilities:          
Dividends, interest and fees receivable   (1,875,045)   (629,649)
Fee and other receivables   2,101,568    16,738 
Escrow receivables, net of reserves   1,135,000    (116,000)
Prepaid expenses   (211,154)   49,900 
Prepaid taxes   (37)   - 
Other liabilities   (1,169,399)   322,658 
Purchases of equity investments   (1,870,978)   (4,268,340)
Purchases of debt instruments   (9,745,192)   (36,751,624)
Purchases of short-term investments   (24,999,410)   (49,991,103)
Proceeds from equity investments (1)   10,709,962    30,803,643 
Proceeds from debt instruments   82,685,527    3,395,440 
Sales/maturities of short-term investments   24,912,778    50,094,859 
           
Net cash provided by (used in) operating activities   84,314,198    (3,013,082)
           
Cash flows from Financing Activities:          
Repayments from senior notes   (20,000,000)   - 
Borrowings from revolving credit facility II   25,000,000    50,000,000 
Repayments from revolving credit facility II   (25,000,000)   (50,000,000)
Borrowings from revolving credit facility IV   -    26,100,000 
Repayments from revolving credit facility IV   (15,100,000)   (4,000,000)
Repurchase of common stock   -    (4,069,924)
Financing fees paid   -    (1,053,921)
Distributions paid to shareholders   (8,847,556)   (7,728,062)
Repurchases of common stock under dividend reinvestment plan   (192,256)   (269,711)
           
Net cash provided by financing activities   (44,139,812)   8,978,382 
           
Net change in cash, cash equivalents, and restricted cash for the period   40,174,386    5,965,300 
           
Cash, cash equivalents, and restricted cash, beginning of period  $11,698,929   $15,887,700 
           
Cash, cash equivalents, and restricted cash, end of period  $51,873,315   $21,853,000 

 

(1) For the nine month period ended July 31, 2019, proceeds from equity investments includes $1,018,000 from escrow receivables, net of reserves.

 

During the nine month periods ended July 31, 2020 and 2019 MVC Capital, Inc. paid $5,412,656 and $6,018,487 in interest expense, respectively.

 

During the nine month periods ended July 31, 2020 and 2019 MVC Capital, Inc. paid $2,404 and $1,616 in income taxes, respectively.

 

Non-cash activity:

 

During the nine month periods ended July 31, 2020 and 2019, MVC Capital, Inc. recorded payment in-kind dividend and interest of $3,629,098 and $5,143,943, respectively. This amount was added to the principal balance of the investments and recorded as dividend/interest income.

 

During the nine month periods ended July 31, 2020 and 2019, the Plan Agent purchased 23,812 and 29,543 shares of common stock in the open market in order to satisfy the reinvestment portion of our dividends.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6

 

 

 

MVC Capital, Inc.
Consolidated Statements of Changes in Net Assets
                     
          Accumulated        
For the Nine Month Period November 1, 2018 to July 31, 2019 (Unaudited)  Common
Stock
   Additional
Paid-In-Capital
   Overdistributed
Earnings
   Treasury
Stock
   Total Net
Asset Value
 
Balances at October 31, 2018  $283,044   $408,583,787   $(79,700,440)  $(102,442,945)  $226,723,446 
                          
Net operating income   -    -    8,469,037    -    8,469,037 
Accumulated net realized gain   -    -    4,583,333    -    4,583,333 
Net unrealized appreciation   -    -    206,778    -    206,778 
Dividends paid to stockholders   -    -    (7,997,773)   -    (7,997,773)
Issuance of common stock under dividend reinvestment plan   269,711    -    -    -    269,711 
Repurchase of common stock under dividend reinvestment plan   (269,711)   -    -    -    (269,711)
Repurchase of common stock   -    -    -    (4,069,924)   (4,069,924)
                          
Balances at July 31, 2019  $283,044   $408,583,787   $(74,439,065)  $(106,512,869)  $227,914,897 
                          
For the Nine Month Period November 1, 2019 to July 31, 2020 (Unaudited)                         
Balances at October 31, 2019  $283,044   $406,258,172   $(72,069,663)  $(106,512,869)  $227,958,684 
                          
Net operating income   -    -    7,646,589    -    7,646,589 
Accumulated net realized loss   -    -    (2,373,691)   -    (2,373,691)
Net unrealized depreciation   -    -    (43,725,966)   -    (43,725,966)
Dividends paid to stockholders   -    -    (9,039,812)   -    (9,039,812)
Issuance of common stock under dividend reinvestment plan   192,256    -    -    -    192,256 
Repurchase of common stock under dividend reinvestment plan   (192,256)   -    -    -    (192,256)
                          
Balances at July 31, 2020  $283,044   $406,258,172   $(119,562,543)  $(106,512,869)  $180,465,804 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7

 

 

MVC Capital, Inc.  
Consolidated Selected Per Share Data and Ratios  
                   
   For the Nine Month
Period
     For the Nine Month
Period
     For the   
   November 1, 2019 to     November 1, 2018 to     Year Ended   
   July 31, 2020     July 31, 2019     October 31, 2019   
   (Unaudited)     (Unaudited)         
Net asset value, beginning of period/year  $12.86     $12.46     $12.46   
                      
Income from operations:                     
Net operating income   0.43      0.48      0.65   
Net realized and unrealized gain (loss) on investments   (2.60)     0.27      0.27   
                      
Total gain (loss) from investment operations   (2.17)     0.75      0.92   
                      
Less distributions from:                     
Income   (0.51)     (0.45)     (0.62)  
                      
Total distributions   (0.51)     (0.45)     (0.62)  
                      
Capital share transactions                     
Anti-dilutive effect of share repurchase program   -      0.10      0.10   
                      
Total capital share transactions   -      0.10      0.10   
                      
Net asset value, end of period/year  $10.18     $12.86     $12.86   
                      
Market value, end of period/year  $6.46     $9.57     $8.77   
                      
Market discount   (36.54)%     (25.58)%     (31.80)%  
                      
Total Return - At NAV (a)   (17.79)%     6.91%     8.33%  
                      
Total Return - At Market (a)   (21.10)%     10.94%     3.64%  
                      
Ratios and Supplemental Data:                     
                      
Portfolio turnover ratio   5.55%     10.04%     11.48%  
                      
Net assets, end of period/year (in thousands)  $180,466     $227,915     $227,959   
                      
Ratios to average net assets:                     
Expenses including tax expense   8.80% (c)   8.32%(c)    8.39%  
Expenses excluding tax expense   8.80% (c)   8.32%(c)    8.39%  
                      
Net operating income before tax expense   4.96% (c)   5.02%(c)    5.13%  
Net operating income after tax expense   4.96% (c)   5.02%(c)    5.13%  
                      
Ratios to average net assets excluding waivers:                     
Expenses including tax expense   9.74% (c)   9.44%(c)    9.52%  
Expenses excluding tax expense   9.74% (c)   9.44%(c)    9.52%  
                      
Net operating income before tax expense   4.02% (c)   3.90%(c)    4.00%  
Net operating income after tax expense   4.02% (c)   3.90%(c)    4.00%  
                      
(a) Total annual return is historical and assumes changes in share price, reinvestments of all dividends and distributions, and no sales charge for the period/year.  
                      
(b) Supplemental Ratio information                     
                      
Ratios to average net assets: (b)                     
Expenses excluding incentive compensation   8.80% (c)   8.32%(c)    8.39%  
Expenses excluding incentive compensation, interest and other borrowing costs   4.78% (c)   4.00%(c)    4.12%  
                      
Net operating income before incentive compensation   4.96% (c)   5.02%(c)    5.13%  
Net operating income before incentive compensation, interest and other borrowing costs   8.98% (c)   9.34%(c)    9.40%  
                      
Ratios to average net assets excluding waivers: (b)                     
Expenses excluding incentive compensation   9.74% (c)   9.44%(c)    9.52%  
Expenses excluding incentive compensation, interest and other borrowing costs   5.72% (c)   5.13%(c)    5.25%  
                      
Net operating income before incentive compensation   4.02% (c)   3.90%(c)    4.00%  
Net operating income before incentive compensation, interest and other borrowing costs   8.04% (c)   8.21%(c)    8.27%  
                      
(c) Annualized.                     

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8

 

 

 

MVC Capital, Inc.

Consolidated Schedule of Investments

July 31, 2020

(Unaudited)

 

Company  Industry  Investment  Acquistion Date  Principal   Cost   Fair Value 
Non-control/Non-affiliated investments- 81.43% (a, c, f, g)                        
Black Diamond Equipment Rentals, LLC  Equipment Rental  Second Lien Loan 12.5000% Cash,06/27/2022 (k, n)  12/28/17  $7,500,000   $7,266,844   $7,500,000 
      Warrants (d, n)  12/28/17   1    400,847    933,000 
                  7,667,691    8,433,000 
Custom Alloy Corporation  Manufacturer of Pipe Fittings and Forgings  Second Lien Loan 12.0000% Cash, 3.0000% PIK, 04/30/2022 (b, k, n)  10/31/14   33,137,484    33,137,484    26,248,833 
      Second Lien Loan 12.0000% Cash, 3.0000% PIK, 04/30/2022 (b, k, n)  10/31/14   6,253,813    6,253,813    4,953,764 
      Revolver 12.0000% Cash, 3.0000% PIK, 04/30/2021 (b, k, n)  07/01/19   3,745,808    3,745,808    3,381,296 
                  43,137,105    34,583,893 
Dukane IAS,LLC  Welding Equipment Manufacturer  Second Lien Note 10.5000% Cash, 2.5000% PIK, 11/17/2020 (b, k, n)  02/17/16   4,575,144    4,566,420    4,565,295 
FOLIOfn, Inc.  Technology Investment - Financial Services  Preferred Stock (5,802,259 shares) (d, i, n)  06/21/00        15,000,000    12,750,000 
Global Prairie PBC, Inc.  Marketing  Second Lien Loan 10.0000% Cash, 4.0000% PIK, 04/16/2025 (b, k, n)  10/16/19   3,087,161    3,035,793    3,076,527 
GTM Intermediate Holdings, Inc.  Medical Equipment/Manufacturer  Second Lien Loan 11.0000% Cash, 1.0000% PIK, 12/7/2024 (b ,k, n)  12/07/18   5,102,710    5,025,420    5,098,327 
      Common Stock (2 shares) (d, n, q)  12/07/18        766,122    1,187,245 
                  5,791,542    6,285,572 
Highpoint Global LLC  Government Services  Second Lien Note 12.0000% Cash, 2.0000% PIK, 09/30/2022 (b, k, n)  10/19/17   5,280,808    5,237,046    5,280,808 
HTI Technologies and Industries, Inc.  Electronic Component Manufacturing  Second Lien Note 16.7500% PIK, 9/15/2024 (b, k, n)  06/01/16   12,101,934    12,085,650    11,574,645 
Initials, Inc.  Consumer Products  Senior Subordinated Debt 8.0000% Cash, 7.0000% PIK, 10/1/2020 (b, h, k, n)  06/23/15   5,642,913    5,642,913    626,221 
International Precision Components Corporation  Plastic Injection Molding  Second Lien Loan 12.0000% Cash, 2.0000% PIK, 10/3/2024 (b, k, n, r)  06/27/12   7,700,000    7,581,258    7,700,000 
Jedson Engineering, Inc.  Engineering and Construction Management  First Lien Loan 12.0000% Cash, 3.0000% PIK, 06/30/2022 (b, k, n)  06/25/19   9,487,685    9,311,595    6,598,351 
Legal Solutions Holdings, Inc.  Business Services  Senior Subordinated Debt 6.0000% Cash, 10.0000% PIK, 03/31/2022 (b, h, k, n)  12/30/14   10,141,212    10,141,212    9,259,159 
Powers Equipment Acquisition Company, LLC  Equipment Manufacturer  First Lien Note 13.5000% PIK, 04/30/2024 (b, k, n, s)  05/01/19   6,724,345    6,626,953    5,524,748 
SMA Holdings, Inc.  Consulting  First Lien Loan 11.0000% Cash, 06/26/2024 (k, n)  06/26/19   7,000,000    6,519,104    7,000,000 
      Warrants (d, n)  06/26/19   2    504,555    792,120 
                  7,023,659    7,792,120 
Trientis GmbH  Environmental Services  First Lien Note 5.0000% PIK, 10/26/2024 (b, e, h, m, n, o)  10/20/17   1,248,632    1,248,632    221,379 
      Warrants (d, e, n, o)  03/19/18   1    67,715    - 
                  1,316,347    221,379 
Tuf-Tug Inc.  Safety Equipment Manufacturer  Second Lien Loan 11.0000% Cash, 2.0000% PIK,02/24/2024 (b, k, n)  08/24/18   5,061,687    5,030,101    5,052,984 
      Common Stock (24.6 shares) (d, n, p)  08/24/18        750,000    535,924 
                  5,780,101    5,588,908 
Turf Products, LLC  Distributor - Landscaping and Irrigation Equipment  Senior Subordinated Debt 10.0000% Cash, 10/07/2023 (k, n)  11/30/05   8,697,056    8,697,056    8,124,954 
U.S. Gas & Electric, Inc.  Energy Services  Second Lien Loan, 9.5000% Cash, 07/05/2025 (l, n)  07/05/17   2,285,250    2,285,250    2,285,250 
      Second Lien Loan, 9.5000% Cash, 07/05/2025 (h, l, n)  07/05/17   2,485,469    2,485,469    - 
                  4,770,719    2,285,250 
U.S. Spray Drying Holding Company  Specialty Chemicals  Class B Common Stock (784 shares) (d, n)  03/28/13        5,488,000    10,000 
      Secured Loan 8.0000% Cash, 04/30/2025 (k, n)  05/02/14   1,500,000    1,500,000    1,500,000 
      Senior Secured Loan 8.0000% Cash, 04/30/2025 (k, n)  11/08/17   1,500,000    1,500,000    1,500,000 
                  8,488,000    3,010,000 
United States Technologies, Inc.  Electronics Manufacturing and Repair  Senior Lien Loan 10.5000% Cash, 07/17/2021 (k, n)  07/17/15   3,666,667    3,666,667    3,666,667 
                         
Sub Total Non-control/Non-affiliated investments                $175,567,727   $146,947,497 
                         
Affiliate investments - 23.77% (a, c, f, g)                        
Advantage Insurance, Inc.  Insurance  Preferred Stock (587,001 shares) (a, d, e, n)  09/23/13        5,870,010    5,175,776 
JSC Tekers Holdings  Real Estate Management  Common Stock (3,201 shares) (a, d, e, n)  05/04/11        4,500    - 
      Preferred Stock (9,159,085 shares) (a, d, e, n)  05/01/14        11,810,188    5,019,000 
                  11,814,688    5,019,000 
Security Holdings B.V.  Electrical Engineering  Common Equity Interest (a, d, e, n)  09/03/08        51,204,270    18,844,000 
      Bridge Loan 5.0000% PIK, 05/31/2022 (a, b, e, k, n)  04/03/17   5,187,508    5,187,508    5,187,508 
      Senior Subordinated Loan 3.1000% PIK, 05/31/2022 (a, b, e, k, n)  05/30/18   8,677,707    8,677,707    8,677,707 
                  65,069,485    32,709,215 
                         
Sub Total Affiliate investments                $82,754,183   $42,903,991 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

9

 

 

MVC Capital, Inc.

Consolidated Schedule of Investments - (Continued)

July 31, 2020

(Unaudited)

 

Company  Industry  Investment  Acquistion Date  Principal   Cost   Fair Value 
Control investments - 17.18% (a, c, f, g)                     
MVC Automotive Group GmbH  Automotive Dealerships  Common Equity Interest (d, e, n)  09/20/07       $52,185,015   $14,737,000 
      Bridge Loan 6.0000% Cash, 12/31/2021 (e, k, n)  06/28/16  $7,149,166    7,149,166    7,149,166 
                  59,334,181    21,886,166 
MVC Private Equity Fund LP  Private Equity  Limited Partnership Interest (d, j, k, n)  11/21/11        7,179,036    8,885,662 
      General Partnership Interest (d, j, k, n)  11/21/11        183,138    227,491 
                  7,362,174    9,113,153 
RuMe Inc.  Consumer Products  Common Stock (5,297,548 shares) (d, n)  07/15/11        924,475    - 
      Series C Preferred Stock (23,896,634 shares) (d, n)  05/07/14        3,410,694    - 
      Series B-1 Preferred Stock (4,999,076 shares) (d, n)  07/15/11        999,815    - 
      Subordinated Debt 10.0000% PIK, 3/31/2021 (b, h, k, n)  10/07/16   3,793,732    3,793,732    - 
      Revolver 10.0000% PIK, 3/31/2021 (b, h, k, n)  08/09/18   2,231,948    2,231,948    - 
      Revolver 10.0000% PIK, 3/31/2021 (b, h, k, n)  08/30/19   726,704    726,704    - 
      Warrants (d, n)  12/31/13   3    594,544    - 
                  12,681,912    - 
                         
Sub Total Control investments                $79,378,267   $30,999,319 
                         
TOTAL PORTFOLIO INVESTMENTS - 122.38% (f)                $337,700,177   $220,850,807 
                         
Cash equivalents- 27.82% (f, g)                        
Fidelity Institutional Government Money Market Fund - Class I  Money Market Fund  Beneficial Shares (50,100,415 shares)          $50,100,415   $50,100,415 
Morgan Stanley Institutional Liquidity Government Portfolio - Class I  Money Market Fund  Beneficial Shares (99,904 shares)           99,904    99,904 
Total Cash equivalents                 50,200,319    50,200,319 
                         
TOTAL INVESTMENT ASSETS - 150.20%                $387,900,496   $271,051,126 

 

(a) These securities are restricted from public sale without prior registration under the Securities Act of 1933.The Company negotiates certain aspects of the method and timing of the disposition of these investments, including registration rights and related costs.

 

(b) These securities accrue a portion of their interest/dividends in "payment in kind" interest/dividends which is capitalized to the investment.

 

(c) All of the Company's equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except MVC Automotive Group GmbH, Security Holdings B.V., Trientis GmbH, JSC Tekers Holdings, and MVC Private Equity Fund L.P.

 

The Company makes available significant managerial assistance to all of the portfolio companies in which it has invested.

 

(d) Non-income producing assets.

 

(e) The principal operations of these portfolio companies are located in Europe and Puerto Rico which represents approximately 23% of the total assets.The remaining portfolio companies are located in United States which represents approximately 55% of the total assets.

 

(f) Percentages are based on net assets of $180,465,804 as of July 31, 2020.

 

(g) See Note 3 for further information regarding “Investment Classification.”

 

(h) All or a portion of the accrued interest on these securities have been reserved for.

 

(i) Legacy Investments.

 

(j) MVC Private Equity Fund, LP is a private equity fund focused on control equity investments in the lower middle market.The fund currently holds two investments, one located in the United States and one in Gibraltar, the investments are in the energy services and industrial sectors.The Company owns 18.9% of the fund through its limited partnership interest and owns .5% of the fund through its general partnership interest.The Company's proportional share of Gibdock Limited equity interest and loan and Advanced Oil Field Services, LLC common stock, preferred stock, and loan is $6,704,992 and $2,064,571, respectively.The Company's partnership interests in the MVC Private Equity Fund, LP are not redeemable.

 

(k) All or a portion of these securities may serve as collateral for the People's United credit facility.

 

(l) U.S. Gas & Electric, Inc. is an indirect subsidiary of Vistra Energy (NYSE: VST). On October 18, 2019 and July 6, 2020, Vistra Energy notified the Company that it was asserting offsets of Company's loan assets totaling approximately $2.5 million relating to an indemnification claim obligations attributable to U.S. Gas.The offset is reflected in the fair value of the loan asset as the Company is considering its response to the claim.

 

(m) Cash/PIK toggle at borrower's option

 

(n) These securities are valued using unobservable inputs.

 

(o) During the fiscal year ended October 31, 2018, all assets and liabilities of SGDA Europe were transferred to a new Austrian holding company, Trientis GmbH, to achieve operating efficiencies.

 

(p) Shares of Tuf-Tug, Inc. are held via Alitus T-T, LP.

 

(q) Shares of GTM Intermediate Holdings, Inc. are held via GTM Ultimate Holdings, LLC.

 

(r) Variable PIK rate between 2.0000% and 3.5000%.

 

(s) Variable cash rate between 10.5000% and 13.5000%.

 

PIK - Payment-in-kind

 

- Denotes zero cost or fair value.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

10

 

 

 

MVC Capital, Inc.

Consolidated Schedule of Investments

October 31, 2019

 

Company  Industry  Investment  Acquistion Date  Principal   Cost   Fair Value/
Market Value
 
Non-control/Non-affiliated investments- 100.60% (a, c, f, g)                     
Apex Industrial Technologies, LLC  Supply Chain Equipment Manufacturer   First Lien Loan 12.0000% Cash,  12/31/2019 (k, n)  03/09/18  $15,000,000   $14,899,274   $15,000,000 
Array Information Technology, Inc.  Information Technology Products and Services   Second Lien Loan 12.0000% Cash, 4.0000% PIK,  10/03/2023 (b, k, n, p)  04/03/18   6,259,648    6,175,991    6,322,216 
       Warrants (d, n)  04/03/18   1    -    - 
                  6,175,991    6,322,216 
Black Diamond Equipment Rentals, LLC  Equipment Rental   Second Lien Loan 12.5000% Cash,  06/27/2022 (k, n)  12/28/17   7,500,000    7,174,926    7,575,000 
       Warrants (d, n)  12/28/17   1    400,847    960,000 
                  7,575,773    8,535,000 
Custom Alloy Corporation  Manufacturer of Pipe Fittings and Forgings   Second Lien Loan 12.0000% Cash, 3.0000% PIK, 04/30/2022 (b, k, n)  10/31/14   32,471,814    32,471,814    32,061,135 
       Second Lien Loan 12.0000% Cash, 3.0000% PIK, 04/30/2022 (b, k, n)  10/31/14   6,128,186    6,128,186    6,050,681 
       Revolver 12.0000% Cash, 3.0000% PIK, 04/30/2020 (b, k, n)  07/01/19   2,050,000    2,050,000    2,050,000 
                  40,650,000    40,161,816 
Dukane IAS,LLC  Welding Equipment Manufacturer   Second Lien Note 10.5000% Cash, 2.5000% PIK, 11/17/2020 (b, k, n)  02/17/16   4,489,182    4,458,353    4,534,074 
Essner Manufacturing, LP  Defense/Aerospace Parts Manufacturing   First Lien Loan 11.5000% Cash, 12/20/2022 (k, n, o)  12/20/17   3,588,606    3,543,739    3,588,606 
FOLIOfn, Inc.  Technology Investment - Financial Services   Preferred Stock (5,802,259 shares) (d, i, n)  06/21/00        15,000,000    6,352,000 
 Global Prairie PBC, Inc.  Marketing   Second Lien Loan 10.0000% Cash, 4.0000% PIK, 04/16/2025 (b, k, n)  10/16/19   3,000,000    2,940,448    3,000,000 
GTM Intermediate Holdings, Inc.  Medical Equipment/Manufacturer   Second Lien Loan 11.0000% Cash, 1.0000% PIK, 12/7/2024 (b ,k, n)  12/07/18   5,064,069    4,973,443    5,064,069 
       Common Stock (2 shares) (d, n, t)  12/07/18        766,122    766,122 
                  5,739,565    5,830,191 
Highpoint Global LLC  Government Services  Second Lien Note 12.0000% Cash, 2.0000% PIK, 09/30/2022 (b, k, n)  10/19/17   5,201,232    5,142,323    5,201,232 
HTI Technologies and Industries, Inc.  Electronic Component Manufacturing  Second Lien Note 12.0000% Cash, 3.7500% PIK, 9/15/2024 (b, k, n)  06/01/16   11,419,845    11,400,660    11,419,845 
Initials, Inc.  Consumer Products  Senior Subordinated Debt 8.0000% Cash, 7.0000% PIK, 06/23/2020 (b, h, k, n)  06/23/15   5,642,913    5,642,913    1,272,188 
International Precision Components Corporation  Plastic Injection Molding  Second Lien Loan 12.0000% Cash, 3.5000% PIK, 10/3/2024 (b, k, n, u)  06/27/12   8,000,000    7,854,192    8,000,000 
Jedson Engineering, Inc.  Engineering and Construction Management  First Lien Loan 12.0000% Cash, 3.0000% PIK, 06/21/2024 (b, k, n)  06/25/19   6,041,262    5,928,722    6,041,262 
Legal Solutions Holdings, Inc.  Business Services  Senior Subordinated Debt 12.0000% Cash, 3.0000% PIK, 03/18/2020 (b, k, n)  12/30/14   12,182,950    12,182,950    12,182,950 
Morey's Seafood International, LLC  Food Services  Second Lien Loan 10.0000% Cash, 3.0000% PIK, 08/12/2022 (b, k, n, q)  08/13/13   16,485,324    16,485,324    16,485,324 
Powers Equipment Acquisition Company, LLC  Equipment Manufacturer  First Lien Note 13.5000% Cash, 04/30/2024 (k, n, v)  05/01/19   6,500,000    6,383,100    6,500,000 
SMA Holdings, Inc.  Consulting  First Lien Loan 11.0000% Cash, 06/26/2024 (k, n)  06/26/19   7,000,000    6,426,640    6,530,794 
      Warrants (d, n)  06/26/19   2    504,555    504,555 
                 6,931,195    7,035,349 
Trientis GmbH  Environmental Services  First Lien Note 5.0000% PIK, 10/26/2024 (b, e, h, m, n, r)  10/20/17   1,248,632    1,248,632    176,906 
       Warrants (d, e, r, n)  03/19/18   1    67,715    - 
                  1,316,347    176,906 
Tuf-Tug Inc.  Safety Equipment Manufacturer  Second Lien Loan 11.0000% Cash, 2.0000% PIK,  02/24/2024 (b, k, n)  08/24/18   4,985,284    4,947,047    5,035,136 
      Common Stock (24.6 shares) (d, n, s)  08/24/18        750,000    778,210 
                5,697,047    5,813,346 
Turf Products, LLC  Distributor - Landscaping and Irrigation Equipment  Senior Subordinated Debt 10.0000% Cash, 08/07/2020 (k, n)  11/30/05   7,717,056    7,717,056    7,563,104 
     Third Lien Loan 10.0000% Cash,  08/07/2020 (k, n)  12/22/17   1,050,000    1,050,000    1,032,473 
                  8,767,056    8,595,577 
U.S. Gas & Electric, Inc.  Energy Services  Second Lien Loan, 9.5000% Cash, 07/05/2025 (l, n)  07/05/17   37,527,881    37,527,881    36,974,616 
U.S. Spray Drying Holding Company  Specialty Chemicals  Class B Common Stock (784 shares) (d, n)  03/28/13        5,488,000    1,800,000 
      Secured Loan 12.0000% Cash, 04/30/2021 (k, n)  05/02/14   1,500,000    1,500,000    1,500,000 
      Senior Secured Loan 12.0000% Cash, 04/30/2021 (k, n)  11/08/17   1,500,000    1,500,000    1,500,000 
                  8,488,000    4,800,000 
United States Technologies, Inc.  Electronics Manufacturing and Repair  Senior Lien Loan 10.5000% Cash, 07/17/2020 (k, n)  07/17/15   5,500,000    5,497,954    5,500,000 
                         
Sub Total Non-control/Non-affiliated investments                $246,228,807   $229,322,498 
                         
Affiliate investments - 27.13% (a, c, f, g)                        
Advantage Insurance, Inc.  Insurance  Preferred Stock (750,000 shares) (d, e, n)  09/23/13        7,500,000    7,513,627 
Equus Total Return, Inc.  Registered Investment Company  Common Stock (3,228,024 shares) (d, k)  05/14/14        7,524,035    4,874,316 
JSC Tekers Holdings  Real Estate Management  Common Stock (3,201 shares) (d, e, n)  05/04/11        4,500    - 
      Preferred Stock (9,159,085 shares) (d, e, n)  05/01/14        11,810,188    4,910,000 
                  11,814,688    4,910,000 
Security Holdings B.V.  Electrical Engineering  Common Equity Interest (d, e, n)  09/03/08        51,204,270    33,607,000 
      Bridge Loan 5.0000% PIK, 12/31/2019 (b, e, k, n)  04/03/17   4,937,218    4,937,218    4,937,218 
      Senior Subordinated Loan 3.1000% PIK, 05/31/2020 (b, e, k, n)  05/30/18   6,009,735    6,009,735    6,009,735 
                  62,151,223    44,553,953 
                         
Sub Total Affiliate investments                $88,989,946   $61,851,896 

 

 The accompanying notes are an integral part of these consolidated financial statements.

 

11

 

 

MVC Capital, Inc.

Consolidated Schedule of Investments - (Continued)

October 31, 2019

 

Company  Industry  Investment  Acquistion Date  Principal   Cost   Fair Value/
Market Value
 
Control investments - 21.53% (c, f, g)                        
MVC Automotive Group GmbH  Automotive Dealerships  Common Equity Interest (a, d, e, n)  09/20/07       $52,185,015   $20,602,000 
      Bridge Loan 6.0000% Cash, 12/31/2020 (a, e, k, n)  06/28/16  $7,149,166    7,149,166    7,149,166 
                  59,334,181    27,751,166 
MVC Private Equity Fund LP  Private Equity  Limited Partnership Interest (a, d, j, k, n)  11/21/11        9,034,881    12,252,382 
      General Partnership Interest (a, d, j, k, n)  11/21/11        230,481    312,561 
                 9,265,362    12,564,943 
RuMe Inc.  Consumer Products  Common Stock (5,297,548 shares) (a, d, n)  07/15/11        924,475    - 
      Series C Preferred Stock (23,896,634 shares) (a, d, n)  05/07/14        3,410,694    1,462,857 
      Series B-1 Preferred Stock (4,999,076 shares) (a, d, n)  07/15/11        999,815    - 
      Subordinated Debt 10.0000% PIK, 3/31/2020 (a, b, k, n)  10/07/16   3,610,446    3,610,446    3,610,446 
      Revolver 10.0000% PIK, 3/31/2021 (a, b, k, n)  08/09/18   2,075,613    2,075,613    2,075,613 
      Revolver 10.0000% PIK, 2/28/2020 (a, b, k, n)  08/30/19   403,507    233,297    233,297 
      Warrants (a, d, n)  12/31/13   3    594,544    1,372,379 
                  11,848,884    8,754,592 
                         
Sub Total Control investments                $80,448,427   $49,070,701 
                         
TOTAL PORTFOLIO INVESTMENTS - 149.26% (f)                $415,667,180   $340,245,095 
                         
Cash equivalents and restricted cash equivalents - 4.55% (f, g)                        
Fidelity Institutional Government Money Market Fund - Class I  Money Market Fund  Beneficial Shares (10,278,123 shares)          $10,278,123   $10,278,123 
Morgan Stanley Institutional Liquidity Government Portfolio - Class I  Money Market Fund  Beneficial Shares (99,158 shares)           99,158    99,158 
Total Cash equivalents                 10,377,281    10,377,281 
                         
TOTAL INVESTMENT ASSETS - 153.81%                $426,044,461   $350,622,376 

 

(a) These securities are restricted from public sale without prior registration under the Securities Act of 1933.  The Company negotiates certain aspects of the method and timing of the disposition of these investments, including registration rights and related costs.

 

(b) These securities accrue a portion of their interest/dividends in "payment in kind" interest/dividends which is capitalized to the investment.

 

(c) All of the Company's equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except MVC Automotive Group GmbH, Security Holdings B.V., Trientis GmbH, JSC Tekers Holdings, Equus Total Return Inc., and MVC Private Equity Fund L.P.

The Company makes available significant managerial assistance to all of the portfolio companies in which it has invested.

 

(d) Non-income producing assets.

 

(e) The principal operations of these portfolio companies are located in Europe and Puerto Rico which represents approximately 23% of the total assets. The remaining portfolio companies are located in United States which represents approximately 71% of the total assets.

 

(f) Percentages are based on net assets of $227,958,684 as of October 31, 2019.

 

(g) See Note 3 for further information regarding "Investment Classification."

 

(h) All or a portion of the accrued interest on these securities have been reserved for.

 

(i) Legacy Investments.

 

(j) MVC Private Equity Fund, LP is a private equity fund focused on control equity investments in the lower middle market. The fund currently holds two investments, one located in the United States and one in Gibraltar, the investments are in the energy services and industrial sectors.  The Company owns 18.9% of the fund through its limited partnership interest and owns ..5% of the fund through its general partnership interest. The Company's proportional share of Gibdock Limited equity interest and loan and Advanced Oil Field Services, LLC common stock, preferred stock, and loan is $5,230,958 and $3,433,612, respectively.  The Company's partnership interests in the MVC Private Equity Fund, LP are not redeemable.

 

(k) All or a portion of these securities may serve as collateral for the People's United credit facility.

 

(l) U.S. Gas & Electric, Inc. is an indirect subsidiary of Vistra Energy (NYSE: VST)

 

(m) Cash/PIK toggle at borrower's option

 

(n) These securities are valued using unobservable inputs.

 

(o) Variable rate between 10.5000% and 11.5000% cash.

 

(p) 12% Cash and 0-4% PIK based on Funded Debt to EBITDA.  4% PIK initially.

 

(q) 10% Cash and 3% PIK beginning July 1, 2019.

 

(r) During the fiscal year ended October 31, 2018, all assets and liabilities of SGDA Europe were transferred to a new Austrian holding company, Trientis GmbH, to achieve operating efficiencies.

 

(s) Shares of Tuf-Tug, Inc. are held via Alitus T-T, LP.

 

(t) Shares of GTM Intermediate Holdings, Inc. are held via GTM Ultimate Holdings, LLC.

 

(u) Variable PIK rate between 2.0000% and 3.5000%.

 

(v) Variable cash rate between 10.5000% and 13.5000%.

 

PIK - Payment-in-kind                          

 

- Denotes zero cost or fair value.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

12

 

 

 

MVC Capital, Inc. (the “Company”)

Notes to Consolidated Financial Statements

July 31, 2020

(Unaudited)

1. Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. Certain amounts, when applicable, have been reclassified to adjust to current period presentations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included as required by Regulation S-X, Rule 10-01. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2019, filed with the U.S. Securities and Exchange Commission (the “SEC”). As the Company is an investment company, (as defined by the Investment Company Act of 1940 (the “1940 Act”)), management follows investment company accounting and reporting guidance of Financial Accounting Standards Board (“FASB”) 946-Investment Companies, which is accounting principles generally accepted in the United States of America (“GAAP”).

 

2. Consolidation

 

On July 16, 2004, the Company formed a wholly-owned subsidiary, MVC Financial Services, Inc. (“MVCFS”). MVCFS is incorporated in Delaware and its principal purpose is to provide advisory, administrative and other services to the Company, the Company’s portfolio companies and other entities. MVCFS had opening equity of $1 (100 shares at $0.01 per share). The Company does not hold MVCFS for investment purposes and does not intend to sell MVCFS.

 

On October 14, 2011, the Company formed a wholly-owned subsidiary, MVC Cayman, an exempted company incorporated in the Cayman Islands, to hold certain of its investments and to make certain future investments. The results of MVCFS and MVC Cayman are consolidated into the Company’s financial statements and all inter-company accounts have been eliminated in consolidation. Of the $51.9 million in cash and cash equivalents on the Company’s Consolidated Balance Sheets as of July 31, 2020, approximately $1.1 million was held by MVC Cayman.

 

During fiscal year ended October 31, 2012 and thereafter, MVC Partners, LLC (“MVC Partners”) was consolidated with the operations of the Company as MVC Partners’ limited partnership interest in the MVC Private Equity Fund, L.P. (“PE Fund”) is a substantial portion of MVC Partners operations. Previously, MVC Partners was presented as a portfolio company on the Consolidated Schedule of Investments. The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company. There are additional disclosures resulting from this consolidation.

 

MVC GP II, LLC (“MVC GP II”), an indirect wholly-owned subsidiary of the Company, serves as the general partner of the PE Fund.  MVC GP II is wholly-owned by MVCFS, a subsidiary of the Company.  The results of MVC GP II are consolidated into MVCFS and ultimately the Company.  All inter-company accounts have been eliminated in consolidation.  

 

3. Investment Classification

 

As required by the 1940 Act, we classify our investments by level of control. As defined in the 1940 Act, “Control Investments” are investments in those companies that we are deemed to “Control.” “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of us, as defined in the 1940 Act, other than Control Investments. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments. Generally, under that 1940 Act, we are deemed to control a company in which we have invested if we own 25% or more of the voting securities of such company. We are deemed to be an affiliate of a company in which we have invested if we own 5% or more and less than 25% of the voting securities of such company.

 

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Investment Transactions and Related Operating Income – Investment transactions and related revenues and expenses are accounted for on the trade date. The cost of securities sold is determined on a first-in, first-out basis, unless otherwise specified. Dividend income and distributions on investment securities is recorded on the ex-dividend date. The tax characteristics of such distributions received from our Portfolio Companies will be determined by whether or not the distribution was made from the investment's current taxable earnings and profits or accumulated taxable earnings and profits from prior years. Interest income, which includes accretion of discount and amortization of premium, if applicable, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Fee income includes fees for guarantees and services rendered by the Company or its wholly-owned subsidiary to Portfolio Companies and other third parties such as due diligence, structuring, transaction services, monitoring services, and investment advisory services. Guaranty fees are recognized as income over the related period of the guaranty. Due diligence, structuring, and transaction services fees are generally recognized as income when services are rendered or when the related transactions are completed. Monitoring and investment advisory services fees are generally recognized as income as the services are rendered. Any fee income determined to be loan origination fees is accreted into income over the respective terms of the applicable loans and any original issue discount and market discount are capitalized and then amortized into income using the effective interest method. Upon the prepayment of a loan or debt security, any unamortized original issue discount or market discount is recorded as interest income. For investments with PIK interest and dividends, we base income and dividend accrual on the valuation of the PIK notes or securities received from the borrower. If the value of the PIK notes or securities of a portfolio company is not sufficient to cover the contractual interest or dividend, the Company does not accrue interest or dividend income on the notes or securities.

 

The functional currency of the Company is the U.S. Dollar. Assets and liabilities denominated in a currency other than the U.S. Dollar are translated into U.S. Dollars at the closing rates of exchange on the date of determination. Purchases and sales of investments and income and expenses denominated in currencies other than U.S. Dollars are translated at the rates of exchange on the respective dates of the transactions. The resulting gains and losses from such currency translation are included in the Consolidated Statement of Operations. The Company does not isolate the portion of the results of operations resulting from the changes in foreign exchange rates on investments from the fluctuation arising from changes in fair values of securities held. Such fluctuations are included with the Net Realized and Unrealized Gain (Loss) on Investments and foreign currency in the Consolidated Statement of Operations.

 

4. Cash and Cash Equivalents

 

For the purpose of the Consolidated Balance Sheets and Consolidated Statements of Cash Flows, the Company considers all money market and all highly liquid temporary cash investments purchased with an original maturity of less than three months to be cash equivalents. The Company places its cash and cash equivalents with financial institutions and cash held in bank accounts may exceed the Federal Deposit Insurance Corporation ("FDIC") insured limit. As of July 31, 2020, the Company had approximately $46.7 million in cash equivalents, approximately $3.5 million in restricted cash equivalents, approximately $1.5 million in restricted cash and approximately $173,000 in cash totaling approximately $51.9 million. Of the approximately $46.7 million in cash equivalents, approximately $1.1 million was held by MVC Cayman. As of October 31, 2019, the Company had approximately $5.4 million in cash equivalents, approximately $5.0 million in restricted cash equivalents and approximately $1.3 million in cash totaling approximately $11.7 million. Of the approximately $1.3 million in cash and the approximately $5.4 million in cash equivalents, approximately $1.0 million and $99,000, respectively, was held by MVC Cayman.

 

Restricted Cash and Cash Equivalents

 

Cash and cash equivalent accounts that are not available to the Company for day–to-day use and are legally restricted are classified as restricted cash and cash equivalents. Restricted cash and cash equivalents are carried at cost, which approximates fair value. As of July 31, 2020 and October 31, 2019, the Company had restricted cash or cash equivalents of approximately $5.0 million related to the compensating balance requirement for Credit Facility IV (defined below).

 

14

 

 

5. Recent Accounting Pronouncements

 

In June 2016, FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The amendments require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  In addition, ASU 2016-13 requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses.  The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The new standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019.  The Company does not expect the adoption of ASU 2016-13 to have a material impact on our financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurements. The amendments require new disclosures of changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value of instruments held at balance sheet date and the range and weighted average of significant unobservable inputs for recurring and nonrecurring Level 3 fair values. Certain disclosures are being eliminated such as the valuation process required for Level 3 fair value measurements, the policy for timing of transfers between levels and amounts of and reason for transfers between Levels 1 and 2. The ASU is effective for public business entities for fiscal years and interim periods beginning after December 15, 2019. The Company does not expect the adoption of ASU 2018-13 to have a material impact on our financial statements.

 

In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to related Party Guidance for Variable Interest Entities. The guidance supersedes the private company alternative for common control leasing arrangements issued in 2014 and expands it to all qualifying common control arrangements. Also under the guidance, a private company could make an accounting policy election to not apply VIE guidance to legal entities under common control (including common control leasing arrangements) when certain criteria are met. Additionally, a private company electing the alternative is required to provide detailed disclosures about its involvement with, and exposure to, the legal entity under common control. The ASU also amends the guidance for determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in GAAP). The ASU is effective for public business entities for fiscal years and interim periods beginning after December 15, 2019. The Company does not expect the adoption of ASU 2018-17 to have a material impact on our financial statements.

 

6. Investment Valuation Policy

 

Our investments are carried at fair value in accordance with the Accounting Standards Codification, Fair Value Measurement (“ASC 820”). In accordance with the 1940 Act, unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by the Valuation Committee of our Board of Directors. For legally or contractually restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date minus a discount for the restriction. At July 31, 2020, we did not own restricted or unrestricted securities of any publicly traded company in which we have a majority-owned interest or a minority-owned interest.

 

ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy that prioritizes information used to measure value. In determining fair value, the Valuation Committee primarily uses the level 3 inputs referenced in ASC 820.

 

15

 

 

ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset to which the reporting entity has access to as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.

 

Valuation Methodology

 

Pursuant to the requirements of the 1940 Act and in accordance with ASC 820, we value our portfolio securities at their current market values or, if market quotations are not readily available, at their estimates of fair values. Because our portfolio investments generally do not have readily ascertainable market values, we record these investments at fair value in accordance with our Valuation Procedures adopted by the Board of Directors, which are consistent with ASC 820. As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors' supervision and pursuant to our Valuation Procedures. Our Board of Directors may also hire independent consultants to review our Valuation Procedures or to conduct an independent valuation of one or more of our portfolio investments.

 

Pursuant to our Valuation Procedures, the Valuation Committee (which is comprised of three Independent Directors) determines fair values of portfolio company investments on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). In doing so, the Committee considers the recommendations of The Tokarz Group Advisers LLC (“TTG Advisers”). The Committee also takes into account input and reviews by third party consultants retained to support the Company’s valuation process. The Company has also adopted several other enhanced processes related to valuations of controlled/affiliated portfolio companies. Any changes in valuation are recorded in the consolidated statements of operations as "Net unrealized appreciation (depreciation) on investments."

 

Currently, our NAV per share is calculated and published on a quarterly basis. The Company calculates our NAV per share by subtracting all liabilities from the total value of our portfolio securities and other assets and dividing the result by the total number of outstanding shares of our common stock on the date of valuation. Fair values of foreign investments reflect exchange rates, as applicable, in effect on the last business day of the quarter end. Exchange rates fluctuate on a daily basis, sometimes significantly. Exchange rate fluctuations following the most recent quarter end are not reflected in the valuations reported in this Quarterly Report. See Item 1A Risk Factor, "Investments in foreign debt or equity may involve significant risks in addition to the risks inherent in U.S. investments."

 

At July 31, 2020 and October 31, 2019, approximately 78.4% and 92.6%, respectively, of total assets represented investments in portfolio companies recorded at fair value ("Fair Value Investments").

 

Under most circumstances, at the time of acquisition, Fair Value Investments are carried at cost (absent the existence of conditions warranting, in management's and the Valuation Committee's view, a different initial value). During the period that an investment is held by the Company, its original cost may cease to approximate fair value as the result of market and investment specific factors. No pre-determined formula can be applied to determine fair value. Rather, the Valuation Committee analyzes fair value measurements based on the value at which the securities of the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties, other than in a forced or liquidation sale. The liquidity event whereby the Company ultimately exits an investment is generally the sale, the merger, the recapitalization of a portfolio company or by a public offering of its securities.

 

16

 

 

There is no one methodology to determine fair value and, in fact, for any portfolio security, fair value may be expressed as a range of values, from which the Company derives a single estimate of fair value. To determine the fair value of a portfolio security, the Valuation Committee analyzes the portfolio company's financial results and projections, publicly traded comparable companies when available, comparable private transactions when available, precedent transactions in the market when available, third-party real estate and asset appraisals if appropriate and available, discounted cash flow analysis, if appropriate, as well as other factors. The Company generally requires, where practicable, portfolio companies to provide annual audited and more regular unaudited financial statements, and/or annual projections for the upcoming fiscal year.

 

The fair value of our portfolio securities is inherently subjective. Because of the inherent uncertainty of fair valuation of portfolio securities and escrow receivables that do not have readily ascertainable market values, our estimate of fair value may significantly differ from the fair value that would have been used had a ready market existed for the securities. Such values also do not reflect brokers' fees or other selling costs, which might become payable on disposition of such investments.

 

If a security is publicly traded, the fair value is generally equal to market value based on the closing price on the principal exchange on which the security is primarily traded unless restricted and a restricted discount is applied.

 

For equity securities of portfolio companies, whose securities are not publicly traded, the Valuation Committee estimates the fair value based on market and/or income approach with value then attributed to equity or equity like securities using the enterprise value waterfall ("Enterprise Value Waterfall") valuation methodology. Under the Enterprise Value Waterfall valuation methodology, the Valuation Committee estimates the enterprise fair value of the portfolio company and then waterfalls the enterprise value over the portfolio company's securities in order of their preference relative to one another. To assess the enterprise value of the portfolio company, the Valuation Committee weighs 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 assets 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, and third-party asset and real estate appraisals. For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the portfolio company's assets. The Valuation Committee also takes into account historical and anticipated financial results.

 

The Company does not utilize hedge accounting and instead, when applicable, marks its derivatives to market on the Company’s consolidated statement of operations.

 

In assessing enterprise value, the Valuation Committee considers the mergers and acquisitions ("M&A") market as the principal market in which the Company would sell its investments in portfolio companies under circumstances where the Company has the ability to control or gain control of the board of directors of the portfolio company ("Control Companies"). This approach is consistent with the principal market that the Company would use for its portfolio companies if the Company has the ability to initiate a sale of the portfolio company as of the measurement date, i.e., if it has the ability to control or gain control of the board of directors of the portfolio company as of the measurement date. In evaluating if the Company can control or gain control of a portfolio company as of the measurement date, the Company takes into account its equity securities on a fully diluted basis, as well as other factors.

 

For Non-Control Companies, consistent with ASC 820, the Valuation Committee considers a hypothetical secondary market as the principal market in which it would sell investments in those companies. The Company also considers other valuation methodologies such as the Option Pricing Method and liquidity preferences when valuing minority equity positions of a portfolio company.

 

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For loans and debt securities of Non-Control Companies (for which the Valuation Committee has identified the hypothetical secondary market as the principal market), the Valuation Committee determines fair value based on the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield ("Market Yield") valuation methodology. In applying the Market Yield valuation methodology, the Valuation Committee determines the fair value based on such factors as third party broker quotes (if available) and market participant assumptions, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date.

 

Estimates of average life are generally based on market data of the average life of similar debt securities. However, if the Valuation Committee has information available to it that the debt security is expected to be repaid in the near term, the Valuation Committee would use an estimated life based on the expected repayment date.

 

The Valuation Committee determines fair value of loan and debt securities of Control Companies based on the estimate of the enterprise value of the portfolio company. To the extent the enterprise value exceeds the remaining principal amount of the loan and all other debt securities of the company, the fair value of such securities is generally estimated to be their cost. However, where the enterprise value is less than the remaining principal amount of the loan and all other debt securities, the Valuation Committee may discount the value of such securities to reflect an impairment.

 

For the Company's or its subsidiary's investment in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the general partner (the "GP") of the PE Fund, the Valuation Committee relies on the GP's determination of the fair value of the PE Fund which will be generally valued, as a practical expedient, utilizing the net asset valuations provided by the GP, which will be made: (i) no less frequently than quarterly as of the Company's fiscal quarter end and (ii) with respect to the valuation of PE Fund investments in portfolio companies, will be based on methodologies consistent with those set forth in the Company’s Valuation Procedures. In making its determinations, the GP considers and generally relies on TTG Advisers’ recommendations. The determination of the net asset value of the Company’s or its subsidiary’s investment in the PE Fund will follow the methodologies described for valuing interests in private investment funds (“Investment Vehicles”) described below. Additionally, when both the Company and the PE Fund hold investments in the same portfolio company, the GP's Fair Value determination shall be based on the Valuation Committee's determination of the Fair Value of the Company's portfolio security in that portfolio company.

 

As permitted under GAAP, the Company’s interests in private investment funds are generally valued, as a practical expedient, utilizing the net asset valuations provided by management of the underlying Investment Vehicles, without adjustment, unless TTG Advisers is aware of information indicating that a value reported does not accurately reflect the value of the Investment Vehicle, including any information showing that the valuation has not been calculated in a manner consistent with GAAP. Net unrealized appreciation (depreciation) of such investments is recorded based on the Company’s proportionate share of the aggregate amount of appreciation (depreciation) recorded by each underlying Investment Vehicle. The Company’s proportionate investment interest includes its share of interest and dividend income and expense, and realized and unrealized gains and losses on securities held by the underlying Investment Vehicles, net of operating expenses and fees. Realized gains and losses on distributions from Investment Vehicles are generally recognized on a first in, first out basis.

 

The Company applies the practical expedient to interests in Investment Vehicles on an investment by investment basis, and consistently with respect to the Company’s entire interest in an investment. The Company may adjust the valuation obtained from an Investment Vehicle with a premium, discount or reserve if it determines that the net asset value is not representative of fair value.

 

If the Company intends to sell all or a portion of its interest in an Investment Vehicle to a third-party in a privately negotiated transaction near the valuation date, the Company will consider offers from third parties to buy the interest in an Investment Vehicle in valuations, which may be discounted for both probability of close and time.

 

When the Company receives nominal cost warrants or free equity securities ("nominal cost equity") with a debt security, the Company typically allocates its cost basis in the investment between debt securities and nominal cost equity at the time of origination. If the Company is not reimbursed for investment or transaction related costs at the time an investment is made, the Company typically capitalizes those costs to the cost basis of the investment.

 

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Interest income, adjusted for amortization of premium and accretion of discount on a yield to maturity methodology, is recorded on an accrual basis to the extent that such amounts are expected to be collected. Origination and/or closing fees associated with investments in portfolio companies are accreted into income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any unamortized original issue discount or market discount is recorded as interest income. Prepayment premiums are recorded on loans when received as interest income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that the Company expects to collect such amounts.

 

For loans, debt securities, and preferred securities with contractual payment-in-kind interest or dividends, which represent contractual interest/dividends accrued and added to the loan balance or liquidation preference that generally becomes due at maturity, the Company will not ascribe value to payment-in-kind interest/dividends, if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. However, the Company may ascribe value to payment-in-kind interest if the health of the portfolio company and the underlying securities are not in question. All payment-in-kind interest that has been added to the principal balance or capitalized is subject to ratification by the Valuation Committee. For interest or deferred interest receivables purchased by the Company at a discount to their outstanding amount, the Company amortizes the discount using the effective yield method and records it as interest income over the life of the loan. The Company will not ascribe value to the interest or deferred interest, if the Company has determined that the interest is not collectible.

 

Escrows from the sale of a portfolio company are generally valued at an amount, which may be expected to be received from the buyer under the escrow's various conditions and discounted for both risk and time.

 

ASC 460, Guarantees, requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies. The Valuation Committee typically will look at the pricing of the security in which the guarantee provided support for the security and compare it to the price of a similar or hypothetical security without guarantee support. The difference in pricing will be discounted for time and risk over the period in which the guarantee is expected to remain outstanding.

 

Reclassifications – Certain amounts from prior years have been reclassified to conform to the current year presentation.

 

7. Concentration of Market Risk

 

Financial instruments that subjected the Company to concentrations of market risk consisted principally of equity investments, subordinated notes, debt instruments and escrow receivables (other than cash equivalents), which collectively represented approximately 78.4% and 94.3% of the Company's total assets at July 31, 2020 and October 31, 2019, respectively. As discussed in Note 8, these investments consist of securities in companies with no readily determinable market values and as such are valued in accordance with the Company's fair value policies and procedures. The Company's investment strategy represents a high degree of business and financial risk due to the fact that the Company’s portfolio investments (other than cash equivalents) are generally illiquid, in small and middle market companies, and include foreign investments (which subject the Company to additional risks such as currency, geographic, demographic and operational risks), entities with little operating history or entities that possess operations in new or developing industries. These investments, should they become publicly traded, would generally be (i) subject to restrictions on resale, if they were acquired from the issuer in private placement transactions; and (ii) susceptible to market risk. Additionally, we are classified as a non-diversified investment company within the meaning of the 1940 Act, and therefore may invest a significant portion of our assets in a relatively small number of portfolio companies, which gives rise to a risk of significant loss should the performance or financial condition of one or more portfolio companies deteriorate. Please also see the risk factor titled “Any failure on our part to maintain our status as a business development company would reduce our operating flexibility.” in Item 3 – “Quantitative and Qualitative Disclosures About Market Risk” for information about certain regulatory limitations on our investment activity as a BDC. As of July 31, 2020, the fair value of our largest investment, Custom Alloy Corporation (“Custom Alloy”), comprised 12.3% of our total assets and 19.2% of our net assets. The Company's investments in short-term securities are generally in U.S. government securities, with a maturity of greater than three months but generally less than one year or other high quality and highly liquid investments. The Company considers all money market and other cash investments purchased with an original maturity of less than three months to be cash equivalents.

 

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The following table shows the portfolio composition by industry grouping at fair value as a percentage of net assets as of July 31, 2020 and October 31, 2019.

 

   July 31, 2020   October 31, 2019 
Manufacturer of Pipe Fittings   19.16%   17.62%
Electrical Engineering   18.12%   19.55%
Automotive Dealerships   12.13%   12.17%
Technology Investment - Financial Services   7.06%   2.79%
Electronics Component Manufacturing   6.41%   5.01%
Business Services   5.13%   5.34%
Private Equity   5.05%   5.51%
Equipment Rental   4.67%   3.74%
Distributor - Landscaping and Irrigation Equipment   4.50%   3.77%
Consulting   4.32%   3.09%
Plastic Injection Molding   4.27%   3.51%
Engineering and Construction Management   3.66%   2.65%
Medical Equipment Manufacturer   3.48%   2.56%
Safety Equipment Manufacturer   3.10%   2.55%
Equipment Manufacturer   3.06%   2.85%
Government Services   2.93%   2.28%
Insurance   2.87%   3.30%
Real Estate Management   2.78%   2.15%
Welding Equipment Manufacturer   2.53%   1.99%
Electronics Manufacturing and Repair   2.03%   2.41%
Marketing   1.71%   1.32%
Specialty Chemicals   1.67%   2.11%
Energy Services   1.27%   16.22%
Consumer Products   0.35%   4.40%
Environmental Services   0.12%   0.08%
Regulated Investment Company   0.00%   2.14%
Supply Chain Equipment Manufacturer   0.00%   6.58%
Information Technology Products and Services   0.00%   2.77%
Food Services   0.00%   7.23%
Defense/Aerospace Parts Manufacturing   0.00%   1.57%
    122.38%   149.26%

 

The following table shows the portfolio composition by geographic region at fair value as a percentage of total assets as of July 31, 2020 and October 31, 2019.

 

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   July 31, 2020   October 31, 2019 
Northeast   22.74%   21.57%
Europe   21.25%   21.37%
Southeast   14.90%   21.18%
Midwest   11.65%   17.69%
West   6.06%   7.72%
Puerto Rico   1.84%   2.07%
Southwest   0.00%   2.34%
    78.44%   93.94%

 

 

8. Portfolio Investments

 

Pursuant to the requirements of the 1940 Act and ASC 820, we value our portfolio securities at their current market values or, if market quotations are not readily available, at their estimated fair values. Because our portfolio company investments generally do not have readily ascertainable market values, we record these investments at fair value in accordance with Valuation Procedures adopted by our Board of Directors. As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors' supervision and pursuant to our Valuation Procedures.

 

The levels of fair value inputs used to measure our investments are characterized in accordance with the fair value hierarchy established by ASC 820. Where inputs for an asset or liability fall in more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment's fair value measurement. We use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement. The three levels of the fair value hierarchy and investments that fall into each of the levels are described below:

 

  Level 1: Level 1 inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We use Level 1 inputs for investments in publicly traded unrestricted securities for which we do not have a controlling interest. Such investments are valued at the closing price on the measurement date.  
     
  Level 2: Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly or other inputs that are observable or can be corroborated by observable market data.        
     
  Level 3: Level 3 inputs are unobservable and cannot be corroborated by observable market data. We use Level 3 inputs for measuring the fair value of the vast majority of our investments. See Note 6 “Investment Valuation Policy” for the investment valuation policies used to determine the fair value of these investments.

 

In determining the appropriate level, the Company considers the length of time until the investment is redeemable, including notice and lock-up periods and any other restriction on the disposition of the investment. The Company also considers the nature of the portfolios of the underlying Investment Vehicles and such vehicles’ ability to liquidate their investment.

 

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The following fair value hierarchy tables set forth our investment related assets and (liabilities) by level as of July 31, 2020 and October 31, 2019 (in thousands):

 

   July 31, 2020 
   Level 1   Level 2   Level 3   Investment measured at
NAV
   Total 
Senior/Subordinated Loans and credit facilities  $-   $-   $151,754   $-   $151,754 
Common Stock   -    -    1,733    -    1,733 
Preferred Stock   -    -    22,945    -    22,945 
Warrants   -    -    1,725