Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-35906
 
HARVEST CAPITAL CREDIT CORPORATION
(Exact name of registrant as specified in its charter)  
 
Delaware
(State or other Jurisdiction of
 Incorporation or Organization)
46-1396995
(I.R.S. Employer
Identification Number)
 
 
767 Third Avenue, 29th Floor
New York, NY 10017
(Address of principal executive offices) (Zip Code)
 
(212) 906-3589
(Registrant's Telephone Number, Including Area Code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 definitions of “accelerated filer,” “large 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
¨
(Do not check if a smaller reporting Company)
 
 
Smaller reporting company    
¨
 
 
 
Emerging growth company
þ

 
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. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ☐    No þ.
The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding as of August 8, 2018 was 6,397,740.
 



HARVEST CAPITAL CREDIT CORPORATION
 
 QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED JUNE 30, 2018
 
TABLE OF CONTENTS
 
 
Page
 
 
 
Consolidated Statements of Assets and Liabilities as of June 30, 2018 and December 31, 2017
 
Consolidated Statements of Operations for the three months and six months ended June 30, 2018 and June 30, 2017
 
Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2018 and June 30, 2017
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and June 30, 2017
 
Consolidated Schedule of Investments as of June 30, 2018
 
 
Notes to Consolidated Financial Statements
 
Consolidated Schedule of Investments in and Advances to Affiliates for the six months ended June 30, 2018
 
Consolidated Schedule of Investments in and Advances to Affiliates for the year ended December 31, 2017
 
 
 

i


PART I - FINANCIAL INFORMATION
Item 1.           Consolidated Financial Statements

Harvest Capital Credit Corporation 
Consolidated Statements of Assets and Liabilities (Unaudited)

June 30,

December 31,

2018

2017
ASSETS:



Non-affiliated/non-control investments, at fair value (cost of $80,526,957 at 6/30/18 and $80,790,705 at 12/31/17)
$
82,761,470


$
82,902,537

Affiliated investments, at fair value (cost of $29,228,055 at 6/30/18 and $26,365,364 at 12/31/17)
30,330,874


25,983,871

Control investments, at fair value (cost of $13,059,688 at 6/30/18 and $11,984,621 at 12/31/17)
7,500,273


6,714,270

Total investments, at fair value (cost of $122,814,700 at 6/30/18 and $119,140,690 at 12/31/17)
120,592,617


115,600,678





Cash
8,375,062


4,233,597

Restricted cash
3,374,174


7,230,840

Interest receivable
440,552


287,408

Accounts receivable – other
182,657


37,688

Deferred offering costs


146,446

Deferred financing costs
430,136


508,284

Other assets
218,195


107,899

Total assets
$
133,613,393


$
128,152,840





LIABILITIES:



Revolving line of credit
$
23,000,000


$
16,721,853

Unsecured notes (net of deferred offering costs of $916,106 at 6/30/18 and $1,004,448 at 12/31/17)
27,833,894


27,745,552

Accrued interest payable
135,956


139,148

Accounts payable - base management fees
605,237


582,912

Accounts payable - incentive management fees
187,293



Accounts payable - administrative services expenses
366,666


397,463

Accounts payable and accrued expenses
877,885


782,726

Deferred tax liability
523,478



Other liabilities
4,936


1,757

Total liabilities
53,535,345


46,371,411





Commitments and contingencies (Note 8)







NET ASSETS:



Common stock, $0.001 par value, 100,000,000 shares authorized, 6,537,157 issued and 6,395,192 outstanding at 6/30/18 and 6,519,978 issued and 6,457,588 outstanding at 12/31/17
6,537


6,520

Capital in excess of common stock
93,071,543


93,043,208

Treasury shares at cost, 141,965 and 62,390 shares at 6/30/18 and 12/31/17, respectively
(1,573,457
)

(724,039
)
Accumulated realized losses on investments
(9,653,256
)

(8,923,961
)
Net unrealized depreciation on investments
(2,745,562
)

(3,540,012
)
Undistributed net investment income
972,243


1,919,713

Total net assets
80,078,048


81,781,429

Total liabilities and net assets
$
133,613,393


$
128,152,840





Common stock outstanding
6,395,192


6,457,588





Net asset value per common share
$
12.52


$
12.66

 
 
See accompanying notes to unaudited financial statements.

1



Harvest Capital Credit Corporation 
Consolidated Statements of Operations (Unaudited) 

Three Months Ended 
 June 30,

Six Months Ended 
 June 30,

2018

2017

2018

2017
Investment Income:







Interest:







Cash - non-affiliated/non-control investments
$
2,390,700


$
3,065,834


$
4,715,816


$
5,884,704

Cash - affiliated investments
811,059


789,892


1,517,630


1,506,232

Cash - control investments
47,546


72,993


130,934


165,950

PIK - non-affiliated/non-control investments
141,785


254,277


337,827


577,071

PIK - affiliated investments
182,426


186,288


350,303


354,325

Amortization of fees, discounts and premiums, net:











  Non-affiliated/non-control investments
440,680


639,318


631,713


1,086,313

  Affiliated investments
18,245


45,276


34,086


132,532

  Control investments


5,943




9,468

Total interest income
4,032,441


5,059,821


7,718,309


9,716,595

Other income
22,557


23,568


77,473


36,532

Total investment income   
4,054,998


5,083,389


7,795,782


9,753,127









Expenses:







Interest expense - revolving line of credit
150,335


328,818


289,174


528,837

Interest expense - unused line of credit
82,481


30,891


164,136


96,734

Interest expense - deferred financing costs
57,590


52,872


112,711


127,720

Interest expense - unsecured notes
440,235


481,251


880,470


962,502

Interest expense - deferred offering costs
45,856


52,740


90,842


104,445

Total interest expense
776,497


946,572


1,537,333


1,820,238









Professional fees
209,382


331,532


1,241,669


552,786

General and administrative
283,062


294,819


573,348


540,545

Base management fees
605,237


695,760


1,185,880


1,375,944

Incentive management fees
187,293




187,293


58,005

Administrative services expense
366,666


300,000


666,666


600,000

Total expenses, before reimbursement  
2,428,137


2,568,683


5,392,189


4,947,518













     Less: Professional fees reimbursed by HCAP Advisors, LLC (Note 7)
(11,279
)



(449,835
)














Total expenses, after reimbursement
2,416,858


2,568,683


4,942,354


4,947,518













Net Investment Income, before taxes
1,638,140


2,514,706


2,853,428


4,805,609













Excise tax expense






53,246

Current income tax expense
32,833




32,833











Net Investment Income, after taxes
1,605,307


2,514,706


2,820,595


4,752,363













Net realized gains (losses):











  Non-affiliated / Non-control investments


267,019




271,115

  Affiliated investments




(885,642
)


  Control investments
156,347




156,347



Net realized gains (losses)
156,347


267,019


(729,295
)

271,115

Net change in unrealized appreciation (depreciation) on investments:











  Non-affiliated / Non-control investments
68,338


(3,783,706
)

122,681


(3,416,348
)
  Affiliated investments
(297,157
)

(901,599
)

1,484,312


(1,201,714
)
  Control investments
(193,601
)

43,741


(289,064
)

68,298


2


Net change in unrealized appreciation (depreciation) on investments
(422,420
)

(4,641,564
)

1,317,929


(4,549,764
)
Total net unrealized and realized gains (losses) on investments
(266,073
)

(4,374,545
)

588,634


(4,278,649
)
Provision for taxes on unrealized gains on investments
(523,478)




(523,478)



Net increase (decrease) in net assets resulting from operations
$
815,756


$
(1,859,839
)

$
2,885,751


$
473,714









Net investment income per share
$
0.25


$
0.39


$
0.44


$
0.75

Net increase (decrease) in net assets resulting from operations per share
$
0.13


$
(0.29
)

$
0.45


$
0.07

Weighted average shares outstanding (basic and diluted)
6,390,521


6,407,362


6,413,869


6,378,953

Dividends paid per common share (basic and diluted)
$
0.29


$
0.34


$
0.59


$
0.68

 
 
 See accompanying notes to unaudited financial statements.

3


 Harvest Capital Credit Corporation 
Consolidated Statements of Changes in Net Assets (Unaudited)

Six Months Ended 
 June 30,

2018

2017
Increase in net assets from operations:



Net investment income
$
2,820,595


$
4,752,363

Net realized gains (losses) on investments
(729,295
)

271,115

Net change in unrealized appreciation (depreciation) on investments and provision for taxes on unrealized gains on investments
794,451


(4,549,764
)
Net increase in net assets resulting from operations
2,885,751


473,714





Distributions to shareholders (1):



Distributions
(3,768,068
)

(4,309,207
)
Decrease in net assets resulting from shareholder distributions
(3,768,068
)

(4,309,207
)




Capital share transactions:



Issuance of common shares (net of offering costs of $76,106 for the six months ended June 30, 2017)
17


1,485,047

Reinvestment of dividends (2)
174,783


193,330

Share repurchases
(849,418
)


Write-off of deferred offering costs
(146,446
)


Net increase (decrease) in net assets from capital share transactions
(821,064
)

1,678,377





Total decrease in net assets
(1,703,381
)

(2,157,116
)
Net assets at beginning of period
81,781,429


87,122,296





Net assets at end of period
$
80,078,048


$
84,965,180





Capital share activity (common shares):



Shares issued from stock offering


109,774

Shares issued from reinvestment of dividends
17,179


14,899

Shares repurchased
(79,575
)


Net increase (decrease) in capital share activity
(62,396
)

124,673

(1
)
Distributions exceeded net investment income for the six months ended June 30, 2018 in the amount of $947,473 and net investment income exceeded distributions for the six months ended June 30, 2017 in the amount of $443,157. See Dividends and Distributions Policy in Note 2.
(2
)
Net of par value of shares issued of $17 and $15 and funds received for fractional shares of $20 and $46 for the six months ended June 30, 2018 and 2017, respectively.
 See accompanying notes to unaudited financial statements.


4



Harvest Capital Credit Corporation
Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30,

2018

2017
Cash flows from operating activities:



Net increase (decrease) in net assets resulting from operations
$
2,885,751


$
473,714

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:



Paid in kind income
(688,130
)

(931,396
)
Paid in kind income collected
21,269


9,902

Net realized losses (gains) on investments
729,295

(271,115
)
Net change in unrealized appreciation of investments
(1,317,929
)

4,549,764

            Provision for taxes on unrealized gains on investments
523,478



Amortization of fees, discounts and premiums, net
(665,799
)

(1,228,313
)
Amortization of deferred financing costs
112,711


127,720

Amortization of deferred offering costs
90,842


104,445

Proceeds from sales of investments
331,710



Purchase of investments (net of loan origination and other fees)
(13,012,633
)

(29,639,712
)
Proceeds from principal payments
9,616,874


24,445,264

Changes in operating assets and liabilities



(Increase) decrease in interest receivable
(153,144
)

99,927

(Increase) decrease in accounts receivable - other and other assets
(261,859
)

(164,140
)
Increase (decrease) in accrued interest payable
(3,192
)

48,150

Increase (decrease) in accounts payable and other liabilities
264,910


(261,600
)




Net cash used in operating activities
(1,525,846
)

(2,637,390
)




Cash flows from financing activities:



Borrowings on revolving credit facility
44,000,000


28,250,000

Repayment of borrowings on revolving credit facility
(37,721,853
)

(20,631,759
)
Financing costs
(22,316
)

(184,576
)
Offering costs
(2,500
)

(37,457
)
Proceeds from the issuance of common stock
17


1,492,983

Repurchased shares (held in Treasury Stock)
(849,418
)


Distributions to equity holders (net of stock issued under dividend reinvestment plan of $174,802 and $193,330, respectively)
(3,593,285
)

(4,115,877
)






Net cash provided by financing activities
1,810,645


4,773,314





Net increase in cash during the period
284,799


2,135,924






Cash at beginning of period
11,464,437


7,556,978





Cash at end of period (1)
$
11,749,236


$
9,692,902





Non-cash financing activities:



Value of shares issued in connection with dividend reinvestment plan
$
174,802


$
193,330

           Write-off of deferred offering costs
$
146,446


$





Supplemental disclosures of cash flow information:



Cash paid during the period for interest
$
1,336,972


$
1,539,920

Cash paid during the period for taxes
$
39,840


$
103,797


5


 
(1) Consists of cash and restricted cash of $8,375,062 and $3,374,174, respectively, at June 30, 2018, and $4,069,966 and $5,622,936, respectively, at June 30, 2017.



See accompanying notes to unaudited financial statements.

6


Harvest Capital Credit Corporation
Consolidated Schedule of Investments (unaudited)
(as of June 30, 2018)
Portfolio Company
Date**
Industry
Investment (1) (2) (14)
 
 Principal
 Cost
 Fair Value
Non-Control / Non-Affiliate Investments
 
 
 
 
 
AMS Flight Leasing, LLC (loss guaranty provided by IAG Engine Center, LLC) (0.1%) *
04/2017
Aerospace & Defense
Senior Secured Term Loan, due 01/2019 (14.00%)
(5) (7)
$
67,256

$
45,910

$
67,239

 
 
 
 
 
67,256

45,910

67,239

 
 
 
 
 
 
 
 
Bradford Soap
International, Inc. (5.6%) *
08/2015
Consumer Goods - Non-Durable
Junior Secured Term Loan, due 10/2019 (13.63%; 1M LIBOR + 11.50%)
(8)
4,500,000

4,459,831

4,474,000

 
 
 
 
 
4,500,000

4,459,831

4,474,000

 
 
 
 
 
 
 
 
Brite Media LLC (0.2%) *
04/2014
Media: Advertising, Printing & Publishing
Class A Interest (139 Units)
 
 
125,000

146,375

 
 
 
 
 
 
125,000

146,375

 
 
 
 
 
 
 
 
CP Holding Co. Inc
(Choice Pet) (3.8%) *
05/2013
Retailer
Junior Secured Term Loan, due 06/2020 (12.00%)
 
2,899,852

3,060,182

3,060,182

 
 
 
 
 
2,899,852

3,060,182

3,060,182

 
 
 
 
 
 
 
 
DirectMed Parts & Service, LLC (5.9%) *
05/2017
Healthcare & Pharmaceuticals
Senior Secured Term Loan, due 02/2022 (11.88%; 3M LIBOR +9.50% with 1.00% LIBOR floor)
 
4,709,642

4,635,527

4,691,000

 
 
 
Revolver Line of Credit, due 02/2022 (3M LIBOR + 6.50% with 1.00% LIBOR floor)
(4)



 
 
 
 
 
4,709,642

4,635,527

4,691,000

 
 
 
 
 
 
 
 
Douglas Machines Corp. (4.6%) *
05/2014
Capital Equipment
Junior Secured Term Loan, due 12/2018 (12.50%)
 
3,452,633

3,420,588

3,452,000

 
04/2012
 
Common Equity Warrants (204 Shares)
 
 
12,500

208,000

 
 
 
 
 
3,452,633

3,433,088

3,660,000

 
 
 
 
 
 
 
 
Flavors Holdings, Inc. (4.7%) *
10/2014
Beverage, Food & Tobacco
Junior Secured Term Loan, due 10/2021 (12.33%; 3M LIBOR +10.00% with 1.00% LIBOR floor)
 
4,000,000

3,911,087

3,797,000

 
 
 
 
 
4,000,000

3,911,087

3,797,000

 
 
 
 
 
 
 
 
Flight Lease XIII, LLC (0.3%) *
03/2017
Aerospace &Defense
Common Equity Interest (600 Units)
(10)
 
270,514

269,710

 
 
 
 
 
 
270,514

269,710

 
 
 
 
 
 
 
 
Fox Rent A Car, Inc. (1.1%) *
10/2014
Automotive
Common Equity Warrants (102 shares)
 
 

858,037

 
 
 
 
 
 

858,037

 
 
 
 
 
 
 
 
GK Holdings, Inc. (3.5%)*
01/2015
High Tech Industries
Junior Secured Term Loan, due 01/2022 (12.58%; 3M LIBOR +10.25% with 1.00% LIBOR floor)
(8)
3,000,000

2,949,393

2,774,000

 
 
 
 
 
3,000,000

2,949,393

2,774,000

 
 
 
 
 
 
 
 
IAG Engine Center, LLC (0.9%) *
08/2016
Aerospace &Defense
Senior Secured Term Loan, due 08/2018 (14.00%)
(7)
443,395

421,615

443,395

 
 
 
Revenue Linked Security
(6) (10)
 
221,458

317,000

 
 
 
 
 
443,395

643,073

760,395

 
 
 
 
 
 
 
 

7


Portfolio Company
Date**
Industry
Investment (1) (2) (14)
 
 Principal
 Cost
 Fair Value
King Engineering Associates, Inc. (9.8%) *
04/2017
Environmental Industries
Senior Secured Term Loan, due 04/2021 (11.99%; 1M LIBOR +10.00%)
 
6,543,000

6,461,995

6,543,000

 
10/2017
 
Class A Membership Interest (88,231 Units)
(10)
 
605,913

1,277,489

 
 
 
 
 
6,543,000

7,067,908

7,820,489

 
 
 
 
 
 
 
 
National Project Management & Controls, LLC (4.6%)*
06/2018
Construction & Building
Senior Secured Term Loan, due 06/2023 (12.1%; 1M LIBOR + 10.00%)
(15)
3,575,500

3,515,868

3,515,868




Revolving Line of Credit, due 06/2023 (1M LIBOR + 10.00%)
(4)






Class A Membership Interest (53,319 Units)
(10)


200,000

200,000






3,575,500

3,715,868

3,715,868

 
 
 
 
 
 
 
 
ProAir Holdings Corporation (7.9%) *
09/2017
Capital Equipment
Junior Secured Term Loan, due 12/2022 (12.75%)
 
6,500,000

6,412,682

6,341,000

 
 
 
 
 
6,500,000

6,412,682

6,341,000

 
 
 
 
 
 
 
 
Regional Engine
Leasing, LLC (4.2%) *
03/2015
Aerospace &Defense
Senior Secured Term Loan, due 03/2020 (11.00%; the greater of 11.00% or LIBOR +4.50%)
 
3,212,917

3,161,443

3,211,000

 
 
 
Residual Value
(3)
 
102,421

145,000

 
 
 
 
 
3,212,917

3,263,864

3,356,000

 
 
 
 
 
 
 
 
Safety Services Acquisition Corp. (8.9%) *
03/2017
Services: Business
Senior Secured Term Loan, due 03/2019 (15.38%; 3M LIBOR + 11.00% with a 1.00% floor plus 2.00% default interest)
(8)
7,031,250

7,000,886

7,014,000

 
04/2012
 
Series A Preferred Stock (100,000 Shares)
 
 
100,000

79,000

 
 
 
 
 
7,031,250

7,100,886

7,093,000

 
 
 
 
 
 
 
 
Shannon Specialty Floors, LLC (4.9%) *
04/2017
Chemicals, Plastics & Rubber
Junior Secured Term Loan, due 04/2021 (12.34%; 3M LIBOR + 10.00% with 1.00% LIBOR floor)
(8)
3,939,706

3,895,989

3,904,000

 
 
 
 
 
3,939,706

3,895,989

3,904,000

 
 
 
 
 
 
 
 
Sitel Worldwide
Corporation (2.2%) *
08/2015
Services: Business
Junior Secured Term Loan, due 09/2022 (11.88%; 3M LIBOR +9.50% with 1.00% LIBOR floor)
(11)
1,750,000

1,725,697

1,750,000

 
 
 
 
 
1,750,000

1,725,697

1,750,000

 
 
 
 
 
 
 
 
Surge Busy Bee Holdings, LLC (9.4%) *
11/2017
Services: Business
Senior Secured Term Loan, due 11/2022 (12.10%; 1M LIBOR + 10.00%)
 
4,812,500

4,616,510

4,688,000

 
 
 
Senior Secured Term Loan, due 11/2022 (14.00%; 12.00% cash/2.00% PIK)
 
2,512,501

2,419,414

2,432,000

 
 
 
Revolving Line of Credit, due 11/2021 (10.10%, 1M LIBOR+8.00%)
(4)
100,000

100,000

100,000

 
 
 
Class B Equity Warrants (210 Units)
 
 
152,950

273,000

 
 
 
 
 
7,425,001

7,288,874

7,493,000

 
 
 
 
 
 
 
 
World Business Lenders, LLC (0.3%) *
12/2013
Banking, Finance, Insurance & Real Estate
Class B Equity Interest (49,209 Units)
 
 
200,000

218,648

 
 
 
 
 
 
200,000

218,648

 
 
 
 
 
 
 
 
Wetmore Tool and Engineering Company (5.0%) *
03/2017
Capital Equipment
Junior Secured Term Loan, due 09/2021 (12.5%; 12.00% Cash/0.5% PIK)
(8)
4,032,324

3,985,794

4,032,324

 
 
 
 
 
4,032,324

3,985,794

4,032,324

 
 
 
 
 
 
 
 

8


Portfolio Company
Date**
Industry
Investment (1) (2) (14)
 
 Principal
 Cost
 Fair Value
Yucatan Foods, L.P. (15.6%) *
03/2016
Beverage, Food & Tobacco
Junior Secured Term Loan A, due 03/2021 (14.50%; 12.00% cash/2.50% PIK)
(8)
9,220,502

9,109,994

9,220,502

 
 
 
Junior Secured Term Loan B, due 03/2021 (10.00% PIK; convertible into 5.80% of fully diluted common equity)
(9)
3,258,701

3,225,796

3,258,701

 
 
 
 
 
12,479,203

12,335,790

12,479,203

Subtotal Non-Control / Non-Affiliate Investments
 
 
$
79,561,679

$
80,526,957

$
82,761,470

 
 
 
 
 
 
 
 
Affiliate Investments
 
 
 
 
 
Coastal Screen and Rail, LLC (8.9%)*
01/2018
Construction & Building
Senior Secured Term Loan, due 01/2023 (12.00%; 10.50% Cash/1.50% PIK)
 
$
6,442,713

$
6,313,534

$
6,314,000

 
01/2018
 
Revolving Line of Credit, due 07/2022 (10.31%; 3M LIBOR + 8.00%)
 
500,000

500,000

500,000

 
01/2018
 
Preferred Equity Interest (6.21% fully diluted Common Equity)
(10)
 
150,000

294,000

 
 
 
 
 
6,942,713

6,963,534

7,108,000

 
 
 
 
 
 
 
 
Flight Lease XII, LLC (0.8%) *
03/2017
Aerospace &Defense
Common Equity Interest (1,000 Units)
(10)
 
389,757

632,527

 
 
 
 
 
 
389,757

632,527

 
 
 
 
 
 
 
 
24/7 Software, Inc. (formerly Instant Sales Solutions, Inc.) (5.0%) *
07/2017
High Tech Industries
Senior Secured Term Loan, due 07/2022 (13.25%)
 
2,775,000

2,750,267

2,775,000

 
 
 
Revolving Line of Credit, due 07/2021 (3M LIBOR+9.00% with a 1.00% LIBOR floor)
(4)



 
 
 
Common Stock (950 Shares)
(10)
 
950,000

1,241,000

 
 
 
 
 
2,775,000

3,700,267

4,016,000

 
 
 
 
 
 
 
 
Northeast Metal
Works LLC (16.8%) *
09/2014
Metals & Mining
Senior Secured Term Loan, due 12/2019 (17.00%; 10.50% Cash plus 6.50% PIK)
 
10,096,583

10,068,715

9,974,000

 
 
 
Revolving Line of Credit, due 12/2019 (15.00%)
(13)
1,650,000

1,650,000

1,637,000

 
05/2017
 
Preferred Equity Interest (2,493 Class A Units)
(10)
 
1,595,520

1,849,000

 
 
 
 
 
11,746,583

13,314,235

13,460,000

 
 
 
 
 
 
 
 
V-Tek, Inc. (6.4%) *
03/2017
Capital Equipment
Senior Secured Term Loan, due 03/2022 (13.38%; 3M LIBOR + 11.00%)
 
3,456,250

3,374,165

3,456,250

 
 
 
Senior Secured Revolver, due 03/2021 (8.88%; 3M LIBOR + 6.50%)
(4)
1,336,097

1,336,097

1,336,097

 
 
 
Common Stock (90 Shares)
(10)
 
150,000

322,000

 
 
 
 
 
4,792,347

4,860,262

5,114,347

Subtotal Affiliate Investments
 
 
$
26,256,643

$
29,228,055

$
30,330,874

 
 
 
 
 
 
 
 
Control Investments
 
 
 
 
 
Flight Lease VII, LLC (1.1%) *
03/2016
Aerospace &Defense
Common Equity Interest (1,800 Units)
(16)
 
$
857,273

$
857,273

 
 
 
 
 
 
857,273

857,273

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Infinite Care, LLC (8.1%) *
02/2016
Healthcare & Pharmaceuticals
Senior Secured Term Loan, due 02/2019 (14.10%; 1M LIBOR+6.00% with a 0.42% LIBOR floor plus 6.00% PIK)
 
4,502,209

3,600,415

3,050,000

 
 
 
Revolving Line of Credit, due 02/2019 (14.10%, 1M LIBOR+12.00% with a 0.42% LIBOR floor)
 
3,602,000

3,602,000

3,593,000


9


Portfolio Company
Date**
Industry
Investment (1) (2) (14)
 
 Principal
 Cost
 Fair Value
 
 
 
Membership Interest (100% membership interests)
(12)
 
5,000,000


 
 
 
 
 
8,104,209

12,202,415

6,643,000

Subtotal Control Investments
 
 
$
8,104,209

$
13,059,688

$
7,500,273

 
 
 
 
 
Total Investments at 6/30/18 (150.6%) *
 
 
 
$
113,922,531

$
122,814,700

$
120,592,617


* Value as a percentage of net assets
** Date refers to the origination date of the investment

(1)
Debt investments and the revenue linked security are income producing investments unless an investment is on non accrual. Common equity, residual values and warrants are non-income producing.
(2)
For each loan, the Company has provided the interest rate in effect on the date presented, as well as the contractual components of that interest rate. In the case of the Company's variable or floating rate loans, the interest rate in effect takes into account the applicable LIBOR rate in effect on the date presented or, if higher, the applicable LIBOR floor.
(3)
"Residual value" represents the value of the Company's share in the collateral securing the loan.
(4)
Credit facility has an unfunded commitment in addition to the amounts shown in the Consolidated Schedule of Investments. See Note 8 in the Notes to Consolidated Financial Statements for further discussion on unfunded commitments.
(5)
The Company restructured the investment in IAG Engine Center, LLC on June 20, 2017. Specifically, AMS Flight Leasing, LLC was formed to facilitate the purchase of an aircraft engine from IAG Engine Center, LLC for $1.4 million. Per the terms of the agreement, the proceeds of the aircraft engine sale were used by IAG Engine Center, LLC to pay down the Company’s existing debt investment in IAG Engine Center, LLC. Concurrently, the Company also entered in a separate debt investment with AMS Flight Leasing, LLC for $1.1 million, which is separately presented on the Consolidated Schedule of Investments in Unaffiliated Issuers.
(6)
The revenue linked security entitles the Company to participate in the proceeds of inventory sales pursuant to a consignment agreement between IAG Engine Center, LLC and an affiliated entity of IAG Engine Center, LLC, AMS Flight Funding, LLC.
(7)
IAG Engine Center, LLC has provided up to $1.4 million of credit enhancements to AMS Flight Leasing, LLC.
(8)
The coupon on the loan is subject to a pricing grid based on certain leverage ratios of the portfolio company.
(9)
The loan is convertible any time, at the Company's discretion, into 5.8% of the fully diluted common equity of the borrower.
(10)
The investment is held by HCAP Equity Holdings, LLC, the Company's taxable blocker subsidiary.
(11)
This portfolio company investment is a level 2 asset. Portfolio company investments without this footnote are level 3 assets whose values were determined using significant unobservable inputs.
(12)
Infinite Care LLC ("ICC") is in default under the terms of its credit agreement and was on non-accrual status as of June 30, 2018. ICC was current on its interest payments to the Company through December 31, 2017; however, it failed to repay the Company’s protective loan advances at various dates in the fourth quarter of 2017.  ICC was previously in breach of its minimum EBITDA, minimum fixed charge and total leverage covenants, but these breaches were waived by the Company through December 31, 2017 in connection with its entry into an agreement, dated as of January 13, 2017, with ICC relating thereto.  In October 2017, the Company exercised its rights under a stock pledge of ICC. The Company formed a wholly owned subsidiary, HCAP ICC, LLC, to exercise its proxy right under the pledge agreement and take control of ICC’s board of directors. In January 2018, HCAP took control of ICC's equity after accelerating the debt and auctioning ICC’s equity in a public sale.  The Company bid a portion of its outstanding debt to gain control of ICC in connection with the public sale process. Upon the completion of the sale process in January 2018, the Company converted $2.0 million of its debt investment in ICC into shares of ICC’s membership interests. ICC failed to pay its scheduled amortization payment to the Company as of June 30, 2018. In addition, for the six months ended June 30, 2018, the Company funded $1.5 million in revolver advances to ICC to fund their liquidity needs.

ICC had $3.5 million in cash receipts in the second quarter of 2018, and also had $0.6 million in cash, among other current and long-term assets and current liabilities, and long-term liabilities consisting only of the $8.1 million debt principal it owed the Company (which included $0.5 million of payment-in-kind interest due to the Company at the maturity of its debt investments in ICC) and no other debt as of June 30, 2018.

The Company is currently in conversations with the investment committee of its investment adviser and its board of directors about the appropriate next steps for ICC. In that regard, the Company is considering (1) selling ICC as-is, (2) investing in underperforming areas of ICC’s business prior to selling ICC or (3) investing further in the business with the intent of continuing to hold its investments in ICC.



10


(13)
The interest rate on the revolver is 11% prior to the interim advance term; 13.5% from the first amendment effective date to February 28, 2018; 14.25% from March 1, 2018 through May 31, 2018 and 15% from June 1, 2018 until expiration of the interim advance. The interest rate on the term loan is 11% prior to and following the interim advance term; 10.5% cash pay plus 6% PIK from the first amendment date trough February 28, 2018; 10.5% cash pay plus 6.25% PIK from March 1, 2018 to May 31, 2018; 10.5% cash pay plus 6.5% PIK from June 1, 2018 until expiration of the interim advance.
(14)
The Company's non-qualifying assets, on a fair value basis, comprise approximately 1% of the Company's total assets.
(15)
Not included here is a $5.0 million delayed draw term loan commitment, which the Company may elect to fund at its sole discretion once a delayed draw request has been made by the portfolio company.
(16)
This is an equity investment that receives a cash flow stream based on lease payments received by Flight Lease VII, LLC. Flight Lease VII, LLC owns an aircraft that was leased to one lessee. The lessee has been in arrears on its lease payments and in June of 2018, Flight Lease VII, LLC terminated the lease. As a result of the cessation of cash flows, future payments on this equity investment will resume if Flight Lease VII, LLC is successful in obtaining a new lease partner.

See accompanying notes to unaudited financial statements.



As of June 30, 2018, investments consisted of the following:

Type
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Senior Secured Debt
$
65,574,361

 
$
65,340,848

 
54.2
%
 
81.7
%
Junior Secured Debt
46,157,034

 
46,063,710

 
38.1
%
 
57.4
%
Equity
10,861,847

 
8,871,059

 
7.4
%
 
11.1
%
Revenue Linked Security
221,458

 
317,000

 
0.3
%
 
0.4
%
Total
$
122,814,700

 
$
120,592,617

 
100.0
%
 
150.6
%

The rate type of debt investments at fair value as of June 30, 2018 was as follows:

Rate Type
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Fixed Rate
$
56,050,504

 
$
56,238,745

 
50.4
%
 
70.2
%
Floating Rate
55,680,891

 
55,165,813

 
49.6
%
 
68.9
%
Total
$
111,731,395

 
$
111,404,558

 
100.0
%
 
139.1
%

The industry composition of investments at fair value as of June 30, 2018 was as follows:


11


Industry
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Aerospace & Defense
$
5,470,390

 
$
5,943,144

 
4.9
%
 
7.4
%
Automotive

 
858,037

 
0.7
%
 
1.1
%
Banking, Finance, Insurance & Real Estate
200,000

 
218,648

 
0.2
%
 
0.3
%
Beverage, Food & Tobacco
16,246,877

 
16,276,204

 
13.5
%
 
20.4
%
Capital Equipment
18,691,826

 
19,147,671

 
15.9
%
 
23.8
%
Chemicals, Plastics and Rubber
3,895,989

 
3,904,000

 
3.2
%
 
4.9
%
Construction & Building
10,679,402

 
10,823,867

 
9.0
%
 
13.5
%
Consumer Goods - Non-Durable
4,459,831

 
4,474,000

 
3.7
%
 
5.6
%
Environmental Industries
7,067,908

 
7,820,489

 
6.5
%
 
9.8
%
Healthcare & Pharmaceuticals
16,837,942

 
11,334,000

 
9.4
%
 
14.2
%
High Tech Industries
6,649,660

 
6,790,000

 
5.6
%
 
8.5
%
Media: Broadcasting & Subscription
125,000

 
146,375

 
0.1
%
 
0.2
%
Metals & Mining
13,314,235

 
13,460,000

 
11.2
%
 
16.8
%
Retailer
3,060,182

 
3,060,182

 
2.5
%
 
3.6
%
Services: Business
16,115,458

 
16,336,000

 
13.6
%
 
20.5
%
Total
$
122,814,700

 
$
120,592,617

 
100.0
%
 
150.6
%

The geographic concentrations at fair value as of June 30, 2018 was as follows:

Region
Amortized Cost

Fair Value

% of Fair Value

% of Net Assets
West
48,961,542


44,773,154


37.1
%

55.9
%
Northeast
36,130,199


36,406,830


30.2
%

45.5
%
South
31,310,277


33,071,633


27.4
%

41.3
%
Midwest
6,412,682


6,341,000


5.3
%

7.9
%

122,814,700


120,592,617


100.0
%

150.6
%


12


Harvest Capital Credit Corporation
Schedule of Investments
(as of December 31, 2017)
Portfolio Company
Date**
Industry
Investment (1) (2)
 
 Principal
 Cost
 Fair Value
Non-Control / Non-Affiliate Investments
 
 
 
 
 
AMS Flight Leasing, LLC (loss guaranty provided by IAG Engine Center, LLC) (0.5%) *
04/2017
Aerospace &Defense
Senior Secured Term Loan, due 01/2019 (14.00%)
(5) (7)
$
428,456

$
242,518

$
428,456

 
 
 
 
 
428,456

242,518

428,456

 
 
 
 
 
 
 
 
Bradford Soap
International, Inc. (5.5%) *
08/2015
Consumer Goods - Non-Durable
Junior Secured Term Loan, due 10/2019 (10.63%; 1M LIBOR + 9.25%)
 
4,500,000

4,457,846

4,500,000

 
 
 
 
 
4,500,000

4,457,846

4,500,000

 
 
 
 
 
 
 
 
Bridgewater Engine
Ownership III, LLC (0.2%) *
10/2014
Aerospace &Defense
Senior Secured Term Loan, due 07/2019 (14.00%; the greater of 14.00% and LIBOR +8.50%)
 
195,421

178,639

195,421

 
 
 
 
 
195,421

178,639

195,421

 
 
 
 
 
 
 
 
Brite Media LLC (0.1%) *
04/2014
Media: Advertising, Printing & Publishing
Class A Interest (139 Units)
 
 
125,000

70,669

 
 
 
 
 
 
125,000

70,669

 
 
 
 
 
 
 
 
CP Holding Co. Inc
(Choice Pet) (3.5%) *
05/2013
Retailer
Junior Secured Term Loan, due 06/2020 (12.00%)
 
2,899,852

2,894,941

2,879,000

 
 
 
 
 
2,899,852

2,894,941

2,879,000

 
 
 
 
 
 
 
 
DirectMed Parts & Service, LLC (6.8%) *
05/2017
Healthcare & Pharmaceuticals
Senior Secured Term Loan, due 02/2022 (11%; 3M LIBOR +9.50% with 1.00% LIBOR floor)
 
5,530,000

5,442,369

5,530,000

 
 
 
Revolver Line of Credit, due 02/2022 (3M LIBOR + 6.50% with 1.00% LIBOR floor)
(4)



 
 
 
 
 
5,530,000

5,442,369

5,530,000

 
 
 
 
 
 
 
 
Douglas Machines Corp. (5.1%) *
05/2014
Capital Equipment
Junior Secured Term Loan, due 12/2018 (12.50%)
 
4,027,633

3,993,541

4,027,633

 
04/2012
 
Common Equity Warrants (204 Shares)
 
 
12,500

177,391

 
 
 
 
 
4,027,633

4,006,041

4,205,024

 
 
 
 
 
 
 
 
Flavors Holdings, Inc. (4.7%) *
10/2014
Beverage, Food & Tobacco
Junior Secured Term Loan, due 10/2021 (11.69%; 3M LIBOR +10.00% with 1.00% LIBOR floor)
 
4,000,000

3,900,507

3,821,500

 
 
 
 
 
4,000,000

3,900,507

3,821,500

 
 
 
 
 
 
 
 
Flight Lease XIII, LLC (0.4%) *
03/2017
Aerospace &Defense
Common Equity Interest (600 Units)
(10)
 
300,000

310,854

 
 
 
 
 
 
300,000

310,854

 
 
 
 
 
 
 
 
Fox Rent A Car, Inc. (1.1%) *
10/2014
Automotive
Common Equity Warrants (102 shares)
 
 

861,425

 
 
 
 
 
 

861,425


13


Portfolio Company
Date**
Industry
Investment (1) (2)
 
 Principal
 Cost
 Fair Value
 
 
 
 
 
 
 
 
GK Holdings, Inc. (3.6%)*
01/2015
High Tech Industries
Junior Secured Term Loan, due 01/2022 (11.94%; 3M LIBOR +10.25% with 1.00% LIBOR floor)
(8)
3,000,000

2,943,370

2,906,000

 
 
 
 
 
3,000,000

2,943,370

2,906,000

 
 
 
 
 
 
 
 
IAG Engine Center, LLC (1.3%) *
08/2016
Aerospace &Defense
Senior Secured Term Loan, due 08/2018 (14.00%)
(7)
563,395

471,875

563,000

 
 
 
Revenue Linked Security
(6) (10)
 
393,515

533,000

 
 
 
 
 
563,395

865,390

1,096,000

 
 
 
 
 
 
 
 
King Engineering Associates, Inc. (9.3%) *
04/2017
Environmental Industries
Senior Secured Term Loan, due 04/2021 (11.37%; 1M LIBOR +10.00%)
 
6,576,000

6,482,233

6,576,000

 
 
 
Revolving Line of Credit, due 04/2019 (11.37%; 1M LIBOR +10.00%)
(4)



 
10/2017
 
Class A Membership Interest (86,433 Units)
(10)
 
521,146

1,051,555

 
 
 
 
 
6,576,000

7,003,379

7,627,555

 
 
 
 
 
 
 
 
ProAir Holdings Corporation (7.7%) *
09/2017
Capital Equipment
Junior Secured Term Loan, due 12/2022 (12.75%)
 
6,500,000

6,405,784

6,282,507

 
 
 
 
 
6,500,000

6,405,784

6,282,507

 
 
 
 
 
 
 
 
Regional Engine
Leasing, LLC (4.4%) *
03/2015
Aerospace &Defense
Senior Secured Term Loan, due 03/2020 (11.00%; the greater of 11.00% or LIBOR +4.50%)
 
3,471,326

3,403,439

3,471,326

 
 
 
Residual Value
(3)
 
102,421

105,322

 
 
 
 
 
3,471,326

3,505,860

3,576,648

 
 
 
 
 
 
 
 
Safety Services Acquisition Corp. (8.9%) *
03/2017
Services: Business
Senior Secured Term Loan, due 03/2019 (14.5%; 3M LIBOR + 11.00% with a 1.00% floor/2.00% default interest)
(8)
7,218,750

7,169,237

7,179,000

 
04/2012
 
Series A Preferred Stock (100,000 Shares)
 
 
100,000

69,000

 
 
 
 
 
7,218,750

7,269,237

7,248,000

 
 
 
 
 
 
 
 
Shannon Specialty Floors, LLC (4.9%) *
04/2017
Chemicals, Plastics & Rubber
Junior Secured Term Loan, due 04/2021 (11.36%; 3M LIBOR + 10.00% with 1.00% LIBOR floor)
(8)
4,000,000

3,948,995

3,968,000

 
 
 
 
 
4,000,000

3,948,995

3,968,000

 
 
 
 
 
 
 
 
Sitel Worldwide
Corporation (2.1%) *
08/2015
Services: Business
Junior Secured Term Loan, due 09/2022 (10.88%; 3M LIBOR +9.50% with 1.00% LIBOR floor)
(11)
1,750,000

1,723,508

1,704,609

 
 
 
 
 
1,750,000

1,723,508

1,704,609

 
 
 
 
 
 
 
 
Surge Busy Bee Holdings, LLC (9.1%) *
11/2017
Services: Business
Senior Secured Term Loan, due 11/2022 (11.38%; 1M LIBOR + 10.00%)
 
4,937,500

4,723,800

4,723,800

 
 
 
Senior Secured Term Loan, due 11/2022 (14.00%; 12.00% cash/2.00% PIK)
 
2,500,000

2,401,389

2,401,389

 
 
 
Revolving Line of Credit, due 11/2021 (9.38%, 1M LIBOR+8.00%)
(4)
150,000

150,000

150,000

 
 
 
Class B Equity Warrants (210 Units)
 
 
152,950

184,372


14


Portfolio Company
Date**
Industry
Investment (1) (2)
 
 Principal
 Cost
 Fair Value
 
 
 
 
 
7,587,500

7,428,139

7,459,561

 
 
 
 
 
 
 
 
Turning Point Brands, Inc. (2.5%) *
02/2017
Beverage, Food & Tobacco
Junior Secured Term Loan, due 08/2022 (11.00%)
(11)
2,000,000

1,982,298

2,015,000

 
 
 
 
 
2,000,000

1,982,298

2,015,000

 
 
 
 
 
 
 
 
World Business Lenders, LLC (0.3%) *
12/2013
Banking, Finance, Insurance & Real Estate
Class B Equity Interest (49,209 Units)
 
 
200,000

221,808

 
 
 
 
 
 
200,000

221,808

 
 
 
 
 
 
 
 
Wetmore Tool and Engineering Company (4.9%) *
03/2017
Capital Equipment
Junior Secured Term Loan, due 09/2021 (12.5%; 12.00% Cash/0.5% PIK)
(8)
4,022,206

3,970,037

3,981,000

 
 
 
 
 
4,022,206

3,970,037

3,981,000

 
 
 
 
 
 
 
 
Yucatan Foods, L.P. ( 14.7%) *
03/2016
Beverage, Food & Tobacco
Junior Secured Term Loan A, due 03/2021 (14.50%; 10.00% cash/4.50% PIK)
(8)
9,062,282

8,933,921

8,995,500

 
 
 
Junior Secured Term Loan B, due 03/2021 (10.00% PIK; convertible into 5.80% of fully diluted common equity)
(9)
3,101,658

3,062,926

3,018,000

 
 
 
 
 
12,163,940

11,996,847

12,013,500

Subtotal Non-Control / Non-Affiliate Investments
 
 
$
80,434,479

$
80,790,705

$
82,902,537

 
 
 
 
 
 
 
 
Affiliate Investments
 
 
 
 
 
Flight Lease XII, LLC (0.8%) *
03/2017
Aerospace &Defense
Common Equity Interest (1,000 Units)
(10)
 
$
500,000

$
616,502

 
 
 
 
 


500,000

616,502

 
 
 
 
 
 
 
 
24/7 Software, Inc. (formerly Instant Sales Solutions, Inc.) ( 5.1%) *
07/2017
High Tech Industries
Senior Secured Term Loan, due 07/2022 (13.25%)
 
2,887,500

2,859,272

2,859,272

 
 
 
Revolving Line of Credit, due 07/2021 (10.5%, 3M LIBOR+9.00% with a 1.00% LIBOR floor)
(4)



 
 
 
Common Equity Interest (950 Units)
(10)
 
950,000

1,300,000

 
 
 
 
 
2,887,500

3,809,272

4,159,272

 
 
 
 
 
 
 
 
Northeast Metal
Works LLC (15.4%) *
09/2014
Metals & Mining
Senior Secured Term Loan, due 12/2019 (16.50%; 10.50% Cash plus 6.00% PIK)
(13)
9,788,725

9,752,528

9,652,000

 
 
 
Revolving Line of Credit, due 12/2019 (13.50%)
 
1,500,000

1,500,000

1,482,000

 
05/2017
 
Preferred Equity Interest (2,500 Class A Units)
(10)
 
1,600,000

1,481,000

 
 
 
 
 
11,288,725

12,852,528

12,615,000

 
 
 
 
 
 
 
 
V-Tek, Inc. (5.8%) *
03/2017
Capital Equipment
Senior Secured Term Loan, due 03/2022 (12.5%; 3M LIBOR + 11.00%)
 
3,500,000

3,406,474

3,500,000

 
 
 
Senior Secured Revolver, due 03/2021 (8.00%; 3M LIBOR + 06.50%)
(4)
886,097

886,097

886,097

 
 
 
Common Equity Interest (90 Units)
(10)
 
150,000

351,000

 
 
 
 
 
4,386,097

4,442,571

4,737,097


15


Portfolio Company
Date**
Industry
Investment (1) (2)
 
 Principal
 Cost
 Fair Value
 
 
 
 
 
 
 
 
WorkWell, LLC ( 4.7%) *
10/2015
Healthcare & Pharmaceuticals
Senior Secured Term Loan, due 10/2020 (13.00%; 3M LIBOR + 11.50% with 0.50% LIBOR floor)
 
4,569,699

4,510,993

3,856,000

 
 
 
Preferred Equity Interest (250,000 Units)
 
 
250,000


 
 
 
Common Equity Interest (250,000 Units)
 
 


 
 
 
 
 
4,569,699

4,760,993

3,856,000

Subtotal Affiliate Investments
 
 
$
23,132,021

$
26,365,364

$
25,983,871

 
 
 
 
 
 
 
 
Control Investments
 
 
 
 
 
Flight Lease VII (1.0%) *
03/2016
Aerospace &Defense
Common Equity Interest (1,800 Units)
 
 
$
857,273

$
829,849

 
 
 
 
 


857,273

829,849

 
 
 
 
 
 
 
 
Flight Lease XI, LLC (0.4%) *
12/2016
Aerospace &Defense
Common Equity Interest (400 Units)
(10)
 
200,000

327,421

 
 
 
 
 


200,000

327,421

 
 
 
 
 
 
 
 
Infinite Care, LLC (6.8%) *
02/2016
Healthcare & Pharmaceuticals
Senior Secured Term Loan, due 02/2019 (13.38%; 1M LIBOR+6.00% with a 0.42% LIBOR floor plus 6.00% PIK)
 
6,360,914

5,862,348

3,492,000

 
 
 
Revolving Line of Credit, due 02/2019 (13.38%, 1M LIBOR+12.00% with a 0.42% LIBOR floor)
 
2,065,000

2,065,000

2,065,000

 
 
 
Class A Interest (3,000,000 Units)
(12)
 
3,000,000


 
 
 
 
 
8,425,914

10,927,348

5,557,000

Subtotal Control Investments
 
 
$
8,425,914

$
11,984,621

$
6,714,270

 
 
 
 
 
Total Investments at 12/31/17 (141.4%) *
 
 
 
$
111,992,414

$
119,140,690

$
115,600,678

* Value as a percentage of net assets
** Date refers to the origination date of the investment


16


(1)
Debt investments and the revenue linked security are income producing investments unless an investment is on non accrual. Common equity, residual values and warrants are non-income producing.
(2)
For each loan, the Company has provided the interest rate in effect on the date presented, as well as the contractual components of that interest rate. In the case of the Company's variable or floating rate loans, the interest rate in effect takes into account the applicable LIBOR rate in effect on the date presented or, if higher, the applicable LIBOR floor.
(3)
"Residual value" represents the value of the Company's share in the collateral securing the loan.
(4)
Credit facility has an unfunded commitment in addition to the amounts shown in the Consolidated Schedule of Investments. See Note 8 in the Notes to Consolidated Financial Statements for further discussion on portion of commitment unfunded at December 31, 2017.
(5)
The Company restructured the investment in IAG Engine Center, LLC on June 20, 2017. Specifically, AMS Flight Leasing, LLC was formed to facilitate the purchase of an aircraft engine from IAG Engine Center, LLC for $1.4 million. Per the terms of the agreement, the proceeds of the aircraft engine sale were used by IAG Engine Center, LLC to pay down the Company’s existing debt investment in IAG Engine Center, LLC. Concurrently, the Company also entered in a separate debt investment with AMS Flight Leasing, LLC for $1.1 million, which is separately presented on the Consolidated Schedule of Investments in Unaffiliated Issuers.
(6)
The revenue linked security entitles the Company to participate in the proceeds of inventory sales pursuant to a consignment agreement between IAG Engine Center, LLC and an affiliated entity of IAG Engine Center, LLC, AMS Flight Funding, LLC. The IAG Engine Center, LLC consignment sales since origination of this security have been slower to materialize than originally planned resulting in lower than expected revenue linked security payments to date. As a result, this investment was placed on non-accrual status during the three months ended March 31, 2017. The revenue linked security payments materialized meaningfully in Q4 2017 and the investment was taken off of non-accrual status.
(7)
IAG Engine Center, LLC has provided up to $1.4 million of credit enhancements to AMS Flight Leasing, LLC.
(8)
The coupon on the loan is subject to a pricing grid based on certain leverage ratios of the portfolio company.
(9)
The loan is convertible any time, at the Company's discretion, into 5.8% of the fully diluted common equity of the borrower.
(10)
The investment is held by HCAP Equity Holdings, LLC, the Company's taxable blocker subsidiary.
(11)
This portfolio company investment is a level 2 asset. Portfolio company investments without this footnote are level 3 assets whose values were determined using significant unobservable inputs.
(12)
Infinite Care LLC ("ICC") is in default under the terms of its credit agreement and was on non-accrual status as of December 31, 2017. ICC was current on its interest payments to the Company through December 31, 2017; however, it failed to repay the Company’s protective loan advances at various dates in the fourth quarter of 2017.  ICC was previously in breach of its minimum EBITDA, minimum fixed charge and total leverage covenants, but these breaches were waived by the Company through December 31, 2017 in connection with its entry into an agreement, dated as of January 13, 2017, with ICC relating thereto.  In October 2017, the Company exercised its rights under a stock pledge of ICC. The Company formed a wholly owned subsidiary, HCAP ICC, LLC, to exercise its proxy right under the pledge agreement and take control of ICC’s board of directors. In January 2018, HCAP took control of ICC's equity after accelerating the debt and auctioning ICC’s equity in a public sale.  The Company bid a portion of its outstanding debt to gain control of ICC in connection with the public sale process. Upon the completion of the sale process in January 2018, the Company converted $2.0 million of its debt investment in ICC into shares of ICC’s membership interests.

ICC had $13.1 million in cash receipts in 2017, and also had $60 thousand dollars in cash, among other current and long-term assets and current liabilities, and long-term liabilities consisting only of the $8.4 million debt principal it owed the Company (which included $0.4 million of payment-in-kind interest due to the Company at the maturity of its debt investments in ICC) and no other debt as of December 31, 2017.

The Company has performed additional diligence procedures on certain balance sheet and income statement accounts of ICC to ensure that the inputs used in connection with its determination of the fair value of its debt investments in ICC at December 31, 2017 were accurate and reliable. The Company determined the fair value of its investments in ICC using a methodology consistent with its valuation policy and with the same methodology it uses in connection with the valuation of its other portfolio company investments. Specifically, the Company utilized comparable investments in the marketplace and determined that a revenue multiple - with cash receipts determined to be the most appropriate proxy therefor based on ICC’s business and circumstances - was the most appropriate metric upon which to base the valuation for this portfolio company. The Company engaged a third party expert to assist it in connection with its determination of fair value of its investments in ICC as of December 31, 2017.

The Company is currently in conversations with the investment committee of its investment adviser and its board of directors about the appropriate next steps for ICC. In that regard, the Company is considering (1) selling ICC as-is, (2) investing in underperforming areas of ICC’s business prior to selling ICC or (3) investing further in the business with the intent of continuing to hold its investments in ICC.
(13)
The interest rate on the revolver is 11% prior to the interim advance term; 13.5% from the first amendment effective date to February 28, 2018; 14.25% from March 1, 2018 through May 31, 2018 and 15% from June 1, 2018 until expiration of the interim advance. The interest rate on the term loan is 11% prior to and following the interim advance term; 10.5% cash pay plus 6% PIK from the first amendment date trough February 28, 2018; 10.5% cash pay plus 6.25% PIK from March 1, 2018 to May 31, 2018; 10.5% cash pay plus 6.5% PIK from June 1, 2018 until expiration of the interim advance.
(14)
The Company's non-qualifying assets, on a fair value basis, comprise approximately 2% of the Company's total assets.

See accompanying notes to unaudited financial statements.


17


As of December 31, 2017, investments consisted of the following:

Type
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Senior Secured Debt
$
61,508,211

 
$
59,010,761

 
51.0
%
 
72.2
%
Junior Secured Debt
48,217,674

 
48,098,749

 
41.6
%
 
58.8
%
Equity
9,021,290

 
7,958,168

 
6.9
%
 
9.7
%
Revenue Linked Security
393,515

 
533,000

 
0.5
%
 
0.7
%
Total
$
119,140,690

 
$
115,600,678

 
100
%
 
141.4
%

The rate type of debt investments at fair value as of December 31, 2017 was as follows:

Rate Type
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Fixed Rate
$
48,471,030

 
$
48,584,757

 
45.4
%
 
59.4
%
Floating Rate
61,254,855

 
58,524,753

 
54.6
%
 
71.6
%
Total
$
109,725,885

 
$
107,109,510

 
100.0
%
 
131.0
%



The industry composition of investments at fair value as of December 31, 2017 was as follows:

Industry
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Aerospace & Defense
$
6,649,680

 
$
7,381,151

 
6.4
%
 
9.0
%
Automotive

 
861,425

 
0.8
%
 
1.1
%
Banking, Finance, Insurance & Real Estate
200,000

 
221,808

 
0.2
%
 
0.3
%
Beverage, Food & Tobacco
17,879,652

 
17,850,000

 
15.4
%
 
21.8
%
Capital Equipment
18,824,433

 
19,205,628

 
16.6
%
 
23.5
%
Chemicals, Plastics and Rubber
3,948,995

 
3,968,000

 
3.4
%
 
4.9
%
Consumer Goods - Non-Durable
4,457,846

 
4,500,000

 
3.9
%
 
5.5
%
Environmental Industries
7,003,379

 
7,627,555

 
6.6
%
 
9.3
%
Healthcare & Pharmaceuticals
21,130,710

 
14,943,000

 
12.9
%
 
18.3
%
High Tech Industries
6,752,642

 
7,065,272

 
6.1
%
 
8.6
%
Media: Broadcasting & Subscription
125,000

 
70,669

 
0.1
%
 
0.1
%
Metals & Mining
12,852,528

 
12,615,000

 
10.9
%
 
15.4
%
Retailer
2,894,941

 
2,879,000

 
2.5
%
 
3.5
%
Services: Business
16,420,884

 
16,412,170

 
14.2
%
 
20.1
%
Total
$
119,140,690

 
$
115,600,678

 
100.0
%
 
141.4
%

The geographic concentrations at fair value as of December 31, 2017 was as follows:


18


Region
Amortized Cost

Fair Value

% of Fair Value

% of Net Assets
West
48,934,402


43,854,691


38.0
%

53.7
%
Northeast
35,861,595


35,660,290


30.8
%

43.6
%
South
27,938,909


29,803,190


25.8
%

36.4
%
Midwest
6,405,784


6,282,507


5.4
%

7.7
%

119,140,690


115,600,678


100.0
%

141.4
%



19


Harvest Capital Credit Corporation
Notes to Unaudited Consolidated Financial Statements
 
Note 1. Organization 
 
Harvest Capital Credit Corporation ("HCAP" or the "Company") was incorporated as a Delaware corporation on November 14, 2012, for the purpose of, among other things, acquiring Harvest Capital Credit LLC (“HCC LLC”). HCAP acquired HCC LLC on May 2, 2013, in connection with HCAP's initial public offering. HCAP is an externally managed, closed-end, non-diversified management investment company that has filed an election to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes, HCAP has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As an investment company, the Company follows accounting and reporting guidance as set forth in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 946, Financial Services- Investment Companies.

On July 1, 2016, the Company formed HCAP Equity Holdings, LLC, a Delaware limited liability company, as a wholly-owned subsidiary of the Company to hold certain equity investments made by the Company in limited liability companies or other forms of pass-through entities. By investing through HCAP Equity Holdings, LLC, the Company is able to benefit from the tax treatment of this entity and create a tax structure that is advantageous with respect to the Company's status as a RIC. This taxable subsidiary is consolidated for U.S. GAAP financial reporting purposes, and the portfolio investments held by the taxable subsidiary are included in the Company's consolidated financial statements and recorded at fair value in conjunction with the Company's valuation policy. The Company also formed a wholly-owned subsidiary, HCAP ICC, LLC, a Delaware limited liability company, to exercise certain rights in connection with its investment in Infinite Care, LLC.

Unless otherwise noted or the context otherwise indicates, the terms "we", "us", "our", and the "Company" refer to Harvest Capital Credit Corporation and its consolidated subsidiaries.

  
Note 2. Summary of Significant Accounting Policies 
 
Basis of Financial Statement Presentation
 
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the rules and regulations of the SEC and Regulation S-X. In the opinion of management, all adjustments of a normal recurring nature considered necessary for the fair statement of the Company's consolidated financial statements have been made. Certain prior period amounts have been reclassified to reflect current period classification.
 
In preparing the consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the Consolidated Statements of Assets and Liabilities and the Consolidated Statements of Operations for the period. Actual results could differ from those estimates.
 
Principles of Consolidation
 
The consolidated financial statements of the Company include the accounts of Harvest Capital Credit Corporation and its wholly-owned subsidiaries, HCAP Equity Holdings, LLC and HCAP ICC, LLC. The effects of all intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation. Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and ASC 946, Financial Services - Investment Companies, the Company is precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries.
Cash
 
Cash as presented in the Consolidated Statements of Assets and Liabilities and the Consolidated Statements of Cash Flows includes bank checking accounts.

Restricted Cash

20



Restricted cash of $3.4 million and $7.2 million as of June 30, 2018 and December 31, 2017, respectively, was held at U.S. Bank, National Association in conjunction with the Company's Credit Facility (see Note 3. Borrowings). The Company is restricted from accessing this cash until the monthly settlement date when, after delivering a covenant compliance certificate, the net restricted cash is released to us after paying interest, fees and expenses owed under its Credit Facility.         
 
Investments and Related Investment Revenue and Expense
 
All investment related revenue and expenses are reflected on the Consolidated Statement of Operations commencing on the settlement date unless otherwise specified by the transaction documents.
 
The Company accrues interest income if it expects that ultimately it will be able to collect it. Generally, when an interest payment default occurs on a loan in the portfolio, when interest has not been paid for greater than 90 days, or when management otherwise believes that the issuer of the loan will not be able to service the loan and other obligations, the Company will place the loan on non-accrual status and will cease accruing interest income on that loan until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed collectible. However, the Company remains contractually entitled to this interest, and any collections actually received on these non-accrual loans may be recognized as interest income on a cash basis or applied to the principal depending upon management's judgment regarding collectability. The Company may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection and the amount of collectible interest can be reasonably estimated.
 
For loans with contractual PIK (payment-in-kind) interest income, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, the Company will not accrue PIK interest if the Company believes that the PIK interest is no longer collectible, including if the portfolio company valuation indicates that such PIK interest is not collectible. Loan origination fees - net of direct loan origination costs, original issue discounts that initially represent the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and market discounts or premiums - are accreted or amortized using the effective interest method as interest income over the contractual life of the loan. Upon the prepayment of a loan or debt security, any unamortized net loan origination fee will be recorded as interest income. Loan exit fees that are contractually required to be paid at the termination or maturity of the loan will be accreted to interest income over the contractual term of the loan. The Company suspends the accretion of interest income for any loans or debt securities placed on non-accrual status. The Company may also collect other prepayment premiums on loans. These prepayment premiums are recorded as other income as earned. Dividend income, if any, will be recognized on the ex-dividend date.

Interest income from certain of the Company's equity investments are recorded based upon an estimation of an effective yield to expected maturity utilizing projected cash flows in accordance with ASC 325-40, Beneficial Interests in Securitized Financial Assets. The Company monitors the expected cash inflows from these equity investments and the effective yield is determined and updated at each reporting date.

Certain expenses related to legal and tax consultation, due diligence, valuation expenses and independent collateral appraisals may arise when the Company makes certain investments. To the extent that such costs are not classified as direct loan origination costs, these expenses are recognized in the Consolidated Statements of Operations as they are incurred.
 
Investment Date
 
The Company records investment purchases and sales based on the trade date. For instances when the trade date and funding date differ, the Company captures the open trades in the receivable for securities sold or payable for securities purchased on the Consolidated Statements of Assets and Liabilities.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
 
Realized gains and losses on investments are calculated using the specific identification method. The Company measures realized gains or losses on equity investments as the difference between the net proceeds from the sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. The Company measures realized gains or losses on debt investments as the difference between the net proceeds from the repayment or sale and the contractual amount owed to us on the investment, without regard to unrealized appreciation or depreciation previously recognized or unamortized deferred fees. The acceleration of unamortized deferred fees is recognized as interest income and the collection of prepayment and other fees is recognized as other income. The Company recognized $0.2 million in net realized gains on its

21


investments during the three months ended June 30, 2018 and $0.3 million in net realized gains on its investments during the three months ended June 30, 2017. The Company recognized $0.7 million in net realized losses on its investments during the six months ended June 30, 2018 and $0.3 million of realized gains on its investments during the six months ended June 30, 2017.

Net changes in unrealized appreciation or depreciation measure changes in the fair value of its investments relative to changes in their amortized cost. The Company recognized $0.4 million in net change in unrealized depreciation during the three months ended June 30, 2018 and $4.6 million in net change in unrealized depreciation during the three months ended June 30, 2017. The Company recognized $1.3 million in net change in unrealized appreciation during the six months ended June 30, 2018 and $4.5 million in net change in unrealized depreciation during the six months ended June 30, 2017.

 Classification of Investments
 
The Company classifies its investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual owns beneficially more than 25% of the voting securities of an investee company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through beneficial ownership of at least 5% but not more than 25% of the outstanding voting securities of another person. See table below for a breakdown of the Company's investments by classification at June 30, 2018 and December 31, 2017, respectively.

 
Number of portfolio company investments by classification
 
June 30, 2018

December 31, 2017

Non-Control/Non-Affiliated
22

23

Affiliated
5

5

Control
2

3

Total
29

31



Valuation of Investments
 
Valuation analyses of the Company’s investments are performed on a quarterly basis pursuant to ASC 820, Fair Value Measurement. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with applicable accounting guidance and expands disclosure of fair value measurements.
 
Pursuant to ASC 820, the valuation standard used to measure the value of each investment is fair value defined as, “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Investments are recorded at their fair value at each quarter end (the measurement date).
 
Fair Value Investment Hierarchy
 
Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1 
Quoted prices (unadjusted) for identical assets or liabilities in active public markets that the entity has the ability to access as of the measurement date.
Level 2 
Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 
Significant unobservable inputs that reflect a reporting entity’s own assumptions about what market participants would use in pricing an asset or liability.
  
Valuation Process
 

22


Investments are measured at fair value as determined in good faith by the Company's management team, reviewed by the audit committee of the board of directors (independent directors), and ultimately approved by the Company's board of directors, based on, among other factors, consistently applied valuation procedures on each measurement date.

The board of directors undertakes a multi-step valuation process at each measurement date.

The valuation process begins with each investment initially being valued by the Company's management or the investment professionals of the Company's investment adviser and / or, if applicable, by an independent valuation firm.

Preliminary valuation conclusions are documented and discussed with senior management.

The audit committee of the board of directors reviews and discusses the preliminary valuations.

The board of directors discusses valuations and determines the fair value of each investment in the Company's portfolio in good faith, based upon the input of senior management, the independent valuation firm report (if reviewed in such quarter), and the audit committee.

The nature of the materials and input that the Company’s board of directors receives in the valuation process varies depending on the nature of the investment and the other facts and circumstances. For example, in the case of investments that are Level 1 or 2 assets, a formal report by the Company’s management or the investment professionals of its investment adviser, called a portfolio monitoring report, or “PMR,” is not generally prepared, and no independent external valuation firm is engaged due to the availability of quotes in markets for such investments or similar assets.

In the case of investments that are Level 3 assets, however, the Company’s board of directors generally receives a report on material Level 3 investments on a quarterly basis (i) from the Company’s management or the investment professionals of its investment adviser in the form of a PMR, (ii) from a third-party valuation firm, or (iii) in some cases, both. In the case of investments that are Level 3 assets and have an investment rating of 1 (performing above expectations), the Company generally engages an independent external valuation firm to review all such material investments at least annually. In quarters where an external valuation is not prepared for such investments, the Company’s management or the investment professionals of its investment adviser generally prepare a PMR. In the case of investments that are Level 3 assets and have an investment rating of 2 through 5 (with performance ranging from within expectations to substantially below expectations), the Company generally engages an independent external valuation firm to review such material investments quarterly (and may receive a PMR in addition to the review of the independent external valuation firm where the Level 3 assets have an investment rating of 3 through 5). However, in certain cases for Level 3 assets, the Company may determine that it is more appropriate for the Company to prepare a PMR instead of engaging an independent external valuation firm on a quarterly basis, because a third-party valuation is not cost effective or the nature of the investment does not warrant a quarterly third-party valuation. In addition, under certain unique circumstances, the Company may determine that a formal valuation report is not likely to be informative, and neither a third-party valuation report nor a report from the Company’s management or the investment professionals of its investment adviser is prepared. Such circumstances might include, for example, an instance in which the investment has paid off after the period end date but before the board of directors meets to discuss the valuations.

Further, Level 3 debt investments that have closed within six months of the measurement date are valued at cost unless unique circumstances dictate otherwise.

 Valuation Methodology
 
The following section describes the valuation methods and techniques used to measure the fair value of the investments.
 
Fair value for each investment may be derived using a combination of valuation methodologies that, in the judgment of management, are most relevant to such investment, including, without limitation, being based on one or more of the following: (i) market prices obtained from market makers for which management has deemed there to be enough breadth (number of quotes) and depth to be indicative of fair value, (ii) the price paid or realized in a completed transaction or binding offer received in an arms-length transaction, (iii) the market approach (enterprise value), (iv) the income approach (discounted cash flow analysis) or (v) the bond yield approach.
 
The valuation methods selected for a particular investment are based on the circumstances and on the level of sufficient data available to measure fair value. If more than one valuation method is used to measure fair value, the results are evaluated and

23


weighted, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.
 
The determination of fair value using the selected methodologies takes into consideration a range of factors including, but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public and private exchanges for comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment, compliance with agreed upon terms and covenants, and assessment of credit ratings of an underlying borrower.
 
In most cases we use the bond yield approach for valuing Level 3 debt investments, as long as we deem this method appropriate. This approach entails analyzing the interest rate spreads for recently completed financing transactions which are similar in nature to the Company's investments, in order to assess what the range of effective market interest rates would be for the Company's investment if it were being made on or near the valuation date. Then all of the remaining expected cash flows of the investment are discounted using this range of interest rates to determine a range of fair values for the debt investment. If, in the Company's judgment, the bond yield approach is not appropriate, we may use the market approach, or, in certain cases, an alternative methodology potentially including an asset liquidation or expected recovery model.
 
The fair value of equity securities, including warrants, in portfolio companies oftentimes considers the market approach, which applies market valuation multiples of publicly-traded firms or recently acquired private firms engaged in businesses similar to those of the portfolio companies. This approach to determining the fair value of a portfolio company’s equity security will typically involve: (1) applying to the portfolio company’s trailing twelve month EBITDA (earnings before interest, taxes, depreciation and amortization) a range of enterprise value to EBITDA multiples that are derived from an analysis of comparable companies, in order to arrive at a range of enterprise values for the portfolio company; then (2) subtracting from the range of enterprise values balances of any debt or equity securities that rank senior to the Company's equity securities; and (3) multiplying the range of equity values by the Company’s ownership share of such equity to determine a range of fair values for the Company’s equity investment.
    
The Company also uses the income approach, which discounts a portfolio company’s expected future cash flows to determine its net present enterprise value. The discount rate used is based upon the company’s weighted average cost of capital, which is determined by blending the cost of the portfolio company’s various debt instruments and its estimated cost of equity capital. The cost of equity capital is estimated based upon the Company's market knowledge and discussions with private equity sponsors.
 
These valuation methodologies involve a significant degree of judgment. As it relates to investments that do not have an active public market, there is no single standard for determining the estimated fair value. Valuations of privately held investments are inherently uncertain, and they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. In some cases, fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a single estimate may then be determined.
 
Consequently, fair value for each investment may be derived using a combination of valuation methodologies that, in the judgment of management, are most relevant to such investment. The selected valuation methodologies for a particular investment are consistently applied on each measurement date. However, a change in a valuation methodology or its application from one measurement date to another is possible if the change results in a measurement that is equally or more representative of fair value in the circumstances.
 
Capital Gains Incentive Fee
 
Under GAAP, the Company calculates the capital gains incentive fee as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional incentive fee is subject to the performance of investments until there is a realization event, the amount of provisional capital gains incentive fee accrued at a reporting date may vary from the capital gains incentive fee that is ultimately paid and the differences could be material.
 
Deferred Offering Costs
 
Deferred offering costs are made up of offering costs related to the preparation and filing of the Company's shelf registration statement on Form N-2 and the expenses related to the Company's 2022 Notes (defined below). The deferred offering costs relating

24


to the Company's preparation and filing of its shelf registration statement on Form N-2 consist of underwriting fees, legal fees and other direct costs incurred and are recognized as assets and are recognized as deferred offering expense as shares are issued. The deferred offering costs relating to the Company's 2022 Notes offering consist of underwriting fees, legal fees, and other direct costs incurred and are recognized as a reduction to the unsecured notes on the Company's consolidated statement of assets and liabilities and are amortized as deferred offering expense through the maturity of the 2022 Notes. The Company had no deferred offering costs relating to the Company's shelf registration statement on Form N-2 as of June 30, 2018. The balance of deferred offering costs relating to the Company's shelf registration statement on Form N-2 as of December 31, 2017 was $0.1 million. The balance of deferred offering costs relating to the Company's 2022 Notes as of June 30, 2018 and December 31, 2017 was $0.9 million and $1.0 million, respectively. Amortization expense of the deferred offering costs relating to the Company's 2022 Notes was $0.1 million and $0.1 million for the three months ended June 30, 2018 and June 30, 2017, respectively. Amortization expense of the deferred offering costs relating to the Company's 2022 Notes was $0.1 million and $0.1 million for the six months ended June 30, 2018 and June 30, 2017, respectively. During the three months ended June 30, 2018, the Company wrote off the remaining balance of $0.1 million of deferred offering costs relating to the Company's shelf registration statement on Form N-2 as the Company does not expect to issue any additional shares under the existing shelf registration statement.

Deferred Financing Costs
 
Deferred financing costs are made up of debt issuance costs associated with the Company's revolving line of credit. The deferred financing costs consist of fees and other direct costs incurred by the Company in obtaining debt financing from its lenders and are recognized as assets and are amortized as interest expense over the term of the applicable credit facility. The balance of deferred financing costs as of June 30, 2018 and December 31, 2017 was $0.4 million and $0.5 million, respectively. The amortization expense relating to deferred debt financing costs during the three months ended June 30, 2018 and June 30, 2017 was $0.1 million and $0.1 million, respectively. The amortization expense relating to deferred debt financing costs during the six months ended June 30, 2018 and June 30, 2017 was $0.1 million and $0.1 million, respectively.
 
Dividends and Distributions 
 
Dividends and distributions to common stockholders are recorded on the ex-dividend date.  Distributions to shareholders which exceed tax distributable income (tax net investment income and realized gains, if any) are reported as distributions of paid-in capital (i.e., return of capital). The determination of the tax attributes of the Company's distributions is made at the end of the year based upon the Company's taxable income for the full year and the distributions paid during the full year. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment. The Company adopted a dividend reinvestment plan that provides for reinvestment of the Company's dividends and other distributions on behalf of the Company's stockholders, unless a stockholder elects to receive cash. As a result, if the board of directors authorizes, and the Company declares, a cash dividend or other distribution, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash distribution automatically reinvested in additional shares of common stock, rather than receiving the cash distribution.

During the three month periods ended June 30, 2018 and June 30, 2017, the Company declared distributions totaling $0.29 and $0.34 per share, respectively. During the six month periods ended June 30, 2018 and June 30, 2017, the Company declared distributions totaling $0.59 and $0.68, respectively.

 Income Taxes
 
Beginning with its first taxable year ending December 31, 2013, the Company elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code and intends to receive RIC tax treatment annually. To receive RIC tax treatment, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. As a RIC, the Company will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which the Company paid no U.S. federal income tax.

The company's wholly-owned taxable subsidiary, HCAP Equity Holdings LLC, holds certain portfolio investments that are listed on the Consolidated Schedule of Investments. HCAP Equity Holdings LLC is consolidated for financial reporting purposes, such that the company’s consolidated financial statements reflect the Company’s investments in the portfolio companies owned

25


by it. The purpose of HCAP Equity Holdings LLC is to permit the Company to hold certain portfolio companies that are organized as limited liability companies (“LLCs”) (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of the RIC’s gross revenue for income tax purposes must consist of qualifying investment income. Absent such a taxable subsidiary, a proportionate amount of any gross income of an LLC (or other pass-through entity) portfolio investment would flow through directly to the RIC. To the extent that such income did not consist of qualifying investment income, it could jeopardize the Company’s ability to qualify as a RIC and therefore cause the Company to incur significant amounts of federal income taxes. When LLCs (or other pass-through entities) are owned by a taxable subsidiary, their income is taxed to the taxable subsidiary and does not flow through to the RIC, thereby helping the Company preserve its RIC status and resultant tax advantages. HCAP Equity Holdings LLC is not consolidated for income tax purposes and may generate income tax expense as a result of its ownership of the portfolio companies. This income tax expense is reflected in the Company’s Consolidated Statements of Operations.

HCAP Equity Holdings, LLC is subject to U.S. federal and state income taxes. HCAP Equity Holdings, LLC is not consolidated for income tax purposes and may generate income tax liabilities or assets from permanent and temporary differences in the recognition of items for financial reporting and income tax purposes at HCAP Equity Holdings, LLC. During the three and six months ended June 30, 2018 the Company recognized a $0.5 million provision for taxes on unrealized gains on investments which is presented on the Company's Consolidated Statement of Assets and Liabilities as of June 30, 2018 as a deferred tax liability. The Company did not incur a deferred tax liability for the three and six months ended June 30, 2017.
 
The Company’s tax returns are subject to examination by federal, state and local taxing authorities. Because many types of transactions are susceptible to varying interpretations under federal and state income tax laws and regulations, the amounts reported in the accompanying financial statements may be subject to change at a later date by the respective taxing authorities. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. Penalties or interest that may be assessed related to any income taxes would be classified as other operating expenses in the financial statements. Based on an analysis of the Company's tax position, there are no uncertain tax positions that met the recognition or measurement criteria and the Company has no amounts accrued for interest or penalties as of June 30, 2018. Neither HCC LLC nor the Company is currently undergoing any tax examinations. The Company does not anticipate any significant increase or decrease in unrecognized tax benefits for the next twelve months. The federal tax years 2014-2017 for HCC LLC and the Company remain subject to examination by the IRS. The state tax years 2012-2017 for HCC LLC and the Company remain subject to examination by the state taxing authorities.


Note 3. Borrowings 
 
The Company's debt obligations consist of the following:

 
As of
 
June 30, 2018
 
December 31, 2017
Revolving line of credit
$
23,000,000

 
$
16,721,853

Unsecured notes (net of deferred offering costs of $916,106 at 6/30/18 and $1,004,448 at 12/31/17)
27,833,894

 
27,745,552

Total debt obligations
$
50,833,894

 
$
44,467,405


The weighted average stated interest rate and weighted average maturity on all of the Company's debt obligations outstanding as of June 30, 2018 were 5.72% and 3.1 years, respectively. The weighted average average stated interest rate and weighted average maturity on all of the Company's debt obligations outstanding as of December 31, 2017 was 5.6% and 3.8 years, respectively.


Revolving Line of Credit

On October 29, 2013, the Company entered into a Loan and Security Agreement with CapitalSource Bank (now Pacific Western Bank), as agent and a lender, and each of the lenders from time to time party thereto, including City National Bank, to provide the Company with a $55.0 million senior secured revolving credit facility (the “Credit Facility”). The Credit Facility is secured by all of the Company’s assets, including the Company's equity interest in HCAP Equity Holdings, LLC and HCAP ICC, LLC, and has an accordion feature that allows the size of the facility to increase up to $85.0 million. The Credit Facility has a revolving period that expires on October 30, 2018. The maturity date under the Credit Facility is the earlier of (x) April 30, 2020,

26


or (y) the date that is six (6) months prior to the maturity of any of the Company's outstanding unsecured long-term indebtedness, which, based on the Company's outstanding 2022 Notes that mature on September 15, 2022, the maturity date under the Credit Facility would be April 30, 2020. HCAP Equity Holdings, LLC became a co-borrower under the Credit Facility in August 2016, and HCAP ICC, LLC, became a borrower under the Credit Facility in November 2017.

Advances under the Credit Facility bear interest at a rate per annum equal to the lesser of (i) the applicable LIBOR rate plus 3.25% (with a 0.50% LIBOR floor) and (ii) the maximum rate permitted under applicable law.
In addition, the Credit Facility requires payment of a fee for unused amounts during the revolving period, which fee varies depending on the obligations outstanding as follows: (i) 0.75% per annum, if the average daily principal balance of the obligations outstanding for the prior month are less than fifty percent of the maximum loan amount; and (ii) 0.50% per annum, if such obligations outstanding are equal to or greater than fifty percent of the maximum loan amount. In each case, the fee is calculated based on the difference between (i) the maximum loan amount under the Credit Facility and (ii) the average daily principal balance of the obligations outstanding during the prior calendar month.
The Credit Facility also contains customary terms and conditions, including, without limitation, affirmative and negative covenants, including, without limitation, information reporting requirements, a minimum tangible net worth, a minimum debt service coverage ratio, a minimum liquidity of 4% of the maximum loan amount, a maximum leverage ratio of 1.00 to 1.00, and maintenance of RIC and BDC status. In addition, the Credit Facility contains a covenant that limits the amount of the Company's unsecured longer-term indebtedness (as defined in the Credit Facility), which includes the Company's 2022 Notes, to 50% of the maximum borrowing amount under the Credit Facility. The Credit Facility also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, and the occurrence of a material adverse effect. In addition, the Credit Facility provides that, upon the occurrence and during the continuation of such an event of default, the Company’s administration agreement could be terminated and a backup administrator could be substituted by the agent.
Availability under the Credit Facility is determined by advance rates against eligible loans in the borrowing base up to a maximum aggregate availability of $55.0 million. Advance rates against individual investments range from 40% to 65% depending on the seniority of the investment in the borrowing base.
As of June 30, 2018 and December 31, 2017 the outstanding balance on the Credit Facility was $23.0 million and $16.7 million, respectively. As of June 30, 2018 and December 31, 2017, the Company was in compliance with its debt covenants.
Unsecured Notes
On January 27, 2015, the Company closed the public offering of $25.0 million in aggregate principal amount of its 7.00% Notes due 2020 (the "2020 Notes"). On February 4, 2015, the Company closed on an additional $2.5 million in aggregate principal amount of 2020 Notes to cover the over-allotment option exercised by the underwriters. In total, the Company issued 1,100,000 2020 Notes at a price of $25.00 per Note. The total net proceeds to the Company from the 2020 Notes, after deducting underwriting discounts of $0.8 million and offering expenses of $0.2 million, were $26.5 million. The 2020 Notes were redeemable in whole or in part at anytime at the Company's option after January 16, 2017 at a price equal to 100% of the outstanding principal amount of the 2020 Notes plus accrued and unpaid interest. The 2020 Notes were redeemed on September 23, 2017. As a result of the redemption, the Company recorded a loss on extinguishment of debt for the amount of the unamortized debt issuance costs in the amount equal to $0.6 million. The loss on extinguishment of debt was classified as a component of net investment income in the Company’s Consolidated Statement of Operations. The 2020 Notes were listed on the NASDAQ Global Market under the trading symbol “HCAPL.”

On August 24, 2017, the Company closed the public offering of $25.0 million in aggregate principal amount of its 6.125% Notes due 2022 (the "2022 Notes"). On September 1, 2017, the Company closed on an additional $3.75 million in aggregate principal amount of 2022 Notes to cover the over-allotment option exercised by the underwriters. In total, the Company issued 1,150,000 of the 2022 Notes at a price of $25.00 per Note. The total net proceeds to the Company from the 2022 Notes, after deducting offering costs of $1.2 million, were $27.7 million. As of June 30, 2018, the outstanding principal balance of the 2022 Notes was $28.8 million and the debt issuance costs balance was $0.9 million. As of December 31, 2017, the outstanding principal balance of the 2022 Notes was $28.8 million and the debt issuance costs balance was $1.0 million. The Company used the proceeds of the 2022 Notes to redeem the 2020 Notes in full on September 23, 2017.


27


The 2022 Notes mature on September 15, 2022 and bear interest at a rate of 6.125%. They are redeemable in whole or in part at anytime at the Company's option after September 15, 2019 at a price equal to 100% of the outstanding principal amount of the 2022 Notes plus accrued and unpaid interest. The 2022 Notes are unsecured obligations of the Company and rank pari passu with any future unsecured indebtedness; senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2022 Notes; effectively subordinated to all of the existing and future secured indebtedness of the Company, to the extent of the value of the assets securing such indebtedness, including borrowings under the Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any subsidiaries, financing vehicles, or similar facilities the Company may form in the future, with respect to claims on the assets of any such subsidiaries, financing vehicles, or similar facilities. Interest on the 2022 Notes is payable quarterly on March 15, June 15, September 15, and December 15 of each year. The 2022 Notes are listed on the NASDAQ Global Market under the trading symbol “HCAPZ.” The Company may from time to time repurchase 2022 Notes in accordance with the 1940 Act and the rules promulgated thereunder.

The indenture governing the 2022 Notes (the "2022 Notes Indenture”) contains certain covenants, including covenants (i) requiring the Company’s compliance with the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, whether or not the Company continues to be subject to such provisions of the 1940 Act; (ii) requiring the Company’s compliance, under certain circumstances, with a modified version of the requirements set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, whether or not the Company continues to be subject to such provisions of the 1940 Act, prohibiting the declaration of any cash dividend or distribution upon any class of the Company’s capital stock (except to the extent necessary for the Company to maintain its status as a RIC under Subchapter M of the Code), or purchasing any such capital stock, if the Company’s asset coverage, as defined in the 1940 Act, were below 200% (or 150% after May 4, 2019) at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution, or purchase; and (iii) requiring the Company to provide financial information to the holders of the 2022 Notes and the custodian if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2022 Notes Indenture. As of June 30, 2018, the Company was in compliance with its debt covenants.

As a BDC, we are generally required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of the Company's borrowings, of at least 200%. However, the Small Business Credit Availability Act, which was signed into law on March 23, 2018, has modified this requirement to permit a BDC to reduce the required minimum asset coverage ratio applicable to a BDC from 200% to 150%, if certain requirements are met. On May 4, 2018, the Company's board of directors unanimously approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the Investment Company Act of 1940, as amended by the Small Business Credit Availability Act. As a result, the asset coverage ratio applicable to the Company will be changed from 200% to 150% effective May 4, 2019.

As of June 30, 2018 and December 31, 2017, the Company's aggregate indebtedness, including outstanding borrowings under the Credit Facility and the aggregate principal amount outstanding on the 2022 Notes, was $51.8 million and $45.5 million, respectively, and as of June 30, 2018, and December 31, 2017, the Company's asset coverage, as defined in the 1940 Act, was 258% and 284%, respectively.


Note 4. Concentrations of Credit Risk 
 
The Company’s investment portfolio consists primarily of loans to privately-held small to mid-size companies. Many of these companies may experience variation in operating results. Many of these companies do business in regulated industries and could be affected by changes in government regulations.
 
The largest debt investments may vary from year to year as new debt investments are recorded and repaid. The Company’s five largest debt investments represented approximately 41.1% and 41.7% of total debt investments outstanding as of June 30, 2018 and December 31, 2017, respectively. Investment income, consisting of interest and fees, can fluctuate significantly upon repayment of large loans. Interest income from the five largest debt investments accounted for approximately 35.8% and 36.6% of total loan interest and fee income for the three months ended June 30, 2018 and June 30, 2017, respectively. Interest income from the five largest debt investments accounted for approximately 36.8% and 37.4% of total loan interest and fee income for the six months ended June 30, 2018 and June 30, 2017, respectively.
 
Note 5. Shareholders’ Equity
 

28


The following table summarizes the total shares issued and proceeds received for shares of the Company’s common stock net of any underwriting discounts and offering costs for the quarters ended June 30, 2018 and June 30, 2017.

Three months ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017

Shares
Amount

Shares
Amount

Shares
Amount

Shares
Amount
Shares issued

$



$



$


109,774

$
1,485,047

Shares repurchased
(14,678
)
(151,506
)




(79,575
)
(849,418
)



Dividends reinvested
8,695

85,276


7,980

100,677


17,179

174,802


14,899

193,330

Total
(5,983
)
$
(66,230
)

7,980

$
100,677


(62,396
)
$
(674,616
)

124,673

$
1,678,377


As of June 30, 2018 and 2017, the Company had no dilutive securities outstanding.

On January 27, 2017, the Company entered into an equity distribution agreement with JMP Securities LLC relating to up to 1,000,000 shares of the Company's common stock that the Company may offer and sell from time to time at prices related to the prevailing market prices or at negotiated prices. During the three months ended June 30, 2017, the Company did not sell any shares through this agreement. During the six months ended June 30, 2017, the Company sold 109,774 shares of stock under this agreement at an average gross price of $14.22 per share.

On September 29, 2017, the Company entered into a new equity distribution agreement with JMP Securities to sell up to 1,000,000 shares of the Company's common stock from time to time at prevailing market prices or at negotiated prices. During both the three and six months ended June 30, 2018, the Company did not sell any shares through this agreement.

On March 8, 2016, the Company's board of directors authorized a $3.0 million open market stock repurchase program. Pursuant to the program, the Company was authorized to repurchase up to $3.0 million in the aggregate of the Company's outstanding stock in the open market. The repurchase program expired on December 31, 2016. On June 13, 2017, the board of directors authorized another $3.0 million open market stock repurchase program. Pursuant to the program, the Company was authorized to repurchase up to $3.0 million in the aggregate of the outstanding stock in the open market. The timing, manner, price and amount of any share repurchases will be determined by management at its discretion, and no assurances can be given that any common stock, or any particular amount, will be purchased. Unless amended by the Company's board of directors, the repurchase program will expire on the earlier of June 30, 2018 or the repurchase of $3.0 million of the Company's outstanding shares of common stock. The repurchase program expired on June 30, 2018.
    
During the three months ended June 30, 2018, the Company repurchased 14,678 shares of its common stock at an average price of $10.32, and a total cost of $0.2 million. During the six months ended June 30, 2018, the Company repurchased 79,575 shares of its common stock at an average price of $10.67 per share, and a total cost of $0.8 million. During both the three and six months ended June 30, 2017, the Company did not repurchase any shares of its common stock.

The Company has adopted an “opt out” dividend reinvestment plan, or “DRIP,” for its common stockholders. As a result, if the Company makes cash distributions, then stockholders’ cash distributions will be automatically reinvested in additional shares of the Company's common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.


Note 6. Fair Value Measurements 
 
As described in Note 2, the Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.

Unsecured notes: The 2022 Notes are a Level 2 financial instrument with readily observable market inputs from other comparable unsecured notes in the marketplace. The unsecured notes trade under the ticker HCAPZ. As of June 30, 2018 and December 31, 2017 the fair value of the 2022 Notes were $29.2 million and $29.3 million, respectively, which was based on the closing price of the 2022 Notes on that day.


29


Off-balance sheet financial instruments: The fair value of unfunded commitments is estimated based on the fair value of the funded portion of the corresponding debt investment.
 
As of June 30, 2018 and December 31, 2017, unfunded commitments totaled $2.7 million and $3.0 million, respectively, and if funded, their estimated fair values on such dates were $2.7 million and $3.0 million, respectively.
 
There were no assets or liabilities measured at fair value on a nonrecurring basis as of June 30, 2018 or December 31, 2017.
 
The following table details the financial instruments that are carried at fair value and measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017, respectively:
 
 
Fair Values as of June 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Financial assets:

 

 

 

     Senior Secured
$

 
$

 
$
65,340,849

 
$
65,340,849

     Junior Secured

 
1,750,000

 
44,313,709

 
46,063,709

     Equity and Equity Related Securities

 

 
8,871,059

 
8,871,059

     Revenue Linked Security

 

 
317,000

 
317,000


$

 
$
1,750,000

 
$
118,842,617

 
$
120,592,617


 
Fair Values as of December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
     Senior Secured
$

 
$

 
$
59,010,761

 
$
59,010,761

     Junior Secured

 
3,719,609

 
44,379,140

 
48,098,749

     Equity and Equity Related Securities

 

 
7,958,168

 
7,958,168

     Revenue Linked Security

 

 
533,000

 
533,000

 
$

 
$
3,719,609

 
$
111,881,069

 
$
115,600,678

 
  

The following table provides quantitative information related to the significant unobservable inputs used to fair value the Company's Level 3 investments as of June 30, 2018 and December 31, 2017, respectively, and indicates the valuation techniques utilized by the Company to determine the fair value:

30


Type of Investment
 
Fair Value at June 30, 2018
 
Valuation Technique (1)
 
Significant Unobservable Input
 
Range
 
Weighted Average

 

 

 

 

 

Senior Secured
 
$
65,340,849

 
Bond Yield
 
Risk adjusted discount factor
 
8.5% - 30.8%
 
14.4%

 

 

 

 

 


 

 
Market
 
EBITDA multiple
 
2.2x - 9.1x
 
5.5x

 

 

 

 

 


 

 
Income
 
Weighted average cost of capital
 
10.5% - 30.8%
 
15.1%

 

 

 

 

 


 

 

 

 

 

Junior Secured
 
$
44,313,709

 
Bond Yield
 
Risk adjusted discount factor
 
11.3% - 18.5%
 
15.2%

 

 

 

 

 


 

 
Market
 
EBITDA multiple
 
0.8x - 9.8x
 
7.5x

 

 

 

 

 


 

 
Income
 
Weighted average cost of capital
 
8.0% - 17.3%
 
13.9%

 

 

 

 

 


 

 

 

 

 

Equity and Equity Related Securities
 
$
8,871,059

 
Market
 
EBITDA multiple
 
4.4x - 6.9x
 
5.6x

 

 

 

 

 


 

 
Income
 
Weighted average cost of capital
 
10.5% - 25.0%
 
14.8%

 

 

 

 

 

Revenue Linked Security
 
$
317,000

 
Income
 
Weighted average cost of capital
 
20.8%
 
20.8%

Type of Investment
 
Fair Value at December 31, 2017
 
Valuation Technique (1)
 
Significant Unobservable Input
 
Range
 
Weighted Average

 

 

 

 

 

Senior Secured
 
$
59,010,761

 
Bond Yield
 
Risk adjusted discount factor
 
6.0% - 30.2%
 
10.6%

 

 

 

 

 


 

 
Market
 
EBITDA multiple
 
2.2x - 6.7x
 
5.5x

 

 

 

 

 


 

 
Income
 
Weighted average cost of capital
 
10.0% - 23.1%
 
15.6%

 

 

 

 

 


 

 

 

 

 

Junior Secured
 
$
44,379,140

 
Bond Yield
 
Risk adjusted discount factor
 
4.1% - 17.5%
 
12.6%

 

 

 

 

 


 

 
Market
 
EBITDA multiple
 
0.9x - 10.9x
 
7.4x

 

 

 

 

 


 

 
Income
 
Weighted average cost of capital
 
9.0% - 17.8%
 
15.1%

 

 

 

 

 


 

 

 

 

 

Equity and Equity Related Securities
 
$
7,958,168

 
Market
 
EBITDA multiple
 
3.6x - 6.9x
 
5.5x

 

 

 

 

 


 

 
Income
 
Weighted average cost of capital
 
10.0% - 25.0%
 
14.6%

 

 

 

 

 

Revenue Linked Security
 
$
533,000

 
Income
 
Weighted average cost of capital
 
36.6%
 
36.6%


31


(1)
When estimating the fair value of its debt investments, the Company typically utilizes the bond yield technique. The significant unobservable inputs used in the fair value measurement under this technique are risk adjusted discount factors. However, the Company also takes into consideration the market technique and income technique in order to determine whether the fair value of the debt investment is within the estimated enterprise value of the portfolio company. The significant unobservable inputs used under these techniques are EBITDA multiples and weighted average cost of capital. Under the bond yield technique, significant increases (decreases) in the risk adjusted discount factors would result in a significantly lower (higher) fair value measurement.
 
When estimating the fair value of its equity investments, the Company utilizes the (i) market technique and (ii) income technique. The significant unobservable inputs used in the fair value measurement of the Company’s equity investments are EBITDA multiples and weighted average cost of capital (“WACC”). Significant increases (decreases) in EBITDA multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in WACC inputs in isolation would result in a significantly lower (higher) fair value measurement.


  The following tables provide a reconciliation of the beginning and ending balances for Level 3 assets. Transfers between investment type and level, if any, are recognized at fair value at the end of the quarter in which the transfers occur:



 
Six Months Ended June 30, 2018
 
Senior Secured
 
Junior Secured
 
Equity and Equity Related Securities
 
Revenue - Linked Security
 
Total
 
 
 
 
 
 
 
 
 
 
Fair value of portfolio, 1/1/2018
$
59,010,761

 
$
44,379,140

 
$
7,958,168

 
$
533,000

 
$
111,881,069

New/Add-on investments
12,812,500

 

 
434,766

 

 
13,247,266

Principal payments received
(6,643,744
)
 
(635,242
)
 
(187,086
)
 
(172,057
)
 
(7,638,129
)
Sales of investments

 

 
(313,878
)
 

 
(313,878
)
Loan origination and other fees received
(219,633
)
 
(26,250
)
 

 

 
(245,883
)
Payment-in-kind interest earned
362,803

 
325,326

 

 

 
688,129

Accretion of deferred loan origination fees/discounts
390,275

 
255,634

 

 

 
645,909

Transfers to (from) level 3

 

 

 

 

Transfer (to) from investment type
(2,000,000
)
 

 
2,000,000

 

 

Net realized losses on investments
(636,050
)
 

 
(93,245
)
 

 
(729,295
)
Change in unrealized appreciation (depreciation) on investments
2,263,937

 
15,101

 
(927,666
)
 
(43,943
)
 
1,307,429

Fair value of portfolio, end of period
$
65,340,849

 
$
44,313,709

 
$
8,871,059

 
$
317,000

 
$
118,842,617

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at June 30, 2018
$
(233,512
)
 
$
(117,627
)
 
$
(1,990,789
)
 
$
95,542

 
$
(2,246,386
)
 

32



Six Months Ended June 30, 2017

Senior Secured

Junior Secured

CLO Equity

Equity and Equity Related Securities

Revenue - Linked Security

Total












Fair value of portfolio, 1/1/2017
$
76,221,062


$
44,442,975


$
138,730


$
4,207,964


$
992,012


$
126,002,743

New/Add-on investments
16,904,484


11,452,429




2,643,640




31,000,553

Principal payments received
(20,420,246
)

(348,162
)



(420,627
)

(151,127
)

(21,340,162
)
Loan origination and other fees received
(514,250
)

(207,500
)



(4,096
)



(725,846
)
Payment-in-kind interest earned
503,221


428,175








931,396

Accretion of deferred loan origination fees/discounts
1,107,462


88,482








1,195,944

Transfers to (from) level 3











Transfer (to) from investment type
2,986,604


(2,986,604
)








Net realized gains (losses) on investments




(33,251
)

304,366




271,115

Change in unrealized appreciation (depreciation) on investments
(580,589
)

(4,607,391
)



(629,698
)

(145,928
)

(5,963,606
)
Fair value of portfolio, end of period
$
76,207,748


$
48,262,404


$
105,479


$
6,101,549


$
694,957


$
131,372,137

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at June 30, 2017
$
(500,760
)

$
(4,607,391
)

$


$
(629,698
)

$
(145,928
)

$
(5,883,777
)

There were no transfers between levels of the fair value hierarchy during the six months ended June 30, 2018. There were no transfers between levels of the fair value hierarchy during the six months ended June 30, 2017.

The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a portion of the Company’s assets and liabilities.
 
Note 7. Related Party Transactions 
 
The Company was founded in September 2011 by certain members of its investment adviser and JMP Group Inc. (now JMP Group LLC) ("JMP Group"), a full-service investment banking and asset management firm. JMP Group currently holds an equity interest in the Company and its investment adviser. JMP Group conducts its primary business activities through three wholly-owned subsidiaries: (i) Harvest Capital Strategies, LLC ("HCS"), an SEC registered investment adviser that focuses on long-short equity hedge funds, middle-market lending and private equity, (ii) JMP Securities LLC, a full-service investment bank that provides equity research, institutional brokerage and investment banking services to growth companies and their investors, and (iii) JMP Credit Advisors LLC ("JMP Credit Advisors"), which manages approximately $1.2 billion in credit assets of collateralized loan obligation and warehouse funds.

Management and Incentive Fees
 
In conjunction with the Company's initial public offering in May 2013, HCAP entered into an investment advisory and management agreement with HCAP Advisors LLC ("HCAP Advisors"), which is a majority owned subsidiary of JMP Group. Under the investment advisory and management agreement, the base management fee is calculated based on the Company's gross assets (which includes assets acquired with the use of leverage and excludes cash and cash equivalents) at an annual rate of 2.0% on gross assets up to and including $350 million, 1.75% on gross assets above $350 million and up to and including $1 billion, and 1.5% on gross assets above $1 billion. The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears based on the pre-incentive fee net investment income for the immediately preceding calendar quarter and is 20% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, the investment adviser receives no incentive fee until the net investment income equals the

33


hurdle rate of 2.0%, but then receives, as a “catch-up”, 100% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, the investment adviser, HCAP Advisors (as defined above), will receive 20% of the pre-incentive fee net investment income as if a hurdle rate did not apply. Since the hurdle rate is fixed, as interest rates rise, it is easier for the investment adviser to surpass the hurdle rate and receive an incentive fee based on net investment income.The second part is calculated and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and management agreement, as of the termination date) and equals 20% of the realized capital gains on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.
  
The incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the pre-incentive fee net investment income is payable except to the extent 20% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative income and capital gains incentive fees accrued and/or paid for the 11 preceding quarters. As a result, even in the event that the pre-incentive fee net investment income exceeds the hurdle rate, no incentive fee will be payable to the extent that the Company has generated cumulative net decreases in assets resulting from operations over the trailing 12 quarters due to unrealized or realized net losses on its investments. Due to this total return requirement, incentive fees of $0.5 million were not paid or accrued for the three months ended June 30, 2017.

The incentive fee for the three and six months ended June 30, 2018 was $187,293 and $187,293, respectively. The Company did not incur an incentive fee expense for the three months ended June 30, 2017. The incentive fee expense for the six months ended June 30, 2017 totaled $0.1 million.

The capital gains incentive fee is determined and paid annually with respect to cumulative realized capital gains (but not unrealized capital gains) to the extent such cumulative realized capital gains exceed cumulative realized and unrealized capital losses through the end of such fiscal year (less the aggregate amount of any previously paid capital gain incentive fee). The Company also records an expense accrual relating to the capital gains incentive fee payable by the Company to its investment adviser when (i) the cumulative realized and unrealized gains on its investments exceed all cumulative realized and unrealized capital losses on its investments and (ii) the capital gains incentive fee that would be payable exceeds the aggregate amount of any previously paid capital gain incentive fee given the fact that a capital gains incentive fee would be owed to the investment adviser if the Company were to liquidate its investment portfolio at such time. Any decrease in unrealized appreciation in subsequent periods will result in the reversal of some or all of such previously recorded expense accrual. The actual incentive fee payable to the Company's investment adviser related to capital gains is determined and payable in arrears at the end of each fiscal year and is only based on cumulative realized capital gains, including realized capital gains for such period, but not unrealized capital gains. The Company recorded a net change in unrealized depreciation of $0.4 million and a net change in unrealized depreciation of $4.6 million for the three months ended June 30, 2018 and June 30, 2017, respectively. The Company recorded a net change in unrealized appreciation of $1.3 million and a net change in unrealized depreciation of $4.5 million for the six months ended June 30, 2018 and 2017, respectively. The Company recorded a realized gain of $0.2 million for the three months ended June 30, 2018 and a realized gain of $0.3 million for the three months ended June 30, 2017. The Company recorded a net realized loss of $0.7 million for the six months ended June 30, 2018 and a realized gain of $0.3 million for the six months ended June 30, 2017.

Total base management fees and incentive fees expense was $0.8 million and $0.7 million for the three months ended June 30, 2018 and June 30, 2017, respectively. Total base management fees and incentive management fees expense was $1.4 million and $1.4 million for the six months ended June 30, 2018 and June 30, 2017, respectively. Accrued base management fees and incentive management fees were $0.8 million and $0.6 million as of June 30, 2018 and December 31, 2017, respectively.
   
Administrative Services Expense

In conjunction with the Company's initial public offering in May 2013, HCAP entered into an administration agreement with JMP Credit Advisors pursuant to which JMP Credit Advisors provided administrative services to HCAP and furnished us with office facilities, equipment, and clerical, bookkeeping, and record keeping services. Payments under the administration agreement were equal to an amount based upon the Company's allocable portion of the administrator's overhead in performing its obligations under the administration agreement, including rent and the Company's allocable portion of the cost of its chief financial officer and chief compliance officer and their respective staffs and administrative services provided to the Company by its chief executive officer and other officers. The Company negotiated a cap with JMP Credit Advisors to cap the amounts payable during the 2017 fiscal year at $1.4 million.


34


On April 17, 2018, in connection with the Company moving its administrative function from its Alpharetta, Georgia office to its New York, New York office, the board of directors approved entry into an administration agreement with HCAP Advisors, which was entered into and took effect as of April 29, 2018. Under the new agreement, HCAP Advisors will provide administrative services to HCAP and furnish the Company with office facilities, equipment, and clerical, bookkeeping, and record keeping services. Payments under the administration agreement are equal to an amount based upon the Company's allocable portion of the administrator's overhead in performing its obligations under the administration agreement, including rent and the Company's allocable portion of the cost of its executive officers and their respective staffs and administrative services provided to the Company by its executive officers. The Company negotiated a cap with HCAP Advisors to cap the amounts payable during the 2018 fiscal year to $1.4 million.

Total administrative services expense was $0.4 million and $0.3 million for the three months ended June 30, 2018 and June 30, 2017, respectively. Total administrative services expense was $0.7 million and $0.6 million for the six months ended June 30, 2018 and June 30, 2017, respectively. Accrued administrative services fees were $0.4 million and $0.4 million as of June 30, 2018 and December 31, 2017, respectively.

Expenses Reimbursed by HCAP Advisors

From time to time HCAP Advisors may voluntarily waive and/or reimburse expenses incurred by the Company. During the six months ended June 30, 2018, the Company incurred approximately $0.7 million in non-recurring professional fees for additional work provided by its legal counsel and external auditors in connection with the material weakness identified by management as disclosed in Item 9A of the Company's annual report on Form 10-K for the year ended December 31, 2017. HCAP Advisors has agreed to reimburse the Company approximately $0.4 million of those expenses. The Company is under no legal obligation to repay HCAP Advisors for any amount of the expenses HCAP Advisors agreed to reimburse the Company.

Other Related Party Transactions

On January 27, 2017, the Company entered into an equity distribution agreement with JMP Securities LLC relating to up to 1,000,000 shares of its common stock that the Company may offer and sell from time to time at prices related to the prevailing market prices or at negotiated prices. During the six months ended June 30, 2017, the Company sold 109,774 shares at an average price of $14.22 per share.

On September 29, 2017, the Company entered into a new equity distribution agreement with JMP Securities to sell up to 1,000,000 shares of its common stock from time to time at prevailing market prices or at negotiated prices. During the three and six months ended June 30, 2018, the Company did not sell any shares through this agreement.

Note 8. Commitments and Contingencies 
 
At June 30, 2018, the Company had a total of $2.7 million in unfunded commitments comprised entirely of unfunded revolving line of credit commitments on five of the Company’s debt investments.  At December 31, 2017, the Company had a total of $3.0 million in unfunded commitments comprised entirely of unfunded revolving line of credit commitments on five of the Company’s debt investments.  The following table summarizes the Company's unfunded commitments and extended fair value as of June 30, 2018 and December 31, 2017:

As of June 30, 2018

As of December 31, 2017

Unfunded commitment

Extended fair value of unfunded commitment

Unfunded commitment

Extended fair value of unfunded commitment
Surge Busy Bee Holdings, LLC
$
350,000


$
340,337


$
300,000


$
287,652

DirectMed Parts & Services, LLC
1,000,000


996,042


1,000,000


1,000,000

National Project Management & Controls, LLC
400,000


393,329





24/7 Software, Inc.
300,000


300,000


300,000


297,067

King Engineering Associates, Inc.




300,000


300,000

V-Tek, Inc.
663,903


663,903


1,113,903


1,113,903


$
2,713,903


$
2,693,611


$
3,013,903


$
2,998,622



35


Legal Proceedings

The Company is party to certain legal proceedings incidental to the normal course of business, including where third parties may try to seek to impose liability on us in connection with the activities of its portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with certainty, the Company does not expect these proceedings to have a material effect on the Company's financial condition or results of operations.
 
Note 9. Net Increase in Net Assets Resulting from Operations per Common Share
 
In accordance with the provision of ASC 260, “Earnings per Share,” basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. There were no potentially dilutive common shares issued as of June 30, 2018 or June 30, 2017 because there were no dilutive securities outstanding.
 
The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for each period:

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017
Net increase (decrease) in net assets resulting from operations
$
815,756


$
(1,859,839
)

$
2,885,751


$
473,714

Weighted average shares outstanding (basic and diluted)
6,390,521


6,407,362


6,413,869


6,378,953

Net increase (decrease) in net assets resulting from operations per share
$
0.13


$
(0.29
)

$
0.45


$
0.07



Note 10. Income Tax

To receive RIC tax treatment, the Company must, among other things, distribute annually at least 90% of its net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year which generated such taxable income. The Company may, in the future, make actual distributions to its stockholders of its net capital gains. The Company can offer no assurance that the Company will achieve results that will permit the payment of any cash distributions and, if the Company issues senior securities, the Company may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of its borrowings. The Company incurred $0.1 million in excise tax for calendar year 2017.

The Company has a taxable subsidiary, HCAP Equity Holdings LLC, which is designed to hold certain portfolio investments in an effort to comply with source-income type requirements contained in the RIC tax provisions of the Code. This taxable subsidiary is consolidated for U.S. GAAP financial reporting purposes and the portfolio investments held by it are included in the Company’s consolidated financial statements, and recorded at fair value. This taxable subsidiary is not consolidated with the Company for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities as a result of its ownership of certain portfolio investments. Any income generated by this taxable subsidiary would be taxed at normal corporate tax rates based on its taxable income. The Company recorded a current income tax expense of $32,833 and $32,833 for the three and six months ended June 30, 2018, respectively. The Company did not incur a current income tax expense for both the three and six months ended June 30, 2017. During the three and six months ended June 30, 2018 the Company recognized a $0.5 million provision for taxes on unrealized gains on investments, respectively, which is presented on the Company's Consolidated Statement of Assets and Liabilities as of June 30, 2018 as a deferred tax liability. The Company did not incur a deferred tax liability for both the three and six months ended June 30, 2017.
 




36


Note 11. Financial Highlights
 
The following is a schedule of financial highlights for the six months ended ended June 30, 2018, and June 30, 2017, respectively:


Six Months Ended June 30,

2018

2017
Per share data:



Net asset value at beginning of period
$
12.66


$
13.86

     Net investment income (1)
0.44


0.75

     Realized gains (losses) on investments (1)
(0.11
)

0.04

     Net change in unrealized appreciation (depreciation) on investments
0.21


(0.72
)
     Provision for taxes on unrealized gains on investments
(0.09
)


Net increase in net assets from operations
0.45


0.07

     Distributions (2)
(0.59
)

(0.68
)
Total distributions
$
(0.59
)

(0.68
)
     Effect of shares repurchased

(5)

Net asset value at end of period
$
12.52


$
13.25

Net assets at end of period
80,078,048


84,965,180

Shares outstanding at end of period
6,395,192


6,412,169

Weighted average shares outstanding (basic and diluted)
6,413,869


6,378,953

Per share closing price at end of period
10.56


$
13.11





Ratios and Supplemental data:



Total return based on change in NAV (not annualized), gross of incentive fees (3)
4.99
%

0.74
%
Total return based on change in NAV (not annualized), net of incentive fees (3)
4.74
%

0.67
%
Total investment return (not annualized) (4)
2.05
%

0.41
%
Average Net Assets
$
81,051,805


$
87,003,698

Ratio of expenses to average net assets, excluding expenses reimbursed by HCAP Advisors, before incentive fees (annualized)
12.92
%

11.37
%
Ratio of expenses to average net assets, excluding expenses reimbursed by HCAP Advisors, after incentive fees (annualized)
13.39
%

11.50
%
Ratio of expenses to average net assets, including expenses reimbursed by HCAP Advisors, before incentive fees (annualized)
11.81
%

11.37
%
Ratio of expenses to average net assets, including expenses reimbursed by HCAP Advisors, after incentive fees (annualized)
12.28
%

11.50
%
Ratio of net investment income to average net assets
6.96
%

10.92
%





37


(1)
Based on weighted average number of common shares outstanding for the period.
(2)
Distributions exceeded net investment income for the six months ended June 30, 2018 in the amount of $947,473 and net investment income exceeded distributions for the six months ended June 30, 2017 in the amount of and $443,157. See Dividends and Distributions Policy in Note 2.
(3)
This measure of total investment return measures the changes in net asset value over the period indicated, taking into account dividends as reinvested. The return is calculated by taking the difference between the net asset value per share at the end of the period (plus assumed reinvestment of dividends and distributions at prices obtained under the Company's dividend reinvestment plan) and the net asset value per share at the beginning of the period, and dividing that difference by the net asset value per share at the beginning of the period. This return primarily differs from the total investment return in that it does not take into account changes in the market price of the Company's stock. Computation of this ratio for an individual shareholder may vary due to timing of share activity.
(4)
This measure of total investment return measures the changes in market value over the period indicated, taking into account dividends as reinvested. The return is calculated based on an assumed purchase of stock at the market price on the first day of the period (plus assumed reinvestment of dividends and distributions at prices obtained under the Company’s dividend reinvestment plan) and an assumed sale at the market price on the last day of the period. The difference between the sale and purchases is then divided by the purchase prices. The total investment return does not reflect any sales load that may be paid by investors. Computation of this ratio for an individual shareholder may vary due to timing of share activity.
(5)
Rounds to less than $0.01 per share.
 

Note 12. Subsequent Events 

The Company has evaluated events and transactions occurring subsequent to June 30, 2018 for items that should potentially be recognized or disclosed in these consolidated financial statements.

On July 31, 2018, the Company received a full repayment at par value, plus accrued and unpaid interest, plus a 1.0% prepayment fee on its junior secured term loan in Sitel Worldwide Corporation.

On August 1, 2018, the Company declared monthly distributions of $0.095 per share payable on each August 30, 2018, September 27, 2018, and October 25, 2018.

On August 2, 2018, the Company received a full repayment at par value, plus accrued but unpaid interest for its senior secured term loan in AMS Flight Leasing, LLC.

On August 2, 2018, the Company received a full repayment at par value, plus accrued but unpaid interest for its senior secured term loan in IAG Engine Center, LLC.

On August 2, 2018, the Company received its final distribution on its revenue linked security investment. In connection with the final distribution, the Company entered into an agreement with Flight Lease XX, Inc. which provides the Company a future payout of proceeds from the sale of an asset to the extent sales proceeds exceed $0.6 million, whereby the Company would receive 50% of any excess over $0.6 million with a $0.3 million cap.

On August 7, 2018, the Company made a $2.5 million junior secured debt investment in Water-Land Manufacturing & Supply, LLC. The term loan carries an interest rate of 3 month LIBOR + 10.50% with a 2.25% LIBOR floor.

  






 


38



Schedule 12-14

Harvest Capital Credit Corporation
Consolidated Schedule of Investments in and Advances to Affiliates (Unaudited)
Six Months Ended June 30, 2018
Portfolio Company
Type of Investment (4) (5) (10) (17)
 
Net Realized Loss
Net Change in Unrealized Appreciation (Depreciation)
Amount of Dividends or Interest Credited to Income (1)
December 31, 2017 Value
Gross Additions (2)
Gross Reductions (3)
June 30, 2018 Value
More Than 25% Owned
 
 
 
 
 
 
 
 
 
Flight Lease XI, LLC
Common Equity Interest (400 Units)
(7) (11)
$
156,347

$
(127,421
)
$
92,791

$
327,421

$

$
(327,421
)
$

 
 
 
 
 
 
 
 
 
 
Flight Lease VII, LLC
Common Equity Interest (1,800 Units)
(11)

27,424

38,144

829,849

27,424


857,273

 
 
 
 
 
 
 
 
 
 
Infinite Care, LLC
Senior Secured Term Loan, due 2/2019 (13.38%; 1M LIBOR + 6.00% with a 0.42% LIBOR floor plus 6.00% PIK)
(8) (13)

1,819,933


3,492,000

1,819,933

(2,261,933
)
3,050,000

 
 
 
 
 
 
 
 
 
 
 
Revolving Line of Credit, due 2/2019 (13.38%; 1M LIBOR + 12.00% with a 0.42% LIBOR floor
 

(9,000
)

2,065,000

1,537,000

(9,000
)
3,593,000

 
 
 
 
 
 
 
 
 
 
 
Membership Interest (100% membership interests)
(8)

(2,000,000
)


2,000,000

(2,000,000
)

 
 
 
 
 
 
 
 
 
 
Total More Than 25% Owned Portfolio Companies
 
 
$
156,347

$
(289,064
)
$
130,935

$
6,714,270

$
5,384,357

$
(4,598,354
)
$
7,500,273

 
 
 
 
 
 
 
 
 
 
5% and Greater Owned, But Not Greater Than 25%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Coastal Screen and Rail, LLC
Senior Secured Term Loan, due 01/2023 (12.00%; 10.50% Cash/1.50% PIK)
(16)
$

$
466

$
349,643

$

$
6,414,000

$
(100,000
)
$
6,314,000

 
 
 
 
 
 
 
 
 
 
 
Revolving Line of Credit, due 07/2022 (10.01%; 3M LIBOR + 8.00%)
 


22,840


500,000


500,000


39



Portfolio Company
Type of Investment (4) (5) (10) (17)
 
Net Realized Loss
Net Change in Unrealized Appreciation (Depreciation)
Amount of Dividends or Interest Credited to Income (1)
December 31, 2017 Value
Gross Additions (2)
Gross Reductions (3)
June 30, 2018 Value
 
 
 
 
 
 
 
 
 
 
 
Preferred Equity Interest (6.21% fully diluted Common Equity)
 

144,000



294,000


294,000

 
 
 
 
 
 
 
 
 
 
Flight Lease XII, LLC
Common Equity Interest (1,000 Units)
(7) (11)

126,268

95,238

616,502

126,268

(110,243
)
632,527

 
 
 
 
 
 
 
 
 
 
24/7 Software, Inc. (formerly Instant Sales Solutions, Inc.)
Senior Secured Term Loan, due 7/2022 (13.25%)
(6) (14)

24,733

192,888

2,859,272

28,228

(112,500
)
2,775,000

 
 
 
 
 
 
 
 
 
 
 
Revolving Line of Credit, due 7/2021 (10.5%; 3M LIBOR + 9.00% with a 1.00% LIBOR floor
 







 
 
 
 
 
 
 
 
 
 
 
Common Equity Interest (950 Units)
(7)

(59,000
)

1,300,000


(59,000
)
1,241,000

 
 
 
 
 
 
 
 
 
 
Northeast Metal Works LLC
Senior Secured Term Loan, due 12/2019 (16.50%; 10.50% Cash plus 5.00% PIK)
(9) (15)

5,813

850,692

9,652,000

322,000


9,974,000

 
 
 
 
 
 
 
 
 
 
 
Revolving Line of Credit, due 12/2019 (13.50%)
 

5,000

100,053

1,482,000

155,000


1,637,000

 
 
 
 
 
 
 
 
 
 
 
Preferred Equity Interest (2,500 Class A Units)
(7)
398

327,480


1,481,000

372,480

(4,480
)
1,849,000

 
 
 
 
 
 
 
 
 
 
V-Tek, Inc.
Senior Secured Term Loan, due 3/2022 (12.5%; 3M LIBOR + 11.00%)
(12)

(11,441
)
277,682

3,500,000

11,442

(55,192
)
3,456,250

 
 
 
 
 
 
 
 
 
 
 
Senior Secured Revolver, due 3/2021 (8.00%; M LIBOR + 6.50%)
(6)


62,983

886,097

450,000


1,336,097

 
 
 
 
 
 
 
 
 
 

40



Portfolio Company
Type of Investment (4) (5) (10) (17)
 
Net Realized Loss
Net Change in Unrealized Appreciation (Depreciation)
Amount of Dividends or Interest Credited to Income (1)
December 31, 2017 Value
Gross Additions (2)
Gross Reductions (3)
June 30, 2018 Value
 
Common Equity Interest (90 Units)
(7)

(29,000
)

351,000


(29,000
)
322,000

 
 
 
 
 
 
 
 
 
 
WorkWell, LLC
Senior Secured Term Loan, due 10/2020 (13.00%; 3M LIBOR + 11.50% with 0.50% LIBOR floor)
(13)
(636,050
)
654,993


3,856,000

654,993

(4,510,993
)

 
 
 
 
 
 
 
 
 
 
 
Preferred Equity Interest (250,000 Units)
 
(249,990
)
250,000



250,000

(250,000
)

 
 
 
 
 
 
 
 
 
 
 
Common Equity Interest (250,000 Units)
 







 
 
 
 
 
 
 
 
 
 
Total 5% And Greater Owned, But Not Greater Than 25%
 
 
$
(885,642
)
$
1,439,312

$
1,952,019

$
25,983,871

$
9,578,411

$
(5,231,408
)
$
30,330,874





41


(1)
Represents the total amount of interest and fees credited to income for the portion of the year an investment was included in Affiliate categories.
(2)
Gross additions include increase in the cost basis of investments resulting from new portfolio investment and accrued PIK interest.
(3)
Gross reductions include decreases in the total cost basis of investments resulting from principal or PIK repayments or sales.
(4)
Debt investments are income producing investments unless an investment is on non-accrual. Common equity, residual values and warrants are non-income producing.
(5)
For each loan, the Company has provided the interest rate in effect on the date presented, as well as the contractual components of that interest rate. In the case of the Company's variable or floating rate loans, the interest rate in effect takes into account the applicable LIBOR rate in effect on the date presented or, if higher, the applicable LIBOR floor.
(6)
Credit facility has an unfunded commitments in addition to the amounts shown in the Consolidated Schedule of Investments. See Note 8 in the Notes to Consolidated Financial Statements for further discussion on portion of commitment unfunded at December 31, 2017.
(7)
The investment is held by HCAP Equity Holdings, LLC, the Company's taxable blocker subsidiary.
(8)
Infinite Care LLC ("ICC") is in default under the terms of its credit agreement. In October 2017, the Company exercised its rights under a stock pledge of the borrower. The Company formed a wholly owned subsidiary, HCAP ICC, LLC, to exercise its proxy right under the pledge agreement and take control of the board of ICC. The loan was placed on non-accrual status in Q4 2017. In January 2018, HCAP took control of the borrower's equity after accelerating the debt and auctioning the borrower’s equity in a public sale. The Company bid a portion of its outstanding debt to gain control of the company. Upon completion of this process the Company converted $2.0 million of its debt investment in the borrower to membership interests.
(9)
The interest rate on the revolver is 11% prior to following the interim advance term; 13.5% from the first amendment effective date to February 28, 2018; 14.25% from March 1, 2018 through May 31, 2018 and 15% from June 1, 2018 until expiration of the interim advance. The interest rate on the term loan is 11% prior to and following the interim advance term; 10.5% cash pay plus 6% PIK from the first amendment date trough February 28, 2018; 10.5% cash pay plus 6.25% PIK from March 1, 2018 to May 31, 2018; 10.5% cash pay plus 6.5% PIK from 6/1/18 until expiration of the interim advance.
(10)
The Company's non-qualifying assets, on a fair value basis, comprise approximately 1% of the Company's total assets
(11)
Industry: Aerospace & Defense
(12)
Industry: Capital Equipment
(13)
Industry: Healthcare & Pharmaceuticals
(14)
Industry: High Tech Industries
(15)
Industry: Metals & Mining
(16)
Industry: Construction & Building
(17)
All of the Company's portfolio investments are generally subject to restrictions on resale as "restricted securities," unless otherwise noted.

As of June 30, 2018 affiliate investments consisted of the following:

Type
 
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Senior Secured Debt
 
$
33,195,193

 
$
32,635,347

 
27.1
%
 
40.7
%
Equity
 
9,092,550

 
5,195,800

 
4.3
%
 
6.5
%
Total
 
$
42,287,743

 
$
37,831,147

 
31.4
%
 
47.2
%

The rate type of affiliate debt investments at fair value as of June 30, 2018 was as follows:

Type
 
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Fixed Rate
 
$
20,782,516

 
$
20,700,000

 
17.2
%
 
25.8
%
Floating Rate
 
12,412,677

 
11,935,347

 
9.9
%
 
14.9
%
Total
 
$
33,195,193

 
$
32,635,347

 
27.1
%
 
40.7
%

The industry composition of affiliate investments at fair value as of June 30, 2018 was as follows:


42


Type
 
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Aerospace & Defense
 
$
1,247,030

 
$
1,489,800

 
1.2
%
 
1.9
%
Capital Equipment
 
4,860,262

 
5,114,347

 
4.2
%
 
6.4
%
Construction & Building
 
6,963,534

 
7,108,000

 
5.9
%
 
8.9
%
Healthcare & Pharmaceuticals
 
12,202,415

 
6,643,000

 
5.5
%
 
8.3
%
High Tech Industries
 
3,700,267

 
4,016,000

 
3.3
%
 
5
%
Metals & Mining
 
13,314,235

 
13,460,000

 
11.3
%
 
16.7
%
Total
 
$
42,287,743

 
$
37,831,147

 
31.4
%
 
47.2
%

The geographic concentrations at fair value as of June 30, 2018 was as follows:

Type

Amortized Cost

Fair Value

% of Fair Value

% of Net Assets
West

$
17,062,677


$
11,757,347


9.8
%

14.7
%
Northeast

13,314,235


13,460,000


11.2
%

16.7
%
South

11,910,831


12,613,800


10.5
%

15.8
%
Total

$
42,287,743


$
37,831,147


31.5
%

47.2
%



43


Harvest Capital Credit Corporation 
Consolidated Schedule of Investments in and Advances to Affiliates  
Year Ended December 31, 2017
 
Portfolio Company
Type of Investment (4) (5) (10)

Net Realized Loss
Net Change in Unrealized Appreciation (Depreciation)
Amount of Dividends or Interest Credited to Income (1)
December 31, 2016 Value
Gross Additions (2)
Gross Reductions (3)
December 31, 2017 Value
More Than 25% Owned









Flight Engine Leasing III LLC
Senior Secured Term Loan, due 12/2018 (13.00%; the greater of 13.00% or LIBOR + 7.50%)

$

$

$
119,821

$
1,807,299

$
17,701

$
(1,825,000
)
$











Flight Lease XI, LLC
Common Equity Interest (400 Units)
(7) (11)

127,421

149,154

200,000

127,421


327,421











Flight Lease VII, LLC
Common Equity Interest (1,800 Units)
(11)

(15,393
)
155,859

923,947


(94,098
)
829,849











Infinite Care, LLC
Senior Secured Term Loan, due 2/2019 (13.38%; 1M LIBOR + 6.00% with a 0.42% LIBOR floor plus 6.00% PIK)
(8) (13)

(2,366,893
)
653,687

5,916,570

318,209

(2,742,779
)
3,492,000












Revolving Line of Credit, due 2/2019 (13.38%; 1M LIBOR + 12.00% with a 0.42% LIBOR floor



70,875

200,000

1,865,000


2,065,000












Class A Common Equity Units (3,000,000 Units)


(1,266,500
)

1,266,500


(1,266,500
)











Total More Than 25% Owned Portfolio Companies


$

$
(3,521,365
)
$
1,149,396

$
10,314,316

$
2,328,331

$
(5,928,377
)
$
6,714,270











5% and Greater Owned, But Not Greater Than 25%









 
 
 
 
 
 
 
 
 
 
Flight Lease XII, LLC
Common Equity Interest (1,000 Units)
(7) (11)
$

$
116,502

$

$

$
616,502

$

$
616,502











24/7 Software, Inc. (formerly Instant Sales Solutions, Inc.)
Senior Secured Term Loan, due 7/2022 (13.25%)
(6) (14)


198,005


2,971,772

(112,500
)
2,859,272












Revolving Line of Credit, due 7/2021 (10.5%; 3M LIBOR + 9.00% with a 1.00% LIBOR floor



















44


Portfolio Company
Type of Investment (4) (5) (10)

Net Realized Loss
Net Change in Unrealized Appreciation (Depreciation)
Amount of Dividends or Interest Credited to Income (1)
December 31, 2016 Value
Gross Additions (2)
Gross Reductions (3)
December 31, 2017 Value

Common Equity Interest (950 Units)
(7)

350,000



1,300,000


1,300,000











Northeast Metal Works LLC
Senior Secured Term Loan, due 12/2019 (16.50%; 10.50% Cash plus 5.00% PIK)
(9) (15)

(237,269
)
1,760,994

11,678,261

530,621

(2,556,882
)
9,652,000












Revolving Line of Credit, due 12/2019 (13.50%)


(18,000
)
215,961

1,189,239

1,295,751

(1,002,990
)
1,482,000












Preferred Equity Interest (2,500 Class A Units)
(7)

(119,000
)


1,600,000

(119,000
)
1,481,000











Peekay Acquisition, LLC
Senior Secured Term Loan, due 2/2016 (17.00% PIK)

(1,995,421
)
1,957,463


37,959

1,957,462

(1,995,421
)












Common Equity Interest (Peekay Boutiques, Inc.) (35,000 Units)

(105,000
)
105,000



105,000

(105,000
)











V-Tek, Inc.
Senior Secured Term Loan, due 3/2022 (12.5%; 3M LIBOR + 11.00%)
(12)

93,526

343,208


3,500,000


3,500,000












Senior Secured Revolver, due 3/2021 (8.00%; M LIBOR + 6.50%)
(6)


54,543


1,036,097

(150,000
)
886,097












Common Equity Interest (90 Units)
(7)

201,000



351,000


351,000











WorkWell, LLC
Senior Secured Term Loan, due 10/2020 (13.00%; 3M LIBOR + 11.50% with 0.50% LIBOR floor)
(13)

(677,146
)
727,153

4,546,000

135,584

(825,584
)
3,856,000












Preferred Equity Interest (250,000 Units)


(170,000
)

170,000


(170,000
)












Common Equity Interest (250,000 Units)


(523
)

523


(523
)











Total 5% And Greater Owned, But Not Greater Than 25%


$
(2,100,421
)
$
1,601,553

$
3,299,864

$
17,621,982

$
15,399,789

$
(7,037,900
)
$
25,983,871



45


(1)
Represents the total amount of interest and fees credited to income for the portion of the year an investment was included in Affiliate categories.
(2)
Gross additions include increase in the cost basis of investments resulting from new portfolio investment and accrued PIK interest.
(3)
Gross reductions include decreases in the total cost basis of investments resulting from principal or PIK repayments or sales.
(4)
Debt investments and the CLO subordinated notes are income producing investments unless an investment is on non-accrual. Common equity, residual values and warrants are non-income producing.
(5)
For each loan, the Company has provided the interest rate in effect on the date presented, as well as the contractual components of that interest rate. In the case of the Company's variable or floating rate loans, the interest rate in effect takes into account the applicable LIBOR rate in effect on the date presented or, if higher, the applicable LIBOR floor.
(6)
Credit facility has an unfunded commitments in addition to the amounts shown in the Consolidated Schedule of Investments. See Note 8 in the Notes to Consolidated Financial Statements for further discussion on portion of commitment unfunded at December 31, 2017.
(7)
The investment is held by HCAP Equity Holdings, LLC, the Company's taxable blocker subsidiary.
(8)
Infinite Care LLC ("ICC") is in default under the terms of its credit agreement. In October 2017, the Company exercised its rights under a stock pledge of the borrower. The Company formed a wholly owned subsidiary, HCAP ICC, LLC, to exercise its proxy right under the pledge agreement and take control of the board of ICC. The loan was placed on non-accrual status in Q4 2017. In January 2018, HCAP took control of the borrower's equity after accelerating the debt and auctioning the borrower’s equity in a public sale. The Company bid a portion of its outstanding debt to gain control of the company. Upon completion of this process the Company converted $2.0 million of its debt investment in the borrower to membership interests.
(9)
The interest rate on the revolver is 11% prior to following the interim advance term; 13.5% from the first amendment effective date to February 28, 2018; 14.25% from March 1, 2018 through May 31, 2018 and 15% from June 1, 2018 until expiration of the interim advance. The interest rate on the term loan is 11% prior to and following the interim advance term; 10.5% cash pay plus 6% PIK from the first amendment date trough February 28, 2018; 10.5% cash pay plus 6.25% PIK from March 1, 2018 to May 31, 2018; 10.5% cash play plus 6.5% PIK from 6/1/18 until expiration of the interim advance.
(10)
The Company's non-qualifying assets, on a fair value basis, comprise approximately 2% of the Company's total assets
(11)
Industry: Aerospace & Defense
(12)
Industry: Capital Equipment
(13)
Industry: Healthcare & Pharmaceuticals
(14)
Industry: High Tech Industries
(15)
Industry: Metals & Mining

As of December 31, 2017, affiliate investments consisted of the following:
Type
 
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Senior Secured Debt
 
$
30,842,712

 
$
27,792,369

 
24.0
%
 
34.0
%
Equity
 
7,507,273

 
4,905,772

 
4.2
%
 
6.0
%
Total
 
$
38,349,985

 
$
32,698,141

 
28.2
%
 
40.0
%

The rate type of affiliate debt investments at fair value as of December 31, 2017 was as follows:
Type
 
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Fixed Rate
 
$
14,111,800

 
$
13,993,272

 
12.1
%
 
17.1
%
Floating Rate
 
16,730,912

 
13,799,097

 
11.9
%
 
16.9
%
Total
 
$
30,842,712

 
$
27,792,369

 
24.0
%
 
34.0
%

The industry composition of affiliate investments at fair value as of December 31, 2017 was as follows:
Type
 
Amortized Cost
 
Fair Value
 
% of Fair Value
 
% of Net Assets
Aerospace & Defense
 
$
1,557,273

 
$
1,773,772

 
1.5
%
 
2.2
%
Capital Equipment
 
4,442,571

 
4,737,097

 
4.1
%
 
5.8
%
Healthcare & Pharmaceuticals
 
15,688,341

 
9,413,000

 
8.1
%
 
11.5
%
High Tech Industries
 
3,809,272

 
4,159,272

 
3.6
%
 
5.1
%
Metals & Mining
 
12,852,528

 
12,615,000

 
10.9
%
 
15.4
%
Total
 
$
38,349,985

 
$
32,698,141

 
28.2
%
 
40.0
%

46


The geographic concentrations at fair value as of December 31, 2017 was as follows:

Type

Amortized Cost

Fair Value

% of Fair Value

% of Net Assets
West

$
20,130,912


$
14,150,097


12.2
%

17.3
%
Northeast

12,852,528


12,615,000


10.9
%

15.4
%
South

5,366,545


5,933,044


5.1
%

7.3
%
Total

$
38,349,985


$
32,698,141


28.2
%

40.0
%



47



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations 

Forward-Looking Statements
 
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

our future operating results, including the performance of our existing investments;
the introduction, withdrawal, success and timing of business initiatives and strategies;
changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;
the relative and absolute investment performance and operations of our investment adviser;
the impact of increased competition;
the impact of investments we intend to make and future acquisitions and divestitures;
our ability to turn potential investment opportunities into transactions and thereafter into completed and successful investments;
the unfavorable resolution of any future legal proceedings;
our business prospects and the prospects of our portfolio companies;
our regulatory structure and tax status;
the adequacy of our cash resources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies;
the impact of interest rate volatility on our results, particularly because we use leverage as part of our investment strategy;
the ability of our portfolio companies to achieve their objective;
the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our investment adviser;
our contractual arrangements and relationships with third parties;
our ability to access capital and any future financings by us;
the ability of our investment adviser to attract and retain highly talented professionals; and
the impact of changes to tax legislation and, generally, our tax position.
 
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.
 
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
 

48


The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this quarterly report on Form 10-Q.
 
Overview
 
We were formed as a Delaware corporation on November 14, 2012. We completed our initial public offering on May 7, 2013, raising $51.0 million in gross proceeds. On May 17, 2013, we raised another $6.5 million in gross proceeds from the closing of the initial public offering underwriters’ overallotment option. Immediately prior to the initial public offering, we acquired Harvest Capital Credit LLC in a merger whereby the outstanding limited liability company membership interests were converted into shares of our common stock and we assumed and succeeded to all of Harvest Capital Credit LLC’s assets and liabilities, including its entire portfolio of investments. We issued 2,246,699 shares of our common stock for all of Harvest Capital Credit LLC’s 2,266,974 outstanding membership interests in connection with the merger. Harvest Capital Credit LLC is considered to be our predecessor for accounting purposes and, as such, its financial statements are our historical financial statements.
  
Our investment objective is to generate both current income and capital appreciation primarily by making direct investments in the form of subordinated debt, senior debt, and to a lesser extent, minority equity investments. We plan to accomplish our investment objective by targeting investments in small and mid-sized U.S. private companies with annual revenues of less than $100 million and EBITDA (earnings before interest, taxes, depreciation and amortization) of less than $15 million. We believe that transactions involving companies of this size offer higher yielding investment opportunities, lower leverage levels and other terms more favorable than transactions involving larger companies.
 
We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company 1940 Act, as amended (the "1940 Act"). As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States.
 
We have also elected to be treated for U.S. federal income tax purposes as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code (the "Code"), and we intend to receive RIC tax treatment annually. To receive RIC tax treatment, we must, among other things, meet certain source-of-income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income we distribute to our stockholders, provided we distribute at least 90% of our ordinary income and short term capital gains.
 
Portfolio
 
Portfolio Composition
 
As of June 30, 2018, we had $120.6 million (at fair value) invested in 29 portfolio companies. As of June 30, 2018, our portfolio was comprised of approximately 54.2% senior secured debt, 38.1% junior secured debt and 7.7% equity and equity-like investments (including our revenue linked security investment).

As of December 31, 2017, we had $115.6 million (at fair value) invested in 31 portfolio companies. As of December 31, 2017, our portfolio was comprised of approximately 51.0% senior secured debt, 41.6% junior secured debt and 7.4% equity and equity-like investments (including our revenue linked security investment).
  
We originate and invest primarily in privately-held middle-market companies (typically those with less than $15.0 million of EBITDA) through first lien and second lien debt, oftentimes with a corresponding equity investment component and less frequently with a corresponding royalty security. The composition of our investments as of June 30, 2018 and December 31, 2017 was as follows:
 

49


 
June 30, 2018
 
December 31, 2017
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
 
 
 
 
 
 
 
Senior Secured
$
65,574,361

 
$
65,340,848

 
$
61,508,211

 
$
59,010,761

Junior Secured
46,157,034

 
46,063,710

 
48,217,674

 
48,098,749

Equity
10,861,847

 
8,871,059

 
9,021,290

 
7,958,168

Revenue Linked Security
221,458

 
317,000

 
393,515

 
533,000

Total Investments
$
122,814,700

 
$
120,592,617

 
$
119,140,690

 
$
115,600,678


At June 30, 2018, our average portfolio company debt investment at amortized cost and fair value was approximately $4.9 million and $4.8 million, respectively, and our largest portfolio company debt investment by amortized cost and fair value was approximately $12.3 million and $12.5 million, respectively. At December 31, 2017, our average portfolio company debt investment at amortized cost and fair value was approximately $4.6 million and $4.5 million, respectively, and our largest portfolio company debt investment by amortized cost and fair value was approximately $12.0 million and $12.0 million, respectively.
 
At June 30, 2018, 49.6% of our debt investments bore interest based on floating rates (some of which were subject to interest rate floors), such as LIBOR, and 50.4% of our debt investments bore interest at fixed rates. At December 31, 2017, 54.6% of our income producing investments bore interest based on floating rates (some of which were subject to interest rate floors), such as LIBOR, and 45.4% bore interest at fixed rates.

The weighted average effective yield of our debt and other income-producing investments, as of June 30, 2018 and December 31, 2017, was approximately 14.5% and 15.3%, respectively. The weighted average effective yield on the entire portfolio, as of June 30, 2018 and December 31, 2017, was 12.7% and 13.7%, respectively.

The weighted average effective yield on debt and other income-producing investments is computed using the effective interest rates for our debt and other income-producing investments, including cash and PIK interest as well as the accretion of deferred fees. The individual investment yields are then weighted by the respective fair values of the investments (as of the date presented) in calculating the weighted average effective yield as a percentage of our debt and other income-producing investments. Infinite Care, LLC was excluded from the calculation as of June 30, 2018 because it was on non-accrual status as of that date. Infinite Care, LLC was excluded from the calculation as of December 31, 2017 because it was on non-accrual status as of that date. Other equity components of the investment portfolio were also excluded from these calculations either because they do not have stated interest rates or are non-income producing.

The weighted average annualized yield on total investments takes the same yields but weights them to determine the weighted average effective yield as a percentage of the Company's total investments. The weighted average annualized yield on the Company's investments for a given period will generally be higher than what investors in our common stock would realize in a return over the same period because the weighted average annualized yield does not reflect the Company's expenses or any sales load that may be paid by investors.

For investments that have a PIK interest component, PIK interest is accrued each period but generally not collected until the debt investment is sold or paid off. A roll forward of PIK interest accruals and collections for the three and six months ended June 30, 2018 and June 30, 2017 is summarized in the table below.

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017
PIK, beginning of period
$
4,099,981


$
3,063,182


$
3,852,636


$
2,582,253

Accrual
324,211


440,565


688,130


931,396

Payments
(21,269
)



(21,269
)

(9,902
)
Write-off




(116,574
)


  PIK, end of period
$
4,402,923


$
3,503,747


$
4,402,923


$
3,503,747


Investment Activity
 

50


During the three months ended June 30, 2018, we closed $4.7 million of debt investment commitments and $0.3 million of equity investments in one new and three existing portfolio companies. During the three months ended June 30, 2017, we closed $15.4 million of debt investment commitments in three new and three existing portfolio companies and a $1.6 million equity investment in an existing portfolio company. During the six months ended June 30, 2018, we closed $12.5 million of debt investment commitments and $0.4 million of equity investments in two new and four existing portfolio companies. During the six months ended June 30, 2017, we closed $30.5 million of debt investment commitments and $1.0 million of equity investments in eight new and six existing portfolio companies.

During the three months ended June 30, 2018, we exited $0.1 million of debt investment commitments and $0.2 million of equity investments in two portfolio companies. During the three months ended June 30, 2017, we exited $4.2 million of debt investment commitments in two portfolio companies. During the six months ended June 30, 2018, we exited $6.9 million of debt investment commitments and $0.2 million of equity investments in four portfolio companies. During the six months ended June 30, 2017, we exited $8.4 million of debt investment commitments in four portfolio companies.
 
Our level of investment activity can vary substantially from period to period depending on many factors, including the level of merger and acquisition activity in our target market, the general economic environment and the competitive environment for the types of investments we make.
 
Asset Quality
 
In addition to various risk management and monitoring tools, we use an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment rating:
 
Investment Rating 1 is used for investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment.
Investment Rating 2 is used for investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans are initially rated 2.
Investment Rating 3 is used for investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with financial covenants.
Investment Rating 4 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in workout. Investments with a rating of 4 are those for which some loss of return but no loss of principal is expected.
Investment Rating 5 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in workout. Investments with a rating of 5 are those for which some loss of return and principal is expected.

      The following table shows the investment rankings of our debt investments at fair value (in millions):
 
 
As of June 30, 2018
 
As of December 31, 2017
Investment Rating
 
Fair Value (in millions)
 
% of Total
Portfolio
 
Number of
Portfolio Companies
 
Fair Value (in millions)
 
% of Total
Portfolio
 
Number of
Portfolio Companies
 
 
 
 
 
 
 
 
 
 
 
 
 
1
 
$
23.8

 
21.3
%
 
8

 
$
25.6

 
23.9
%
 
8

2
 
57.2

 
51.4
%
 
10

 
48.9

 
45.6
%
 
10

3
 
20.7

 
18.6
%
 
3

 
20.3

 
19.0
%
 
3

4
 
3.0

 
2.7
%
 
1

 
6.7

 
6.3
%
 
2

5
 
6.6

 
6.0
%
 
1

 
5.6

 
5.2
%
 
1

 
 
$
111.3

 
100.0
%
 
23

 
$
107.1

 
100.0
%
 
24

     

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Loans and Debt Securities on Non-Accrual Status
 
We do not accrue interest income on loans and debt securities if we doubt our ability to collect such interest. Generally, when an interest payment default occurs on a loan in the portfolio, when interest has not been paid for greater than 90 days, or when management otherwise believes that the issuer of the loan will not be able to service the loan and other obligations, we will place the loan on non-accrual status and will cease accruing interest income on that loan until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed collectible. However, we remain contractually entitled to this interest, and any collections actually received on these non-accrual loans may be recognized as interest income on a cash basis or applied to the principal depending upon management's judgment regarding collectability. As of June 30, 2018, we had one loan (our senior secured debt investment in Infinite Care, LLC) on non-accrual status, which comprised 6.4% of our debt portfolio at cost. As of December 31, 2017, we had one loan on non-accrual status (our senior secured debt investment in Infinite Care, LLC), which comprised 7.2% of our debt portfolio at cost. The failure by a borrower or borrowers to pay interest and repay principal could have a material adverse effect on our financial condition and results of operation.

Results of Operations
 
An important measure of our financial performance is the net increase or decrease in net assets resulting from operations, which includes net investment income, net realized gain or loss and net change in unrealized appreciation or depreciation. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating expenses, including interest on borrowed funds. Net realized gain or loss on investments is generally the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net change in unrealized appreciation or depreciation on investments is the net unrealized change in the fair value of our investment portfolio.
 
Comparison of the Three and Six Months Ended June 30, 2018 and June 30, 2017
 
Revenues
 
We generate revenue primarily in the form of interest income on debt investments and, to a lesser extent, capital gains on equity investments we make in portfolio companies. Our debt investments typically have terms of five to seven years and bear interest at a fixed or floating rate. Interest on our debt investments is payable at least quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in kind, or PIK. Any outstanding principal amount of our debt investments and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment, commitment, loan origination, structuring or due diligence fees and consulting fees, which may be non-recurring in nature.

Investment income for the three months ended June 30, 2018 totaled $4.1 million, compared to investment income of $5.1 million for the three months ended June 30, 2017. Investment income for the three months ended June 30, 2018 comprised of $3.2 million in cash interest, $0.3 million in PIK interest, $0.5 million in fees earned on the investment portfolio and $22,557 of other income. Investment income for the three months ended June 30, 2017 was comprised of $3.9 million in cash interest, $0.4 million in PIK interest, $0.7 million in fees earned on the investment portfolio, and $23,568 of other income. The decrease in investment income is primarily attributable to a lower portfolio balance compared to June 30, 2017 as well as a decrease in the effective yield on the investment portfolio compared to June 30, 2017.

Investment income for the six months ended June 30, 2018 totaled $7.8 million, compared to investment income of $9.8 million for the six months ended June 30, 2017. Investment income for the six months ended June 30, 2018 was comprised of $6.4 million in cash interest, $0.7 million in PIK interest, $0.7 million in fees earned on the investment portfolio, and $77,473 in other income. Investment income for the six months ended June 30, 2017 was comprised of $7.6 million in cash interest, $0.9 million in PIK interest, $1.2 million in fees earned on the investment portfolio, and $36,532 of other income. The decrease in investment income in the six months ended June 30, 2018 is primarily attributable a lower portfolio balance compared to June 30, 2017 as well as a decrease in the effective yield on the investment portfolio compared to June 30, 2017.
 
Expenses
 

52


Our primary operating expenses include the payment of fees to HCAP Advisors LLC ("HCAP Advisors") under the investment advisory and management agreement, our allocable portion of overhead expenses under the administration agreement with our administrator, and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, which include:

Interest expense and unused line fees;
the cost of calculating our net asset value, including the cost of any third-party valuation services;
the cost of effecting sales and repurchases of shares of our common stock and other securities;
fees payable to third parties relating to making investments, including out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments;
transfer agent and custodial fees;
out-of-pocket fees and expenses associated with marketing efforts;
federal and state registration fees and any stock exchange listing fees;
U.S. federal, state and local taxes;
independent directors’ fees and expenses;
brokerage commissions;
fidelity bond, directors’ and officers’ liability insurance and other insurance premiums;
direct costs, such as printing, mailing, long distance telephone and staff;
fees and expenses associated with independent audits and outside legal costs; and
costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws; and
    
Operating expenses totaled $2.4 million for the three months ended June 30, 2018, compared to $2.6 million for the three months ended June 30, 2017. Operating expenses in both periods consisted of interest expense, management fees, administrator expenses, interest and related fees, professional fees, valuation fees, insurance expenses, directors' fees and other general and administrative expenses. The decrease in operating expenses was primarily due to a $0.2 million decrease in interest expense along with lower professional fees compared to the three months ended June 30, 2017.

Operating expenses totaled $4.9 million for the six months ended June 30, 2018, compared to $4.9 million for the six months ended June 30, 2017. Operating expenses in both periods consisted of interest expense, management fees, administrator expenses, interest and related fees, professional fees, valuation fees, insurance expenses, directors' fees and other general and administrative expenses. The decrease in operating expenses was primarily due to lower interest expense and management fees incurred during the six months ended June 30, 2018 compared to the six months ended June 30, 2017, partially offset by higher professional fees incurred during the six months ended June 30, 2018. We incurred higher professional fees and general and administrative costs during the six months ended June 30, 2018 relating to the material weakness identified by management at December 31, 2017.

From time to time HCAP Advisors may voluntarily waive and/or reimburse expenses incurred by the Company. During the six months ended June 30, 2018 the Company incurred approximately $0.7 million in non-recurring professional fees for additional work provided by its legal counsel and external auditors in connection with the material weakness identified by management as disclosed in Item 9A of the Company's annual report on Form 10-K for the year ended December 31, 2017. HCAP Advisors has agreed to reimburse the Company approximately $0.4 million of those expenses. The Company is under no legal obligation to repay HCAP Advisors for any amount of the expenses HCAP Advisors is reimbursing the Company. Net of expenses reimbursed by HCAP Advisors, the Company incurred approximately $0.3 million in one-time expenses related to additional professional fees incurred relating to the material weakness that the Company does not expect to recur in the future.

Interest expense decreased slightly due to a lower average outstanding debt balance during the three and six months ended June 30, 2018, compared to June 30, 2017.


53


Administrative services expense was $0.4 million for the three months ended June 30, 2018, compared to $0.3 million for the three months ended June 30, 2017. Administrative services expense was $0.7 million for the six months ended June 30, 2018, compared to $0.6 million for the six months ended June 30, 2017. The increase is attributable to the increase in the 2018 annual cap entered into by the Company such that the maximum amount that would be payable by the Company for 2018 is $1.4 million.

Base management fees was $0.6 million for the for three months ended June 30, 2018, compared to $0.7 million for the three months ended June 30, 2017. Base management fees was $1.2 million for the six months ended June 30, 2018, compared to $1.4 million for the six months ended June 30, 2017. The decrease in base management fees is attributable to a smaller average amount of gross investments outstanding during the three and six months ended June 30, 2018, as compared to the three and six months ended June 30, 2017.

We incurred a $0.2 million incentive management fee for both the three and six months ended June 30, 2018. We did not incur an incentive management fee for the three months ended June 30, 2017 and incurred a $0.1 million incentive management fee for the six months ended June 30, 2017. The increase in incentive management fees for the three months ended June 30, 2018 and decrease in incentive management fees for the six months ended June 30, 2017 is primarily a result of the pre-incentive fee net investment income exceeding the hurdle rate. We only incur an income incentive management fee if our pre-incentive fee net investment income return exceeds a 2.0% (8.0% annualized) hurdle rate. Our pre-incentive fee net investment income return met this hurdle for the three months ended June 30, 2018. In addition, the income incentive fees paid or owed to HCAP Advisors are subject to a three year total return requirement, such that no incentive fee, in respect of pre-incentive fee net investment income, will be payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the calendar quarter for which such fees are being calculated and the 11 preceding quarters exceeds the cumulative incentive fees paid or accrued over the 11 preceding quarters. Due to this total return requirement, incentive fees of $0.5 million were not paid or accrued for the three months ended June 30, 2017.
    
Net Investment Income
 
Net investment income was $1.6 million for the three months ended June 30, 2018, compared to $2.5 million for the three months ended June 30, 2017. Net investment income per share was $0.25 for the three months ended June 30, 2018, compared to $0.39 for the three months ended June 30, 2017.

Net investment income was $2.8 million for the six months ended June 30, 2018, compared to 4.8 million for the six months ended June 30, 2017. For the six months ended June 30, 2018, net investment income per share was $0.44 compared to $0.75 for the six months ended June 30, 2017.
 
Net Realized Gains and Losses
 
Realized gains and losses on investments are calculated using the specific identification method. We measure realized gains or losses on equity investments as the difference between the net proceeds from the sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. We measure realized gains or losses on debt investments as the difference between the net proceeds from the repayment or sale and the contractual amount owed to us on the investment, without regard to unrealized appreciation or depreciation previously recognized or unamortized deferred fees. The acceleration of unamortized deferred fees is recognized as interest income and the collection of prepayment and other fees is recognized as other income.
 
We recognized $0.2 million in net realized gains on our investments for the three months ended June 30, 2018, compared to $0.3 million in net realized gains on our investments for the three months ended June 30, 2017. We recognized $0.7 million in net realized losses on our investments for the six months ended June 30, 2018, compared to $0.3 million of net realized gains on our investments in the six months ended June 30, 2017. A summary of realized gains and losses for the three and six months ended June 30, 2018 and 2017 is as follows:


54



Three Months Ended June 30,

2018

2017
Flight Lease XI, LLC (Common Equity Interest)
$
156,347


$

Mercury Network, LLC (Common Equity Units)


300,270

Shinnecock CLO 2006-1, Ltd (CLO Subordinated Notes)


(33,251
)

$
156,347


$
267,019


A summary of realized gains and losses for the six months ended June 30, 2018 and 2017 is as follows:


Six Months Ended June 30,

2018

2017
Flight Lease XI, LLC (Common Equity Interest)
$
156,347


$

Mercury Network, LLC (Common Equity Units)


300,270

Northeast Metal Works LLC (Preferred Equity Interest)
398



Rostra Tool Company (Common Equity Warrants)


4,096

Shinnecock CLO 2006-1, Ltd (CLO Subordinated Notes)


(33,251
)
WorkWell, LLC
(886,040
)



$
(729,295
)

$
271,115

 
Net Change in Unrealized Appreciation (Depreciation) of Investments
 
Net change in unrealized appreciation (depreciation) primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized.

Net change in unrealized appreciation (depreciation) on investments totaled $(0.4) million for the three months ended June 30, 2018 and $(4.6) million for the three months ended June 30, 2017.

Net change in unrealized appreciation (depreciation) on investments totaled $1.3 million for the six months ended June 30, 2018 and $(4.5) million for the six months ended June 30, 2017.

In addition, we recognized a provision for deferred tax liabilities relating to investments owned by our taxable blocker of 0.5 million for the three months ended June 30, 2018. We recognized a provision for deferred tax liabilities relating to investments owned by our taxable blocker of 0.5 million for the six months ended June 30, 2018. We did not recognize any provision for deferred tax liabilities relating to investments owned by our taxable blocker for both the three and six months ended June 30, 2017.
  
Net Increase in Net Assets Resulting from Operations
 
The net increase (decrease) in net assets resulting from operations was $0.8 million for the three months ended June 30, 2018, compared to $(1.9) million for the three months ended June 30, 2017. The $2.7 million increase in net assets resulting from operations for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, was primarily attributable to a $3.6 million positive change in net unrealized depreciation (which is net of $0.5 million of deferred taxes), decrease in interest expense of $0.2 million and a decrease in professional fees of $0.1 million, partially offset by a $1.0 million decrease in investment income, $0.2 million increase in management and administrative fees and a $0.1 million decrease in net realized gains.

The net increase in net assets resulting from operations was $2.9 million for the six months ended June 30, 2018, compared to $0.5 million for the six months ended June 30, 2017. The $2.4 million increase in net assets resulting from operations for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, was primarily attributable to an increase in unrealized appreciation on investments during the six months ended June 30, 2018, offset by a decrease in net investment income.

Financial Condition, Liquidity and Capital Resources
 
Cash Flows from Operating and Financing Activities
 

55


Our operating activities used cash of $1.5 million for the six months ended June 30, 2018 and used cash of $2.6 million for the six months ended June 30, 2017, primarily in connection with investment exits and fundings of new investments.

Our financing activities provided cash of $1.8 million for the six months ended June 30, 2018 and provided cash of $4.8 million for the six months ended June 30, 2017. Our financing activity proceeds and uses for both periods were primarily in connection with dividends paid to shareholders and net borrowings on our Credit Facility. During the six months ended June 30, 2017, we also had financing activity proceeds from the issuance of common shares.
   
Our liquidity and capital resources are derived from our Credit Facility, proceeds received from common stock offerings, proceeds received from the public offering of our 2022 Notes in the third quarter of 2017, and cash flows from operations, including investment sales and repayments. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as the payment of dividends to the holders of our common stock. We used, and expect to continue to use, these capital resources as well as proceeds from public and private offerings of securities to finance our investment activities.
 
Although we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our board of directors makes certain determinations in connection therewith. For portions of 2018 and 2017, our common stock traded at a discount to our then-current net asset value. If our common stock continues to trade at a discount to net asset value, we may be limited in our ability to raise equity capital unless we obtain the approval described above, which we have not obtained.
 
In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
 
Also, as a BDC, we are generally required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. However, the Small Business Credit Availability Act, which was signed into law, on March 23, 2018, has modified this requirement to permit a BDC to reduce the required minimum asset coverage ratio applicable to a BDC from 200% to 150%, if certain requirements are met. See Risk Factors - Recent Legislation May Allow Us to Incur Additional Leverage below. This requirement limits the amount that we may borrow. As of June 30, 2018, our aggregate indebtedness, including outstanding borrowings under our Credit Facility and the aggregate principal amount outstanding on our 2022 Notes, was $51.8 million, and our asset coverage, as defined in the 1940 Act, was 258%. As of December 31, 2017, our aggregate indebtedness, including outstanding borrowings under our Credit Facility and the aggregate principal amount outstanding on our 2022 Notes, was $45.5 million, and our asset coverage, as defined in the 1940 Act, was 284%. The amount of leverage that we employ as a BDC will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing.

As of June 30, 2018 and December 31, 2017, we had cash and restricted cash of $11.7 million and $11.5 million, respectively.
 
Credit Facility
 
On October 29, 2013, the Company entered into a Loan and Security Agreement with CapitalSource Bank (now Pacific Western Bank), as agent and a lender, and each of the lenders from time to time party thereto, including City National Bank, to provide the Company with a $55.0 million senior secured revolving credit facility (the “Credit Facility”). The Credit Facility is secured by all of the Company’s assets, including the Company's equity interest in HCAP Equity Holdings, LLC, and has an accordion feature that allows the size of the facility to increase up to $85.0 million. The Credit Facility has a revolving period that expires on October 30, 2018. The maturity date under the Credit Facility is the earlier of (x) April 30, 2020, or (y) the date that is six (6) months prior to the maturity of any of our outstanding unsecured long-term indebtedness, which based on our outstanding

56


2022 Notes that mature on September 15, 2022, the maturity date under the Credit Facility would be April 30, 2020. HCAP Equity Holdings, LLC became a co-borrower under the Credit Facility in August 2016, and HCAP ICC, LLC, became a borrower under the Credit Facility in November 2017.

Advances under the Credit Facility bear interest at a rate per annum equal to the lesser of (i) the applicable LIBOR rate plus 3.25% (with a 0.50% LIBOR floor) and (ii) the maximum rate permitted under applicable law.
In addition, the Credit Facility requires payment of a fee for unused amounts during the revolving period, which fee varies depending on the obligations outstanding as follows: (i) 0.75% per annum, if the average daily principal balance of the obligations outstanding for the prior month are less than fifty percent of the maximum loan amount; and (ii) 0.50% per annum, if such obligations outstanding are equal to or greater than fifty percent of the maximum loan amount. In each case, the fee is calculated based on the difference between (i) the maximum loan amount under the Credit Facility and (ii) the average daily principal balance of the obligations outstanding during the prior calendar month.
The Credit Facility also contains customary terms and conditions, including, without limitation, affirmative and negative covenants, including, without limitation, information reporting requirements, a minimum tangible net worth, a minimum debt service coverage ratio, a minimum liquidity of 4% of the maximum loan amount, a maximum leverage ratio of 1.00 to 1.00, and maintenance of RIC and BDC status. In addition, the Credit Facility contains a covenant that limits the amount of our unsecured longer-term indebtedness (as defined in the Credit Facility), which includes our 2022 Notes, to 50% of the maximum borrowing amount under the Credit Facility. The Credit Facility also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, and the occurrence of a material adverse effect. In addition, the Credit Facility provides that, upon the occurrence and during the continuation of such an event of default, the Company’s administration agreement could be terminated and a backup administrator could be substituted by the agent. 
As of June 30, 2018 and December 31, 2017, the outstanding balance on the $55.0 million Credit Facility was $23.0 million and $16.7 million, respectively.

Notes Offering

On January 27, 2015, the Company closed the public offering of $25.0 million in aggregate principal amount of its 7.00% Notes due 2020 (the "2020 Notes"). On February 4, 2015, the Company closed on an additional $2.5 million in aggregate principal amount of 2020 Notes to cover the over-allotment option exercised by the underwriters. In total, the Company issued 1,100,000 2020 Notes at a price of $25.00 per Note. The total net proceeds to the Company from the 2020 Notes, after deducting underwriting discounts of $0.8 million and offering expenses of $0.2 million, were $26.5 million. The 2020 Notes were redeemable in whole or in part at anytime at the Company's option after January 16, 2017 at a price equal to 100% of the outstanding principal amount of the 2020 Notes plus accrued and unpaid interest. The 2020 Notes were redeemed on September 23, 2017. The 2020 Notes were listed on the NASDAQ Global Market under the trading symbol “HCAPL.”

On August 24, 2017, the Company closed the public offering of $25.0 million in aggregate principal amount of its 6.125% Notes due 2022 (the "2022 Notes"). On September 1, 2017, the Company closed on an additional $3.75 million in aggregate principal amount of 2022 Notes to cover the over-allotment option exercised by the underwriters. In total, the Company issued 1,150,000 of the 2022 Notes at a price of $25.00 per Note. The total net proceeds to the Company from the 2022 Notes, after deducting underwriting discounts of $0.9 million and offering expenses of $0.2 million, were $27.7 million. As of June 30, 2018, the outstanding principal balance of the 2022 Notes was $28.8 million and the debt issuance costs balance was $0.9 million. As of December 31, 2017, the outstanding principal balance of the 2022 Notes was $28.8 million and the debt issuance costs balance was $1.0 million. The Company used the proceeds of the 2022 Notes to redeem the 2020 Notes in full on September 23, 2017.

The 2022 Notes mature on September 15, 2022 and bear interest at a rate of 6.125%. They are redeemable in whole or in part at anytime at the Company's option after September 15, 2019 at a price equal to 100% of the outstanding principal amount of the 2022 Notes plus accrued and unpaid interest. The 2022 Notes are unsecured obligations of the Company and rank pari passu with any future unsecured indebtedness; senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2022 Notes; effectively subordinated to all of the existing and future secured indebtedness of the Company, to the extent of the value of the assets securing such indebtedness, including borrowings under the Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any subsidiaries, financing vehicles, or similar facilities the Company may form in the future, with respect to claims on the assets of any such subsidiaries, financing vehicles, or similar facilities. Interest on the 2022 Notes is payable quarterly on March 15, June 15, September 15, and December 15 of each year.

57


The 2022 Notes are listed on the NASDAQ Global Market under the trading symbol “HCAPZ.” The Company may from time to time repurchase 2022 Notes in accordance with the 1940 Act and the rules promulgated thereunder.

The indenture governing the 2022 Notes (the "2022 Notes Indenture”) contains certain covenants, including covenants (i) requiring the Company’s compliance with the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, whether or not the Company continues to be subject to such provisions of the 1940 Act; (ii) requiring the Company’s compliance, under certain circumstances, with a modified version of the requirements set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, whether or not the Company continues to be subject to such provisions of the 1940 Act, prohibiting the declaration of any cash dividend or distribution upon any class of the Company’s capital stock (except to the extent necessary for the Company to maintain its treatment as a RIC under Subchapter M of the Code), or purchasing any such capital stock, if the Company’s asset coverage, as defined in the 1940 Act, were below 200% (or 150% after May 4, 2019) at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution, or purchase; and (iii) requiring the Company to provide financial information to the holders of the 2022 Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2022 Notes Indenture.

At the Market Stock Offering

 On January 27, 2017, we entered into an equity distribution agreement with JMP Securities LLC relating to up to 1,000,000 shares of our common stock that we may offer and sell from time to time at prices related to the prevailing market prices or at negotiated prices. During the six months ended June 30, 2018, we did not sell any shares under this agreement. During the six months ended June 30, 2017, we sold 109,774 shares at an average price of $14.22 per share.

Off-Balance Sheet Arrangements
 
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of June 30, 2018, our only off-balance sheet arrangements consisted of $2.7 million of unfunded revolving line of credit commitments to five of our portfolio companies.  As of December 31, 2017, our only off-balance sheet arrangements consisted of $3.0 million of unfunded revolving line of credit commitments to five of our portfolio companies.
 
Regulated Investment Company Status and Dividends
 
We have elected to be treated as a RIC under Subchapter M of the Code. If we receive RIC tax treatment, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.
 
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
 
To receive RIC tax treatment, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. As a RIC, the Company will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which the Company paid no U.S. federal income tax.
 
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility and our 2022 Notes Indenture may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain

58


circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.
  
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
 
In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.
 

Recent Developments

On July 31, 2018, the Company received a full repayment at par value, plus accrued and unpaid interest, plus a 1.0% prepayment fee on its junior secured term loan in Sitel Worldwide Corporation.

On August 1, 2018, the Company declared monthly distributions of $0.095 per share payable on each August 30, 2018, September 27, 2018, and October 25, 2018.

On August 2, 2018, the Company received a full repayment at par value, plus accrued but unpaid interest for its senior secured term loan in AMS Flight Leasing, LLC.

On August 2, 2018, the Company received a full repayment at par value, plus accrued but unpaid interest for its senior secured term loan in IAG Engine Center, LLC.

On August 2, 2018, the Company received its final distribution on its revenue linked security investment. In connection with the final distribution, the Company entered into an agreement with Flight Lease XX, Inc. which provides the Company a future payout of proceeds from the sale of an asset to the extent sales proceeds exceed $0.6 million, whereby the Company would receive 50% of any excess over $0.6 million with a $0.3 million cap.

On August 7, 2018, the Company made a $2.5 million junior secured debt investment in Water-Land Manufacturing & Supply, LLC. The term loan carries an interest rate of 3 month LIBOR + 10.50% with a 2.25% LIBOR floor.

Item 3.          Quantitative and Qualitative Disclosures About Market Risk
 
We are subject to financial market risks, including changes in interest rates. As of June 30, 2018, sixteen of our debt investments, or 49.6%, of the fair value of our portfolio bore interest at floating rates. Nine of these floating rate loans have interest rate floors. The weighted average LIBOR floor for all of our floating rate loans at June 30, 2018 was 0.98%. Four of these floating rate loans have terms that are the greater of a fixed rate of LIBOR plus a set rate. The fixed component of the interest rate exceeds the floating rate component, which effectively converts these loans to fixed rate loans. As of June 30, 2017, twenty-three loans, or 70.1%, of the fair value of the portfolio bore interest at floating rates. Fourteen of these floating rate loans have interest rate floors. The weighted average LIBOR floor for all of our floating rate loans at June 30, 2017 was 0.59%. Four of these floating rate loans have terms that are the greater of a fixed rate or LIBOR plus a set rate. The fixed rate component of the interest rate exceeds the floating rate component, which effectively converts these loans to fixed rate loans. Assuming that the Consolidated Statement of Assets and Liabilities as of June 30, 2018 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical one percent increase in LIBOR would increase our net investment income by approximately $0.4 million. Alternatively, a hypothetical one percent decrease in LIBOR would decrease our net investment income by approximately $0.4 million. Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business

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developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. We have not engaged in any hedging activities to date. Changes in interest rates will affect our cost of funding. Our interest expense will be affected by changes in the published LIBOR rate in connection with our Credit Facility; however, the interest rate on our outstanding 2022 Notes is fixed for the life of such debt.  
  
Item 4.          Controls and Procedures.
 
(a) Evaluation of Disclosure Controls and Procedures
 
We have established disclosure controls and procedures to provide reasonable assurance that information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported, within the time periods specified in the rules and forms.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of June 30, 2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2018, due to the material weakness in internal control over financial reporting, as described in Management's Report on Internal Control Over Financial Reporting in Item 9A of our annual report on Form 10-K for the year ended December 31, 2017.

(b) Remediation Progress for Material Weakness in Internal Control over Financial Reporting

We have improved our controls to remediate the material weakness that existed as of December 31, 2017. As discussed in our annual report on Form 10-K for the year ended December 31, 2017, to address the material weakness, in the first quarter of 2018 the Company adopted a corrective action plan, added new and/or enhanced existing controls surrounding the valuation process and oversight of the financial reporting processes of our portfolio companies, including enhanced monitoring by our financial staff of the financial reports of our portfolio companies. In the first quarter of 2018, we hired James Fowler as our Chief Investment Officer, who is responsible for the daily management of our portfolio company investments after they are made and is specifically charged with ensuring that financial and related information from the portfolio companies is routed directly from the portfolio companies to the Company's financial staff. In addition, in the second quarter of 2018 we engaged a third party service provider to help us assess and improve our internal controls for complying with Section 404 of the Sarbanes-Oxley Act in a future period.

These actions have been fully integrated into the Company's internal controls as of June 30, 2018. Until the remediation steps are fully tested, the material weakness as described above will continue to exist.

Management does not expect that the Company's disclosure controls and procedures or the Company's internal control over financial reporting (even if fully remediated) will prevent or detect all errors and all fraud. A control system, regardless of how well conceived and operated, can provide only reasonable, not absolute, assurance that the objective of the control system will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

(c) Changes in Internal Control Over Financial Reporting
 
As described above in section (b), there was a change in the Company's internal control over financial reporting that occurred during the six months ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 
PART II - OTHER INFORMATION
 
Item  1.          Legal Proceedings

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We are a party to certain legal proceedings incidental to the normal course of our business, including where third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we do not expect these these proceedings will have a material effect on our financial condition or results of operations.

Item 1A.
Risk Factors

In addition to the information provided under the heading "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2017, the Company identified the following risk and uncertainty that could materially affect our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially affect our business, financial condition and/or operating results.

Recent legislation may allow us to incur additional leverage

The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, the Small Business Credit Availability Act (the "SBCAA"), which was signed into law on March 23, 2018, has modified the 1940 Act to allow a BDC to increase the maximum amount of leverage it may incur from an asset coverage ratio of 200% to an asset coverage ratio of 150%, if certain requirements are met. Under the SBCAA, we are allowed to reduce the asset coverage ratio applicable to us to 150%, and thereby increase our leverage capacity, if shareholders representing at least a majority of the votes cast, when quorum is met, approve a proposal to do so. If we receive shareholder approval, we would be allowed to reduce the asset coverage ratio applicable to us on the first day after such approval.  Alternatively, the SBCAA allows the majority of our independent directors to approve the reduction in the asset coverage ratio applicable to us to 150%, in which case the approval would become effective after one year. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to reduce the asset coverage ratio applicable to us to 150%, our leverage capacity and usage, and risks related to leverage.

On May 4, 2018, the Company’s board of directors unanimously approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the Investment Company Act of 1940, as amended by the SBCAA.  As a result, the asset coverage ratio applicable to the Company will be changed from 200% to 150%, effective May 4, 2019. At that time, we would be permitted under the 1940 Act to increase our leverage up to an amount that reduces our asset coverage ratio from 200% to 150%, but we would still have to comply with or amend any then-existing provisions of our Credit Facility that limit our ability to incur such additional leverage. Under our existing Credit Facility, for example, our debt-to-tangible equity ratio is limited to 1.00 to 1.00.

If we were to incur such increased leverage, the risks associated with an investment in us may increase. Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities. Increasing our leverage, for example, makes our net asset value more sensitive to decreases and increases in our total assets and subject to greater variation. If the value of our assets increases, then the additional leverage would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not increased our leverage. Conversely, if the value of our assets decreases, the additional leverage would cause net asset value to decline more sharply than it otherwise would have had we not increased our leverage. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the additional leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not increased our leverage. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Leverage is generally considered a speculative investment technique.

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended June 30, 2018, we issued a total of 8,484 shares of our common stock under our dividend reinvestment plan (“DRIP”). This issuance was not subject to the registration requirements of the Securities Act of 1933. The aggregate value of the shares of our common stock issued under the DRIP was approximately $89,508 for the three months ended June 30, 2018.


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On June 13, 2017, our board of directors authorized a $3.0 million open market stock repurchase program. Pursuant to our program, we are authorized to repurchase up to $3.0 million in the aggregate of our outstanding stock in the open market. The timing, manner, price and amount of any share repurchases will be determined by our management at its discretion, and no assurances can be given that any common stock or any particular amount will be purchased. Unless amended by our board of directors, the repurchase program will expire on the earlier of June 30, 2018 or the repurchase of $3.0 million of our outstanding shares of common stock. The repurchase program expired on June 30, 2018.

During the three months ended June 30, 2018, the Company made the following repurchases pursuant to the repurchase plan:

Month

Total Number of Shares Purchased (1)

Average Purchase Price

Total Number of Shares Purchased as part of Publicly Announced Plan

Maximum Remaining Dollar Value that May Yet Be Purchased Under Plan (2)
April 1 - April 30, 2018

14,678


$
10.32


14,678


1,748,680

May 1 - May 31, 2018







1,748,680

June 1 - June 30, 2018







1,748,680



14,678


$
10.32


14,678


$
1,748,680


(1)
Excluded here, but footnoted for reference, are purchases of 65,500 shares of our common stock made on the open market by or on behalf of JMP Group LLC, which is a majority owner of our investment adviser and administrator, consisting of 42,607 shares in April 2018 at an average purchase price of $10.38, and 22,893 shares in May 2018 at an average purchase price of $10.23.
(2)
The Company's repurchase program expired on June 30, 2018.


Item 3.         Defaults Upon Senior Securities
 
Not applicable.


Item 4.         Mine Safety Disclosures
 
Not applicable.



Item 5.         Other Information
     
None.


Item 6.         Exhibits


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EXHIBIT INDEX

Exhibit
Number
 

Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
* Filed herewith.

 

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
HARVEST CAPITAL CREDIT CORPORATION
 
 
Date: August 9, 2018
/s/ Joseph A. Jolson
 
Joseph A. Jolson
Chairman and Chief Executive Officer
 
 
Date: August 9, 2018
/s/ William E. Alvarez, Jr.
 
William E. Alvarez, Jr.
Chief Financial Officer, Chief Compliance Officer and Secretary
(Principal Financial and Accounting Officer)

 


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