| 1. | Business and Organization |
Siguler Guff Small Business Credit Opportunities Fund, Inc. (“SBCOF” or the “Fund”), was incorporated in Maryland on July 7, 2014 as a non-diversified, closed-end management investment company and has elected status as a business development company (a “BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”) on July 1, 2015. Siguler Guff Advisers, LLC (the “Investment Manager”) serves as the Fund’s Investment Manager. The Investment Manager is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”), pursuant to the 1940 Act. One hundred percent of the stock of the Fund is held by Siguler Guff Small Business Credit Opportunities Fund, LP (the “Partnership”). Prior to commencing its operations on October 13, 2015, the Fund had no operations other than the issuance to the Partnership of 100,000 shares of common stock, $0.001 par value for $25,000 in September 2014.
Since the Partnership owns one hundred percent of the stock of the Fund, the term of the Fund will be the same as that of the Partnership. The term of the Partnership will continue until the later to occur of: (a) September 17, 2026, or (b) the date of which all the Partnership’s assets have been distributed and the Partnership’s obligations (including contingent obligations) have terminated, unless the Partnership is sooner dissolved in accordance with Article 9 of its Partnership Agreement dated July 9, 2014 and amended as of May 14, 2018. The term may be extended for up to three additional years with the consent of the Advisory Board.
The Fund’s investment objective is to achieve attractive risk-adjusted returns by generating current income from debt investments. There can be no assurance that the Fund will attain its investment objective. The Fund will typically invest in U.S. companies in the lower middle market segment. The Investment Manager defines the “lower middle market” as privately-owned companies with between $2 million to $15 million of earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and between $10 million to $100 million of revenue. Investments take the form of mezzanine debt as well as some “unitranche” loans with a first lien on a company’s assets, as well as second lien loans. The Partnership generally seeks to purchase equity securities alongside the Fund’s investments into those same companies, generally with an aggregate cost of up to 20% of the value of the Fund’s total investment. The Fund also may extend mezzanine financing in forms other than subordinated loans, such as convertible loans and preferred stock.
The Fund jointly co-invests in investments alongside the Partnership and Siguler Guff SBCOF Parallel Fund, LP (the “Parallel Partnership”) and may co-invest with other investment funds managed by or otherwise affiliated with the Investment Manager (collectively, the “Affiliated Funds”). The Fund and the Affiliated Funds generally invest pro-rata and pari passu with each other in investments, except when tax, regulatory or investment restrictions prevent the Fund or the Affiliated Funds from investing. The General Partner of the Partnership and Parallel Partnership is an Affiliate of the Investment Manager.
The Fund is subject to certain investment guidelines and restrictions as set forth in its registration statement filed with the SEC on Form 10.
Siguler Guff Small Business Credit Opportunities Fund, Inc.
Notes to Consolidated Financial Statements September 30, 2018 (Unaudited)
| 2. | Summary of Significant Accounting Policies |
Unaudited Interim Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of the Fund included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair statement of results for the interim periods. The results of operations for interim periods are not necessarily indicative of operating results for an entire year.
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2017, which are included in the Fund's Annual Report on Form 10-K filed with the SEC on March 29, 2018.
Basis of Accounting
These consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and such differences could be material. The most significant estimates inherent in the preparation of the Fund's consolidated financial statements are the valuation of investments and revenue recognition.
The Fund is an investment company and follows the accounting and reporting guidance as prescribed by Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 946, Financial Services – Investment Companies (“ASC 946”).
The financial statements include portfolio investments at fair value of $33,591,236 at September 30, 2018 and $41,154,948 at December 31, 2017. The portfolio investments represent approximately 179% of net assets at September 30, 2018 and approximately 140% of net assets at December 31, 2017 and their fair values have been determined in good faith by the Fund's Board of Directors (“Directors”). Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.
Consolidation
The Fund has certain wholly-owned subsidiaries, including subsidiaries that are not consolidated for U.S. federal income tax purposes, which hold certain portfolio investments of the Fund. These subsidiaries are consolidated with the Fund for accounting purposes, and the portfolio investments held by the subsidiaries are included in the Fund’s consolidated financial statements as investments. All significant intercompany balances and transactions have been eliminated. The investments held through the subsidiaries are reflected in the Consolidated Schedule of Portfolio Investments in addition to any investments the Fund holds directly. As provided under Regulation S-X and ASC 946, the Fund will generally not consolidate its investment in a company other than a wholly-owned investment company or a controlled operating company whose business consists of providing services to the Fund. Accordingly, the Fund consolidated the results of certain of its wholly-owned subsidiaries in its financial statements.
Siguler Guff Small Business Credit Opportunities Fund, Inc.Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
Valuation of Portfolio Investments
The FASB ASC 820, Fair Value Measurements and Disclosures ("ASC 820") defines fair value as the amount 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. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments' complexity.
Assets and liabilities recorded at fair value in the Fund's consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
| | · | Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. |
| · | Level 2 - 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 at the measurement date for substantially the full term of the assets or liabilities. |
| · | Level 3 - Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
Under ASC 820, the Fund performs detailed valuations of its debt investments for which quotations are not readily available on an individual basis, using bond yield, market and income approaches as appropriate. In certain instances, the Fund may use alternative methodologies, including recent purchase transactions, asset liquidation, expected recovery model or other alternative approaches to estimate the fair value.
Investments where market quotations for securities of the same issue are readily available on an exchange are marked-to-market at fair value at the closing price on the financial statement date. Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value.
Under the bond yield approach, the Fund uses bond yield models to determine the present value of the future cash flow streams of its debt investments. The Fund reviews various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assesses the information in the valuation process.
Under the market approach, the Fund estimates the enterprise value of the portfolio companies in which it invests. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Fund derives a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, the Fund analyzes various factors, including the portfolio company's historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA, cash flows, net income or revenues. The Fund generally requires portfolio companies to provide annual audited and quarterly or monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.
Siguler Guff Small Business Credit Opportunities Fund, Inc.Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
Under the income approach, the Fund generally prepares and analyzes discounted cash flow models based on projections of the future free cash flows of the business.
The fair value of the Fund's portfolio investments at September 30, 2018 and December 31, 2017 was determined in good faith by the Directors. The Directors are ultimately responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to the Fund’s valuation policy. Because of the inherent uncertainty of valuation, these estimated fair values do not necessarily represent amounts that might be ultimately realized and the differences could be material.
The following table summarizes the level of the Fund’s assets measured at fair value as of September 30, 2018 and December 31, 2017:
| | | Assets at Fair Value as of September 30, 2018 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| Senior Subordinated Notes | | $ | - | | | $ | - | | | $ | 25,253,595 | | | $ | 25,253,595 | |
| Term Notes | | | - | | | | - | | | | 8,262,021 | | | | 8,262,021 | |
| Money Market Fund | | | 75,620 | | | | - | | | | - | | | | 75,620 | |
| Total Portfolio Investments | | $ | 75,620 | | | $ | - | | | $ | 33,515,616 | | | $ | 33,591,236 | |
| | | Assets at Fair Value as of December 31, 2017 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| Senior Subordinated Notes | | $ | - | | | $ | - | | | $ | 28,511,612 | | | $ | 28,511,612 | |
| Term Notes | | | - | | | | - | | | | 5,872,743 | | | | 5,872,743 | |
| Money Market Fund | | | 6,770,593 | | | | - | | | | - | | | | 6,770,593 | |
| Total Portfolio Investments | | $ | 6,770,593 | | | $ | - | | | $ | 34,384,355 | | | $ | 41,154,948 | |
At September 30, 2018 and December 31, 2017, 100% of the Fund’s Portfolio Investments have been classified within Level 3, with the exception of the Money Market Fund. Assumptions used by the Fund due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Fund’s results of operations.
Siguler Guff Small Business Credit Opportunities Fund, Inc.
Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
The following tables summarize the significant unobservable inputs the Fund used to value investments categorized within Level 3. The below table is not intended to be all-inclusive, but instead captures the significant unobservable inputs relevant to the determination of fair values:
| | | | | | | Unobservable Input as of September 30, 2018 | |
| Investment Type | | Fair Value1 | | Primary Valuation Technique | | Input | | Range | |
| | | | | | | | | | |
| Senior Subordinated Notes | | $ | 21,304,080 | | Discounted Cash Flow | | Discount Rate | | | 10.0% - 14.0 | % |
| | | | | | | | | | | | |
| Term Notes | | | 5,291,572 | | Discounted Cash Flow | | Discount Rate | | | 9.3% - 14.3 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total | | $ | 26,595,652 | | | | | | | | |
1Not reflected in the table above are Level 3 investments that have been primarily valued based upon recent transactions totaling $6,919,964 as of September 30, 2018. These recent transactions had no observable inputs and were valued at amortized cost.
| | | | | | | Unobservable Input as of December 31, 2017 | |
| Investment Type | | Fair Value1 | | Primary Valuation Technique | | Input | | Range | |
| | | | | | | | | | |
| Senior Subordinated Notes | | $ | 20,987,560 | | Discounted Cash Flow | | Discount Rate | | | 10.0% - 14.0 | % |
| | | | | | | | | | | | |
| Term Notes | | | 1,801,124 | | Discounted Cash Flow | | Discount Rate | | | 9.1% - 12.6 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total | | $ | 22,788,684 | | | | | | | | |
1Not reflected in the table above are Level 3 investments that have been primarily valued based upon recent transactions totaling $11,595,671 as of December 31, 2017. These recent transactions had no observable inputs and were valued at amortized cost.
The following is a rollforward of the portfolio investments in which significant unobservable inputs (Level 3) were used in determining fair value:
| | | Fair Value Measurements using Significant Unobservable Inputs (Level 3) | |
| | | For the Three Months Ended September 30, 2018 | |
| | | Beginning Balance | | | Purchases | | | Sales Proceeds | | | Distribution | | | Reallocations | | | Accretion/Payment- in-Kind Interest Income | | | Net Realized Gain/(Loss) | | | Ending Balance | |
| Senior Subordinated Notes | | $ | 24,867,027 | | | $ | 323,855 | | | $ | - | | | $ | - | | | $ | - | | | $ | 62,713 | | | $ | - | | | $ | 25,253,595 | |
| Term Notes | | | 8,042,063 | | | | 218,680 | | | | (23,917 | ) | | | - | | | | - | | | | 25,195 | | | | - | | | | 8,262,021 | |
| Total | | $ | 32,909,090 | | | $ | 542,535 | | | $ | (23,917 | ) | | $ | - | | | $ | - | | | $ | 87,908 | | | $ | - | | | $ | 33,515,616 | |
| | | For the Nine Months Ended September 30, 2018 | |
| | | Beginning Balance | | | Purchases | | | Sales Proceeds | | | Distribution | | | Reallocations | | | Accretion/Payment- in-Kind Interest Income | | | Net Realized Gain/(Loss) | | | Ending Balance | |
| Senior Subordinated Notes | | $ | 28,511,612 | | | $ | 16,170,571 | | | $ | (2,105,927 | ) | | $ | (17,520,464 | ) | | $ | - | | | $ | 197,803 | | | $ | - | | | $ | 25,253,595 | |
| Term Notes | | | 5,872,743 | | | | 5,756,144 | | | | (1,321,882 | ) | | | (2,092,479 | ) | | | - | | | | 47,495 | | | | - | | | | 8,262,021 | |
| Total | | $ | 34,384,355 | | | $ | 21,926,715 | | | $ | (3,427,809 | ) | | $ | (19,612,943 | ) | | $ | - | | | $ | 245,298 | | | $ | - | | | $ | 33,515,616 | |
Siguler Guff Small Business Credit Opportunities Fund, Inc.
Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
| | | For the Three Months Ended September 30, 2017 | |
| | | Beginning Balance | | | Purchases | | | Sales Proceeds | | | Distribution | | | Reallocations | | | Accretion/Payment- in-Kind Interest Income | | | Net Realized Gain/(Loss) | | | Ending Balance | |
| Senior Subordinated Notes | | $ | 24,705,044 | | | $ | 4,883,260 | | | $ | - | | | $ | - | | | $ | 1,769,228 | | | $ | 47,000 | | | $ | - | | | $ | 31,404,532 | |
| Term Notes | | | 1,678,220 | | | | - | | | | - | | | | - | | | | 120,710 | | | | 494 | | | | - | | | | 1,799,424 | |
| Total | | $ | 26,383,264 | | | $ | 4,883,260 | | | $ | - | | | $ | - | | | $ | 1,889,938 | | | $ | 47,494 | | | $ | - | | | $ | 33,203,956 | |
| | | For the Nine Months Ended September 30, 2017 | |
| | | Beginning Balance | | | Purchases | | | Sales Proceeds | | | Distribution | | | Reallocations | | | Accretion/Payment- in-Kind Interest Income | | | Net Realized Gain/(Loss) | | | Ending Balance | |
| Senior Subordinated Notes | | $ | 23,149,094 | | | $ | 12,252,740 | | | $ | (5,762,147 | ) | | $ | - | | | $ | 1,470,640 | | | $ | 202,383 | | | $ | 91,822 | | | $ | 31,404,532 | |
| Term Notes | | | - | | | | 1,798,324 | | | | - | | | | - | | | | - | | | | 1,100 | | | | - | | | | 1,799,424 | |
| Total | | $ | 23,149,094 | | | $ | 14,051,064 | | | $ | (5,762,147 | ) | | $ | - | | | $ | 1,470,640 | | | $ | 203,483 | | | $ | 91,822 | | | $ | 33,203,956 | |
Net change in unrealized gain/(loss) and net realized gain/(loss), if any, on Level 3 Portfolio Investments in the table above are included in the accompanying Consolidated Statement of Operations. For the periods ended September 30, 2018 and September 30, 2017, the Fund has a net change in unrealized gain/(loss) of $0 on Level 3 portfolio investments still held by the Fund as of the financial statement date.
Investments
Security transactions are accounted for on the trade date unless there are substantial conditions to the purchase. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment. Unrealized gains or losses primarily reflect the change in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized. Realized gains or losses on the disposition of investments are calculated using the specific identification method.
Cash
Cash is comprised of deposit accounts held at one United States financial institution. During the period, the balances held at the financial institution may at times exceed federally insured limits.
Income and Expense
Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Fund stops accruing interest on investments when it is determined that interest is no longer collectible. Fees received upon closing a transaction generally are treated as a reduction in the cost basis of the investment. Any resulting discount, or closing fee received, from recording the loan or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan using the effective-yield method.
The Fund has investments in debt securities which contain payment-in-kind ("PIK") interest provisions. PIK interest is computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as interest income. The Fund stops accruing PIK interest on investments when it is determined that PIK interest is no longer collectible.
Other income includes the estimated amount of the exit fee due to the Fund in connection with the purchase of the NetFortris Operating Co., Inc. (“NetFortris”) term notes as well as a commitment fee received in connection with the delayed draw term notes from Environmental Group Holdings, LLC. The reallocation of other income as of September 30, 2018 is due to a portion of the exit fee and corresponding receivable being distributed to the Partnership on March 28, 2018. The reduction of other income as of September 30, 2018 is due to a portion of the exit fee being reduced as NetFortris repaid a portion of the outstanding principal balance as well as a reduction of the exit fee rate during the second quarter.
Siguler Guff Small Business Credit Opportunities Fund, Inc.Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
Expenses include investment management fees, legal fees, directors' fees, audit and tax service expenses, interest expense, amortization of deferred financing costs and other general and administrative expenses. Expenses are recognized on an accrual basis.
Reallocations
Additional Limited Partners may be admitted to the Partnership and existing Limited Partners may increase their Capital Commitments, with the consent of the General Partner at any time up to and including the Final Closing. Each Capital Commitment of such additional Limited Partner and each increased Capital Commitment, shall be treated as having been made, as of the Initial Closing date for all purposes of the Agreement.
Due to additional commitments received in 2017 by the Partnership and Parallel Partnership, portfolio investments and items of income and expense have been reallocated between the Fund, the Partnership and the Parallel Partnership to reflect committed capital ownership percentages as of the Final Closing, which occurred on September 29, 2017.
Prior to the Final Closing, portfolio investments and items of income and expense are allocated according to the committed capital ownership percentages as of the latest Closing. Following the Final Closing, reallocation of portfolio investments and items of income and expense between the Fund, the Partnership and the Parallel Partnership has occurred.
As a result, included in the Consolidated Statements of Operations for three and nine month periods ended September 30, 2017 are reallocations of amounts previously included in the Consolidated Statements of Operations for the period ended December 31, 2015 and year ended December 31, 2016. As the Final Closing had already occurred, there were no reallocations included in the Consolidated Statements of Operations for three and nine month periods ended September 30, 2018. Below is a summary of such adjustments:
| | | 2016 As Reported | | | Reallocations (to)/from Parallel Partnership | | | 2016 Adjusted | |
| Investment Income | | | | | | | | | |
| Non-Controlled, Non-Affiliated Investments: | | | | | | | | | |
| Interest income | | $ | 1,890,751 | | | $ | 82,819 | | | $ | 1,973,570 | |
| Payment-in-kind interest income | | | 157,660 | | | | 7,995 | | | | 165,655 | |
| Total Investment Income | | | 2,048,411 | | | | 90,815 | | | | 2,139,226 | |
| | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | |
| Investment Management Fee | | | 295,764 | | | | 20,635 | | | | 316,399 | |
| Professional fees | | | 508,701 | | | | 453 | | | | 509,154 | |
| Directors fees | | | 172,500 | | | | - | | | | 172,500 | |
| Other general and administrative | | | 8,832 | | | | (50 | ) | | | 8,782 | |
| Total Expenses | | | 985,797 | | | | 21,038 | | | | 1,006,835 | |
| Investment Management Fee Waived (Note 7) | | | (77,534 | ) | | | (7,927 | ) | | | (85,461 | ) |
| Total Net Expenses | | | 908,263 | | | | 13,111 | | | | 921,374 | |
| Net Investment Income/(Loss) before income tax (benefit)/expense | | | 1,140,148 | | | | 77,704 | | | | 1,217,852 | |
| Income tax (benefit)/expense (Note 2) | | | 392,221 | | | | - | | | | 392,221 | |
| Net Investment Income/(Loss) after income tax (benefit)/expense | | | 747,927 | | | | 77,704 | | | | 825,631 | |
| | | | | | | | | | | | | |
| Net Increase/(Decrease) in Net Assets Resulting from Operations | | $ | 747,927 | | | $ | 77,704 | | | $ | 825,631 | |
| | | | | | | | | | | | | |
| Net Investment Income/(Loss) and Net Increase/(Decrease) in Net Assets Resulting from Operations Per Share (Basic and Diluted) | | $ | 7.48 | | | $ | 0.78 | | | $ | 8.26 | |
|
| Weighted average shares outstanding | | | 100,000 | | | | - | | | | 100,000 | |
Siguler Guff Small Business Credit Opportunities Fund, Inc.Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
Distributions
On March 28, 2018, the Fund distributed assets and corresponding liabilities to the Partnership, which was performed to enable the Fund to be qualified as a regulated investment company for federal income tax purposes. Below is a summary of the assets and liabilities that were distributed from the Fund to the Partnership:
| Investment Name | Investment Type | Asset / Liabilities Classification | | Balance Prior to Distribution | | | Distribution to Partnership | | | Balance Post Distribution | |
| Audax AAMP Holdings, Inc. | Senior Subordinated Note | Portfolio Investments at Fair Value | | $ | 5,282,779 | | | $ | - | | | $ | 5,282,779 | |
| Chairman's Foods, LLC | Senior Subordinated Note | Portfolio Investments at Fair Value | | $ | 4,539,347 | | | $ | (3,279,079 | ) | | $ | 1,260,268 | |
| Earthlite, LLC | Senior Subordinated Note | Portfolio Investments at Fair Value | | $ | 1,403,288 | | | $ | (143,288 | ) | | $ | 1,260,000 | |
| Gatekeeper Systems, Inc. | Senior Subordinated Note | Portfolio Investments at Fair Value | | $ | 2,742,648 | | | $ | (1,482,648 | ) | | $ | 1,260,000 | |
| La Tavola, LLC | Senior Subordinated Note | Portfolio Investments at Fair Value | | $ | 3,680,885 | | | $ | (2,420,885 | ) | | $ | 1,260,000 | |
| Medsurant Holdings, LLC | Senior Subordinated Note | Portfolio Investments at Fair Value | | $ | 4,029,624 | | | $ | (2,769,625 | ) | | $ | 1,259,999 | |
| Northeastern Bus Rebuilders Inc. | Senior Subordinated Note | Portfolio Investments at Fair Value | | $ | 5,534,107 | | | $ | - | | | $ | 5,534,107 | |
| S.R. Smith, LLC | Senior Subordinated Note | Portfolio Investments at Fair Value | | $ | 2,622,136 | | | $ | (1,362,136 | ) | | $ | 1,260,000 | |
| Schlotterbeck & Foss, LLC | Senior Subordinated Note | Portfolio Investments at Fair Value | | $ | 4,918,564 | | | $ | (3,658,566 | ) | | $ | 1,259,998 | |
| Trachte, LLC | Senior Subordinated Note | Portfolio Investments at Fair Value | | $ | 3,664,236 | | | $ | (2,404,237 | ) | | $ | 1,259,999 | |
| Arc Drilling, LLC | Term Note | Portfolio Investments at Fair Value | | $ | 1,739,315 | | | $ | (476,901 | ) | | $ | 1,262,414 | |
| Environmental Group Holdings, LLC | Term Note | Portfolio Investments at Fair Value | | $ | 1,282,314 | | | $ | - | | | $ | 1,282,314 | |
| NetFortris Operating Co., Inc. | Term Note | Portfolio Investments at Fair Value | | $ | 1,804,499 | | | $ | (541,813 | ) | | $ | 1,262,686 | |
| Whitney, Bradley & Brown, Inc. | Term Note | Portfolio Investments at Fair Value | | $ | 2,331,505 | | | $ | (1,073,765 | ) | | $ | 1,257,740 | |
| N/A | N/A | Investor note credit facility | | $ | (24,450,000 | ) | | $ | 11,427,775 | | | $ | (13,022,225 | ) |
| N/A | N/A | Deferred financing costs | | $ | 53,788 | | | $ | (25,140 | ) | | $ | 28,648 | |
| | | | | $ | 21,179,035 | | | $ | (8,210,308 | ) | | $ | 12,968,727 | |
Income Taxes
As of January 1, 2018, the Fund believes that it qualifies to be treated as a Regulated Investment Company (“RIC”) under subchapter M of the Internal Revenue Code (the “Code) and operates in a manner so as to qualify for the tax treatment applicable to RICs. It is the Fund’s intention to make the election for treatment as a RIC in its tax filing for the year ended December 31, 2018. Prior to January 1, 2018, the Fund was treated as a corporation for U.S. federal income tax purposes.
In order to qualify for favorable tax treatment as a RIC, the Fund is required to distribute annually to its shareholder at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Fund must distribute annually at least 98% of its ordinary income and 98.2% of net capital gains from the current year and any undistributed ordinary income and net capital gains from the preceding years. The Fund, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If the Fund chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to the Partnership (its sole shareholder). The Fund will accrue excise tax on estimated undistributed taxable income as required.
Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with U.S. GAAP. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain/(loss), as appropriate, in the period that the differences arise. Temporary and permanent differences are primarily attributable to differences in the tax treatment of certain loans and the tax characterization of income and non-deductible expenses. These differences are generally determined in conjunction with the preparation of the Fund’s annual RIC tax return.
Siguler Guff Small Business Credit Opportunities Fund, Inc.Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and tax differences are reclassified among the Fund’s capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from U.S. GAAP. The Fund may pay distributions in excess of its taxable net investment income. This excess would be a tax-free return of capital in the period and reduce the shareholder's tax basis in its shares.
The Fund records uncertain tax positions in accordance with FASB ASC 740, Income Taxes (“ASC 740”), on the basis of a two-step process whereby (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Fund has determined that there are no uncertain tax positions that would have a material impact to the financial statements of the Fund, and therefore, no provisions are required to be recorded by the Fund. The Fund does not anticipate significant increases to uncertain tax positions in the next twelve months. The Fund will recognize any interest and penalties, if applicable, for any uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the period ended September 30, 2018 and year ended December 31, 2017 or accrued for as of September 30, 2018 and December 31, 2017.
The Fund files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Fund is subject to examination by federal, state, local and foreign jurisdictions, where applicable. At September 30, 2018, no examinations were being conducted by the Internal Revenue Service or any other taxing authority. Under the respective statute of limitations, tax years beginning in 2015 remain subject to examination by the various tax jurisdictions.
During the period prior to January 1, 2018, the Fund did not qualify to be treated as a regulated investment company, or RIC, for federal income tax purposes. As such, the Fund was treated as a corporation for U.S. federal income tax purposes. As a corporation for U.S. federal income tax purposes, the Fund was taxed on its taxable income even if that income was distributed to the Partnership, and all distributions out of its earnings and profits were taxable as dividends to the investors of the Partnership; thus, such income was subject to two layers of tax (although corporate Limited Partners may be entitled to a dividends-received deduction).
Income taxes payable/(receivable) and prepaid taxes, including deferred benefits, consists of the following:
| | | For the Nine Months Ended September 30, 2018 | | | For the Year Ended December 31, 2017 | |
| Federal income taxes: | | | | | | |
| Current | | $ | - | | | $ | 8,615 | |
| Deferred | | | - | | | | - | |
| State income taxes: | | | | | | | | |
| Current | | | - | | | | (18,446 | ) |
| Deferred | | | - | | | | - | |
| Total | | $ | - | | | $ | (9,831 | ) |
Siguler Guff Small Business Credit Opportunities Fund, Inc.Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
The provision for income taxes is composed of the following charges/(benefits):
| Current: | | For the Three Months Ended September 30, 2018 | | | For the Nine Months Ended September 30, 2018 | | | For the Three Months Ended September 30, 2017 | | | For the Nine Months Ended September 30, 2017 | |
| Federal | | $ | - | | | $ | - | | | $ | 339,875 | | | $ | 754,392 | |
| State | | | - | | | | - | | | | 51,827 | | | | 111,422 | |
| Total Current | | | - | | | | - | | | | 391,702 | | | | 865,814 | |
| Deferred: | | | | | | | | | | | | | | | | |
| Federal | | | - | | | | - | | | | 1,163 | | | | 83,499 | |
| State | | | - | | | | - | | | | 147 | | | | 11,226 | |
| Total Deferred | | | - | | | | - | | | | 1,310 | | | | 94,725 | |
| Total Net (Benefit)/Expense | | $ | - | | | $ | - | | | $ | 393,012 | | | $ | 960,539 | |
The Fund accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The deferred tax assets and liabilities have been recognized in the Consolidated Statement of Assets and Liabilities as follows:
| | | For the Nine Months Ended September 30, 2018 | | | For the Year Ended December 31, 2017 | |
| Deferred Tax Assets: | | | | | | |
| Accrued Professional Fees | | $ | - | | | $ | 42,938 | |
| Organizational Expenses | | | - | | | | 74,324 | |
| Debt Issuance Costs | | | - | | | | 52,563 | |
| Total Deferred Tax Assets | | $ | - | | | $ | 169,825 | |
| Deferred Tax Liabilities: | | | | | | | | |
| Interest Income | | $ | - | | | $ | 39,635 | |
| Total Deferred Tax Liabilities | | $ | - | | | $ | 39,635 | |
| Valuation Allowance | | | - | | | | (130,190 | ) |
| Net Deferred Income Taxes | | $ | - | | | $ | - | |
The Fund recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Fund considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.
Siguler Guff Small Business Credit Opportunities Fund, Inc.Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
As of December 31, 2017, the Fund concluded that it was more likely than not that an amount of the deferred tax assets, relating to the period after RIC qualification, would not be utilized. Therefore, the Fund recorded a valuation allowance of $130,190 against its net deferred tax assets, for the year ending December 31, 2017 representing the portion of net deferred tax assets for which the Fund was not expected to realize a benefit after the Fund meets RIC qualification. If the Fund determined that it would be able to realize net deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
As of September 30, 2018 and December 31, 2017, the Fund had no federal or state net operating loss carryforwards.
The effective tax rate varied from the statutory federal income tax rates. The effective tax rate is affected by a number of factors, the most significant of which has been the state income taxes, changes in tax law and valuation allowance related to our deferred tax assets.
| | | For the Nine Months Ended September 30, 2018 | | | For the Year Ended December 31, 2017 | |
| Computed "Expected" Tax Rate | | | - | % | | | 34.00 | % |
| Permanent Differences | | | - | % | | | 0.05 | % |
| State Income Taxes, Net of Federal Income Tax Benefit | | | - | % | | | 3.27 | % |
| Effect of Changes in Tax Law, Rates | | | - | % | | | 2.00 | % |
| Deferred Tax Asset Valuation Allowance Impact | | | - | % | | | (1.20 | )% |
| Effective Tax Rate | | | - | % | | | 38.12 | % |
On December 22, 2017, H.R. 1, also known as the Tax Cuts and Jobs Act (the “Tax Act”), was enacted, which significantly revised U.S. corporate income tax by, lowering corporate income tax rates. ASC 740, requires the re-measurement of U.S. deferred tax assets and liabilities that existed as of December 22, 2017, to the new federal income tax rate of 21% as well as any federal impact associated with state and local deferred income taxes. As of December 31, 2017, the Fund accounted for the effects of the Tax Act by recording a decrease to its net deferred tax assets of $67,645 and a corresponding decrease of $67,645 to the valuation allowance. As a result, there was a gross impact to the tax provision from the re-measurement of U.S. deferred tax assets at lower enacted tax rates. However, since there was a full valuation allowance being recorded by the Fund against its net deferred tax assets as of December 31, 2017, there was no impact on the Fund’s tax provision for the year ended December 31, 2017, as a result of the Tax Act.
Other Receivable
Included in other receivable is the estimated amount of the exit fee due to the Fund in connection with the purchase of the NetFortris term notes as well as a commitment fee received in connection with the delayed draw term notes from Environmental Group Holdings, LLC. The exit fee rate of the NetFortris term notes is 2.75% per year of the outstanding principal balance of the term notes through the fiscal quarter ending September 30, 2018. Thereafter, the exit fee rate of the NetFortris term notes is 2.75% per year of the outstanding principal balance of the term notes if the senior leverage ratio of the portfolio investment is greater than or equal to 3.50x, 1.25% per year of the outstanding principal balance of the term notes if the senior leverage ratio of the portfolio investment is less than 3.50x and greater than or equal to 3.00x or 0.25% per year of the outstanding principal balance of the term notes if the senior leverage ratio of the portfolio investment is less than 3.00x. The exit fee accrues monthly and will be repaid in addition to the principal at the maturity date, or if repaid earlier.
Siguler Guff Small Business Credit Opportunities Fund, Inc.Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
On March 28, 2018, the Fund reallocated a portion of the other receivable and corresponding other income correlated to the asset distribution to the Partnership to be qualified as a regulated investment company for federal income tax purposes (see Note 2). A portion of the other receivable was reduced due to a portion of the exit fee being reduced as NetFortris repaid a portion of the outstanding principal balance as well as a reduction of the exit fee rate during the quarter.
Investor Note Credit Facility
On August 8, 2017, the Fund, Partnership and Parallel Partnership entered into a credit facility of short term borrowings (the “Credit Facility”) in the amount of $10,000,000 collateralized by the unfunded Committed Equity Capital of the Limited Partners of the Partnership and Parallel Partnership. On December 15, 2017, the Credit Facility was amended and increased to $40,000,000. The Credit Facility is intended to fund the operations of the Fund, Partnership and Parallel Partnership and was originally scheduled to expire on August 8, 2018, subject to extension. On August 7, 2018, the Credit Facility was extended and is currently scheduled to expire on February 8, 2019. The maximum commitment amount of the Credit Facility was amended and decreased to $29,209,580. In consideration for establishing the Credit Facility, the Fund, Partnership and Parallel Partnership paid a Facility Fee in the amount of 0.25% times the maximum commitment amount. The Credit Facility is stated at its outstanding principal amount and bears interest on the outstanding principal amount at a rate per annum equal to LIBOR plus 1.55%. In addition, an unused commitment fee equal to 0.25% per annum times the difference between the total commitment amount and the average daily outstanding amount of principal is incurred as an expense. On March 28, 2018, the Fund distributed a portion of the outstanding Credit Facility balance correlated to the asset distribution to the Partnership to be qualified as a regulated investment company for federal income tax purposes (see Note 2). From the date of the first drawdown through September 30, 2018, the Credit Facility held an outstanding balance of $17,629,580 of which the Fund’s portion was $16,429,580 at a rate between 2.78% and 3.64%. The weighted average interest rate for the period ending September 30, 2018 was 3.47%. The balance presented on the Consolidated Statement of Assets and Liabilities approximates its fair value, which would be categorized as Level 3 within the fair value hierarchy.
The Fund is required to maintain a minimum asset coverage ratio (total assets-to-debt outstanding) of 2.00 under the 1940 Act. As of September 30, 2018, the Fund had an asset coverage ratio of 2.14.
Deferred Financing Costs
Deferred financing costs consist of fees and expenses paid in connection with the closing of, amendment and extension to the Fund’s Credit Facility. These costs are amortized using the straight-line method over the term of the Credit Facility. Deferred financing costs related to the Credit Facility are presented on the Fund’s Consolidated Statement of Assets and Liabilities. On March 28, 2018, the Fund distributed a portion of the deferred financing costs correlated to the asset distribution to the Partnership to be qualified as a regulated investment company for federal income tax purposes (see Note 2).
Siguler Guff Small Business Credit Opportunities Fund, Inc.Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). Under ASU 2014-09, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the guidance in ASU 2014-09 and has the same effective date as the original standard. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, an update on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which includes amendments for enhanced clarification of the guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Revenue from Contracts with Customers (Topic 606), the amendments in this update are of a similar nature to the items typically addressed in the technical corrections and improvements project. Additionally, in February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, an update clarifying that a financial asset is within the scope of Subtopic 610-20 if it is deemed an “in-substance non-financial asset.” The Fund has adopted ASU 2014-09 and there has not been a material impact on the Consolidated Financial Statements.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The new standard changes the accounting for credit losses for certain instruments. The new measurement approach is based on expected losses, commonly referred to as the current expected credit loss model, and applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investment in leases, and reinsurance and trade receivables, as well as certain off-balance sheet credit exposures, such as loan commitments. The standard also changes the impairment model for available-for-sale debt securities. The standard is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. The Fund is currently assessing the impact of adopting ASU 2016-13 on the Consolidated Financial Statements.
In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The standard will modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted and the Fund is currently assessing the impact of adopting ASU 2018-13 on the Consolidated Financial Statements.
SEC Disclosure Update and Simplification
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification (the “SEC Release”), amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments are intended to facilitate the disclosure of information to investors and simplify compliance. This final rule is effective on November 5, 2018. The Fund is currently assessing the impact of adopting the SEC Release on the Consolidated Financial Statements.
Due to Portfolio Investment
Included in due to Portfolio Investment are amounts received by the Fund from a Portfolio Investment erroneously and were returned to the Portfolio Investment subsequent to quarter end.
Siguler Guff Small Business Credit Opportunities Fund, Inc.
Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
The terms and conditions of the portfolio investments, including restrictions on resale, are subject to the terms of the companies’ purchase and sale agreements, limited partnership agreements, private placement memoranda and other governing documents.
Purchases of investments for the period ended September 30, 2018 totaled $21,926,715. Sales of investments for the period ended September 30, 2018 totaled $10,133,654. On March 28, 2018, there was also $19,612,943 of portfolio investments distributed to the Partnership in order for the Fund to be qualified as a regulated investment company for federal income tax purposes. Purchases of investments for the period ended September 30, 2017 totaled $20,158,321 with an additional $1,470,640 being reallocated from the Parallel Partnership due to the reallocation of Portfolio Investments (see Note 2). Sales of investments for the period ended September 30, 2017 totaled $5,762,147.
At September 30, 2018 and December 31, 2017, the cost of portfolio investments for federal income tax purposes was $33,761,867 and $30,498,160, respectively. There was no aggregate or net unrealized appreciation/(depreciation) of portfolio investments for federal income tax purposes.
The Fund’s investment holdings are illiquid, with the exception of the Money Market Fund, and are subject to redemption/resale restrictions in accordance with their respective agreements.
The Fund’s investments are subject to general economic, political and market risk. These factors may affect the level and volatility of prices and the liquidity of Portfolio Investments, which could adversely affect the Fund’s profitability or result in losses.
In addition, the Fund is subject to credit risk (the risk that an issuer or borrower will default in the payment of principal and/or interest on an instrument), interest rate risk (the risks associated with market changes in interest rates), illiquidity risk/risks of investing in smaller and lower middle market size companies (the risk that the value of Portfolio Investment will decline sharply after its purchase, whether because of adverse developments affecting that security or a general withdrawal of capital from the small and lower middle market) and concentration/lack of diversification risk (various factors, including prevailing market conditions, available investment opportunities, regulatory constraints, constraints imposed by certain portfolio companies, and the timing of investments, may prevent the Investment Manager from diversifying the Fund’s portfolio or may result in the Fund’s portfolio not being as diversified as the Investment Manager may otherwise prefer).
Lastly, the Fund is subject to subordination of interest risk. Portfolio Investments may be in subordinated loans, structurally subordinated loans, mezzanine loans and other structured investments and preferred equity interests or equity interests of an issuer. These Portfolio Investments will be subordinated to the senior obligations of the property or issuer, either contractually, structurally or inherently due to the nature of the securities. Greater credit risks are usually attached to these subordinated investments than to investments in senior obligations. In addition, these securities may not be protected by financial or other covenants, such as limitations upon additional indebtedness, typically protecting the senior debt, and may have limited liquidity.
The Fund’s risk of loss related to any one investment is generally limited to its aggregate investment in such Portfolio Investment.
Siguler Guff Small Business Credit Opportunities Fund, Inc.
Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
The Fund is owned entirely by the Partnership, to which the Fund sold 100,000 shares (“Initial Shares”), at a price of $0.25 per share in an offering exempt from the registration requirements of the Securities Act of 1933, as amended (“1933 Act”) pursuant to Section 4(a)(2) and Regulation D (“Regulation D”) thereof. The Partnership offers and sells limited partnership interests (the “Interests”) to investors (the “Limited Partners”) in an offering exempt from the registration requirements of the 1933 Act pursuant to Regulation D, and will sell its Interests in offerings solely to persons that are both “accredited investors”, as that term is defined in Regulation D, and “qualified purchasers” within the meaning of the 1940 Act. To the extent called for by the Fund, the Partnership, subject to its approval of the need for such funds, may make further contributions to the capital of the Fund to the extent of the Limited Partners’ capital commitment to the Partnership (“Committed Equity Capital”). Total Committed Equity Capital of the Partnership is $112,960,000.�� Total contributed capital to the Partnership through September 30, 2018 was $79,862,720, of which $38,501,057 was contributed to the Fund.
Two Limited Partners of the Partnership have Committed Equity Capital in excess of ten percent of the total Committed Equity Capital of the Partnership, which cumulatively represent approximately 29% of the total Committed Equity Capital of the Partnership. The concentration of these partners’ Committed Equity Capital could have a material effect on the Partnership and the Fund in the event of default or other actions by these partners.
As of September 30, 2018 and December 31, 2017, there were 10,000,000 shares of $0.001 par value common stock authorized, and 100,000 shares issued and outstanding.
Distributions are declared at the sole discretion of the Directors. On February 16, 2018, July 31, 2018 and September 13, 2018, the Fund declared and paid distributions to the Partnership in the amount of $4,383,035, $3,603,591 and $445,394 or $43.83, $36.04 and $4.45 per share, respectively. Additionally, on March 28, 2018, the Fund distributed assets totaling $19,638,083 and liabilities totaling $11,427,775 to the Partnership, which was performed to enable the Fund to be qualified as a regulated investment company for federal income tax purposes (see Note 2). From inception through September 30, 2018, the Fund has distributed $23,953,770 or $239.54 per share to the Partnership.
| 6. | Related Party Transactions |
The Fund has a Board of Directors, a majority of whom are directors that are not “interested persons” of the Fund, as defined in the 1940 Act (the “Independent Directors”). During the three and nine month periods ended September 30, 2018, the Independent Directors received compensation from the Fund aggregating to $42,250 and $128,750, respectively. During the three and nine month periods ended September 30, 2017, the Independent Directors received compensation from the Fund aggregating to $41,250 and $126,750, respectively.
The General Partner of the Partnership and Parallel Partnership has committed $10,000 each to the Partnership and Parallel Partnership, and Affiliates of the General Partner have committed $300,000 and $12,030,000 to the Partnership and Parallel Partnership, respectively.
Siguler Guff Small Business Credit Opportunities Fund, Inc.
Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
Pursuant to the Partnership Agreement, the General Partner of the Partnership and Parallel Partnership shall bear all costs related to the organization, offering, distribution and placement of the partnership interests in the Partnership and Parallel Partnership that exceed $1,500,000 or 0.40% of the Aggregate Capital Commitments. As of September 30, 2018, the General Partner incurred a total of $150,189 of expenses over this threshold related to the Partnership and Parallel Partnership. For the period ended September 30, 2018, the Fund did not incur any expenses that were over this threshold.
Due to/from Affiliate(s) represents amounts paid by or on behalf of the Fund by the Partnership and Parallel Partnership in connection with the purchase of underlying investments and income and expenses paid or received on behalf of the Fund.
On March 28, 2018, the Fund sold $2,148,905 of senior subordinated notes in Chairman’s Foods, LLC and $1,307,355 of term notes in Environmental Group Holdings, LLC to an affiliated entity.
As compensation for its services, the Investment Manager will receive an investment management fee from the Fund (the “Investment Management Fee”). For the period from October 13, 2015 (commencement of operations) through November 8, 2016, the Investment Management Fee was paid by the Fund quarterly in arrears in an amount equal to 1.75% per annum of the Fund’s Invested Capital, as measured as of the close of business on the last business day of such quarterly period. “Invested Capital” means the cost basis of the portfolio investments of the Fund (excluding cash and cash equivalents) that have not been written off or disposed of, including portfolio investments acquired with borrowed funds.
On March 29, 2016, the Investment Manager voluntarily reduced the Investment Management Fee to 1.25% per annum (effective as of the commencement of the Fund’s operations). The Investment Manager has no ability to claw back any Investment Management Fees waived. On November 9, 2016, the Independent Directors amended the Investment Management Agreement reducing the Investment Management Fee from 1.75% to 1.25% per annum of the Fund’s Invested Capital, as measured as of the close of business on the last business day of such quarterly period.
For the three and nine months ended September 30, 2017, the amended Investment Management Fee rate of 1.25% was in effect and as such, the amount of Investment Management Fees waived during the periods were charged as a result of reallocations (see Note 2). Offset Fees have been applied to reduce payments of the Management Fees paid by the Fund for the period ended September 30, 2018.
The General Partner of the Partnership and Parallel Partnership also receives from the Partnership a share of any profits derived from the investments held by the Partnership and Parallel Partnership, including those of the Fund.
In the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Investment Manager expects the risk of loss to be remote.
Siguler Guff Small Business Credit Opportunities Fund, Inc.Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
On August 9, 2018, the Fund committed up to an additional $303,083 in the form of a delayed draw term note (“DDTN”) to provide reserve short-term liquidity to Environmental Group Holdings, LLC (“EG”). The DDTN was provided to EG in the absence of a suitable revolving credit facility, however since this agreement, a revolving credit facility has been set up and the DDTN will not likely be drawn by EG before maturity.
The following per share data and ratios have been derived from information provided in the consolidated financial statements. The following is a schedule of consolidated financial highlights for a common share outstanding for the periods ended September 30, 2018 and September 30, 2017.
| | | For the Nine Months Ended September 30, 2018 | | | For the Nine Months Ended September 30, 2017 | |
| | | | | | | |
| Total Return | | | 9.74 | % | | | 6.80 | % |
| | | | | | | | | |
| Per Share Amounts: | | | | | | | | |
| Net Asset Value, Beginning of Period | | $ | 293.33 | | | $ | 179.09 | |
| Net Investment Income/(Loss) after income tax (benefit)/expense | | | 19.06 | | | | 15.40 | |
|
| Net Realized Gain/(Loss) on Portfolio Investments | | | - | | | | 0.92 | |
| Net Increase/(Decrease) in Net Assets Resulting from Operations | | | 19.06 | | | | 16.32 | |
|
| Contributions from Stockholder | | | 41.70 | | | | 84.69 | |
| Paid-in capital distributed to stockholder | | | (150.07 | ) | | | - | |
| Distributions from net investment income/(loss) | | | (15.69 | ) | | | - | |
| Distributions from net realized gain/(loss) | | | (0.66 | ) | | | - | |
| Net Asset Value, End of Period | | $ | 187.67 | | | $ | 280.10 | |
| | | | | | | | | |
| Net Assets, End of Period | | $ | 18,766,889 | | | $ | 28,009,641 | |
| Average Net Assets | | $ | 20,636,189 | | | $ | 23,957,355 | |
| | | | | | | | | |
| Ratios / Supplemental Data: | | | | | | | | |
| Ratio of net investment income/(loss) after income tax (benefit)/expense to average net assets | | | 9.24 | % | | | 6.43 | % |
|
| Ratio of total expenses to average net assets before Investment Management Fee Waived | | | 6.36 | % | | | 2.69 | % |
|
| Ratio of total expenses to average net assets after Investment Management Fee Waived | | | 6.36 | % | | | 2.66 | % |
|
| Common Shares Outstanding, End of Period | | | 100,000 | | | | 100,000 | |
| Portfolio Turnover Rate | | | 10.18 | % | | | 21.29 | % |
Average Outstanding Borrowings1 | | $ | 17,774,971 | | | $ | 4,600,000 | |
| Asset Coverage Ratio | | | 2.14 | | | | 7.09 | |
1The average outstanding borrowings has been calculated for the periods ended September 30, 2018 and September 30, 2017.
Siguler Guff Small Business Credit Opportunities Fund, Inc.
Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
On October 1, 2018, the Fund purchased an additional $107,878 of senior subordinated notes in Schlotterbeck & Foss, LLC.
On October 17, 2018, $200,903 of the Fund’s outstanding principal balance of the Trachte, LLC senior subordinated notes was prepaid.
