STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
Notes to Financial Statements
September 30, 2021
(Unaudited)
Note 11. Financial Highlights
The following is a schedule of financial highlights for the period from May 14, 2021 to September 30, 2021:
| | | September 30, 2021 | |
| Per share data: | | | |
Net asset value at beginning of period | | $ | 25.00 | |
Net investment income (loss) (1) | | | 0.35 | |
Net realized and unrealized gain (loss) (1) | | | 0.27 | |
Net increase (decrease) in net assets resulting from operations (1) | | | 0.62 | |
Stockholder distributions (2) | | | (0.13 | ) |
Net asset value at end of period | | $ | 25.49 | |
Net assets at end of period | | $ | 65,621,497 | |
Shares outstanding at end of period | | | 2,574,446 | |
Total return based on average net asset value (3) | | | 1.96 | % |
| Ratio/Supplemental data: | | | | |
Ratio of expenses to average net assets (4) | | | 6.56 | % |
Ratio of net investment income (loss) to average net assets (4) | | | 4.46 | % |
Portfolio turnover (5) | | | 1.17 | % |
| (1) | The per share data was derived by using the weighted average shares outstanding during the period presented. |
| (2) | Management monitors available taxable earnings, including net investment income and realized capital gains, to determine if a tax return of capital may occur for the year. To the extent the Company’s taxable earnings fall below the total amount of the Company’s distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to the Company’s stockholders. The tax character of distributions will be determined at the end of the fiscal year. |
| (3) | Total return based on average net asset value is calculated by dividing the net increase (decrease) in net assets resulting from operations by the average net asset value. Return calculations are not annualized. |
| (4) | Ratios are annualized. To the extent incentive fees are included within the ratio, they are not annualized. |
| (5) | Ratio is not annualized. |
12. Subsequent Events
The Company has evaluated subsequent events through November 15, 2021, the date on which the financial statements were issued. On November 10, 2021, the Company declared a dividend of $0.18 per share for Stockholders on record as of November 10, 2021, to be paid in the form of cash or additional shares on November 19, 2021, the distribution payment date.
On October 1, 2021 Temporary Housing Directory, LLC was sold and the Company received full repayment of outstanding principal, interest and prepayment fees of the first lien senior secured debt investment and realized a gain on its equity.
On October 28, 2021 the Company drew an additional $5,000,000 under the Secured Credit Facility.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward Looking Statements
Statements contained in this Form 10-Q (including those relating to current and future market conditions and trends in respect thereof) that are not historical facts are based on current expectations, estimates, projections, opinions and/or beliefs of the Company, the Advisor and Star Mountain. Such statements involve known and unknown risks, uncertainties and other factors and undue reliance should not be placed thereon. Certain information contained in this Form 10-Q constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “seek,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” “target,” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of the Company may differ materially from those reflected or contemplated in such forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond the Company’s control and are difficult to predict, that could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements including, without limitation, the risks, uncertainties and other factors the Company identifies in the section entitled “Item 1A. Risk Factors” and elsewhere in this Form 10-Q and in the Company’s filings with the SEC.
Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, some of those assumptions are based on the work of third parties and any of those assumptions could prove to be inaccurate; as a result, the forward-looking statements based on those assumptions also could prove to be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Form 10-Q should not be regarded as a representation by us that the Company’s plans and objectives will be achieved. These risks and uncertainties include those described or identified in the section entitled “Item 1A. Risk Factors” and elsewhere in this Form 10-Q. Investors should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. The Company does not undertake any obligation to update or revise any forward-looking statements or any other information contained herein, except as required by applicable law. The safe harbor provisions of Section 21E of the Exchange Act, which preclude civil liability for certain forward-looking statements, do not apply to the forward- looking statements in this Form 10-Q because the Company is an investment company.
The following factors are among those that may cause actual results to differ materially from the Company’s forward-looking statements:
| • | the Company’s future operating results; |
| • | changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including with respect to changes from the impact of the COVID-19 pandemic; the length and duration of the COVID-19 outbreak in the United States as well as worldwide and the magnitude of the economic impact of that outbreak; |
| • | interest rate volatility, including volatility associated with the decommissioning of LIBOR and the transition to new reference rates; |
| • | the effect of the disruption caused by the COVID-19 pandemic on the Company’s ability to effectively manage the Company’s business and on the availability of equity and debt capital and the Company’s use of borrowed money to finance a portion of the Company’s investments; |
| • | the Company’s business prospects and the prospects of the Company’s prospective portfolio companies; |
| • | the impact of increased competition; |
| • | the Company’s contractual arrangements and relationships with third parties; |
| • | the dependence of the Company’s future success on the general economy and its impact on the industries in which the Company invests; |
| • | the ability of the Company’s prospective portfolio companies to achieve their objectives. |
| • | the relative and absolute performance of the Advisor; |
| • | the ability of the Advisor and its affiliates to retain talented professionals; |
| • | the Company’s expected financings and investments; |
| • | the Company’s ability to pay dividends or make distributions; |
| • | the adequacy of the Company’s cash resources. |
| • | risks associated with possible disruptions due to terrorism in the Company’s operations or the economy generally; |
| • | the impact of future acquisitions and divestitures; |
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
| • | the Company’s regulatory structure and tax status as a BDC and a RIC; and |
| • | future changes in laws or regulations and conditions in the Company’s operating areas. |
The safe harbor provisions of Section 21E of the Exchange Act, which preclude civil liability for certain forward-looking statements, do not apply to the forward-looking statements in this Form 10-Q.
Overview:
Star Mountain Lower Middle-Market Corp. is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act, as amended. In addition, for U.S. federal income tax purposes, the Company has elected to be treated and intends to continue to be treated as a RIC under the subchapter M of the Internal Revenue Code of 1986, as amended. As such, the Company will be required to comply with various regulatory requirements, such as the requirement to invest at least 70% of the Company’s assets in “qualifying assets,” source of income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of the Company’s taxable income.
The Company’s investment objectives are to generate current income and capital appreciation. The Company seeks to achieve its investment objectives by investing primarily in privately negotiated loans and equity investments to SMBs generally with annual revenues greater than $15 million and earnings before interest, taxes, depreciation and amortization of less than $50 million. Generally, these businesses are owner-operated with an average 20+ year operating history. To accomplish this, the Company plans to make direct investments in SMBs and make investments in investment funds focused primarily on investing in SMBs generally not owned by large private equity firms.
The Company seeks to provide investors with access to a diversified portfolio of credit investments generating current income distributions with equity upside. Capital protection is achieved through defensive structures with affirmative, negative and financial maintenance covenants and active portfolio management which results in generally low volatility and low correlation to public market indices. The Company aims to target diversification of assets by vintage, industry and geography through direct originations and acquisitions of loan portfolios.
The Company’s investment strategy may be complemented by secondary fund investments and secondary loans, consisting of generally non-brokered purchases of limited partnership interests in lower middle-market credit-oriented funds and secondary loans. This complementary strategy may result in portfolio construction and diversification benefits.
The Company’s investments are subject to a number of risks. See “Part 2. Item 1A. Risk Factors.”
Characteristics of and Risks Related to Investments in Private Companies:
The Company will generally invest in limited partnership interests of funds focused on making investments in SMBs and in long-term loans to and private equity investments in small and medium-sized private companies that do not have an established trading market. The Company typically exits its debt and equity investments through structured terms and amortization or when the portfolio company has a liquidity event such as a sale, recapitalization, or initial public offering of the company. The illiquidity of the Company’s investments may adversely affect the Company’s ability to dispose of debt and equity securities at times when it may be otherwise advantageous for the Company to liquidate such investments. In addition, if the Company were forced to immediately liquidate some or all of the investments in the portfolio, the proceeds of such liquidation could be significantly less than the current value of such investments.
Investments in private businesses involve a high degree of business and financial risk, which can result in substantial losses for the Stockholders in those investments and accordingly should be considered speculative. There is generally no publicly available information about the companies in which the Company invests, and the Company relies significantly on the diligence of its service providers and agents to obtain information in connection with investment decisions. If the Company is unable to identify all material information about these companies, among other factors, the Company may fail to receive the expected return on investment or lose some or all of the money invested in these companies. In addition, these businesses may have shorter operating histories, narrower product lines, smaller market shares and less experienced management than their larger competitors and may be more vulnerable to customer preferences, market conditions, and loss of key personnel, or economic downturns, which may adversely affect the return on, or the recovery of, investments in such businesses.
Operating and Regulatory Structure:
The Company’s investment activities are managed by Star Mountain Fund Management, LLC and supervised by the Board, a majority of whom are independent. Under the Investment Advisory Agreement, the Company pays Star Mountain Fund Management, LLC a quarterly management fee based on the Company’s average gross assets as well as incentive fees based on the Company’s performance.
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
The Company has entered into an Administration Agreement with Star Mountain Fund Management, LLC to serve as Administrator for the Company. Pursuant to the Administration Agreement, Star Mountain Fund Management, LLC will provide the Company with services such as accounting, financial reporting, legal and compliance support and investor relations support, necessary for the Company to operate or engage a third-party firm to perform some or all of these functions.
Revenues:
The Company generates revenues primarily through receipt of interest income from the Portfolio Investments the Company holds. In addition, the Company generates income from various loan origination and other fees and dividends on direct equity investments. The debt the Company invests in will typically not be rated by any rating agency, but if it were, it is likely that such debt would be rated below investment grade.
Expenses:
The Advisor and/or any affiliate of the Advisor that enters into an Administration Agreement with the Company are authorized to incur and pay, in the name and on behalf of the Company, all expenses which they deem necessary or advisable.
The Advisor is responsible for and pays, or causes to be paid, all Overhead Expenses, except to the extent provided below. For this purpose, “Overhead Expenses” include overhead expenses of an ordinarily recurring nature such as rent, utilities, supplies, secretarial expenses, stationery, charges for furniture, fixtures and equipment, employee benefits including insurance, payroll taxes and compensation of all employees.
The Company reimburses the Advisor or its affiliates, as applicable, for all costs and expenses incurred in connection with administering the Company’s business including out of pocket expenses (including travel, lodging and meals), the Company’s allocable portion of the Advisor’s or any affiliated Administrator’s Overhead Expenses in performing its obligations under the Advisory Agreement or any Administration Agreement, as applicable, including rent and the allocable portion of the compensation paid by the Advisor or its affiliates, as applicable, to the Company’s Chief Compliance Officer and Chief Financial Officer and their respective staffs (based on the percentage of time such individuals devote, on an estimated basis, to the business affairs of the Company), third-party software licensing, implementation, data management and recovery services and custom development costs.
All other expenses are borne by the Company, including legal, accounting, tax, auditing, consulting and other professional expenses (including, without limitation, expenses relating to establishing reputation and public relations in connection with self-sourced lending or other financial transactions); the Management Fee and Incentive Compensation; professional liability insurance (including costs relating to directors’ and officers’ liability insurance and errors and omissions insurance); research and market data expenses; interest on indebtedness; custodial fees; bank service fees; investment-related fees and expenses (such as third-party sourcing fees, fees and expenses of legal and other professionals, due diligence expenses and travel, lodging and meal expenses) related to the analysis, purchase or sale of investments, whether or not the investments are consummated; expenses related to special purpose vehicles (each, an “SPV”) (including, without limitation, Overhead Expenses related thereto); interest payable on debt, if any, incurred to finance the Company’s investments; other expenses related to the purchase, monitoring, sale, settlement, custody or transmittal of Company assets (directly or through trading affiliates) as are determined by the Advisor or an affiliate thereof, as applicable, in its sole discretion (including costs associated with systems and software used in connection with investment-related activities); costs of reporting to Stockholders and Stockholder meetings; administration fees and expenses charged by any third-party provider of administration services; entity-level taxes; expenses relating to the offer, transfer, sale and marketing of shares; filing fees and expenses; Federal and state registration fees and expenses; regulatory and compliance fees and expenses of the Company (including with respect to any registration activities of the Company); costs of winding up and liquidating the Company; costs associated with ensuring compliance with the applicable BDC and RIC requirements, including, but not limited to, costs incurred in connection with the organization of, and transfer of assets to, a private investment vehicle; expenses incurred in connection with a Stockholder that defaults in respect of a capital commitment; and other expenses associated with the operation of the Company and its investment activities, including extraordinary expenses such as litigation, workout and restructuring and indemnification expenses, if any.
The Company is also responsible for the costs of the offering of common shares and other securities, including, but not limited to, all expenses incurred in connection with an IPO; costs and expenses relating to distributions paid to Stockholders; costs of effecting sales and repurchases of the Company’s securities; allocated costs incurred by the Advisor or its affiliate in providing managerial assistance to those companies in which the Company has invested who request it; transfer agent fees; fees and expenses paid to the Company’s independent directors (including expenses and costs related to meetings of the independent directors); for the three months ended September 30, 2021 director expense is $20,164 as shown on the Statement of Operations. Additionally costs include preparing and filing reports with the SEC and other Company reporting and compliance costs, including registration and listing fees; the Company’s allocable portion of the fidelity bond; the costs of reports, proxy statements or other notices to Stockholders, including printing and mailing costs; the costs of any Stockholders’ meetings and communications; expenses payable under any underwriting agreement, including associated fees, expenses and any indemnification obligations; and all other expenses incurred by the Company in connection with maintaining its status as a BDC. In addition, the Company may make investments in investment funds focused primarily on investing in SMBs. As a result, the Company (and the Stockholders, indirectly through the Company) bears the Company’s proportionate share of the fees and expenses paid by the shareholders of such investment fund.
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
Generally, expenses incurred directly in connection with a particular investment (or proposed investment) of the Company and other accounts managed by the Advisor and/or certain affiliates (the “Star Mountain Accounts”) are allocated among the Company and other Star Mountain Accounts pro rata based upon capital invested (or proposed to be invested) in such investment; provided that expenses specifically attributable to the Company or any other Star Mountain Account may be allocated to the Company or any such other Star Mountain Account, as applicable. The Advisor allocates other expenses among the Company and other Star Mountain Accounts in a fair and equitable manner taking into account such factors as it deems appropriate.
Notwithstanding the foregoing, in light of the Company’s investment mandate, which may include investments in small loans, niche credits and other similar securities, it may not be practical to specifically allocate certain investment-related expenses to the particular loans to which they relate. The Advisor, in its absolute and sole discretion, may instead allocate such expenses (along with expenses that relate to transactions that are not consummated) pro rata across one or more investments.
Advisor Expenses:
The Advisor shall pay (a) the respective compensation and expenses of the officers and employees of the Advisor, including salaries and benefits of the officers and employees of the Advisor, except as otherwise specified; (b) expenses associated with office space and facilities, utilities and telephone services, news, quotation and similar information and pricing services, computer equipment, travel expenses and support of the Advisor incurred in connection with Company operations; and (c) organizational expenses in excess of $1,000,000.
Board Approval of the Investment Advisory Agreement:
The Investment Advisory Agreement was approved by the Board at a meeting of the Board called, in part, for such purpose, on February 24, 2021. Such approval was made in accordance with, and on the basis of an evaluation satisfactory to the Board as required by, Section 15(c) of the 1940 Act and applicable rules and regulations thereunder, including a consideration of, among other factors, (i) the nature, quality and extent of the advisory and other services to be provided under the agreement, (ii) the investment performance of the personnel who manage investment portfolios with objectives similar to the Company’s, (iii) comparative data with respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives and (iv) information about the services to be performed and the personnel performing such services under the agreement.
Portfolio and Investment Activity:
For the three months ended September 30, 2021, the Company invested (net of original issue discount) $18.5 million in three new portfolio companies and $1.4 million in two existing portfolio companies as reflected in the Schedule of Investments.
The Company had $421,124 and $828,550 in principal repayments for the three months ended September 30, 2021 and for the period from May 14, 2021 to September 30, 2021, respectively, of which $182,193 was paid in cash as of September 30, 2021 (with the remaining balance as receivable).
As of September 30, 2021, the Company’s investments consisted of the following:
| | | September 30, 2021 | |
| Fair Value: | | | | | | |
| First Lien Senior Secured Loan | | $ | 48,837,417 | | | | 69.4 | % |
| Second Lien Senior Secured Loan | | | 8,706,657 | | | | 12.4 | |
| Preferred Equity Securities | | | 9,816,287 | | | | 13.9 | |
| Warrants and Other Equity Securities | | | 3,061,949 | | | | 4.3 | |
| Total | | $ | 70,422,310 | | | | 100.00 | % |
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
The table below describes investments by industry composition based on fair value as of September 30, 2021:
| | | September 30, 2021 | |
| Fair Value: | | | | | | |
| Advertising | | $ | 2,991,695 | | | | 4.3 | % |
| Aerospace & Defense | | | 3,579,112 | | | | 5.1 | |
| Commercial Services & Supplies | | | 2,586,806 | | | | 3.7 | |
| Construction & Engineering | | | 17,493,626 | | | | 24.8 | |
| Consumer Finance | | | 2,848,467 | | | | 4.0 | |
| Diversified Telecommunication Services | | | 8,157,693 | | | | 11.6 | |
| Entertainment | | | 2,018,279 | | | | 2.9 | |
| Healthcare Providers & Services | | | 1,493,057 | | | | 2.1 | |
| Household Durables | | | 2,750,271 | | | | 3.9 | |
| Household Products | | | 4,053,750 | | | | 5.8 | |
| IT Services | | | 2,006,352 | | | | 2.8 | |
| Professional Services | | | 17,815,958 | | | | 25.3 | |
| Road & Rail | | | 1,008,172 | | | | 1.4 | |
| Software | | | 1,619,072 | | | | 2.3 | |
| Total | | $ | 70,422,310 | | | | 100.0 | % |
Portfolio Asset Quality:
The Advisor employs an investment risk rating to assign each investment an investment grade no less than quarterly. The system is intended primarily to reflect the underlying risk of a portfolio investment relative to the Company’s initial cost basis in respect of such portfolio investment (i.e., at the time of origination), although it may also take into account under certain circumstances, the portfolio company’s cash flow generation relative to underwriting expectations, recent business performance trends, collateral coverage and other relevant factors.
When necessary, the Advisor will update its investment risk ratings, borrowing base criteria and covenant compliance reports. The investment risk rating of a particular investment should not, however, be deemed to be a guarantee of the investment’s future performance.
Performance Risk Rating
| | Summary Description
|
Grade 1 | | Investment is performing above expectations. Full return of principal, interest and dividend income is expected. |
Grade 2 | | Investment is performing in-line with expectations. Risk factors remain neutral or favorable compared with initial underwriting. All investments are given a “2” at the time of origination. |
Grade 3 | | Investment is performing below expectations. Capital impairment or payment delinquency is not anticipated. The investment may also be out of compliance with certain financial covenants. |
Grade 4 | | Investment is performing below expectations. Quantitative or qualitative risks have increased materially. Delinquency of interest and / or dividend payments is anticipated. No loss of principal anticipated. |
Grade 5 | | Investment is performing substantially below expectations. It is anticipated that the Company will not recoup its initial cost basis and may realize a loss upon exit. Most or all of the debt covenants are out of compliance. Amortization, interest and / or dividend payments are substantially delinquent. |
In the event of credit deterioration, the Advisor may form a team or engage outside advisors to preserve the value of the Company’s investment, including requirement of additional equitization from the ownership group or exercising other creditor rights.
For investments rated 4 or 5, the Advisor enhances its level of scrutiny over the monitoring of such portfolio company and will develop an action plan to address the underperformance. The Advisor’s senior investment team has extensive experience managing investments through workouts, restructurings, and bankruptcies.
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
The following table shows the distribution of the Company’s investments on the 1 to 5 investment performance risk rating scale as of September 30, 2021:
| Investment Performance Risk Rating | | Investments at Fair Value | | | Percentage of Total Investments | |
1
| | $ | - | | | | - | % |
2
| | | 62,847,449
| | | | 89.2 | |
3
| | | 7,574,861 | | | | 10.8 | |
4
| | | -
| | | | -
| |
5
| | | -
| | | | -
| |
| | $ | 70,422,310 | | | | 100.0 | % |
Results of Operations:
The Company is a newly-formed entity that commenced principal operations on May 14, 2021. Since the Company commenced principal operations on May 14, 2021, there are no prior periods with which to compare the Company’s operating results.
The following table represents the operating results for the three months ended September 30, 2021:
| | Three months ended September 30, 2021 | |
| Total investment income | | $ | 1,598,588 | |
| Total expenses | | | 1,126,956 | |
| Net investment income before taxes | | | 471,632 | |
| Income taxes, including excise taxes | | | - | |
| Net investment income | | | 471,632 | |
| Net realized gain (loss) on investments | | | - | |
| Net realized gain (loss) | | | - | |
| Net change in unrealized gain loss on investments | | | 1,010,683 | |
| Net change in unrealized gain (loss) | | | 1,010,683 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 1,482,315 | |
The following table represents the operating results for the period May 14, 2021 to September 30, 2021:
| | For the period May 14, 2021 to September 30, 2021 | |
| Total investment income | | $ | 2,294,413 | |
| Total expenses | | | 1,498,931 | |
| Net investment income before taxes | | | 795,482 | |
| Income taxes, including excise taxes | | | - | |
| Net investment income | | | 795,482 | |
| Net realized gain (loss) on investments | | | - | |
| Net realized gain (loss) | | | - | |
| Net change in unrealized gain loss on investments | | | 620,903 | |
| Net change in unrealized gain (loss) | | | 620,903 | |
Net increase (decrease) in net assets resulting from operations
| | $ | 1,416,385 | |
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
Investment Income:
The composition of the Company’s investment income was as follows for the three months ended September 30, 2021:
| | | Three months ended September 30, 2021 | |
| Non-controlled/non-affiliate investment income | | | |
| Interest income | | $ | 1,434,199 | |
| PIK interest income | | | 86,232 | |
| Dividend income | | | 52,343 | |
| Controlled/affiliate investment income | | | | |
| Interest income | | | 25,814 | |
| Total investment income | | $ | 1,598,588 | |
The composition of the Company’s investment income was as follows for the period from May 14, 2021 to September 30, 2021:
| | | Period from May 14, 2021 to September 30, 2021 | |
| Non-controlled/non-affiliate investment income | | | |
| Interest income | | $ | 2,041,073 | |
| PIK interest income | | | 156,937 | |
| Dividend income | | | 56,413 | |
| Controlled/affiliate investment income | | | | |
| Interest income | | | 39,990 | |
| Total investment income | | $ | 2,294,413 | |
Operating Expenses:
The composition of the Company’s operating expenses was as follows for the three months ended September 30, 2021:
| | | Three months ended September 30, 2021 | |
| Management fee | | $ | 263,221 | |
| Organizational expense | | | 210,303 | |
| Professional fees | | | 164,258 | |
| Legal expense | | | 199,114 | |
| General and administrative fees | | | 22,181 | |
| Incentive fee | | | 124,180 | |
| Interest and other financing fees | | | 123,535 | |
| Director expense | | | 20,164 | |
| Expenses | | $ | 1,126,956 | |
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
The composition of the Company’s operating expenses was as follows for the period from May 14, 2021 to September 30, 2021:
| | | Period from May 14, 2021 to September 30, 2021
| |
Management fee | | $ | 363,761 | |
Organizational expense | | | 272,555 | |
Professional fees | | | 229,099 | |
Legal expense | | | 199,114 | |
General and administrative fees | | | 156,002 | |
Incentive fee | | | 124,180 | |
Interest and other financing fees | | | 123,535 | |
| Director expense | | | 30,685 | |
| Expenses | | $ | 1,498,931 | |
Income Taxes, Including Excise Tax:
On May 14, 2021, the Company elected to be regulated as a BDC under the 1940 Act. The Company also elected to be treated as a RIC under Subchapter M of the Code, for the taxable year ending December 31, 2021, and intends to qualify annually as a RIC. As long as the Company maintains its status as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its Stockholders. Rather, any tax liability related to income earned by the Company represents obligations of the Company’s Stockholders and will not be reflected in the financial statements of the Company.
To qualify as a RIC under Subchapter M of the Code, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, to qualify for RIC tax treatment, the Company must distribute to its Stockholders, for each taxable year, at least 90.0% of its “investment company taxable income” for that year, which is generally its ordinary income plus the excess of its realized net short-term capital gains over its realized net long-term capital losses. In order for the Company not to be subject to U.S. federal excise taxes, it must distribute annually an amount at least equal to the sum of (i) 98.0% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the calendar year and (iii) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. The Company, at its discretion, may carry forward taxable income in excess of calendar year dividends and pay a 4.0% nondeductible U.S. federal excise tax on this income. For the three months ended September 30, 2021 and for the period from May 14, 2021 to September 30, 2021, the Company did not record a net expense on the statements of operations for U.S. federal excise tax.
The Company accounts for income taxes in conformity with ASC Topic 740 — Income Taxes (“ASC Topic 740”). ASC Topic 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company did not record any uncertain income tax positions for the period ending September 30, 2021.
Net Increase (Decrease) in Net Assets Resulting from Operations:
For the three months ended September 30, 2021 and for the period from May 14, 2021 to September 30, 2021, the net increase (decrease) in net assets resulting from operations was $1,482,315 and 1,416,385, respectively. Based on the weighted average shares of Common Stock outstanding for the three months ended September 30, 2021 and for the period from May 14, 2021 to September 30, 2021, the Company’s per share net increase (decrease) in net assets resulting from operations was $0.61 and $0.62, respectively.
Financial Condition, Liquidity and Capital Resources:
The Company will generate cash primarily from the net proceeds generated from private offerings, and from cash flows from fees, interest and dividends earned from investments and principal repayments, proceeds from sales of investments and borrowings under the Company’s Secured Credit Facility. The Company’s primary use of funds will be direct credit and equity investments in SMBs, payments of expenses and distributions to holders of the Company’s Common Stock and, to a lesser extent, the Company may invest in limited partnership interests of funds focused on making investments in SMBs. As of September 30, 2021, the Company had approximately $2.1 million in cash on hand and $5.0 million in debt outstanding.
In accordance with the 1940 Act, the Company generally is required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all borrowings and any preferred stock that may be issued in the future, of at least 150%. If this ratio declines below 150%, the Company cannot incur additional debt and could be required to sell a portion of the Company’s investments to repay some debt when it is disadvantageous to do so.
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
Capital Contributions:
For the three months ended September 30, 2021 and for the period from May 14, 2021 to September 30, 2021, the Company entered into subscription agreements (collectively, the “Subscription Agreements”) with new investors, providing for the private placement of common shares. Under the terms of the Subscription Agreements, investors are required to fund drawdowns to purchase common shares up to the amount of their respective capital commitments on an as-needed basis with a minimum of 8 business days’ prior notice. As of September 30, 2021, the Company had received capital commitments totaling $115.5 million.
At the time of the BDC Conversion on May 14, 2021, the Company issued and sold 1,688,601 shares of the Company’s Common Stock, par value $0.001 per share, for an aggregate offering price of $42,215,029.
Pursuant to a capital drawdown notice to its investors, the Company issued and sold 629,240 shares of the Company’s Common Stock, par value $0.001 per share, on June 11, 2021, for an aggregate offering price of $15,851,000.
Pursuant to a capital drawdown notice to its investors, the Company issued and sold 244,608 shares of the Company’s Common Stock, par value $0.001 per share, on August 17, 2021, for an aggregate offering price of $6,139,650.
Distributions:
The Board will determine the timing and amount, if any, of the Company’s distributions. The Company intends to pay distributions on a quarterly basis. In order to avoid corporate-level tax on the distributed income as a RIC, the Company must distribute to Stockholders at least 90.0% of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, on an annual basis out of the assets legally available for such distributions. In order for the Company to avoid certain excise taxes imposed on RICs, the Company currently intends to distribute, or be deemed to distribute, during each calendar year an amount at least equal to the sum of (1) 98.0% of the Company’s ordinary income for the calendar year, (2) 98.2% of the Company’s capital gain in excess of capital loss for the one-year period ending on October 31 of such calendar year and (3) any ordinary income and net capital gain for preceding years that were not distributed during such years and on which we paid no U.S. federal income tax.
The Company has adopted an “opt out” DRP for Stockholders. When a distribution is declared, Stockholders’ cash distributions will automatically be reinvested in additional shares of Common Stock unless a Stockholder specifically “opts out” of the Company’s DRP. Stockholders may opt out of the Company’s DRP by providing notice twenty (20) business days in advance of the distribution payment date.
If a Stockholder opts out, that Stockholder will receive cash distributions. Although distributions paid in the form of additional shares of Common Stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, Stockholders participating in the Company’s DRP will not receive any corresponding cash distributions with which to pay any such applicable taxes. If distributions paid exceed tax earnings and profits, portions of the distribution can be recorded as a return of capital.
Pursuant to a distribution notice to its investors, the Company issued 11,997 DRP shares of the Company’s Common Stock, par value $0.001 per share, on August 20, 2021, for an aggregate offering price of $300,751.
Pursuant to a distribution notice to its investors, the Company distributed $0.13 per share, on August 20, 2021, for an aggregate cash distribution of $568 to a Stockholder that opted-out of the DRP.
Transactions with Related Parties:
The Company has various business relationships with affiliated or related parties, including the following:
| • | The Company has an Investment Advisory Agreement with Star Mountain Fund Management, LLC, an investment advisor registered with the SEC, to manage day-to-day operating and investing activities. The Company pays Star Mountain Fund Management, LLC a fee for its services under the Investment Advisory Agreement consisting of two components - a base management fee and an incentive fee. See Note 2 to the financial statements and “Significant Accounting Policies” for additional information. |
| • | The Company has an Administration Agreement with Star Mountain Fund Management, LLC to provide the Company with the office facilities and administrative services necessary to conduct day-to-day operations. See Note 2 to the financial statements for additional information. |
| • | Brett A. Hickey, the Company’s Chief Executive Officer and Chairman of the Board, is also the Chief Executive Officer of Star Mountain Fund Management, LLC. Christopher J. Gimbert, the Company’s Chief Financial Officer, is also the Chief Financial Officer of Star Mountain Fund Management, LLC. Stephen B. Paras serves as a director on the Board and is a Managing Director and Chief Credit Officer of Star Mountain Fund Management, LLC. Jaspal Bajaj, the Company’s Chief Compliance Officer, is also the Chief Compliance Officer and Controller of Star Mountain Fund Management, LLC. |
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
| • | The Company has a license agreement with Star Mountain Capital, LLC, under which Star Mountain Capital, LLC, has agreed to grant the Company a non-exclusive, royalty-free license to use the name “Star Mountain Capital” for specified purposes in the Company’s business. |
In addition, the Company has adopted a formal code of ethics that governs the conduct of Star Mountain Capital’s officers, directors and employees. The Company’s officers and directors also remain subject to the duties imposed by both the 1940 Act and Delaware General Corporation Law.
Contractual Obligations:
Payments for investment advisory services under the Investment Advisory Agreement in future periods are equal to (a) a management fee calculated at an annual rate of 1.75% of the value of the Company’s gross assets and (b) an incentive fee based on the Company’s performance. The Company has entered into an administration agreement with Star Mountain Fund Management, LLC to serve as the Company’s Administrator. The Company anticipates that the Administrator will be reimbursed for administrative expenses incurred on the Company’s behalf.
Off-Balance Sheet Arrangements:
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.
Critical Accounting Policies:
This discussion of the Company’s expected operating plans is based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. The preparation of these financial statements will require the Advisor to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, the Company’s critical accounting policies, including revenue recognition and taxes, have been described in Item 1. Note 2. Summary of Significant Accounting Policies.
Valuation of Portfolio Investments:
Investments for which market quotations are readily available are typically valued at those market quotations. To validate market quotations, the Company utilizes a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued quarterly at fair value as determined in good faith by the Board, based on, among other considerations, the input of the Advisor, the Company’s Audit Committee and independent third-party valuation firm, engaged at the direction of the Board.
The Board oversees a multi-step valuation process, which includes, among other procedures, the following:
| • | the quarterly valuation process commences with each portfolio company or investment being initially evaluated by the investment professionals of the Advisor responsible for the monitoring of the portfolio investment; |
| • | the Advisor’s Valuation Committee reviews the valuations provided by the independent third-party valuation firm and develops a valuation recommendation. Valuation recommendations are presented to the Audit Committee of the Board; |
| • | the Audit Committee of the Board reviews valuation recommendations of the Advisor incorporating any adjustments or further supplements by the Advisor to the valuations; and |
| • | the Board discusses these valuations and determines the fair value of each investment in the portfolio in good faith, based on the input of the Advisor, the independent valuation firm, and the Audit Committee. |
The Company applies Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurement (ASC 820), as amended, which establishes a framework for measuring fair value in accordance with U.S. GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, the Company considers its principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs used in determination of fair value.
The three-tier hierarchy of inputs is summarized below.
| • | Level 1 - Quoted prices are available in active markets/exchanges for identical investments as of the reporting date. |
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
| • | Level 2 - Pricing inputs are observable inputs including, but not limited to, prices quoted for similar assets or liabilities in active markets/exchanges or prices quoted for identical or similar assets or liabilities in markets that are not active, and fair value is determined through the use of models or other valuation methodologies. |
| • | Level 3 - Pricing inputs are unobservable for the investment and include activities where there is little, if any, market activity for the investment. The inputs into determination of fair value require significant management judgment and estimation. |
The use of these valuation models requires significant estimation and judgment by the Advisor. The Advisor uses a third-party valuation firm to ensure fair values are determined on an independent basis. While the Company believes its valuation methods are appropriate, other market participants may value identical assets differently than the Company at the measurement date. The methods used by the Company may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The Company may also have risk associated with its concentration of investments in certain geographic regions and industries.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Accordingly, the degree of judgment exercised by the Advisor in determining fair value is greatest for securities categorized in Level 3.
The determination of what constitutes “observable” requires significant judgment by the Advisor. The Advisor considers observable data to be market data, which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, which may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and observability of prices and inputs may be reduced for many investments. This condition could cause the investment to be reclassified to a lower level within the fair value hierarchy.
In addition, on December 3, 2020, the SEC announced its adoption of Rule 2a-5 under the 1940 Act, which establishes an updated regulatory framework for determining fair value in good faith for purposes of the 1940 Act. The new rule clarifies how fund boards can satisfy their valuation obligations in light of recent market developments. The rule will permit boards, subject to board oversight and certain other conditions, to designate certain parties to perform the fair value determinations. The Company will continue to review the new rule and its impact on the Company and its valuation policies, and will comply with its valuation requirements on or before the SEC’s compliance date in 2022.
| Quantitative and Qualitative Disclosures About Market Risk |
The Company is subject to financial market risks, including changes in interest rates. The Company invests primarily in illiquid debt securities of private companies. Most of the Company’s investments do not have a readily available market price, and the Company values these investments at fair value as determined in good faith by the Board in accordance with the Company’s valuation policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each Portfolio Investment while employing a consistently applied valuation process for the types of investments the Company makes.
The majority of the loans in the Company’s portfolio have floating interest rates, and we expect that the Company’s loans in the future may also have floating interest rates. These loans are usually based on a floating LIBOR and typically have interest rate re-set provisions that adjust applicable interest rates under such loans to current market rates on a monthly or quarterly basis. The majority of the loans in the Company’s current portfolio have interest rate floors which will effectively convert the loans to fixed rate loans in the event interest rates decrease.
On March 5, 2021, the United Kingdom’s Financial Conduct Authority (“FCA”) and ICE Benchmark Authority formally announced the dates after which the LIBORs will no longer be representative and subsequently cease publication. Certain LIBORs (e.g., all EUR and CHF LIBOR settings, the Spot Next/Overnight, 1 week, 2 month and 12 month JPY and GBP LIBOR settings, and the 1 week and 2 months US dollar LIBOR settings) will cease publication after December 31, 2021. However, the publication of certain other LIBORs (e.g., the overnight, 1 month, 3 month, 6 month, and 12 months USD LIBOR settings) will continue through at least June 30, 2023. This announcement and any additional regulatory or market changes may have an adverse impact on the Company’s investments, performance or financial condition. Until then, the Company may continue to invest in instruments that reference such rates or otherwise use such reference rates due to favorable liquidity or pricing. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on the Company’s overall financial condition or results of operations. In addition, if LIBOR ceases to exist, we may need to renegotiate agreements extending beyond the expected transition dates with the Company’s portfolio companies that utilize LIBOR as a factor in determining the interest rate, in order to replace LIBOR with the new standard that is established, which may have an adverse effect on the Company’s overall financial condition or results of operations. Following the replacement of LIBOR, some or all of these agreements may bear interest a lower interest rate, which could have an adverse impact on the Company’s results of operations. Moreover, if LIBOR ceases to exist, we may need to renegotiate certain terms of the Company’s credit facilities. If we are unable to do so, amounts drawn under the Company’s credit facilities may bear interest at a higher rate, which would increase the cost of the Company’s borrowings and, in turn, affect the Company’s results of operations.
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
Assuming that the statement of assets and liabilities as of September 30, 2021, was to remain constant and that we took no actions to alter the Company’s existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates:
Change in Interest Rates | | Increase (decrease) in interest income | | | Increase (decrease) in interest expense | | | Net increase (decrease) in net investment income | |
Down 25 basis points | | $ | - | | | $ | (12,500 | ) | | $ | 12,500 | |
Up 100 basis points | | | 46,723 | | | | 50,000 | | | | (3,277 | ) |
Up 200 basis points | | | 386,191 | | | | 100,000 | | | | 286,191 | |
Up 300 basis points | | | 931,765 | | | | 150,000 | | | | 781,765 | |
Although we believe that this analysis is indicative of the Company’s existing sensitivity to interest rate changes, it does not adjust for changes in the credit market, credit quality, the size and composition of the assets in the Company’s portfolio and other business developments, including borrowing under the credit facility or other borrowings that could affect net increase in net assets resulting from operations, or net income. Accordingly, we can offer no assurances that actual results would not differ materially from the analysis above.
Evaluation of Disclosure over Financial Procedures: The Company’s disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurances that information required to be disclosed in this and other reports filed under the Securities Exchange Act of 1934, as amended, is recorded processed, summarized and reported within the required time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
The Company’s Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in alerting them on a timely basis in relation to material Company information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934. Any system of controls, regardless of design and execution, can provide only reasonable assurance of achieving the desired control objectives.
Changes in Internal Control over Financial Reporting: Future events may impact the effectiveness of a system of controls, and managerial judgement will be required to evaluate the cost-benefit relationship of implementing incremental controls and procedures. There have been no changes in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
As a BDC, the Company cannot generally issue and sell its Common Stock at a price below net asset value per share. It may, however, issue and sell its Common Stock, at a price below the current net asset value of the Common Stock, or issue and sell warrants, options or rights to acquire such Common Stock, at a price below the current net asset value of the Common Stock if the Company’s Board determines that such sale is in the Company’s best interest and in the best interests of its Stockholders, and its Stockholders have approved the policy and practice of making such sales within the preceding 12 months. In any such case, the price at which the securities are to be issued and sold may not be less than a price that, in the determination of the Board, closely approximates the market value of such securities.
As a BDC, the Company is prohibited under the 1940 Act from knowingly participating in certain transactions with its affiliates, including the Company’s officers, directors, investment adviser, principal underwriters and certain of their affiliates, without the prior approval of the members the Board who are not interested persons and, in some cases, prior approval by the SEC through an exemptive order (other than pursuant to current regulatory guidance). The Company and the Advisor have received an exemptive order from the SEC that permits the Company to co-invest with Star Mountain Accounts and other affiliates of the Advisor. Subject to the terms and conditions specified in the exemptive order, the Company will be able to co-invest alongside Star Mountain Accounts or affiliates of the Advisor.
As a BDC, the Company expects to be periodically examined by the SEC for compliance with the 1940 Act.
As a BDC, the Company will be required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the Company against larceny and embezzlement.
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
The Advisor has relief from registration with the CFTC as a CPO with respect to the Company, and the Advisor is exempt from registration with the CFTC as a CTA with respect to the Company and is therefore not be required to provide Stockholders with certified annual reports and other disclosure documents that satisfy the requirements of CFTC rules applicable to registered CPOs and CTAs.
Part II. Other Information
Neither the Company, nor the Company’s subsidiaries nor the Advisor are currently subject to any material legal proceedings.
An investment in our securities involves a high degree of risk. Other than the item noted below, there have been no material changes to the risk factors previously reported under Item 1A: “Risk Factors” of Post-Effective Amendment No. 1 to our Registration Statement on Form 10 which was filed with the SEC on June 25, 2021. 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.
Changes in Interest Rates May Affect Net Investment Income
The Company’s debt investments may be based on floating rates, such as the London Interbank Offer Rate (“LIBOR”), EURIBOR, the Federal Funds Rate or the Prime Rate. General interest rate fluctuations may have a substantial negative impact on the Company’s investments, the value of its interests and the rate of return on invested capital. The Company’s floating rate investments may be linked to LIBOR and it is unclear how increased regulatory oversight and changes in the method for determining LIBOR may affect the value of the financial obligations to be held by or issued to the Company that are linked to LIBOR, or how such changes could affect the Company’s results of operations or financial condition. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to the Company or on its overall financial condition or results of operations.
In the recent past, concerns have been publicized that some of the member banks surveyed by British Bankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivative positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR.
In recent years, the number of unsecured interbank funding transactions in the LIBOR markets has declined substantially and public and private sector industry initiatives have focused on identifying new or alternative reference rates that could be used in place of LIBORs. On March 5, 2021, the United Kingdom’s Financial Conduct Authority (“FCA”) and ICE Benchmark Authority formally announced the dates after which the LIBORs will no longer be representative and subsequently cease publication. Certain LIBORs (e.g., all EUR and CHF LIBOR settings, the Spot Next/Overnight, 1 week, 2 month and 12 month JPY and GBP LIBOR settings, and the 1 week and 2 months US dollar LIBOR settings) will cease publication after December 31, 2021. However, the publication of certain other LIBORs (e.g., the overnight, 1 month, 3 month, 6 month, and 12 months USD LIBOR settings) will continue through at least June 30, 2023. This announcement and any additional regulatory or market changes may have an adverse impact on the Company’s investments, performance or financial condition. Until then, the Company may continue to invest in instruments that reference such rates or otherwise use such reference rates due to favorable liquidity or pricing.
In the United States, the Alternative Reference Rate Committee (“ARRC”), which is sponsored by the Board of Governors of the Federal Reserve System, has designated the Secured Overnight Financing Rate (“SOFR”) as the best rate to replace U.S. dollar LIBOR as a benchmark rate, and the Federal Reserve Bank of New York began publishing SOFR on April 3, 2018. SOFR is an overnight rate based on trade-level data from various segments of the U.S. Treasury repo market. However, unlike LIBOR, SOFR is a secured (and, accordingly, a more risk-free) rate, and is a “backward-looking” overnight rate (and therefore does not include forward-looking term maturities (such as 1-month, 3-month, and 6-month rates)). The ARRC has, as part of its transition plan, initiatives to help develop term structures for SOFR that will be available by the end of 2021. Working groups in other countries for Sterling LIBOR, Euro LIBOR, Yen LIBOR and Swiss LIBOR are also working on designating alternative reference rates for use in lieu of LIBOR in those currencies.
Although market participants, together with regulators, are working diligently to construct a viable alternative benchmark rate to LIBOR rates, there is no assurance that appropriate and usable alternative reference rates will be developed by the end of 2021, or that there will be sufficient liquidity in the markets using those alternative reference rates.
There is also no assurance that the characteristics of any alternative reference rates that are designated will be similar to those of any LIBOR, or that any alternative reference rate will be suitable for use as a benchmark rate for any particular product or security, or that use of an alternative reference rate will produce the economic equivalence of the LIBOR-based rate currently used for such products or securities.
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
A reduction in the interest rates on new investments relative to interest rates on current investments could also have an adverse impact on the Company’s net interest income. An increase in interest rates could decrease the value of any investments the Company holds which earn fixed interest rates, including subordinated loans, senior and junior secured and unsecured debt securities and loans and high yield bonds, and also could increase the Company’s interest expense, thereby decreasing its net income. Also, an increase in interest rates available to investors could make investment in the Company less attractive if the Company is not able to increase its dividend or distribution rate, which could reduce the value of an investment in the Company.
Investors should also be aware that a change in the general level of interest rates can be expected to lead to a change in the interest rate the Company may receive on many of its debt investments. Accordingly, a change in the interest rate could make it easier for the Company to meet or exceed the performance threshold and may result in a substantial increase in the amount of incentive fees payable to the Advisor with respect to the portion of the incentive fee based on income.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Except as previously reported by the Company on its current reports on Form 8-K, the Company did not sell any securities during the period covered by this Quarterly Report on Form 10-Q that were not registered under the Securities Act.
Pursuant to a capital drawdown notice to its investors, the Company issued and sold 244,608 shares of the Company’s Common Stock, par value $0.001 per share, on August 17, 2021, for an aggregate offering price of $6,139,650.
The sales of Common Stock were made pursuant to subscription agreements entered into by the Company and its investors. Under the terms of the subscription agreements, investors are required to fund drawdowns to purchase shares of Common Stock up to the amount of their respective capital commitments on an as needed basis with a minimum of eight business days’ prior notice to the funding date.
| Item 3. | Defaults on Senior Securities |
None.
None.
None.
The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Index to Exhibits, which is incorporated herein by reference.
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
INDEX TO EXHIBITS
Exhibit Number
| | Description of Document
|
| | Certificate of Incorporation (incorporated by reference to the Company’s Form 10 Registration Statement filed on May 7, 2021) |
| 3.2 | | By-Laws (incorporated by reference to the Company’s Form 10 Registration Statement filed on May 7, 2021) |
| 10.1 | | Investment Advisory Agreement (incorporated by reference to the Company’s Form 10 Registration Statement filed on May 7, 2021) |
| 10.2 | | Administration Agreement (incorporated by reference to the Company’s Form 10 Registration Statement filed on May 7, 2021) |
| 10.3 | | Form of Subscription Agreement (incorporated by reference to the Company’s Form 10 Registration Statement filed on May 7, 2021) |
| 10.4 | | Certificate of Conversion to a Corporation (incorporated by reference to the Company’s Form 10 Registration Statement filed on May 7, 2021) |
| 10.5 | | Loan and Servicing Agreement, dated as of July 2, 2021, by and among Star Mountain Lower Middle-Market Capital Corp., as borrower, the lenders party thereto and Sterling National Bank, in its capacities as collateral agent and administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-56259), filed on July 15, 2021) |
| | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
STAR MOUNTAIN LOWER MIDDLE-MARKET CAPITAL CORP.
SIGNATURES
Pursuant to the requirements 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.
| Star Mountain Lower Middle-Market Capital Corp. |
| | | |
| By: | /s/ | Brett A. Hickey |
| | | | Brett A. Hickey |
| | | Chief Executive Officer and President |
|
|
|
| | By: | /s/
| Christopher J. Gimbert |
| | | Name:
| Christopher J. Gimbert |
| | | Chief Financial Officer |
Date: November 15, 2021
