Revenue Recognition
Interest Income Recognition
Interest income, including
the amortization of premiums, acquisition costs and amendment fees, the accretion of original issue discounts (OID), and
paid-in-kind
(PIK)
interest, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due or if our qualitative assessment indicates that the debtor is unable to service its debt
or other obligations, we will place the loan on
non-accrual
status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent
to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on
non-accrual
loans may be recognized as income or applied to the cost basis depending
upon managements judgment. Generally,
non-accrual
loans are restored to accrual status when past due principal and interest are paid and, in managements judgment, are likely to remain current, or
due to a restructuring such that the interest income is deemed to be collectible. At March 31, 2019, loans to Meridian Rack & Pinion, Inc. and New Trident Holdcorp, Inc. were on
non-accrual
status with an aggregate debt cost basis of approximately $8.5 million, or 2.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $2.5 million, or 0.7% of the fair value of all debt
investments in our portfolio. At September 30, 2018, loans to Francis Drilling Fluids, Inc. (FDF) were on
non-accrual
status with an aggregate debt cost basis of approximately
$26.9 million, or 6.9% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $7.7 million, or 2.1% of the fair value of all debt investments in our portfolio.
We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally
issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and
recorded as income over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both OID and PIK
non-cash
income amounts in the form of distributions, even though we have not yet collected the cash on either.
As of
March 31, 2019 and September 30, 2018, we had seven and six OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $11 thousand and $0.1 million for the three and six months ended
March 31, 2019, respectively, and $11 thousand and $0.1 million during the three and six months ended March 31, 2018, respectively. The unamortized balance of OID investments as of each of March 31, 2019 and
September 30, 2018 totaled $0.4 million. As of March 31, 2019 and September 30, 2018, we had four and five investments which had a PIK interest component, respectively. We recorded PIK interest income of $0.3 million and
$0.7 million during the three and six months ended March 31, 2019, respectively, as compared to $1.2 million and $2.3 million during the three and six months ended March 31, 2018, respectively. We collected $0 in PIK
interest in cash during the three and six months ended March 31, 2019, as compared to $0.8 million during the three and six months ended March 31, 2018.
Success Fee Income Recognition
We record success fees as
income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically resulting from an exit or sale, and are
non-recurring.
Dividend Income Recognition
We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to
collect such amounts in cash or other consideration.
Deferred Financing and Offering Costs
Deferred financing and offering costs consist of costs incurred to obtain financing, including lender fees and legal fees. Certain costs associated with our
revolving line of credit are deferred and amortized using the straight-line method, which approximates the effective interest method, over the term of the revolving line of credit. Costs associated with the issuance of our notes payable are
presented as discounts to the principal amount of the notes payable and are amortized using the straight-line method, which approximates the effective interest method, over the term of the notes. Costs associated with the issuance of our mandatorily
redeemable preferred stock are presented as discounts to the liquidation value of the mandatorily redeemable preferred stock and are amortized using the straight-line method, which approximates the effective interest method, over the term of the
respective series of preferred stock. Refer to Note 5
Borrowings
and
Note 6
Mandatorily Redeemable Preferred Stock
for further discussion.
Related Party Fees
We are party to the Advisory
Agreement with the Adviser, which is owned and controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an
incentive fee. Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms of our Fifth Amended and Restated Credit Agreement with KeyBank National Association (KeyBank), as
administrative agent, lead arranger and a lender (our Credit Facility). These fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter.
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