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

•our future operating results, including the performance of our existing investments;

•the introduction, withdrawal, success and timing of business initiatives and strategies;

•changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including with respect to changes from the impact of the Coronavirus ("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;



•the effect of the disruptions caused by the COVID-19 pandemic on our ability to
continue to effectively manage our business and on the availability of equity
and debt capital and our use of borrowed money to finance a portion of our
investments;

•the relative and absolute investment performance and operations of our investment adviser;

•the impact of increased competition;

•the impact of investments we intend to make and future acquisitions and divestitures;

•our ability to turn potential investment opportunities into transactions and thereafter into completed and successful investments;

•the unfavorable resolution of any existing or future legal proceedings;

•the effect of the COVID-19 pandemic on our business prospects and the prospects of our portfolio companies, including our and their ability to achieve our respective objectives;

•our regulatory structure and tax status;

•the adequacy of our cash resources and working capital;

•the timing of cash flows, if any, from the operations of our portfolio companies;

•the impact of interest rate volatility on our results, particularly because we use leverage as part of our investment strategy;



•the impact of legislative and regulatory actions and reforms, including in
response to the COVID-19 pandemic; and regulatory, supervisory or enforcement
actions of government agencies relating to us or our investment adviser;

•our contractual arrangements and relationships with third parties, including but not limited to lenders and investors, including other investors in our portfolio companies;

•our ability to access capital and any future financings by us;

•the ability of our investment adviser to attract and retain highly talented professionals;

•the impact of changes to tax legislation and, generally, our tax position;


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•the ability of the parties to consummate the Mergers on the expected timeline, or at all;

•the ability to realize the anticipated benefits of the proposed Mergers;

•the effects of disruption on our business from the proposed Mergers;

•the combined company's plans, expectations, objectives and intentions, as a result of the Mergers;

•the effect that the pendency of the Mergers or consummation of the Mergers may have on the trading price of our common stock or PTMN Common Stock; and

•any potential termination of the Merger Agreement or action of our stockholders or PTMN's stockholders with respect to any proposed transaction.



Such forward-looking statements may include statements preceded by, followed by
or that otherwise include the words "may," "might," "will," "intend," "should,"
"could," "can," "would," "expect," "believe," "estimate," "anticipate,"
"predict," "potential," "plan" or similar words.

We have based the forward-looking statements included in this annual report on
Form 10-K on information available to us on the date of this annual report on
Form 10-K, and we assume no obligation to update any such forward-looking
statements. Actual results could differ materially from those anticipated in our
forward-looking statements, and future results could differ materially from
historical performance. We undertake no obligation to revise or update any
forward-looking statements, whether as a result of new information, future
events or otherwise, unless required by law or SEC rule or regulation. You are
advised to consult any additional disclosures that we may make directly to you
or through reports that we in the future may file with the SEC, including annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K.

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this annual report on Form 10-K.

Overview



We were formed as a Delaware corporation on November 14, 2012 and completed our
initial public offering on May 7, 2013. Immediately prior to the initial public
offering, we acquired Harvest Capital Credit LLC in a merger whereby the
outstanding limited liability company membership interests of Harvest Capital
Credit LLC were converted into shares of our common stock and we assumed and
succeeded to all of Harvest Capital Credit LLC's assets and liabilities,
including its entire portfolio of investments.

Our investment objective is to generate both current income and capital
appreciation primarily by making direct investments in the form of senior debt,
subordinated debt and, to a lesser extent, minority equity investments. We seek
to accomplish our investment objective by targeting investments in small to
mid-sized U.S. private companies with annual revenues of less than $100 million
and annual EBITDA (earnings before interest, taxes, depreciation and
amortization) of less than $15 million. We believe that transactions involving
companies of this size offer higher yielding investment opportunities, lower
leverage levels and other terms more favorable than transactions involving
larger companies.

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act.



We have also elected to be treated for U.S. federal income tax purposes as a RIC
under Subchapter M of the Code, and we intend to continue to qualify annually
for tax treatment as a RIC.

Our investment adviser, HCAP Advisors, which is registered as an investment
adviser under the Advisers Act, manages our day-to-day operations and provides
investment advisory and management services to us, subject to the overall
supervision of our board of directors and pursuant to an investment advisory and
management agreement. HCAP Advisors also serves as our administrator pursuant to
an administration agreement, through which it furnishes us with office
facilities, equipment and clerical, bookkeeping and recordkeeping services and
performs, or oversees the performance of, our required administrative services.
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Proposed Merger With Portman Ridge Finance Corporation



On December 23, 2020, we entered into the Merger Agreement with PTMN,
Acquisition Sub and Sierra Crest. The Merger Agreement provides that (i)
Acquisition Sub will merge with and into the Company in the First Merger, with
us continuing as the surviving corporation and as a wholly-owned subsidiary of
PTMN, and (ii) immediately after the effectiveness of the First Merger, we will
merge with and into PTMN in the Second Merger, with PTMN continuing as the
surviving corporation. Sierra Crest is expected to manage the combined company
following the Mergers.

The consummation of the Mergers is subject to the satisfaction or (to the extent
permitted by law) waiver of certain customary closing conditions, including
obtaining the requisite approval of our stockholders. For further information,
see "Note 1. Organization-The Proposed Merger with Portman Ridge Finance
Corporation" to our consolidated financial statements included in this Annual
Report on Form 10-K.

COVID-19 Update

The COVID-19 pandemic, and the related effects on the U.S. and global economies,
has had adverse consequences for the business operations of certain of our
portfolio companies and has adversely affected, and threatens to continue to
adversely affect, our operations and the operations of HCAP Advisors.

We are continuing to monitor the COVID-19 pandemic and its impact on our
business and the business of our portfolio companies, and we have continued to
fund existing unfunded revolving lines of credit when requests have been made
from our portfolio companies and intend to continue to do so. We may also
participate in follow-on investments with respect to existing portfolio
companies. Due to the adverse effects of the COVID-19 pandemic on our operations
and our liquidity, and in light of our contractual obligations, we have decided
to temporarily cease to make and originate new investments. We will decide to
resume to make and originate new investments when we believe it is prudent in
light of our capital needs and contractual obligations, and in the best
interests of us and our stockholders.

Neither our management nor our board of directors can predict the full impact of
the COVID-19 pandemic, including its duration and the magnitude of its economic
impact, and we cannot predict the extent and duration of various travel
restrictions, business closures and other quarantine measures imposed, or may in
the future be imposed, by various local, state, and federal governmental
authorities, as well as non-U.S. governmental authorities. As such, we are
unable to accurately predict the extent to which COVID-19 will negatively affect
our portfolio companies' operating results or the impact that such disruptions
may have on our results of operations and financial condition.

Depending on the duration and extent of the disruption to the operations of our
portfolio companies, we expect that certain of our portfolio companies will, and
will continue to, experience financial distress and possibly default on their
financial obligations to us and their other capital providers. This risk is
amplified with respect to portfolio companies operating in certain industries,
such as aerospace and defense, beverage, food and tobacco, construction and
building, consumer goods, retail, business services, energy services and others.
For example, in June 2020, one of our portfolio companies, General Nutrition
Centers, Inc. ("GNC"), filed for bankruptcy. In October 2020, GNC was
restructured upon the finalization of its plan of reorganization, in connection
with which we received approximately $1.9 million, representing a full payoff at
par of each of our New Money DIP Term Loan and Roll-up DIP Term Loan. We also
received an additional $1.2 million in cash, in connection with the finalization
of its plan of reorganization, representing a discounted payoff of our $3.0
million original tranche B-2 Term Loan and received our pro rata share of a new
Second Lien Term Loan with a par value of $1.8 million in GNC Holdings, LLC.

Some of our portfolio companies have taken steps to reduce operating expenses,
such as significantly curtailing business operations, reducing headcounts and/or
deferring capital expenditures, and we expect that additional portfolio
companies may take similar steps if subjected to prolonged and severe financial
distress, which may impair their business on a permanent basis. These
developments would likely result in a decrease in the value of our investment in
any such portfolio company, which decrease could be material. To mitigate these
risks, a majority of our portfolio companies received approval for loans under
the U.S. Small Business Administration's ("SBA") Paycheck Protection Program
("PPP Loan") created as part of the Coronavirus Aid, Relief, and Economic
Security Act. Assuming that the PPP Loan proceeds are used to cover certain
costs and expenses (e.g. documented payroll, mortgage interest, rent, and
utility costs) and certain conditions are met, these PPP Loans could be
completely forgiven by the U.S. federal government. Through the date of this
filing, fourteen of our portfolio companies had received approval of PPP Loans
totaling $30.3 million and certain portfolio companies are in the application
process to receive
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approval for additional PPP Loans. As of December 31, 2020, we had two portfolio
companies, with a combined fair value of $5.6 million, on non-accrual status.
The effects of the COVID-19 pandemic discussed above increase the risk that we
will place additional portfolio investments on non-accrual status in the future.

The COVID-19 pandemic and its effects on our portfolio companies have already
had adverse material effects on our investment income, particularly our interest
income, received from our investments, and we expect that such adverse effects
will continue for the duration of the pandemic and potentially for some time
thereafter. During the year ended December 31, 2020 we added three portfolio
companies, ProAir Holdings Corporation, GK Holdings, Inc., and GNC, to our
non-accrual assets. GNC was subsequently removed from our non-accrual assets
after it was restructured. We may need to restructure our investments in some of
our portfolio companies as a result of the adverse effects of the COVID-19
pandemic, which could result in reduced interest payments, an increase in the
amount of "paid-in-kind" or "PIK" interest we receive, and the placement of any
such investment on non-accrual status. Certain restructurings of our portfolio
investments included in the borrowing base for our Credit Facility or any future
credit facility could result in a reduction in any such borrowing base, which
may have a material adverse effect on our results of operations, financial
condition and available liquidity going forward. In addition, any decreases in
our net investment income would increase the portion of our cash flows dedicated
to servicing borrowings, including existing borrowings and required amortization
payments under the Credit Facility and existing borrowings under the 2022 Notes,
and any distribution payments to stockholders. As discussed below, under
"Financial Condition, Liquidity and Capital Resources," our board of directors
previously took action to defer the record dates and payments of our March 2020
and April 2020 monthly dividends and determined to suspend the declaration of
any future dividends until further notice. We ultimately paid the previously
declared but deferred March 2020 and April 2020 monthly dividends in a single
distribution of $0.16 per share on December 29, 2020 to shareholders of record
at the close of business on December 15, 2020. Depending on the duration of the
COVID-19 pandemic and the extent of its effects on our portfolio companies'
operations and our net investment income, any future distributions to our
stockholders may be for amounts less than our historical distributions, may be
made less frequently than historical practices, and may be made in part cash and
part stock (as per each stockholder's election), subject to a limitation that
the aggregate amount of cash to be distributed to all stockholders must be at
least 20% of the aggregate declared distribution.

Primarily as a result of the COVID-19 pandemic, we have had a significant
reduction in our net asset value as of December 31, 2020, as compared to our net
asset value as of December 31, 2019. The decrease in net asset value as of
December 31, 2020 primarily resulted from realized losses on certain portfolio
company investments we exited during the year as well as due to decreases in the
fair value of some of our portfolio company investments, which are primarily the
result of the adverse economic effects of the COVID-19 pandemic and the
continuing uncertainty surrounding its long-term impact.

As of December 31, 2020, we are permitted under the 1940 Act, as a BDC, to
borrow amounts such that our asset coverage, as defined in the 1940 Act, equals
at least 150% after such borrowing. In addition, the Credit Facility contains
events of default and cross-default provisions relating to other indebtedness,
as well as affirmative and negative covenants, including, among other things:
(i) a limit on our senior debt-to-tangible equity ratio of 1.00 to 1.00 at any
time; (ii) a limit on our total debt-to-tangible equity ratio of 1.40 to 1.00 at
any time; (iii) a limit on our debt service coverage ratio of 1.25 to 1.00 as of
the end of any quarter in the period beginning as of August 1, 2020 (which ratio
was 1.40 to 1.00 as of the end of any quarter prior to August 1, 2020); (iv) a
requirement that our tangible net worth not be less than $58.0 million; (v)
minimum liquidity; and (vi) maintenance of RIC and BDC status. The indenture
governing the 2022 Notes (the "2022 Notes Indenture") also contains certain
covenants, including covenants (i) prohibiting our issuance of any senior
securities unless, immediately after such issuance, we are in compliance with
the 1940 Act asset coverage requirements (after giving effect to any exemptive
relief granted to us by the SEC), and, (ii) if our asset coverage has been below
the 1940 Act minimum asset coverage requirements (after giving effect to any
exemptive relief granted to us by the SEC) for more than six consecutive months,
prohibiting the declaration of any cash dividend or distribution on our common
stock (except to the extent necessary for us to maintain our treatment as a RIC
under Subchapter M of the Code), or purchasing any of our common stock, unless,
at the time of the declaration of the dividend or distribution or the purchase,
and after deducting the amount of such dividend, distribution, or purchase, we
are in compliance with the 1940 Act asset coverage requirements (after giving
effect to any exemptive relief granted to us by the SEC).

As of December 31, 2020, we were in compliance with our asset coverage
requirements under the 1940 Act and with the covenants under the terms of the
Credit Facility and under the 2022 Notes Indenture. However, any continued
increase in net unrealized depreciation on our investment portfolio or further
significant reductions in our net asset value as a result of the effects of the
COVID-19 pandemic or otherwise increases the risk of (i) triggering the 1940 Act
asset coverage covenants under the 2022 Notes Indenture, which would limit our
ability to raise debt capital, pay distributions to our stockholders, and
repurchase shares of our common stock, (ii) reducing our borrowing base under
the Credit Facility or any future credit facility
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going forward, and (iii) breaching certain covenants under the Credit Facility,
including but not limited to those relating to tangible net worth and debt
service coverage ratio. In the event that unrealized depreciation in the fair
value of portfolio investments included in the borrowing base of the Credit
Facility or any future credit facility or other factors cause our aggregate
outstanding borrowings under the Credit Facility or such other credit facility
to exceed the applicable borrowing base, we would be required to immediately
prepay the lenders an amount equal to such excess amount. If we are unable to
remit such payment or we otherwise breach a covenant under the Credit Facility,
or are unable to cure any event of default or obtain a waiver from the lenders,
the lenders may choose to foreclose upon and sell, or otherwise transfer, the
collateral subject to their security interests, which comprises all of our
assets as of December 31, 2020, and accelerate our repayment obligations under
the Credit Facility. Any such event would have a material adverse effect on our
business, liquidity, financial condition, results of operations and ability to
pay distributions to our stockholders. In addition, if the lenders exercise
their right to sell the assets pledged under the Credit Facility, such sales may
be completed at distressed sale prices, thereby diminishing or potentially
eliminating the amount of cash available to us after repayment of the amounts
outstanding under the Credit Facility. See "Risk Factors" included in Part I,
Item 1A in this Annual Report on Form 10-K.

We are also subject to financial risks, including changes in market interest
rates. As of December 31, 2020, 48.4% of our debt investments bore interest
based on floating rates (some of which were subject to interest rate floors),
which generally are LIBOR-based. In addition, the Credit Facility has floating
rate interest provisions. In connection with the COVID-19 pandemic, the U.S.
Federal Reserve and other central banks have reduced certain interest rates and
LIBOR has decreased. A prolonged reduction in interest rates will reduce our
gross investment income and could result in a decrease in our net investment
income if such decreases in LIBOR are not offset by a corresponding increase in
the spread over LIBOR that we earn on any portfolio investments, a decrease in
our operating expenses, or a decrease in the interest rate of our floating
interest rate liabilities tied to LIBOR. See "Item 7A. Quantitative and
Qualitative Disclosures About Market Risk" for an analysis of the impact of
hypothetical base rate changes in interest rates.

We will continue to monitor the rapidly evolving situation relating to the
COVID-19 pandemic and related guidance from U.S. and international authorities,
including federal, state and local public health authorities. Given the dynamic
nature of this situation and the fact that there may be developments outside of
our control that require us or our portfolio companies to adjust plans of
operation, we cannot reasonably estimate the full impact of COVID-19 on our
financial condition, results of operations or cash flows in the future. However,
we do expect that it could have a material adverse impact on our future net
investment income, the fair value of our portfolio investments, and the results
of operations and financial condition of us and our portfolio companies.

Portfolio

Portfolio Composition



As of December 31, 2020, we had $89.6 million (at fair value) invested in 21
companies. As of December 31, 2020, our portfolio, at fair value, was comprised
of approximately 71.1% senior secured term loans, 10.5% junior secured term
loans and 18.4% equity and equity-like investments.

As of December 31, 2019, we had $116.8 million (at fair value) invested in 25
companies. As of December 31, 2019, our portfolio, at fair value, was comprised
of approximately 73.6% senior secured term loans, 16.0% junior secured term
loans and 10.4% equity and equity-like investments.

We originate and invest primarily in privately-held middle-market companies (typically those with less than $15.0 million of annual EBITDA) through first lien and second lien debt, sometimes with a corresponding equity investment component. The composition of our investments as of December 31, 2020 and December 31, 2019 was as follows:



                                     December 31, 2020                    December 31, 2019
                                   Cost           Fair Value           Cost            Fair Value

Senior Secured                $ 66,041,926      $ 64,629,875      $  87,032,136      $  85,954,384
Junior Secured                  14,329,126         9,417,801         20,413,183         18,757,348
Equity and Equity Related       13,663,289        15,506,897         16,004,386         12,097,658
Total Investments             $ 94,034,341      $ 89,554,573      $

123,449,705 $ 116,809,390


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At December 31, 2020, our average portfolio company debt investment at amortized
cost and fair value was approximately $4.2 million and $3.9 million,
respectively, and our largest portfolio company debt investment by amortized
cost and fair value was approximately $13.7 million and $10.8 million,
respectively. At December 31, 2019, our average portfolio company debt
investment at amortized cost and fair value was approximately $4.5 million and
$4.2 million, respectively, and our largest portfolio company debt investment by
amortized cost and fair value was approximately $13.1 million and $11.6 million,
respectively.

At December 31, 2020, 48.4% of our debt investments bore interest based on
floating rates (some of which were subject to interest rate floors), such as
LIBOR, and 51.6% bore interest at fixed rates. At December 31, 2019, 53.0% of
our debt investments bore interest based on floating rates (some of which were
subject to interest rate floors), such as LIBOR, and 47.0% bore interest at
fixed rates.

The weighted average effective yield of our debt and other income-producing
investments, as of December 31, 2020 and December 31, 2019, was approximately
11.9% and 14.0%, respectively. The weighted average effective yield on the
entire portfolio, as of December 31, 2020 and December 31, 2019, was 9.1% and
11.3%, respectively. The weighted average annualized effective yield on debt and
other income-producing investments is computed using the effective interest
rates for our debt and other income-producing investments, including cash and
PIK interest as well as the accretion of deferred fees. The individual
investment yields are then weighted by the respective fair values of the
investments (as of the date presented) in calculating the weighted average
effective yield as a percentage of our debt and other income-producing
investments. ProAir Holdings Corporation and GK Holdings, Inc. were excluded
from the calculation as of December 31, 2020 because they were on non-accrual
status on that date. Infinite Care, LLC and CP Holding Co., Inc. (Choice Pet)
were excluded from the calculation as of December 31, 2019 because they were on
non-accrual status on that date. Equity components of the investment portfolio
were also excluded from these calculations either because they do not have
stated interest rates or are non-income-producing. The weighted average
annualized yield on total investments takes the same yields but weights them to
determine the weighted average effective yield as a percentage of our total
investments. The dollar-weighted average annualized yield on our investments for
a given period will generally be higher than what investors in our common stock
would realize in a return over the same period because the dollar-weighted
average annualized yield does not reflect our expenses or any sales load that
may be paid by investors.
For investments that have a PIK interest component, PIK interest is accrued each
period but generally not collected until the debt investment is sold or paid
off. A roll forward of PIK interest for the years ended December 31, 2020 and
December 31, 2019 is summarized in the tables below.

                                                                 2020
                                Q1               Q2               Q3               Q4               FY

PIK, beginning of period $ 3,855,222 $ 4,102,226 $ 3,505,245

  $ 3,694,494      $ 3,855,222
Accrual                        264,962          255,109          292,631          486,522        1,299,224
Payments                       (17,958)         (24,588)        (103,382)        (122,512)        (268,440)

PIK, end of period $ 4,102,226 $ 3,505,245 $ 3,694,494

  $ 4,046,725      $ 4,046,725



                                                                 2019
                                Q1               Q2               Q3               Q4               FY

PIK, beginning of period $ 3,123,501 $ 3,287,499 $ 3,449,314

  $ 3,617,999      $ 3,123,501
Accrual                        206,634          206,245          205,805          243,149          861,833
Payments                       (42,636)         (44,430)         (37,120)          (5,926)        (130,112)

PIK, end of period $ 3,287,499 $ 3,449,314 $ 3,617,999

$ 3,855,222 $ 3,855,222





Investment Activity

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During the year ended December 31, 2020, we closed $2.2 million of debt
investment commitments in 3 existing portfolio companies and made $0.4 million
of equity investments in 3 existing portfolio companies. We did not originate or
fund investments in any new portfolio companies during the year ended December
31, 2020. See "COVID-19 Update" above. During the year ended December 31, 2019,
we closed $55.3 million of debt investment commitments in nine new and seven
existing portfolio companies. We also made $3.7 million of equity investments in
three new and three existing portfolio companies.

During the year ended December 31, 2020, we exited $25.3 million of debt
investment commitments from 6 portfolio companies. We also exited $0.3 million
of equity investments from 2 portfolio companies. During the year ended
December 31, 2019, we exited $21.4 million of debt investment commitments from
eight portfolio companies. We also exited $0.2 million of equity investments
from two portfolio companies.

Our level of investment activity can vary substantially from period to period depending on many factors, including the level of merger and acquisition activity in our target market, the general economic environment and the competitive environment for the types of investments we make.

Asset Quality



In addition to various risk management and monitoring tools, we use an
investment rating system to characterize and monitor the credit profile and
expected level of returns on each investment in our portfolio. This investment
rating system uses a five-level numeric scale. The following is a description of
the conditions associated with each investment rating:
•Investment Rating 1 is used for investments that are performing above
expectations, and whose risks remain favorable compared to the expected risk at
the time of the original investment.

•Investment Rating 2 is used for investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans are initially rated 2.

•Investment Rating 3 is used for investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with financial covenants.



•Investment Rating 4 is used for investments that are performing substantially
below expectations and whose risks have increased substantially since the
original investment. These investments are often in workout. Investments with a
rating of 4 are those for which there is an increased possibility of loss of
return, but no loss of principal is expected.

•Investment Rating 5 is used for investments that are performing substantially
below expectations and whose risks have increased substantially since the
original investment. These investments are almost always in workout. Investments
with a rating of 5 are those for which loss of return and principal is expected.

The following table shows the investment rankings of our debt investments at fair value (in millions):


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                                                             As of December 31, 2020                                                     As of December 31, 2019
                                      Fair Value (in           % of Total                  Number of              Fair Value (in           % of Total                  Number of
Investment Rating                       millions)              Portfolio              Portfolio Companies           millions)              Portfolio              Portfolio Companies

1                                     $      16.0                     21.9  %                    3                $      14.6                     13.9  %                    3
2                                            20.1                     27.5  %                    4                       66.1                     63.1  %                   13
3                                            13.0                     17.8  %                    3                        2.2                      2.2  %                    1
4                                            24.0                     32.8  %                    4                       13.8                     13.2  %                    2
5                                               -                        -  %                    -                        8.0                      7.6  %                    1
                                      $      73.1                    100.0  %                   14                $     104.7                    100.0  %                   20

Loans and Debt Securities on Non-Accrual Status



We do not accrue interest income on loans and debt securities if we doubt our
ability to collect such interest. Generally, when an interest payment default
occurs on a loan in the portfolio, when interest has not been paid for greater
than 90 days, or when management otherwise believes that the issuer of the loan
will not be able to service the loan and other obligations, we will place the
loan on non-accrual status and will cease accruing interest income on that loan
until all principal and interest is current through payment or until a
restructuring occurs, such that the interest income is deemed collectible.
However, we remain contractually entitled to this interest, and any collections
actually received on these non-accrual loans may be recognized as interest
income on a cash basis or applied to the principal depending on management's
judgment regarding collectability. As of December 31, 2020, we had investments
in two portfolio companies on non-accrual status (our junior secured debt
investment in ProAir Holdings Corporation and our junior secured debt investment
in GK Holdings, Inc.), which totaled $5.6 million at fair value and
$10.4 million at cost and comprised an aggregate of 12.9% of our debt
investments at cost. As of December 31, 2019, we had investments in two
portfolio companies on non-accrual status (our senior secured debt investment in
Infinite Care, LLC and our junior secured debt investment in CP Holding Co.,
Inc. (Choice Pet)), which totaled $10.6 million at fair value and $10.7 million
at cost and comprised an aggregate of 10.0% of our debt investments at cost. The
failure by a borrower or borrowers to pay interest and repay principal could
have a material adverse effect on our financial condition and results of
operation.

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Set forth below is a comparison of the results of operations and changes in
financial condition for the years ended December 31, 2020 and 2019. The
comparison of, and changes between, the fiscal years ended December 31, 2019 and
December 31, 2018 can be found within "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Part II
of our annual report on Form 10-K for the fiscal year ended December 31, 2019,
which is incorporated herein by reference.

Results of Operations



An important measure of our financial performance is the net increase or
decrease in net assets resulting from operations, which includes net investment
income, net change in realized gain or loss and net change in unrealized
appreciation or depreciation. Net investment income is the difference between
our income from interest, distributions, fees and other investment income and
our operating expenses, including interest on borrowed funds. Net realized gain
or loss on investments is generally the difference between the proceeds received
from dispositions of portfolio investments and their amortized cost. Net change
in unrealized appreciation or depreciation on investments is the net unrealized
change in the fair value of our investment portfolio.

Revenues



We generate revenue primarily in the form of interest income on debt investments
and, to a lesser extent, capital gains on equity investments we make in
portfolio companies. Our debt investments typically have terms of five to seven
years and bear interest at a fixed or floating rate. Interest on our debt
investments is payable at least quarterly. Payments of principal on our debt
investments may be amortized over the stated term of the investment, deferred
for several years or due entirely at maturity. In some cases, our debt
investments may pay interest in kind, or PIK. Any outstanding principal amount
of our debt
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investments and any accrued but unpaid interest will generally become due at the
maturity date. The level of interest income we receive is directly related to
the balance of interest-bearing investments multiplied by the weighted average
yield of our investments. We expect that the dollar amount of interest and any
dividend income that we earn to increase as the size of our investment portfolio
increases and to decrease as the size of our investment portfolio decreases. In
addition, we may generate revenue in the form of prepayment, commitment, loan
origination, structuring or due diligence fees and consulting fees, which may be
non-recurring in nature.

Investment income for the year ended December 31, 2020 totaled $11.5 million,
compared to investment income of $12.7 million for the year ended December 31,
2019. Investment income for the year ended December 31, 2020 was comprised of
$8.8 million in cash interest, $1.3 million in PIK interest, $1.1 million in
fees earned on the investment portfolio, and $0.4 million in other income.
Investment income for the year ended December 31, 2019 was comprised of $10.7
million in cash interest, $0.9 million in PIK interest, $0.8 million in fees
earned on the investment portfolio and $0.3 million in other income.

The $1.1 million decrease in investment income in the year ended December 31,
2020 is primarily attributable to a lower weighted average effective yield on
our portfolio, a decrease in the size of our interest-earning portfolio, and
lower prepayment fees compared to the year ended December 31, 2019 as well as to
the addition of Pro Air Holdings Corporation, GK Holdings, Inc., and GNC (which
was subsequently removed after it was restructured) to our non-accrual assets
during the year ended December 31, 2020, offset by the removal of Infinite Care,
LLC from our non-accrual assets during the year.
Expenses

Our primary operating expenses include the payment of fees to HCAP Advisors
under the investment advisory and management agreement, our allocable portion of
overhead expenses and other administrative expenses under the administration
agreement with HCAP Advisors, including the allocated costs incurred by HCAP
Advisors in providing managerial assistance to those portfolio companies that
request it, and other operating costs described below. We bear all other
out-of-pocket costs and expenses of our operations and transactions, which
include:

•interest expense and unused line fees;

•the cost of calculating our net asset value, including the cost of any third-party valuation services;

•the cost of effecting sales and repurchases of shares of our common stock and other securities;

•fees payable to third parties relating to making investments, including out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments;

•transfer agent and custodial fees;

•out-of-pocket fees and expenses associated with marketing efforts;

•federal and state registration fees and any stock exchange listing fees;

•U.S. federal, state and local taxes;

•independent directors' fees and expenses;

•brokerage commissions;

•fidelity bond, directors' and officers' liability insurance and other insurance premiums;

•direct costs, such as printing, mailing, long distance telephone and staff;

•fees and expenses associated with independent audits and outside legal costs, and

•costs associated with our reporting and compliance obligations under applicable U.S. federal and state securities laws.


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Operating expenses totaled $9.9 million for the year ended December 31, 2020,
compared to $8.8 million for the year ended December 31, 2019. Interest expense
increased by $0.4 million to $3.6 million at December 31, 2020, primarily due to
an increase in our average daily borrowings to finance our portfolio and
operations and a higher weighted-average interest rate on borrowings under our
Credit Facility during the year ended December 31, 2020. In addition, during the
year ended December 31, 2020, we accelerated approximately $0.1 million of
deferred financing costs in accordance with ASC 470 Debt, due to the reduction
in our borrowing capacity under our Credit Facility. Professional fees increased
to $1.6 million for the year ended December 31, 2020 from $1.1 million for the
year ended December 31, 2019. General and administrative expenses increased to
$1.1 million for the year ended December 31, 2020 from $1.0 million for the year
ended December 31, 2019. Professional fees increased primarily due to the
increased professional fees we incurred during the fourth quarter relating to
the proposed Mergers. General and administrative increased slightly primarily
due to one-time additional director fee compensation of $0.2 million paid to the
independent members of our board of directors to compensate them for the
additional services they provided to us relating to the proposed Mergers. These
expenses were partially offset by a decrease in non-Mergers related expenses, as
we reviewed all of our service providers in 2019 and changed certain service
providers to more cost-effective solutions, which led to decreases in certain
operating expenses during the year ended December 31, 2020. During the year
ended December 31, 2020, we incurred approximately $1.0 million in expenses
relating to the proposed Mergers.

Base management fees for the year ended December 31, 2020 were $2.1 million, compared to $2.2 million for the year ended December 31, 2019. The slight decrease in base management fees is attributable to a smaller average outstanding investment portfolio in 2020 as compared to 2019.



We did not incur any incentive management fees for each of the years ended
December 31, 2020 or December 31, 2019. We did not incur an incentive management
fees as a result of our pre-incentive fee net investment income not exceeding
the hurdle rate in both 2020 and 2019. We only incur an income incentive
management fee if our pre-incentive fee net investment income return exceeds a
2.0% (8.0% annualized) hurdle rate. Our pre-incentive fee net investment income
did not meet the hurdle for each of the three months ended March 31, 2020, June
30, 2020, September 30, 2020, December 31, 2020, March 31, 2019, June 30, 2019,
September, 30, 2019, and December 31, 2019. The incentive fees paid or owed to
HCAP Advisors are also subject to a three-year total return requirement, such
that no incentive fee, in respect of pre-incentive fee net investment income,
will be payable except to the extent 20.0% of the cumulative net increase in net
assets resulting from operations over the calendar quarter for which such fees
are being calculated and the 11 preceding quarters exceeds the cumulative
incentive fees paid or accrued over the 11 preceding quarters. The total return
requirement did not impact the income incentive fee calculation for the year
ended December 31, 2020 or December 31, 2019.

 Administrative services expense was $1.4 million for each of the years ended
December 31, 2020 and 2019. HCAP Advisors agreed to a $1.4 million cap on
amounts payable by us under the administration agreement for both 2020 and 2019.
The cap included limits such that amounts payable would not exceed $1.4 million
for the year. We hit the $1.4 million cap for both fiscal years 2020 and 2019.
The actual administrative services expense that would have been payable to HCAP
Advisors for the years ended December 31, 2020 and December 31, 2019 exceeded
the cap by approximately $0.1 million and $0.5 million, respectively.

Net Investment Income



For the year ended December 31, 2020, net investment income was $1.7 million,
compared to $3.8 million for the year ended December 31, 2019. For the year
ended December 31, 2020, net investment income per share was $0.28, compared to
$0.63 for the year ended December 31, 2019.

Net Realized Gains and Losses



Realized gains and losses on investments are calculated using the specific
identification method. We measure realized gains or losses on equity investments
as the difference between the net proceeds from the sale and the amortized cost
basis of the investment, without regard to unrealized appreciation or
depreciation previously recognized. We measure realized gains or losses on debt
investments as the difference between the net proceeds from the repayment or
sale and the contractual amount owed to us on the investment, without regard to
unrealized appreciation or depreciation previously recognized or unamortized
deferred fees. Upon prepayment of debt investments, we recognize the
acceleration of unamortized deferred fees as interest income and we recognize
the collection of prepayment and other fees as other income.

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We recognized $4.9 million and $2.4 million in net realized losses on our investments for the years ended December 31, 2020 and December 31, 2019, respectively. A summary of realized gains and losses for the years ended December 31, 2020 and December 31, 2019 is as follows:



                                                                       Year

Ended December 31,


                                                                     2020                   2019
CP Holding Co., Inc. (Junior Secured Term Loan)                 $ (2,038,300)          $          -
Dell International L.L.C. (Senior Secured Term Loan)                       -                  6,151

Deluxe Entertainment Services Group, Inc. (Senior Secured Term Loan)

                                                                      -             (2,404,987)

Deluxe Entertainment Services Group, Inc. (Junior Secured Term Loan)

                                                               (522,921)                     -

Deluxe Entertainment Services Group, Inc. (Common Equity) (2,056,418)

                     -
Flight Lease VII, LLC (Common Equity Interest)                      (112,500)              (271,811)
Flight Lease XII, LLC (Common Equity Interest)                      (231,411)                     -
Flight Lease XIII, LLC (Common Equity Interest)                            -                (23,680)
Fox Rent A Car, Inc. (Common Equity Warrants)                         15,994                239,743

General Nutrition Centers, Inc. (Senior Secured Term Loan) (263,836)

                     -
Kleen-Tech Acquisition, LLC (Common Equity Warrants)                 440,117                      -
Mercury Network, LLC (Common Equity Units)                                 -                 69,981
Northeast Metal Works LLC (Preferred Equity Interest)                      -                 20,750
Regional Engine Leasing, LLC (Residual Value)                       (102,421)                     -
Surge Busy Bee Holdings, LLC (Class B Equity Warrants)               (51,475)                     -
   Net realized losses                                          $

(4,923,171) $ (2,363,853)

Net Change in Unrealized Appreciation of Investments



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

Net change in unrealized appreciation on investments totaled $2.2 million for
the year ended December 31, 2020 and net change in unrealized depreciation
totaled $2.7 million for the year ended December 31, 2019. The change between
years is primarily the result of exiting investments at losses during the year
ended December 31, 2020.

Net Increase (Decrease) in Net Assets Resulting from Operations



The net decrease in net assets resulting from operations was $2.3 million for
the year ended December 31, 2020 compared to a $1.2 million net decrease in net
assets resulting from operations for the year ended December 31, 2019. The $1.1
million decrease between periods was a result of the factors discussed above.

Financial Condition, Liquidity and Capital Resources

Cash Flows from Operating and Financing Activities



Our operating activities provided cash of $28.0 million for the year ended
December 31, 2020 and used cash $23.2 million for the year ended December 31,
2019, primarily in connection with the payoffs and fundings of investments and
receipt of interest payments from our portfolio companies. Our financing
activities used cash of $10.4 million for the year ended December 31, 2020 and
provided cash of $16.3 million for the year ended December 31, 2019, primarily
in connection with borrowings and repayments on our Credit Facility,
distributions paid to shareholders, and repurchases of our common stock.

Our liquidity and capital resources are derived from our Credit Facility,
proceeds received from the offerings of our securities, such as the 2022 Notes
in August 2017, cash flows from operations, including investment sales and
repayments, and cash income earned. Our primary use of funds from operations
includes investments in portfolio companies and other operating expenses we
incur, as well as the payment of distributions to the holders of our common
stock. We used, and expect to continue to use, these capital resources as well
as proceeds from public and private offerings of securities to finance our
investment
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activities. To the extent the proposed Mergers do not close, we may amend or refinance our leverage facilities and borrowings, in order to, among other things, modify covenants or the interest rates payable and extend the reinvestment period or maturity date.



Although we have no current plans to raise capital, we may need to raise capital
in the future and cannot assure you that we will be successful if we need to do
so. In this regard, for so long as our common stock trades at a price below our
net asset value per share, we will likely be limited in our ability to raise
equity capital given that we cannot sell our common stock at a price below net
asset value per share unless our stockholders approve such a sale and our board
of directors makes certain determinations in connection therewith. For all of
2020 and 2019, our common stock traded at a discount to our then-current net
asset value. If our common stock continues to trade at a discount to net asset
value, we will be limited in our ability to raise equity capital unless we
obtain the approval described above, which we have not previously requested from
stockholders.

BDCs are generally required, upon issuing any senior securities, to meet a
coverage ratio of total assets, less liabilities and indebtedness not
represented by senior securities, to total senior securities, which include all
of the BDC's borrowings and any outstanding preferred stock, of at least 200%.
However, the SBCAA, which was signed into law, in March 2018, among other
things, amended Section 61(a) of the 1940 Act to add a new Section 61(a)(2) that
reduces the asset coverage requirement applicable to BDCs from 200% to 150% so
long as the BDC meets certain disclosure requirements and obtains certain
approvals. On May 4, 2018, our board of directors unanimously approved the
application of the modified asset coverage requirements set forth in Section
61(a)(2) of the 1940 Act. As a result, effective May 4, 2019, our applicable
asset coverage ratio under the 1940 Act decreased to 150% from 200%. See "Risk
Factors--Risks Relating to Our Business and Structure--Regulations governing our
operations and capital structure affect (and could limit) our ability to raise,
and the way in which we may raise, additional capital."

As of December 31, 2020, our aggregate indebtedness, including outstanding
borrowings under our Credit Facility and the aggregate principal amount
outstanding on our 2022 Notes, was $64.3 million, and our asset coverage, as
defined in the 1940 Act, was 197%. As of December 31, 2019, our aggregate
indebtedness, including outstanding borrowings under our Credit Facility and the
aggregate principal amount outstanding on our 2022 Notes, was $72.5 million, and
our asset coverage, as defined in the 1940 Act, was 192%. The amount of leverage
that we employ as a BDC will depend on our assessment of market conditions and
other factors at the time of any proposed borrowing, such as the maturity,
covenant package and rate structure of the proposed borrowings, our ability to
raise funds through the issuance of shares of our common stock and the risks of
such borrowings within the context of our investment outlook. Ultimately, we
only intend to use leverage if the expected returns from borrowing to make
investments will exceed the cost of such borrowing.

As of December 31, 2020 and December 31, 2019, we had cash and restricted cash of $39.4 million and $21.8 million, respectively.

Credit Facility



On October 29, 2013, we entered into a Loan and Security Agreement (as amended,
restated and modified from time to time, the "Loan and Security Agreement") with
CapitalSource Bank (now Pacific Western Bank, following a merger), as agent and
a lender, and each of the lenders from time to time party thereto, including
City National Bank, to provide us with our $45.0 million Credit Facility. The
Credit Facility is secured by all of our assets, including our equity interest
in HCAP Equity Holdings, LLC and HCAP ICC, LLC.

As of December 31, 2020, advances under the Credit Facility bear interest at a
rate per annum equal to the lesser of (i) the applicable LIBOR plus 4.50% (with
a 1.00% LIBOR floor) and (ii) the maximum rate permitted under applicable law.
During the revolving period, availability under the Credit Facility is
determined by advance rates against eligible loans in the borrowing base up to a
maximum aggregate availability of $44.3 million. Advance rates against
individual investments range from 40% to 65% depending on the seniority of the
investment in the borrowing base.
In addition, as of December 31, 2020, the Credit Facility included the following
terms, among other things: (i) a revolving period scheduled to expire on January
31, 2021 (please see "Recent Developments" below for information regarding the
extension of the revolving period to June 30, 2021); (ii) provides for a senior
leverage ratio (the ratio of total borrowed money other than subordinated debt
and unsecured longer-term indebtedness to equity) of 1-to-1; (iii) provides for
a total leverage ratio (the ratio of total debt to equity) of 1.4-to-1 and a
limit on our debt service coverage ratio of 1.25-to-1.00 as of the end of any
quarter in the period beginning as of August 1, 2020 (which ratio was
1.40-to-1.00 as of the end of any quarter prior to August 1, 2020); (iv)
additional advances requested under the Credit Facility will be made only at the
discretion of the
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lenders; (v) aggregate commitments under the Loan and Security Agreement are
$45.0 million; (vi) a tangible net worth covenant that reflects a minimum amount
equal to $58.0 million; (vii) an effective limitation on the aggregate value of
eligible loans in the borrowing base to maximum of approximately $44.3 million;
(viii) requires us to pay a monthly fee of 0.50% per annum for unused amounts
during the revolving period, calculated based on the difference between (a) the
maximum loan amount under the Loan and Security Agreement and (b) the average
daily principal balance of the obligations outstanding during the prior calendar
month; (iv) prohibits us from repurchasing shares of our common stock and
declaring and paying any distribution or dividend until the termination of the
Loan and Security Agreement, except, in the case of distributions and dividends,
to the extent necessary for us to maintain our eligibility to qualify as a RIC
under Subchapter M of the Code; (x) includes a minimum liquidity covenant
threshold of least $2.2 million through termination of the Loan and Security
Agreement; and (xi) permits the use of an Alternative Rate (as defined in the
Loan and Security Agreement) in place of LIBOR if certain conditions are
satisfied.
Beginning as of August 1, 2020, during the amortization period, we are required
to pay down the principal amount outstanding under the Credit Facility on a
monthly basis in equal installments during the relevant calendar quarter so that
such outstanding amounts will be reduced by an amount equal to or greater than
(i) $2.2 million for each of the first two full calendar quarters following July
31, 2020, (ii) $3.3 million for each of the succeeding two full calendar
quarters and (iii) $4.3 million for each succeeding calendar quarter until
termination of the Credit Facility, which is scheduled to mature on October 30,
2021. During the amortization period, 90% of all principal collections we
receive from our portfolio companies must generally be paid to the lenders to
pay down our obligations and other amounts outstanding under the Credit
Facility. In addition, any proceeds we receive from the sale or issuance of our
equity or debt securities during the amortization period must generally be
applied to the prepayment of our obligations under the Credit Facility.
The Credit Facility contains additional customary terms and conditions,
including, without limitation, affirmative and negative covenants, including,
without limitation, information reporting requirements, a minimum debt-service
coverage ratio, and maintenance of RIC and BDC status. The Credit Facility also
contains customary events of default, including, without limitation, nonpayment,
misrepresentation of representations and warranties in a material respect,
breach of covenant, cross-default to other indebtedness, bankruptcy, change of
control, and the occurrence of a material adverse effect. In addition, the
Credit Facility provides that, upon the occurrence and during the continuation
of any event of default, our administration agreement could be terminated and a
backup administrator could be substituted by the agent.
The maturity date under the Credit Facility is the earlier of (x) October 30,
2021, or (y) the date that is six months prior to the maturity of any of our
outstanding unsecured long-term indebtedness. Based on our outstanding 2022
Notes that mature on September 15, 2022, the maturity date under the Credit
Facility is October 30, 2021. HCAP Equity Holdings, LLC became a co-borrower
under the Credit Facility in August 2016, and HCAP ICC, LLC, became a borrower
under the Credit Facility in November 2017.
As of December 31, 2020 and December 31, 2019, the outstanding balance on the
$45.0 million Credit Facility was $35.6 million and $43.7 million, respectively.
2022 Notes

On August 24, 2017, we closed the public offering of $25.0 million in aggregate
principal amount of the 2022 Notes. On September 1, 2017, we closed on an
additional $3.75 million in aggregate principal amount of the 2022 Notes to
cover the over-allotment option exercised by the underwriters. In total, we
issued 1,150,000 of the 2022 Notes at a price of $25.00 per Note. The total net
proceeds to us from the issuance of the 2022 Notes, after deducting underwriting
discounts of $0.9 million and offering expenses of $0.2 million, were $27.7
million. As of December 31, 2020 and December 31, 2019, the outstanding
principal balance of the 2022 Notes was $28.8 million and $28.8 million,
respectively. As of December 31, 2020 and December 31, 2019, the deferred
offering costs and discount balance was $0.6 million and $0.8 million,
respectively.

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

The 2022 Notes Indenture contains certain covenants, including covenants (i)
prohibiting our issuance of any senior securities unless, immediately after such
issuance, we are in compliance with the 1940 Act asset coverage requirements
(after giving effect to any exemptive relief granted to us by the SEC); (ii) if
our asset coverage has been below the 1940 Act minimum asset coverage
requirements (after giving effect to any exemptive relief granted to us by the
SEC) for more than six consecutive months, prohibiting the declaration of any
cash dividend or distribution on our common stock (except to the extent
necessary for us to maintain our treatment as a RIC under Subchapter M of the
Code), or purchasing any of our common stock, unless, at the time of the
declaration of the dividend or distribution or the purchase, and after deducting
the amount of such dividend, distribution, or purchase, we are in compliance
with the 1940 Act asset coverage requirements (after giving effect to any
exemptive relief granted to us by the SEC); and (iii) requiring us to provide
financial information to the holders of the 2022 Notes and the Trustee if we
cease to be subject to the reporting requirements of the Exchange Act. These
covenants are subject to limitations and exceptions that are described in the
2022 Notes Indenture.

Contractual Obligations

A summary of the maturities of our principal amounts of debt and other contractual payment obligations as of December 31, 2020 are as follows:



                                                    Payments Due by Period
(in millions)          Total       Less than 1 year       1-3 years       3-5 years      After 5 years
Credit Facility (1)   $ 35.6      $            35.6      $        -      $       -      $            -
2022 Notes (2)          28.8                      -            28.8              -                   -
Total                 $ 64.4      $            35.6      $     28.8      $       -      $            -

(1) The Credit Facility has a revolving period that expires on June 30, 2021, and a

stated maturity date of October 30, 2021. We are required to pay down the principal

amount outstanding under the Credit Facility on a monthly basis in equal

installments during the relevant calendar quarter so that such outstanding amounts

will be reduced by an amount equal to or greater than (i) $2.2 million for each of

the first two full calendar quarters following July 31, 2020, (ii) $3.3 million for

each of the succeeding two full calendar quarters and (iii) $4.3 million for each

succeeding calendar quarter until termination of the Credit Facility, which is

scheduled to mature on October 30, 2021. (2) The 2022 Notes will mature on September 15, 2022 unless earlier repurchased or


       redeemed.

Off-Balance Sheet Arrangements



We may be a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financial needs of our portfolio
companies. As of December 31, 2020, our only off-balance sheet arrangements
consisted of $1.8 million of unfunded revolving lines of credit to four of our
portfolio companies. As of December 31, 2019, our only off-balance sheet
arrangements consisted of $3.1 million of unfunded revolving lines of credit
commitments to seven of our portfolio companies.

Critical Accounting Policies



Our consolidated financial statements are prepared in accordance with GAAP,
which requires the use of estimates that involve the exercise of judgment and
the use of assumptions as to future uncertainties. Our most critical accounting
policies involve decisions and assessments that could affect our reported assets
and liabilities, as well as our reported revenues and expenses. We believe that
all of the decisions and assessments upon which our consolidated financial
statements are based are reasonable at the time made and based upon information
available to use at that time. We rely upon a thorough valuation process, which
includes, for certain portfolio investments, the input of an external
independent third-party valuation firm to arrive at what we believe to be
reasonable estimates of fair value, whenever available. As of December 31, 2020,
our investment portfolio had a fair value of $89.6 million and we recognized
$2.2 million of unrealized appreciation for the year ended December 31, 2020.
For more information on our fair value measurements, see Note 6 of the notes to
our Consolidated
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Financial Statements. For a review of our significant accounting policies and
the recent accounting pronouncements that may impact our results of operations,
see Note 2 of the notes to our Consolidated Financial Statements.

Regulated Investment Company Status and Distributions



We have elected to be treated as a RIC under Subchapter M of the Code. If we
receive RIC tax treatment, we will not be taxed on our investment company
taxable income or realized net capital gains, to the extent that such taxable
income or gains are distributed, or deemed to be distributed, to stockholders on
a timely basis.

Taxable income generally differs from net income for financial reporting
purposes due to temporary and permanent differences in the recognition of income
and expenses, and generally excludes net unrealized appreciation or depreciation
until realized. Distributions declared and paid by us in a year may differ from
taxable income for that year as such dividends may include the distribution of
current year taxable income or the distribution of prior year taxable income
carried forward into and distributed in the current year. Distributions also may
include returns of capital.

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

We intend to distribute to our stockholders between 90% and 100% of our annual
taxable income (which includes our taxable interest and fee income). However,
the covenants contained in the Credit Facility and in the indenture governing
the 2022 Notes, as well as restrictions under the Merger Agreement, may prohibit
us from making distributions to our stockholders, and, as a result, could hinder
our ability to satisfy the distribution requirement. In addition, we may retain
for investment some or all of our net taxable capital gains (i.e., realized net
long-term capital gains in excess of realized net short-term capital losses) and
treat such amounts as deemed distributions to our stockholders. If we do this,
our stockholders will be treated as if they received actual distributions of the
capital gains we retained and then reinvested the net after-tax proceeds in our
common stock. Our stockholders also may be eligible to claim tax credits (or, in
certain circumstances, tax refunds) equal to their allocable share of the tax we
paid on the capital gains deemed distributed to them. To the extent our taxable
earnings for a fiscal taxable year fall below the total amount of our
distributions for that fiscal year, a portion of those distributions may be
deemed a return of capital to our stockholders.

We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, we may be limited in our ability
to make distributions due to the asset coverage test for borrowings applicable
to us as a BDC under the 1940 Act and due to provisions in the Credit Facility
and the indenture governing the 2022 Notes. For example, we are prohibited under
the Loan and Security Agreement from declaring and paying any distribution or
dividend, except to the extent necessary for us to maintain our eligibility to
qualify as a RIC under Subchapter M of the Code. We cannot assure stockholders
that they will receive any dividends or distributions at a particular level.

In this regard, on March 12, 2020, we announced monthly distributions of $0.08
per share payable on each of April 30, 2020 (the "March 2020 Dividend") and May
28, 2020 (the "April 2020 Dividend") to record holders as of April 23, 2020 and
May 21, 2020, respectively. However, our board of directors resolved to defer
the record date and payment of each of the March 2020 Dividend and the April
2020 Dividend and determined to suspend the declaration of any future dividends
until such later time as our board of directors determines is prudent in light
of our capital needs and contractual obligations, and in our stockholders' best
interests. We ultimately paid the previously declared but deferred March 2020
Dividend and April 2020 Dividend in a single distribution of $0.16 per share on
December 29, 2020 to shareholders of record at the close of business on December
15, 2020, but did not declare or pay any other monthly dividends in 2020 after
the declaration and payment of the March 2020 Dividend and the April 2020
Dividend.

In accordance with certain Internal Revenue Service revenue procedures, a RIC
may treat a distribution of its own stock as fulfilling its RIC distribution
requirements if each stockholder may elect to receive his or her entire
distribution in either cash or stock of the RIC, subject to a limitation that
the aggregate amount of cash to be distributed to all stockholders must be at
least 20% of the aggregate declared distribution. If too many stockholders elect
to receive cash, the cash available for distribution
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must be allocated among each stockholder electing to receive cash (with the
balance of the distribution paid in stock). In no event will any stockholder,
electing to receive cash, receive less than the lesser of (a) the portion of the
distribution such stockholder has elected to receive in cash, or (b) an amount
equal to his or her entire distribution times the percentage limitation on cash
available for distribution. If these and certain other requirements are met, for
U.S. federal income tax purposes, the amount of the dividend paid in stock will
be equal to the amount of cash that could have been received instead of stock.

Recent Developments



On January 22, 2021, we entered into the Twelfth Amendment to the Loan and
Security Agreement (the "Amendment"), which amended the Credit Facility to,
among other things, (i) extend the revolving period to June 30, 2021, until
which date we may receive additional advances at the discretion of the lenders;
(ii) amend the definition of "debt service" to exclude from the calculation of
the debt service coverage ratio, for any period from August 1, 2020 through June
30, 2021 (extended from December 31, 2020 pursuant to the Amendment), an amount
equal to the lesser of (x) the amount of the required monthly amortization
payments for the relevant period and (y) the aggregate amount of all prepayments
of principal (both voluntary and mandatory) collected by us during the relevant
period; and (iii) revise the definition of "modified net investment income" to
account for our anticipated transaction costs associated with the pending
Mergers. The other material terms of the Loan Agreement were unchanged by the
Amendment.

As of March 12, 2021, we had no borrowings outstanding under our Credit Facility.



On March 1, 2021, we received $5.5 million from National Program Management &
Project Controls, LLC ("NPMPC") representing full payoffs at par on both of the
senior secured term loan and the senior secured delayed draw term loan and
received a prepayment fee of $0.1 million. In addition, we received proceeds of
$9.0 million for the sale of our class A membership interest in NPMPC. An
additional $0.1 million is held in escrow and will be released to us at a later
date.

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