HCAP Harvest Capital Credit Corporation

Harvest Capital Credit Corporation (the “Company,” “we,” or “our”) (NASDAQ: HCAP) announced financial results for its second quarter ended June 30, 2020.

 

FINANCIAL HIGHLIGHTS

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

 

Q2-2020

 

Q2-2019

 

June 30, 2020

 

June 30, 2019

 

 

Amount

Per share

 

Amount

Per share

 

Amount

Per share

 

Amount

Per share

Net investment income

 

$

203,184

 

$

0.03

 

 

$

840,910

 

$

0.14

 

 

$

1,191,854

 

$

0.20

 

 

$

1,603,180

 

$

0.26

 

Core net investment income (1)

 

 

203,184

 

 

0.03

 

 

 

840,910

 

 

0.14

 

 

 

1,191,854

 

 

0.20

 

 

 

1,603,180

 

 

0.26

 

Net realized gains (losses) on investments

 

 

(2,154,326

)

 

(0.36

)

 

 

26,901

 

 

—

 

 

 

(2,240,753

)

 

(0.38

)

 

 

62,311

 

 

0.01

 

Net change in unrealized appreciation (depreciation) on investments

 

 

1,191,129

 

 

0.20

 

 

 

(781,701

)

 

(0.13

)

 

 

(3,388,408

)

 

(0.57

)

 

 

(1,518,386

)

 

(0.24

)

Net income (loss)

 

($

760,013

)

($

0.13

)

 

$

86,110

 

$

0.01

 

 

($

4,437,307

)

($

0.75

)

 

$

147,105

 

$

0.02

 

Weighted average shares outstanding (basic and diluted)

 

 

5,958,479

 

 

 

 

6,161,052

 

 

 

 

5,954,014

 

 

 

 

6,231,496

 

 

(1) Core net investment income and core net investment income per share are non-GAAP financial measures. For each of the three months ended June 30, 2020 and 2019, there were no adjustments to GAAP net investment income and GAAP net investment income per share to arrive at core net investment income and core net investment income per share.

 

PORTFOLIO ACTIVITY

 

 

 

 

 

 

June 30, 2020

 

December 31, 2019

Portfolio investments at fair value

 

 

 

 

 

$

104,283,736

 

 

$

116,809,390

 

Total assets

 

 

 

 

 

$

135,824,588

 

 

$

140,059,736

 

Net assets

 

 

 

 

 

$

61,001,877

 

 

$

66,781,482

 

Shares outstanding

 

 

 

 

 

5,958,479

 

 

5,945,854

 

Net asset value per share

 

 

 

 

 

$

10.24

 

 

$

11.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

 

Q2-2020

 

Q2-2019

 

June 30, 2020

 

June 30, 2019

Portfolio activity during the period:

 

 

 

 

 

 

 

 

New debt investments

 

$

—

 

 

$

14,912,500

 

 

$

1,255,000

 

 

$

36,262,288

 

New equity investments

 

$

—

 

 

$

2,981,307

 

 

$

200,000

 

 

$

3,139,559

 

Exits of debt investments

 

$

(6,899,852

)

 

$

(4,045,931

)

 

$

(9,096,452

)

 

$

(14,470,579

)

Exits of equity investments

 

$

—

 

 

$

—

 

 

$

(102,421

)

 

$

(206,435

)

Principal repayments

 

$

(899,892

)

 

$

(1,746,688

)

 

$

(1,746,133

)

 

$

(5,094,836

)

Net activity

 

$

(7,799,744

)

 

$

12,101,188

 

 

$

(9,490,006

)

 

$

19,629,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

 

December 31, 2019

Number of portfolio companies

22

 

 

25

 

Number of debt investments

 

 

 

 

 

17

 

 

20

 

 

 

 

 

 

 

 

 

 

Weighted average yield of debt and other income producing investments (1):

 

 

 

Cash

 

 

 

 

 

10.6

%

 

12.0

%

PIK

 

 

 

 

 

1.5

%

 

1.1

%

Fee amortization

 

 

 

 

 

0.7

%

 

0.9

%

Total

 

 

 

 

 

12.8

%

 

14.0

%

 

 

 

 

 

 

 

 

 

Weighted average yield on total investments (2):

 

 

 

Cash

 

 

 

 

 

7.5

%

 

9.7

%

PIK

 

 

 

 

 

1.0

%

 

0.9

%

Fee amortization

 

 

 

 

 

0.5

%

 

0.7

%

Total

 

 

 

 

 

9.0

%

 

11.3

%

(1) The dollar-weighted average annualized effective yield is computed using the effective interest rates for our debt investments 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 of the portfolio as a percentage of our debt and other income producing investments. The dollar-weighted average annualized yield on the Company’s investments for a given period will generally be higher than what investors in our common stock would realize in a return over the same period because the dollar-weighted average annualized yield does not reflect the Company’s expenses or any sales load that may be paid by investors. Infinite Care, LLC, General Nutrition Centers, Inc., GK Holdings, Inc., and ProAir Holdings Corporation were excluded from the calculation as of June 30, 2020 because they were on non-accrual status as of 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 as of that date.

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

SECOND QUARTER AND YEAR TO DATE 2020 OPERATING RESULTS

For the three months ended June 30, 2020, the Company recorded a net operating loss of $0.8 million, as compared to net operating income of $0.1 million in the quarter ended June 30, 2019. The $0.9 million decrease in net operating results in comparable periods principally resulted from the Company recording lower investment income as a result of a lower weighted average effective yield on the Company's income-earning portfolio and the addition of two portfolio companies to non-accrual status, which resulted in a smaller income-earning portfolio, an increase in interest expense, and an increase in realized losses offset by an increase in unrealized appreciation on investments. Per share earnings (loss) were ($0.13) and $0.01 per share for the three months ended June 30, 2020 and 2019, respectively.

Net investment income was $0.2 million, or $0.03 per share, for the quarter ended June 30, 2020, compared to net investment income of $0.8 million, or $0.14 per share, for the quarter ended June 30, 2019, a decrease of $0.6 million in the second quarter of 2020 compared to 2019. The decrease in net investment income during the 2020 second quarter as compared to the 2019 second quarter primarily resulted from a decrease of $0.4 million in investment income between periods and an increase in expenses, principally interest, of $0.2 million during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

For the six months ended June 30, 2020, the Company recorded a net operating loss of $4.4 million, compared to $0.2 million of net operating income in the six months ended June 30, 2019. Per share operating loss was $0.75 in the six months ended June 30, 2020 compared to net operating income of $0.02 per share in the six months ended June 30, 2019. The $4.6 million decrease between periods was primarily attributable to a $0.4 million decrease in net investment income, a $1.9 million increase in net unrealized depreciation, a $2.3 million increase in net realized loss, and a $0.2 million increase in expenses, principally interest. The increase in unrealized depreciation during the six months ended June 30, 2020 is primarily the result of the immediate adverse economic effects of the COVID-19 pandemic and the continuing uncertainty surrounding its long-term impact.

Net investment income was $1.2 million, or $0.20 per share, for the six months ended June 30, 2020, compared to net investment income of $1.6 million, or $0.26 per share, for the six months ended June 30, 2019, a decrease of $0.4 million in the first six months of 2020 compared to the first six months of 2019. The decrease in net investment income during the first six months of 2020 as compared to the first six months of 2019 primarily resulted from a decrease of $0.2 million in investment income between periods and an increase in expenses of $0.2 million during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

As of June 30, 2020, our total portfolio investments at fair value and total assets were $104.3 million and $135.8 million, respectively, compared to $116.8 million and $140.1 million at December 31, 2019. Net asset value per share was $10.24 at June 30, 2020, compared to $11.23 at December 31, 2019.

During the second quarter of 2020, the Company did not make additional investments in portfolio companies. The Company had two payoffs during the three months ended June 30, 2020. The significant investment activity for the quarter ended June 30, 2020 was as follows:

Investment Sales and Payoffs

On June 15, 2020, the Company sold its $2.9 million junior secured debt investment in CP Holding Co., Inc. and received proceeds of $1.1 million. The Company generated an internal rate of return (IRR*) of 9.9% on its investment.

On June 25, 2020, the Company received a $4.0 million repayment, at par, on its junior secured debt investment in Flavors Holdings Inc. The original par value of the debt investment was $4.0 million. The Company generated an internal rate of return (IRR*) of 13.3% on its investment.

* IRR is the rate of return that makes the net present value of all cash flows into or from the investment equal to zero, and is calculated based on the amount of each cash flow received or invested by the Company and the day it was received or invested.

"Our second quarter results reflect the negative impact on certain of our portfolio companies that resulted from the sharp economic recession since February 2020, due to forced business closures in the US caused by the COVID-19 global pandemic, and the high costs associated with the recent short term extension of our revolving line of credit," said Joseph Jolson, Chairman and CEO. "We continue to work with our portfolio companies that have been hurt by the current economic environment, with a focus on minimizing the negative impact, wherever possible, to net asset value, including by lowering cash interest rates to affordable levels. We are also focused on maintaining high levels of liquidity given the uncertainty about replacing the agent bank in our credit line in the context of this difficult environment. While these tactics will continue to have a negative short term effect on our net investment income, we are optimistic they will help support shareholders’ value until business conditions normalize over time,” concluded Mr. Jolson.

CREDIT QUALITY

The Company employs various risk management and monitoring tools to categorize and assess its investments. No less frequently than quarterly, the Company applies an investment risk rating system which uses a five-level numeric scale. In determining an investment rating, Company management takes into account various aspects of a company's performance during the measurement period and assigns an investment rating to each aspect, which are then averaged. Such averages may inform, but do not necessarily determine, the investment rating assigned to a company. 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.

As of June 30, 2020, the weighted average risk rating of the debt investments in the Company's portfolio deteriorated to 3.00 from 2.75 in the previous quarter. Also, as of June 30, 2020, two of the Company’s seventeen debt investments were rated 1, six investments were rated 2, four investments were rated 3, four investments were rated 4, and one investment was rated 5. As of June 30, 2020, four investments with a combined fair value of $17.8 million were on non-accrual status.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2020, the Company had $30.2 million of cash and restricted cash and was fully drawn on its $45.0 million senior secured revolving credit facility. The credit facility is secured by all of the Company’s assets. The revolving period under the credit facility was scheduled to end on July 31, 2020. However, on August 6, 2020, the Company amended the credit facility to, among other things, (i) extend the revolving period to October 31, 2020, until which date the Company may receive additional advances at the discretion of the lenders; and (ii) commence the amortization period beginning August 1, 2020. Please see the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on August 6, 2020, for more information.

COVID-19 DEVELOPMENTS

The COVID-19 pandemic, and the related effects on the U.S. and global economies, has had, and may continue to have, adverse consequences for the business operations of some of the Company's portfolio companies and has adversely affected, and threatens to continue to adversely affect, the Company's operations and the operations of HCAP Advisors. Given the dynamic nature of this situation, the Company cannot reasonably estimate the full impact of COVID-19 on its financial condition, results of operations or cash flows in the future. However, the Company does expect that it could have a material adverse impact on its future net investment income, the fair value of its portfolio investments, and the Company's results of operations and financial condition as well as its portfolio companies. Please see the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on August 6, 2020, for more information.

CONFERENCE CALL

The Company will host a conference call on Friday, August 7, 2020 at 11:00 a.m. Eastern Time to discuss its second quarter results. All interested parties are invited to participate in the conference call by dialing (888) 566-6060 (domestic) or (973) 200-3100 (international). Participants should enter the Conference ID 6167939 when prompted.

ABOUT HARVEST CAPITAL CREDIT CORPORATION

Harvest Capital Credit Corporation (NASDAQ: HCAP) provides customized financing solutions to privately held small and mid-sized companies in the U.S., generally targeting companies with annual revenues of less than $100 million and annual EBITDA of less than $15 million. The Company’s 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. Harvest Capital Credit Corporation is externally managed and has elected to be treated as a business development company under the Investment Company Act of 1940. For more information about Harvest Capital Credit Corporation, visit www.harvestcapitalcredit.com. However, the contents of such website are not and should not be deemed to be incorporated by reference herein.

Forward-Looking Statements

This press release contains forward-looking statements subject to the inherent uncertainties in predicting future results and conditions. Any statements that are not of historical fact (including statements containing the words "believes", "plans", "anticipates", "expects", "estimates", and similar expressions) should also be considered to be forward-looking statements. Certain factors could cause actual events, results and conditions to differ materially from those discussed or projected in these forward-looking statements, including, without limitation, changes in our relationships and contractual arrangements with lenders and changes in economic, market or other conditions, including with respect to the impact of the COVID-19 pandemic and its effects on the Company and its portfolio companies' results of operations and financial condition. These factors are identified from time to time in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q. We undertake no obligation to update such statements to reflect subsequent events, except as may be required by law.

 

Harvest Capital Credit Corporation

Consolidated Statements of Assets and Liabilities

 

 

June 30,

 

December 31,

 

 

2020

 

2019

ASSETS:

 

 

 

 

Non-affiliated/non-control investments, at fair value (cost of $50,851,230 at 6/30/20 and $61,379,670 at 12/31/19)

 

$

46,680,895

 

 

$

60,973,556

 

Affiliated investments, at fair value (cost of $49,417,580 at 6/30/20 and $48,111,833 at 12/31/19)

 

49,354,892

 

 

47,431,234

 

Control investments, at fair value (cost of $14,043,651 at 6/30/20 and $13,958,202 at 12/31/19)

 

8,247,949

 

 

8,404,600

 

Cash

 

8,764,304

 

 

11,199,083

 

Restricted cash

 

21,458,381

 

 

10,648,199

 

Interest receivable

 

560,097

 

 

663,191

 

Accounts receivable – other

 

143,819

 

 

184,804

 

Deferred financing costs

 

332,330

 

 

425,379

 

Other assets

 

281,921

 

 

129,690

 

Total assets

 

$

135,824,588

 

 

$

140,059,736

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

Revolving line of credit

 

$

45,000,000

 

 

$

43,700,000

 

2022 Notes (net of deferred offering costs and unamortized discount of $518,659 at 6/30/20 and $623,276 at 12/31/19)

 

28,231,341

 

 

28,126,724

 

Accrued interest payable

 

96,378

 

 

152,544

 

Accounts payable - base management fees

 

549,808

 

 

593,266

 

Accounts payable - administrative services

 

350,000

 

 

350,000

 

Accounts payable - accrued expenses

 

595,184

 

 

355,720

 

Total liabilities

 

74,822,711

 

 

73,278,254

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

NET ASSETS:

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 6,600,444 issued and 5,958,479 outstanding at 6/30/20 and 6,587,819 issued and 5,945,854 outstanding at 12/31/19

 

6,601

 

 

6,588

 

Capital in excess of common stock

 

90,962,284

 

 

90,876,759

 

Treasury shares, at cost, 641,965 shares at 6/30/20 and 12/31/19

 

(6,723,505

)

 

(6,723,505

)

Accumulated over distributed earnings

 

(23,243,503

)

 

(17,378,360

)

Total net assets

 

61,001,877

 

 

66,781,482

 

Total liabilities and net assets

 

$

135,824,588

 

 

$

140,059,736

 

 

 

 

 

 

Common stock outstanding

 

5,958,479

 

 

5,945,854

 

 

 

 

 

 

Net asset value per common share

 

$

10.24

 

 

$

11.23

 

 

Harvest Capital Credit Corporation

Consolidated Statements of Operations

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2020

 

2019

 

2020

 

2019

Investment Income:

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

Cash - non-affiliated/non-control investments

 

$

 

1,067,603

 

 

$

 

1,349,743

 

 

$

2,631,690

 

 

 

$

 

2,830,855

 

Cash - affiliated investments

 

 

1,105,081

 

 

 

 

1,100,708

 

 

 

2,406,871

 

 

 

 

2,061,654

 

PIK - non-affiliated/non-control investments

 

 

110,582

 

 

 

 

18,647

 

 

 

220,216

 

 

 

 

30,766

 

PIK - affiliated investments

 

 

144,527

 

 

 

 

187,598

 

 

 

299,855

 

 

 

 

382,112

 

Amortization of fees, discounts and premiums

 

 

 

 

 

 

 

 

 

Non-affiliated/non-control investments

 

 

103,647

 

 

 

 

200,200

 

 

 

193,642

 

 

 

 

427,062

 

Affiliated investments

 

 

55,797

 

 

 

 

34,423

 

 

 

115,544

 

 

 

 

57,155

 

Total interest income

 

 

2,587,237

 

 

 

 

2,891,319

 

 

 

5,867,818

 

 

 

 

5,789,604

 

Other income

 

 

3,610

 

 

 

 

102,987

 

 

 

9,790

 

 

 

 

242,946

 

Total investment income

 

 

2,590,847

 

 

 

 

2,994,306

 

 

 

5,877,608

 

 

 

 

6,032,550

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Interest expense – revolving line of credit

 

 

339,900

 

 

 

 

92,295

 

 

 

661,019

 

 

 

 

102,781

 

Interest expense - unused line of credit

 

 

34,105

 

 

 

 

92,135

 

 

 

89,501

 

 

 

 

193,884

 

Interest expense - deferred financing costs

 

 

124,155

 

 

 

 

55,629

 

 

 

182,160

 

 

 

 

110,640

 

Interest expense - 2022 Notes

 

 

440,235

 

 

 

 

440,235

 

 

 

880,470

 

 

 

 

880,470

 

Interest expense - deferred offering costs and discount

 

 

52,765

 

 

 

 

49,210

 

 

 

104,618

 

 

 

 

97,570

 

Total interest expense

 

 

991,160

 

 

 

 

729,504

 

 

 

1,917,768

 

 

 

 

1,385,345

 

 

 

 

 

 

 

 

 

 

 

Professional fees

 

 

248,279

 

 

 

 

297,546

 

 

 

457,324

 

 

 

 

817,880

 

General and administrative

 

 

248,416

 

 

 

 

236,619

 

 

 

479,688

 

 

 

 

491,572

 

Base management fees

 

 

549,808

 

 

 

 

539,727

 

 

 

1,130,974

 

 

 

 

1,034,573

 

Administrative services expense

 

 

350,000

 

 

 

 

350,000

 

 

 

700,000

 

 

 

 

700,000

 

Total expenses

 

 

2,387,663

 

 

 

 

2,153,396

 

 

 

4,685,754

 

 

 

 

4,429,370

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

 

203,184

 

 

 

 

840,910

 

 

 

1,191,854

 

 

 

 

1,603,180

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses):

 

 

 

 

 

 

 

 

 

Non-Affiliated / Non-Control investments

 

 

(2,089,775

)

 

 

 

6,151

 

 

 

(2,176,202

)

 

 

 

52,451

 

Affiliated investments

 

 

(64,551

)

 

 

 

20,750

 

 

 

(64,551

)

 

 

 

20,750

 

Control investments

 

 

—

 

 

 

 

—

 

 

 

—

 

 

 

 

(10,890

)

Net realized gains (losses)

 

 

(2,154,326

)

 

 

 

26,901

 

 

 

(2,240,753

)

 

 

 

62,311

 

Net change in unrealized appreciation (depreciation) on investments:

 

 

 

 

 

 

 

 

 

Non-Affiliated / Non-Control investments

 

 

(522,115

)

 

 

 

49,377

 

 

 

(3,764,219

)

 

 

 

(689,578

)

Affiliated investments

 

 

2,345,794

 

 

 

 

67,816

 

 

 

617,911

 

 

 

 

6,586

 

Control investments

 

 

(632,550

)

 

 

 

(898,894

)

 

 

(242,100

)

 

 

 

(835,394

)

Net change in appreciation (depreciation) on investments

 

 

1,191,129

 

 

 

 

(781,701

)

 

 

(3,388,408

)

 

 

 

(1,518,386

)

Total net unrealized and realized losses on investments

 

 

(963,197

)

 

 

 

(754,800

)

 

 

(5,629,161

)

 

 

 

(1,456,075

)

Net increase (decrease) in net assets resulting from operations

 

$

 

(760,013

)

 

$

 

86,110

 

 

$

(4,437,307

)

 

 

$

 

147,105

 

 

 

 

 

 

 

 

 

 

 

Net investment income per share

 

$

0.03

 

 

 

$

0.14

 

 

$

0.20

 

 

 

$

0.26

 

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

 

($

0.13

)

 

 

$

0.01

 

 

($

0.75

)

 

 

$

0.02

 

Weighted average shares outstanding, basic and diluted

 

 

5,958,479

 

 

 

 

6,161,052

 

 

 

5,954,014

 

 

 

 

6,231,496

 

© 2020 Harvest Capital Credit Corporation

View source version on businesswire.com: https://www.businesswire.com/news/home/20200807005062/en/

Investor & Media Relations Contacts Harvest Capital Credit Corporation

Joseph Jolson Chairman & Chief Executive Officer (415) 835-8970 jjolson@harvestcaps.com

William E. Alvarez, Jr Chief Financial Officer (212) 906-3589 balvarez@harvestcaps.com