Silver Spike Investment Corp. - Quarter Report: 2023 September (Form 10-Q)

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Except where the context suggests otherwise, the terms “we,” “us,” “our,” “the Company,” and “SSIC” refer to Silver Spike Investment Corp. In addition, the terms “SSC,” “Adviser,” “investment adviser” and “administrator” refer to Silver Spike Capital, LLC, our external investment adviser and administrator.

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:

 

•	our future operating results and distribution projections;

 

•	the ability of Silver Spike Capital, LLC (“SSC”) to attract and retain highly talented professionals;

 

•	our business prospects and the prospects of our portfolio companies;

 

•	the impact of interest and inflation rates on our business prospects and the prospects of our portfolio companies;

 

•	the impact of the investments that we expect to make;

 

•	the ability of our portfolio companies to achieve their objectives;

 

•	our expected financings and investments and the timing of our investments in our initial portfolio;

 

•	changes in regulation impacting the cannabis industry;

•	the adequacy of our cash resources and working capital;

•	the current and future effects of the COVID-19 pandemic on us and our portfolio companies; and

 

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

In addition, words such as “anticipate,” “believe,” “expect,” “seek,” “plan,” “should,” “estimate,” “project” and “intend” indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Item 1A. Risk Factors” in our transition report on Form 10-K for the transition period from April 1, 2022 to December 31, 2022 and elsewhere in this quarterly report on Form 10-Q. Other factors that could cause actual results to differ materially include:

 

•	our limited operating history;

•	changes or potential disruptions in our operations, the economy, financial markets or political environment;

 

•	risks associated with possible disruption in our operations or the economy generally due to terrorism, natural disasters or the COVID-19 pandemic;

 

•	future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies (“BDCs”) or regulated investment companies (“RICs”); and

•	other considerations that may be disclosed from time to time in our publicly disseminated documents and filings.

 

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, 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 forward-looking statements contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

PART I: FINANCIAL INFORMATION

 

Item 1.

Financial Statements

SILVER SPIKE INVESTMENT CORP.

Statements of Assets and Liabilities

 

See notes to financial statements.

See notes to financial statements.

SILVER SPIKE INVESTMENT CORP.

Statements of Cash Flows

(Unaudited)

SILVER SPIKE INVESTMENT CORP.

Schedule of Investments

September 30, 2023

(Unaudited)

(in thousands)

SILVER SPIKE INVESTMENT CORP.

Schedule of Investments

December 31, 2022

 (in thousands)

Dividend income on preferred equity securities is recorded on the accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.

Certain investments may have contractual PIK interest or dividends. PIK interest or dividends represents accrued interest or dividends that is added to the principal amount of the investment on the respective interest or dividend payment dates rather than being paid in cash and generally becomes due at maturity. If PIK interest or dividends are not expected to be realized by the Company, the investment generating PIK interest or dividends will be placed on non-accrual status. When an investment with PIK is placed on non-accrual status, the accrued, uncapitalized interest or dividends are generally reversed through interest or dividend income, respectively.

 

Fee Income

All transaction fees earned in connection with our investments are recognized as fee income and are generally non-recurring. Such fees typically include fees for services, including administrative, structuring and advisory services, provided to portfolio companies. We recognize income from fees for providing such structuring and advisory services when the services are rendered or the transactions are completed.

Income Taxes

The Company adopted an initial tax year end of December 31, 2021 and was taxed as a corporation for U.S. federal income tax purposes for the tax period ended December 31, 2021. The Company adopted the tax year end of March 31, 2022 and elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code for the tax period January 1, 2022 through March 31, 2022, and intends to maintain such election in the current and future taxable years. To maintain its tax treatment as a RIC, the Company must meet specified source-of-income and asset diversification requirements and timely distribute to its stockholders for each taxable year at least 90% of its investment company taxable income. In order for the Company not to be subject to U.S. federal excise taxes, it must distribute annually an amount at least equal to the sum of (i) 98% of its net ordinary income for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (iii) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. The Company, at its discretion (subject to the requirement to distribute 90% of its investment company taxable income as described above), may carry forward taxable income in excess of calendar year dividends and pay a 4% nondeductible U.S. federal excise tax on this income. If the Company chooses to do so, this generally would increase expenses and reduce the amount available to be distributed to stockholders. As of September 30, 2023 and December 31, 2022, $0 and $80,566 of accrued excise taxes remained payable.

The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes (“ASC 740”). Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense.

Based on the analysis of the Company’s tax position, the Company has no uncertain tax positions that met the recognition or measurement criteria as of September 30, 2023 and December 31, 2022. The Company does not anticipate any significant increase or decrease in unrecognized tax benefits for the next twelve months. All of the Company’s tax returns remain subject to examination by U.S. federal and state tax authorities.

Distributions
Distributions to common stockholders are recorded on the record date. The amount of taxable income to be paid out as a distribution is determined by our Board of Directors each quarter and is generally based upon the future taxable income estimated by management. Capital gains, if any, are distributed at least annually, although the Company may decide to retain all or some of those capital gains for investment and pay U.S. federal income tax at corporate rates on those retained amounts. If the Company chooses to do so, this generally will increase expenses and reduce the amount available to be distributed to stockholders. Our distributions may exceed our earnings, and therefore, portions of the distributions that we make may be a return of the money originally invested and represent a return of capital distribution to shareholders for tax purposes.

Organization Expenses and Offering Costs

Organizational expenses

Costs associated with the organization of the Company are expensed as incurred. These expenses consist primarily of legal fees and other costs of organizing the Company.

For the three and nine months ended September 30, 2023, the Company did not incur organizational expenses. For the three and nine months ended September 30, 2022, the Company incurred organizational expenses of $0 and $34,168, respectively. As of September 30, 2023 and December 31, 2022, there were no unpaid organizational expenses.

Offering costs

These costs consist primarily of legal fees and other costs incurred in connection with the Company’s share offerings, the preparation of the Company’s registration statement, and registration fees.

Costs associated with the offering of common shares of the Company are capitalized as deferred offering and, if any, are included in deferred offering costs on the Statements of Assets and Liabilities. Costs of approximately $0 and $1,690,184 were charged to capital upon the completion of the Company’s public offering during the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2023, no offering costs were charged to capital. As of September 30, 2023 and December 31, 2022, there were no unpaid offering costs.

 

New Accounting Standards

		December 31, 2022
		Amortized Cost								Fair Value
Geographic Location		Amount				%				Amount				%
Midwest		$	24,420,752				48.4	%		$	24,358,686				48.5	%
West			20,479,987				40.5				20,268,705				40.3
Northeast			3,854,475				7.6				3,854,475				7.7
Southeast			1,772,684				3.5				1,772,684				3.5
Total		$	50,527,898				100.0	%		$	50,254,550				100.0	%

Concentration risk is the risk that the Company’s focus on investments in cannabis companies may subject the Company to greater price volatility and risk of loss as a result of adverse economic, business or other developments affecting cannabis companies than funds investing in a broader range of industries or sectors. At times, the performance of investments in cannabis companies will lag the performance of other industries or sectors or the broader market as a whole.

Investment Type		Fair Value as of December 31, 2022			Valuation Techniques/ Methodologies		Unobservable Input		Range				Weighted Average (1)
Senior Secured First Lien Term Loan		$	40,660,633		Discounted Cash Flow		Discount Rate			7.2% - 9.6	%			8.4	%
							Volatility			20.0% - 20.0	%			20.0	%
Senior Secured Notes			9,593,917		Discounted Cash Flow		Discount Rate			11.6% - 18.7	%			14.3	%
							Volatility			7.0% - 20.0	%			12.4	%
Total		$	50,254,550

The following table provides a summary of changes in the fair value of the Company’s Level 3 portfolio investments for the nine months ended September 30, 2022:

 

Pursuant to the investment advisory agreement between the Company and SSC (the “Investment Advisory Agreement”), fees payable to SSC are equal to (a) a base management fee of 1.75% of the average value of the Company’s gross assets at the end of the two most recent quarters (i.e., total assets held before deduction of any liabilities), which includes investments acquired with the use of leverage and excludes cash and cash equivalents and (b) an incentive fee based on the Company’s performance. The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of the Company’s “Pre-Incentive Fee Net Investment Income” for the quarter, subject to a preferred return, or “hurdle,” of 1.75% per quarter (7% annualized), and a “catch-up” feature. The second part is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Investment Advisory Agreement) and equals 20% of the Company’s realized capital gains on a cumulative basis from inception through the end of the fiscal year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee (the “Incentive Fee on Capital Gains”).

While the Investment Advisory Agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the Incentive Fee on Capital Gains, as required by U.S. GAAP, we accrue the Incentive Fee on Capital Gains on unrealized capital appreciation exceeding unrealized depreciation. This accrual reflects the Incentive Fee on Capital Gains that would be payable to SSC if the Company’s entire investment portfolio was liquidated at its fair value as of the balance sheet date even though SSC is not entitled to an Incentive Fee on Capital Gains with respect to unrealized capital appreciation unless and until such gains are actually realized.