Fidus Investment (FDUS) - 2020 Q1 - Quarterly Report

FORM 10-Q Filing Information General Information This section outlines the Form 10-Q filing details for Fidus Investment Corporation, a quarterly report for March 31, 2020 - The filing is a Quarterly Report on Form 10-Q for Fidus Investment Corporation, covering the period ended March 31, 2020[3] - The registrant's address is 1603 Orrington Avenue, Suite 1005, Evanston, Illinois 60201[3] Registrant Status Fidus Investment Corporation is an 'Accelerated filer' with 24.4 million common shares outstanding as of April 27, 2020 - Fidus Investment Corporation is an 'Accelerated filer'[5] - The registrant is not an 'emerging growth company' and is not a 'shell company'[5] - As of April 27, 2020, 24,437,400 shares of common stock were outstanding[5] PART I — FINANCIAL INFORMATION Item 1. Financial Statements. This section presents Fidus Investment Corporation's unaudited consolidated financial statements for the quarter ended March 31, 2020 Consolidated Statements of Assets and Liabilities Consolidated Statements of Assets and Liabilities (in thousands) | ASSETS | March 31, 2020 (unaudited) | December 31, 2019 | |:--------------------------------------------------------------------|:---------------------------|:------------------| | Total investments, at fair value | $ 718,940 | $ 766,919 | | Cash and cash equivalents | 27,225 | 15,012 | | Total assets | $ 752,542 | $ 789,439 | | LIABILITIES | | | | Total liabilities | 377,008 | 377,129 | | Total net assets | 375,534 | 412,310 | | Total liabilities and net assets | $ 752,542 | $ 789,439 | - Total investments at fair value decreased from $766,919 thousand at December 31, 2019, to $718,940 thousand at March 31, 2020[12] - Cash and cash equivalents increased from $15,012 thousand to $27,225 thousand over the period[12] Consolidated Statements of Operations Consolidated Statements of Operations (in thousands, except per share data) | | Three Months Ended March 31, 2020 (unaudited) | Three Months Ended March 31, 2019 (unaudited) | |:--------------------------------------------------------------------------------------------|:----------------------------------------------|:----------------------------------------------| | Total investment income | $ 19,983 | $ 20,330 | | Total expenses | 2,563 | 10,729 | | Net investment income | 17,417 | 9,599 | | Total net realized gain (loss) on investments | 31,378 | (1,591) | | Total net change in unrealized appreciation (depreciation) on investments | (74,590) | 3,545 | | Net increase (decrease) in net assets resulting from operations | $ (26,971) | $ 11,372 | | Net investment income per share-basic and diluted | $ 0.71 | $ 0.39 | | Net increase (decrease) in net assets resulting from operations per share — basic and diluted | $ (1.10) | $ 0.46 | | Dividends declared per share | $ 0.39 | $ 0.39 | - Net investment income increased by 81.4% to $17,417 thousand for the three months ended March 31, 2020, compared to $9,599 thousand in the prior year, primarily due to a significant decrease in total expenses[16] - The company reported a net decrease in net assets from operations of $(26,971) thousand for Q1 2020, a substantial decline from a net increase of $11,372 thousand in Q1 2019, driven by a large net change in unrealized depreciation on investments[16] Consolidated Statements of Changes in Net Assets Consolidated Statements of Changes in Net Assets (in thousands) | | Balances at December 31, 2019 | Balances at March 31, 2020 | |:--------------------------------------------------------------|:------------------------------|:---------------------------| | Total net assets at beginning of period | $412,310 | $412,310 | | Net investment income | 17,417 | 17,417 | | Net realized gain (loss) on investments, net of taxes | 30,327 | 30,327 | | Net unrealized appreciation (depreciation) on investments | (74,590) | (74,590) | | Realized losses on extinguishment of debt | (125) | (125) | | Dividends declared | (9,537) | (9,537) | | Repurchases of common stock under Stock Repurchase Program | (268) | (268) | | Total net assets at end of period | $375,534 | $375,534 | - Net assets decreased from $412,310 thousand at December 31, 2019, to $375,534 thousand at March 31, 2020, primarily due to significant net unrealized depreciation on investments[19] - The company repurchased 25,719 shares of common stock for $268 thousand during the three months ended March 31, 2020[19] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (in thousands) | Cash Flows from Operating Activities: | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:-----------------------------------------------------------------------------------------------------------------------------------|:----------------------------------|:----------------------------------| | Net cash provided by (used for) operating activities | $ 13,146 | $ (16,511) | | Cash Flows from Financing Activities: | | | | Net cash provided by (used for) financing activities | (933) | 705 | | Net increase (decrease) in cash and cash equivalents | 12,213 | (15,806) | | Cash and cash equivalents: Beginning of period | 15,012 | 42,015 | | Cash and cash equivalents: End of period | $ 27,225 | $ 26,209 | | Supplemental disclosure of cash flow information: Cash payments for interest | $ 5,693 | $ 4,404 | - Net cash provided by operating activities significantly improved to $13,146 thousand for Q1 2020, compared to net cash used of $(16,511) thousand in Q1 2019[24] - Cash and cash equivalents increased by $12,213 thousand, ending the period at $27,225 thousand[24] Consolidated Schedules of Investments Total Investments at Fair Value and Cost (in thousands) | | March 31, 2020 | December 31, 2019 | |:----------------------------------|:---------------|:------------------| | Total Investments, at Fair Value | $718,940 | $766,919 | | Total Investments, at Cost | $731,110 | $704,499 | - The investment portfolio is primarily composed of Second Lien Debt (52.0% at fair value), Subordinated Debt (19.5%), and First Lien Debt (19.1%) as of March 31, 2020[89] - As of March 31, 2020, the company had active investments in 62 portfolio companies and residual investments in four portfolio companies that have sold their underlying operations[83] Notes to Consolidated Financial Statements Note 1. Organization and Nature of Business Fidus Investment Corporation (FIC) is an externally managed BDC and RIC, providing debt and equity financing to lower middle-market companies through SBIC subsidiaries - FIC is a Maryland corporation operating as an externally managed, closed-end, non-diversified BDC under the 1940 Act[42] - The Company elected to be treated as a RIC for federal income tax purposes[42] - FIC provides customized debt and equity financing solutions to lower middle-market companies, directly or through its SBIC-licensed subsidiaries, Fund II and Fund III[43] Note 2. Significant Accounting Policies This note outlines significant accounting policies, including GAAP basis, use of estimates, consolidation, investment risks, fair value measurement, and revenue recognition - Financial statements are prepared in accordance with GAAP, ASC 946, and Regulation S-X, with certain prior period reclassifications[46] - Investments are classified as Control (over 25% voting securities or management control), Affiliate (5% to 25% voting securities), or Non-Control/Non-Affiliate[53] - The company adopted ASU 2018-13, Fair Value Measurement, effective January 1, 2020, with no significant changes to fair value disclosures[81] Note 3. Portfolio Company Investments This note details the Company's investment portfolio composition, activity, and asset quality, including debt, equity, and non-accrual status - As of March 31, 2020, the Company had active investments in 62 portfolio companies with an aggregate fair value of $718,940 thousand[83] - The weighted average effective yield on debt investments was 12.0% as of both March 31, 2020, and December 31, 2019[83][84][85] Portfolio Composition by Investment Type (Fair Value, in thousands) | Investment Type | March 31, 2020 | December 31, 2019 | |:-------------------|:---------------|:------------------| | Second Lien Debt | $373,560 | $383,077 | | Subordinated Debt | 140,188 | 140,843 | | First Lien Debt | 137,307 | 108,327 | | Equity | 64,725 | 126,564 | | Warrants | 3,160 | 8,108 | | Total | $718,940 | $766,919 | Debt Investments on Non-Accrual Status (in thousands) | Portfolio Company | March 31, 2020 Fair Value | March 31, 2020 Cost | December 31, 2019 Fair Value | December 31, 2019 Cost | |:-------------------------------|:--------------------------|:--------------------|:-----------------------------|:-----------------------| | Accent Food Services, LLC | $25,717 | $35,328 | $33,067 | $35,327 | | EBL, LLC (EbLens) | 7,235 | 9,146 | — | — | | Mirage Trailers LLC | 5,297 | 6,277 | — | — | | Virginia Tile Company, LLC | 9,984 | 11,990 | — | — | | Total | $48,233 | $62,741 | $33,067 | $35,327 | Note 4. Fair Value Measurements This note details the Company's fair value measurement policies for portfolio investments, primarily using Level 3 unobservable inputs due to illiquidity - All portfolio investments are valued at fair value, as determined in good faith by the Board, using significant unobservable Level 3 inputs[100] - The valuation process involves initial evaluation by investment professionals, review by the investment committee, independent appraisals, and final determination by the Board[103] Fair Value of Debt Obligations (in thousands) | | March 31, 2020 Carrying Value | March 31, 2020 Fair Value | December 31, 2019 Carrying Value | December 31, 2019 Fair Value | |:-------------------------------------|:------------------------------|:--------------------------|:---------------------------------|:-----------------------------| | SBA debentures | $156,500 | $156,500 | $157,500 | $157,500 | | Credit Facility borrowings | 35,000 | 35,000 | 25,000 | 25,000 | | 2023 Notes | 50,000 | 41,500 | 50,000 | 51,900 | | February 2024 Notes | 69,000 | 64,888 | 69,000 | 72,422 | | November 2024 Notes | 63,250 | 46,173 | 63,250 | 65,148 | | Total | $373,750 | $344,061 | $364,750 | $371,970 | Note 5. Related Party Transactions This note details transactions with Fidus Investment Advisors, LLC, including advisory and administration fees, and the sale of equity investments to Fidus Equity Fund I, L.P - The Investment Advisory Agreement was renewed through June 20, 2020, with a base management fee of 1.75% of total assets (excluding cash) and a two-part incentive fee[125][126] Management and Incentive Fees (in thousands) | Fee Type | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:--------------------------|:----------------------------------|:----------------------------------| | Base management fee | $3,272 | $2,871 | | Income incentive fee | $1,855 | $2,485 | | Capital gains incentive fee | $(8,878) | $355 | - On February 25, 2020, the Company sold 50% of its equity investments in 20 portfolio companies to FEF I for $35.9 million, realizing a gain of approximately $20.4 million[139] Note 6. Debt This note details the Company's debt obligations, including the Revolving Credit Facility, SBA debentures, and Public Notes, along with terms and compliance - The Amended Credit Agreement, effective April 24, 2019, increased revolving commitments to $100 million, extended maturity to April 24, 2023, and modified interest rates and covenants[141] - As of March 31, 2020, outstanding SBA debentures totaled $156,500 thousand, with maturities ranging from 2025 to 2030[148][161] Public Notes Outstanding (in thousands) | Note Type | Principal Amount Outstanding (March 31, 2020) | |:--------------------|:----------------------------------------------| | 5.875% Notes due 2023 | $50,000 | | 6.000% Notes due 2024 | $69,000 | | 5.375% Notes due 2024 | $63,250 | - The Company prepaid $7,000 thousand of SBA debentures during Q1 2020, resulting in realized losses on extinguishment of debt of $125 thousand[157] Note 7. Commitments and Contingencies This note outlines the Company's outstanding commitments to portfolio companies and addresses indemnifications and legal proceedings Outstanding Commitments to Portfolio Companies (in thousands) | Portfolio Company - Investment | March 31, 2020 Unfunded Commitment | |:------------------------------------------------------------------|:-----------------------------------| | Combined Systems, Inc. - Revolving Loan | $0 | | FDS Avionics Corp. (dba Flight Display Systems) - Revolving Loan | $30 | | French Transit, LLC - Revolving Loan | $1,000 | | Rhino Assembly Company, LLC - Delayed Draw Commitment | $875 | | Safety Products Group, LLC - Common Equity (Units) | $2,852 | | Total | $4,757 | - The total unfunded commitments to portfolio companies remained stable at $4,757 thousand as of March 31, 2020, and December 31, 2019[162] - The Company expects the risk of future obligation under indemnifications to be remote and does not believe any legal proceedings will have a material adverse effect[164][165] Note 8. Common Stock This note provides information on the Company's common stock, including public offerings, the ATM Program, and the Stock Repurchase Program - The Company repurchased 25,719 shares of common stock for $268 thousand under its Stock Repurchase Program during the three months ended March 31, 2020[169] - The share repurchases resulted in an approximate $0.01 increase in Net Asset Value (NAV) per share[169] - As of March 31, 2020, 24,437,400 shares of common stock were outstanding[170] Note 9. Dividends and Distributions This note summarizes the Company's dividend payments, including regular and special dividends, and its Dividend Reinvestment Plan (DRIP) activities Dividends Paid (in thousands, except per share data) | Period | Per Share | Total Distribution | |:--------------------------------------|:----------|:-------------------| | Fiscal Year Ended December 31, 2018 | $1.60 | $39,158 | | Fiscal Year Ended December 31, 2019 | $1.60 | $39,141 | | Three Months Ended March 31, 2020 | $0.39 | $9,537 | - For the three months ended March 31, 2020, the Company declared and paid a regular quarterly dividend of $0.39 per share[173] - The Company satisfied its DRIP obligations by repurchasing 31,586 shares on the open market for $239 thousand during Q1 2020, at an average price of $7.58 per share[174] Note 10. Financial Highlights This note provides a summary of key financial highlights, including per share data, ratios to average net assets, and supplemental expense ratios Per Share Data | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:----------------------------------------------------------------------------|:----------------------------------|:----------------------------------| | Net asset value at beginning of period | $16.85 | $16.47 | | Net investment income | 0.71 | 0.39 | | Net realized gain (loss) on investments, net of tax (provision) | 1.25 | (0.06) | | Net unrealized appreciation (depreciation) on investments | (3.05) | 0.14 | | Total increase from investment operations | (1.10) | 0.46 | | Net asset value at end of period | $15.37 | $16.55 | | Market value at end of period | $6.62 | $15.33 | - Net asset value per share decreased from $16.85 at the beginning of the period to $15.37 at the end of March 31, 2020[175] - Total return based on market value was (52.9%) for Q1 2020, a significant decline from 32.1% in Q1 2019[175] Note 11. Subsequent Events This note discloses events after March 31, 2020, including a dividend declaration, a new investment, and the material risks posed by the COVID-19 pandemic - On April 29, 2020, the Board declared a regular quarterly dividend of $0.30 per share, payable on June 26, 2020[177] - On April 30, 2020, the Company invested $12.5 million in subordinated debt and common equity of ECM Industries, LLC[177] - The COVID-19 pandemic presents material uncertainty and risks to the Company's portfolio companies, business, financial condition, results of operations, and cash flows[178] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section analyzes the Company's financial condition and results for Q1 2020, covering investment strategy, portfolio, revenue, expenses, liquidity, and critical accounting policies, highlighting COVID-19 impacts Overview Fidus Investment Corporation (FIC) is a BDC providing customized debt and equity financing to lower middle-market companies, aiming for attractive risk-adjusted returns - FIC provides customized debt and equity financing solutions to lower middle-market companies (revenues between $10.0 million and $150.0 million)[186] - The investment objective is to generate current income from debt investments and capital appreciation from equity-related investments[186] - FIC operates through its BDC structure and wholly-owned SBIC subsidiaries, Fund II and Fund III, and uses Taxable Subsidiaries for certain equity investments[187][188] Investments The Company's investment portfolio is diversified, primarily comprising secured and unsecured debt, with a lesser extent of equity securities, typically with 5-7 year terms - The investment portfolio primarily includes debt investments (second lien, subordinated, first lien) and, to a lesser extent, equity securities[189] - Second lien debt typically has no contractual loan amortization and may include payment-in-kind (PIK) interest[190] - Equity securities often consist of direct minority equity investments (common or preferred stock) or warrants, typically made in conjunction with debt investments[195] Revenues Revenue is generated from interest and fee income on debt investments and dividends on equity investments, recognized on an accrual basis - Revenue sources include interest and fee income on debt investments, and dividends on equity investments[196] - Debt investment origination fees, OID, and market discount/premium are capitalized and accreted/amortized into interest income[196] - Debt or preferred equity investments are placed on non-accrual status when payments are materially past due or collection is doubtful[196] Expenses The Company bears all operational and transactional out-of-pocket costs, including interest on debt, advisory, administration, and professional fees - The Company bears all out-of-pocket costs and expenses of its operations and transactions[198] - Expenses include interest on debt, investment advisory and management fees, administration fees, and professional fees[198] - Compensation and routine overhead expenses for investment advisory personnel are covered by the investment advisor[198] Portfolio Composition, Investment Activity and Yield During Q1 2020, the Company invested $68.2 million and received $73.8 million from sales/repayments, with the portfolio fair value at $718.9 million and a 12.0% weighted average yield Investment Purchases and Sales/Repayments (in millions) | Investment Type | Purchases Q1 2020 | Purchases Q1 2019 | Sales/Repayments Q1 2020 | Sales/Repayments Q1 2019 | |:-------------------|:------------------|:------------------|:-------------------------|:-------------------------| | Second Lien Debt | $20.0 | $14.6 | $11.7 | $19.4 | | Subordinated Debt | 2.0 | 46.2 | 1.6 | 26.7 | | First Lien Debt | 45.9 | 16.3 | 14.0 | 10.8 | | Equity | 0.3 | 3.4 | 42.0 | 0.5 | | Warrants | — | — | 4.5 | — | | Total | $68.2 | $80.5 | $73.8 | $57.4 | - As of March 31, 2020, the fair value of the investment portfolio was $718.9 million, consisting of 62 active portfolio companies[200] - The weighted average yield on debt investments was 12.0% as of both March 31, 2020, and December 31, 2019[202] Portfolio Asset Quality The Company uses a five-level investment rating system to monitor credit risk, with a weighted average rating of 2.2 as of March 31, 2020, indicating performance substantially within expectations - The Company uses a five-level numeric rating scale (1 to 5) to characterize and monitor the credit profile and expected returns of each investment[206] - Investment Rating 2 signifies performance substantially within expectations, similar to origination risk[206] Investment Rating Distribution (Fair Value, in millions) | Investment Rating | March 31, 2020 | December 31, 2019 | |:------------------|:---------------|:------------------| | 1 | $46.4 | $100.1 | | 2 | 535.1 | 580.5 | | 3 | 111.5 | 84.6 | | 4 | 25.8 | 1.7 | | 5 | 0.1 | — | | Total | $718.9 | $766.9 | Non-Accrual As of March 31, 2020, the Company had debt investments in four portfolio companies on non-accrual status, totaling $48.2 million at fair value Debt Investments on Non-Accrual Status (in millions) | Portfolio Company | March 31, 2020 Fair Value | March 31, 2020 Cost | December 31, 2019 Fair Value | December 31, 2019 Cost | |:-------------------------------|:--------------------------|:--------------------|:-----------------------------|:-----------------------| | Accent Food Services, LLC | $25.7 | $35.3 | $33.1 | $35.3 | | EBL, LLC (EbLens) | 7.2 | 9.1 | — | — | | Mirage Trailers LLC | 5.3 | 6.3 | — | — | | Virginia Tile Company, LLC | 10.0 | 12.0 | — | — | | Total | $48.2 | $62.7 | $33.1 | $35.3 | - The number of portfolio companies on non-accrual status increased from one at December 31, 2019, to four at March 31, 2020[208] Discussion and Analysis of Results of Operations This section analyzes Q1 2020 financial performance, highlighting changes in investment income, expenses, net investment income, and net gain/loss on investments Investment Income Investment Income (in millions) | Income Type | Q1 2020 | Q1 2019 | $ Change | % Change | |:------------------------------------|:--------|:--------|:---------|:---------| | Interest income | $17.5 | $15.2 | $2.3 | 14.5% | | Payment-in-kind interest income | 1.1 | 2.6 | (1.5) | (58.9%) | | Dividend income | 0.1 | 0.3 | (0.2) | (53.9%) | | Fee income | 1.3 | 2.1 | (0.8) | (38.9%) | | Interest on idle funds and other income | — | 0.1 | (0.1) | (68.5%) | | Total investment income | $20.0 | $20.3 | $(0.3) | (1.7%) | - Total investment income decreased by $(0.3) million (1.7%) to $20.0 million in Q1 2020, primarily due to decreases in PIK interest income, dividend income, and fee income[209][210][211] - Interest income (excluding PIK) increased by $2.3 million (14.5%) due to higher average debt investment balances[209][210] Expenses Total Expenses (in millions) | Expense Type | Q1 2020 | Q1 2019 | $ Change | % Change | |:----------------------------------|:--------|:--------|:---------|:---------| | Interest and financing expenses | $4.9 | $3.7 | $1.2 | 33.2% | | Base management fee | 3.3 | 2.8 | 0.5 | 14.0% | | Incentive fee - income | 1.9 | 2.5 | (0.6) | (25.4%) | | Incentive fee - capital gains | (8.9) | 0.4 | (9.3) | (2600.8%)| | Administrative service expenses | 0.5 | 0.4 | 0.1 | 16.8% | | Total expenses, including income tax provision | $2.6 | $10.7 | $(8.1) | (76.1%) | - Total expenses decreased by $(8.1) million (76.1%) to $2.6 million in Q1 2020, primarily due to a $(9.3) million decrease in the capital gains incentive fee[212][214] - Interest and financing expenses increased by $1.2 million (33.2%) due to higher average borrowings and increased weighted average interest rates[212][214] Net Investment Income Net investment income increased by $7.8 million (81.4%) to $17.4 million in Q1 2020, driven by decreased expenses - Net investment income increased by $7.8 million (81.4%) to $17.4 million in Q1 2020, driven by the significant decrease in total expenses, partially offset by a slight decrease in total investment income[215] Net Gain (Loss) on Investments The Company reported a total net realized gain of $31.4 million for Q1 2020, but a significant net change in unrealized depreciation of $(74.6) million - The total net realized gain on investments (before income tax) was $31.4 million for Q1 2020, compared to a net realized loss of $(1.6) million for Q1 2019[217][218] Significant Realized Gains (Losses) for Q1 2020 (in millions) | Portfolio Company | Realization Event | Net Realized Gains (Losses) | |:--------------------------------------|:------------------------------|:----------------------------| | Pfanstiehl, Inc. | Sold 50% of equity investment | $12.8 | | Fiber Materials, Inc. | Sale of portfolio company | 9.8 | | Medsurant Holdings, LLC | Sold 50% of equity investment | 1.7 | | Revenue Management Solutions, LLC | Sold 50% of equity investment | 1.5 | | Worldwide Express Operations, LLC | Sold 50% of equity investment | 1.1 | | Gurobi Optimization, LLC | Sold 50% of equity investment | 1.0 | | Net realized gain (loss) on investments | | $31.4 | - The Company recorded a net change in unrealized depreciation of $(74.6) million in Q1 2020, a significant shift from net unrealized appreciation of $3.5 million in Q1 2019, primarily due to fair value adjustments to debt and equity investments and exit/sale/restructuring events[219] Net Increase in Net Assets Resulting From Operations Net assets from operations decreased by $(27.0) million for Q1 2020, primarily due to significant net unrealized depreciation on investments - Net increase (decrease) in net assets resulting from operations was $(27.0) million for Q1 2020, a decrease from $11.4 million in Q1 2019, primarily due to the significant net unrealized depreciation on investments[220] Liquidity and Capital Resources As of March 31, 2020, the Company had $27.2 million in cash and $375.5 million in net assets, with management anticipating adequate capital for the next 12 months - As of March 31, 2020, cash and cash equivalents totaled $27.2 million, and net assets totaled $375.5 million[221] - Management anticipates adequate capital resources for the next 12 months from current cash, the Credit Facility, SBA-guaranteed debentures, and anticipated cash flows from investments[221] - During Q1 2020, the Company experienced a net increase in cash and cash equivalents of $12.2 million, driven by operating activities and net borrowings under the Credit Facility, partially offset by dividends and debt repayments[222] Capital Resources The Company funds investments through SBA debentures, a Revolving Credit Facility, and Public Notes, maintaining SBIC licenses for leverage and an asset coverage ratio of 272.9% as of March 31, 2020 - The Funds, as licensed SBICs, can issue SBA-guaranteed debentures up to $175.0 million per SBIC or $350.0 million for three or more SBICs under common control[224] - The Credit Facility provides $100.0 million in revolving commitments, with an accordion feature up to $250.0 million, maturing April 24, 2023[227] - As of March 31, 2020, the Company's asset coverage ratio was 272.9%, and the Board approved a reduction to 150% effective April 29, 2020[240] Critical Accounting Policies and Use of Estimates The Company's critical accounting policies include investment valuation, primarily for illiquid securities using Level 3 inputs, and comprehensive revenue recognition policies - Investment valuation and revenue recognition are identified as the most critical accounting estimates[244] - Substantially all portfolio investments are valued at fair value, determined in good faith by the board of directors using Level 3 inputs, due to the illiquid nature of the securities[246] - Revenue recognition policies detail the accrual of interest and dividend income, treatment of PIK income, criteria for non-accrual status, and capitalization/accretion of origination fees and OID[257][258][259][260][261][262] Off-Balance Sheet Arrangements The Company had $4.8 million in off-balance sheet arrangements as of March 31, 2020, primarily consisting of unfunded commitments to portfolio companies - Off-balance sheet arrangements consisted of outstanding commitments to fund undrawn revolving loans, other debt investments, and capital commitments[264] - Total unfunded commitments were $4.8 million as of March 31, 2020, and December 31, 2019[264] Related Party Transactions The Company has various relationships with affiliated parties, including advisory and administration agreements, and recently formed Fidus Equity Fund I, L.P. for co-investment - The Company has an Investment Advisory Agreement and an Administration Agreement with Fidus Investment Advisors, LLC[267] - On February 25, 2020, the Company sold 50% of its equity investments in 20 portfolio companies to Fidus Equity Fund I, L.P. (FEF I) for $35.9 million, resulting in a realized gain of approximately $20.4 million[267] - The Company has received exemptive relief from the SEC to allow co-investment with Affiliated Funds and to exclude SBA debentures from asset coverage requirements[268][269] Recent Developments Recent developments include a $0.30 per share quarterly dividend declaration and a $12.5 million investment in ECM Industries, LLC - On April 29, 2020, the Board declared a regular quarterly dividend of $0.30 per share[271] - On April 30, 2020, the Company invested $12.5 million in subordinated debt and common equity of ECM Industries, LLC[271] Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to interest rate risk, affecting funding costs and investment valuation, with hypothetical changes showing potential impacts on net investment income and uncertainty regarding LIBOR transition - The Company is subject to financial market risks, including changes in interest rates, affecting funding costs and investment portfolio valuation[272] - As of March 31, 2020, 31.8% of the debt investment portfolio bore variable interest rates, while SBA debentures and Public Notes bear fixed rates[272] Approximate Annualized Impact of Hypothetical Interest Rate Changes on Net Investment Income (in millions) | Basis Point Increase (Decrease) | Net Increase (Decrease) | Net Investment Income | |:--------------------------------|:------------------------|:----------------------| | (200) | $(0.3) | $(0.2) | | (150) | (0.3) | (0.2) | | (100) | (0.2) | (0.2) | | (50) | (0.1) | (0.1) | | 50 | 0.9 | 0.7 | | 100 | 1.9 | 1.5 | | 150 | 2.7 | 2.2 | | 200 | 3.6 | 2.9 | | 250 | 4.5 | 3.6 | | 300 | 5.4 | 4.3 | Item 4. Controls and Procedures. The Company maintains effective disclosure controls and procedures, with no material changes in internal control over financial reporting during Q1 2020 - Disclosure controls and procedures are designed to ensure information required for SEC reports is recorded, processed, summarized, and reported timely[276] - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of March 31, 2020[276] - No material changes in internal control over financial reporting occurred during the first quarter of 2020[277] PART II — OTHER INFORMATION Item 1. Legal Proceedings. Neither Fidus Investment Corporation nor its investment advisor is currently subject to any material legal proceedings - The Company and its investment advisor are not currently subject to any material legal proceedings[279] Item 1A. Risk Factors. This section highlights risks including increased leverage from a reduced asset coverage ratio, potential adverse effects from LIBOR changes, and significant negative impacts from the COVID-19 pandemic on operations and market value - The Board approved a minimum asset coverage ratio of 150% under the 1940 Act, effective April 29, 2020, which allows for increased leverage but also magnifies potential losses[282][283] - Changes relating to the LIBOR calculation process, including its potential elimination after 2021, may adversely affect the value of LIBOR-indexed, floating-rate debt securities in the portfolio[287][289] - The COVID-19 pandemic has caused significant market volatility and liquidity constraints, posing material uncertainty and risks to portfolio company valuations, business operations, and financial condition[290][295] - The Company may choose to pay dividends in its own stock or reduce/defer dividends to preserve cash, potentially incurring U.S. federal excise tax[296][300] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The Company had no unregistered sales of equity securities, but repurchased 25,719 shares for $0.3 million under its Stock Repurchase Program and 31,586 shares for $0.2 million to satisfy DRIP obligations during Q1 2020 - No unregistered sales of equity securities occurred during the period[303] - The Company repurchased 25,719 shares of common stock for $0.3 million under the Stock Repurchase Program during Q1 2020[305] - 31,586 shares were purchased on the open market for $0.2 million to satisfy DRIP obligations during Q1 2020[305] Item 3. Defaults Upon Senior Securities. There were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[306] Item 4. Mine Safety Disclosures. No mine safety disclosures are applicable or required for the Company - No mine safety disclosures were reported[306] Item 5. Other Information. No other information is reported in this section - No other information was reported[306] Item 6. Exhibits. This section lists the exhibits filed with the Form 10-Q, including corporate documents and various certifications - Exhibits include Articles of Amendment and Restatement, Bylaws, Form of Stock Certificate, and CEO/CFO certifications[308] Signatures The report is duly signed on behalf of Fidus Investment Corporation by Edward H. Ross and Shelby E. Sherard, dated April 30, 2020 - The report is signed by Edward H. Ross, Chairman and Chief Executive Officer, and Shelby E. Sherard, Chief Financial Officer[313][314] - The signatures are dated April 30, 2020[314]