PhenixFIN (PFX) - 2024 Q4 - Annual Report

PART I Business PhenixFIN Corporation is an internally-managed BDC and RIC that invests in private US companies and recently expanded into the insurance sector by acquiring The National Security Group General Overview PhenixFIN is an internally-managed BDC and RIC generating income and capital appreciation from private company investments and managing assets for its new insurance subsidiary, NSG - PhenixFIN is an internally-managed BDC and RIC, having transitioned from an external management structure on January 1, 2021[12] - The company's investment objective is to generate current income and capital appreciation through loans and private equity in both private and public companies, with a portfolio primarily consisting of senior secured loans, bonds, and equity[14] - On October 1, 2024, the company acquired approximately 80% of the equity of The National Security Group (NSG), an insurance holding company, and entered into a contract to manage a portion of NSG's investment assets[17] - As a BDC, the company must maintain an asset coverage ratio of at least 200%, and as of September 30, 2024, its asset coverage was 216.8%[18][20] Investment Process and Structure The company utilizes a four-stage investment process and structures investments across various debt and equity instruments, monitoring credit risk with a five-level rating system - The investment process involves four key stages: Sourcing and Origination, Initial Evaluation, Due Diligence & Underwriting, and Portfolio Management[22][23][24][25] - A five-level numeric rating scale is used to monitor the credit profile of debt investments, ranging from '1' (performing above expectations) to '5' (performing substantially below expectations with expected principal loss)[26] - Debt investments are typically structured as senior secured first and second lien term loans, senior secured notes, unitranche loans, and unsecured debt, often accompanied by warrants or minority equity stakes[29][30][32][33] - The company has invested in its affiliate, FlexFIN, LLC, which operates an asset-based lending business in the gemstone/jewelry industry[37] Portfolio Composition The $227.9 million portfolio is concentrated in Real Estate and Business Services, with a weighted average yield of 12.3% and 57.9% of income-bearing investments at floating rates Portfolio Composition by Industry (FY 2024 vs. FY 2023) | Industry | Fair Value 2024 ($ thousands) | Percentage 2024 | Fair Value 2023 ($ thousands) | Percentage 2023 | | :--- | :--- | :--- | :--- | :--- | | Real Estate | $50,162 | 22.0% | - | - | | Services: Business | $46,706 | 20.5% | $47,083 | 20.7% | | Services: Consumer | $28,121 | 12.3% | $18,292 | 8.1% | | Hotel, Gaming & Leisure | $24,253 | 10.6% | $34,158 | 15.1% | | Banking, Finance, Insurance & Real Estate | - | - | $43,755 | 19.3% | | Total | $227,916 | 100.0% | $226,461 | 100.0% | Portfolio Yield and Interest Rate Composition | Metric | As of Sep 30, 2024 | As of Sep 30, 2023 | | :--- | :--- | :--- | | Weighted Average Yield (on income-bearing portfolio) | 12.3% | 13.3% | | % Floating Rate | 57.9% | 59.5% | | % Fixed Rate | 17.0% | 13.9% | | % Income-Producing Equity | 25.1% | 26.6% | Management and Administration The company operates under an internalized management structure led by a small team and utilizes third-party providers for administration and custody services - The company transitioned to an internalized management structure effective January 1, 2021[43][93] - The management team is led by CEO David Lorber and CFO Ellida McMillan, comprising 3 investment professionals and 6 total employees/consultants as of September 30, 2024[41][94] - SS&C Technologies serves as the company's administrator, while Computershare serves as the custodian[44][92] Regulation As a BDC, the company must adhere to 1940 Act rules, including asset composition, leverage limits, and offering managerial assistance to portfolio companies - The company must invest at least 70% of its total assets in 'qualifying assets', which are primarily securities of private or small public U.S. companies[100] - PhenixFIN is required to maintain an asset coverage ratio of at least 200% when issuing senior securities and has not sought approval to reduce this ratio[97] - The company must offer significant managerial assistance to its portfolio companies to count their securities as qualifying assets[107] - The company has adopted a code of ethics and established proxy voting policies in line with regulatory standards[111][116] Taxation as a RIC To avoid corporate-level tax, the company must operate as a RIC, distributing at least 90% of its taxable income and meeting specific income and asset tests - To qualify as a RIC, the company must distribute at least 90% of its investment company taxable income annually[124] - The company must satisfy a '90% Income Test' and 'Diversification Tests' at the end of each quarter[127][129] - The company may be required to recognize taxable income from non-cash sources like PIK interest, potentially requiring distributions to be funded with debt or asset sales[131][137] - Failure to qualify as a RIC would subject the company to corporate-level income tax, significantly reducing net assets and income available for distribution[134] Risk Factors The company faces diverse risks from economic conditions, its business structure, investments, and regulations, plus new risks from its recent entry into the insurance industry Risks Relating to Our Business and Structure Business and structural risks include market disruption, rising interest rates, challenges of internalized management, leverage, illiquid valuations, and non-diversification - The company operates in a period of market disruption and economic uncertainty, which may adversely affect investment yields and access to capital[144] - Rising interest rates could increase borrowing costs, reduce net investment income, and increase the risk of default for portfolio companies[156][159] - The internalized operating structure exposes the company to risks of significant costs and challenges in retaining qualified personnel[167][170] - The use of leverage, including the 2028 Notes and the Credit Facility, magnifies the risk of loss on the company's common stock[174][175] - A substantial portion of the portfolio is valued using unobservable inputs (Level 3), creating uncertainty about the true value of these investments[181][182] - The company is classified as a non-diversified investment company, meaning its NAV may fluctuate more than a diversified company[184][185] Risks Related to Our Investments The company's speculative investments are illiquid and carry high risk, with a significant concentration in an affiliate operating in the volatile gemstone lending industry - Investments in private companies are risky due to limited public information, potential for limited financial resources, and dependence on small management teams[224] - As of September 30, 2024, 12.1% of total assets were invested in FlexFIN, an affiliate in the gemstone/jewelry lending business, exposing the company to price volatility and fraud risks[235][238][240] - The company may invest in 'unitranche' and 'covenant-lite' loans, which entail greater risk due to higher leverage and less restrictive terms[241][242] - Investments in foreign securities expose the company to additional risks such as currency fluctuations and political instability[246] Risks Related to Our Operations as a BDC and a RIC Operating as a BDC and RIC imposes regulatory constraints on capital raising and compensation, with the risk of losing favorable tax treatment if qualification fails - Regulations governing BDC operations, such as the 200% asset coverage ratio, limit the ability to raise additional capital through debt[256][257] - As an internally managed BDC, the company is subject to 1940 Act limitations on compensation structures, which may affect its ability to attract and retain talent[261][262] - Failure to invest at least 70% of assets in 'qualifying assets' could lead to a loss of BDC status[271][272] - The company would be subject to corporate-level U.S. federal income tax if it fails to maintain its qualification as a RIC[273][274] Risks Relating to an Investment in Our Securities Investing in the company's securities is high-risk, as shares have consistently traded at a significant discount to NAV and future stock sales could dilute shareholders - Shares of the company's common stock have not traded at or above Net Asset Value (NAV) since the first quarter of 2015[281][282] - The market price of the common stock is volatile and can be affected by numerous factors beyond the company's control[283] - Future sales of common stock below the then-current NAV per share would result in immediate dilution to existing shareholders' NAV[288][291] - The company's Credit Facility contains restrictive covenants that could limit operational flexibility[295] Risks of the Insurance Business The acquisition of NSG introduces insurance-specific risks, including actuarial inaccuracies, catastrophic events, regulatory changes, and intense industry competition - NSG's financial results depend on actuarial assumptions, and deviations could require increased reserves, adversely affecting financial condition[301][302] - The insurance business is exposed to catastrophic mortality and property risks from events like pandemics and natural disasters, potentially exacerbated by climate change[310][355] - The property and casualty business is cyclical, characterized by periods of intense price competition that can affect financial performance[325][326] - NSG is subject to extensive state-level regulation, capital requirements, and the risk of a downgrade in its financial strength rating[333][341][347] - NSG relies on reinsurance to limit risk and faces counterparty risk if reinsurers default on their obligations[337][339] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[357] Cybersecurity The company maintains a cybersecurity program with board oversight and has not identified any material cyber threats to its business - The cybersecurity program is designed to identify, assess, and manage material risks from cybersecurity threats, utilizing external experts for evaluation[358] - The Board of Directors provides strategic oversight, while management is responsible for assessing and managing these risks[359][360] - During the reporting period, the company has not identified any cybersecurity risks that it believes have materially affected or are reasonably likely to materially affect its business[361] Properties The company does not own any real estate and leases its principal executive office in New York City - The company does not own any material real estate and has a 5-year operating lease for its headquarters in New York, NY[363] Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not currently party to any material legal proceedings[364] Mine Safety Disclosures The company has no mine safety disclosures to report - None[365] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ under 'PFX' at a persistent discount to NAV, and the company repurchased approximately $2.4 million of its shares in fiscal year 2024 Quarterly Stock Price vs. NAV (FY 2024) | Fiscal Quarter 2024 | NAV per Share | High Closing Price | Low Closing Price | Discount to NAV (High) | Discount to NAV (Low) | | :--- | :--- | :--- | :--- | :--- | :--- | | First Quarter | $73.14 | $42.50 | $36.38 | (41.89)% | (50.26)% | | Second Quarter | $76.35 | $45.50 | $41.34 | (40.41)% | (45.85)% | | Third Quarter | $76.35 | $48.00 | $42.50 | (37.13)% | (44.34)% | | Fourth Quarter | $79.37 | $48.15 | $45.01 | (39.33)% | (43.29)% | Issuer Purchases of Equity Securities (FY 2024) | Month Ended | Shares Repurchased | Aggregate Consideration | | :--- | :--- | :--- | | November 2023 | 475 | $17,825 | | December 2023 | 12,748 | $520,749 | | March 2024 | 40,000 | $1,801,205 | | April 2024 | 700 | $30,637 | | May 2024 | 12 | $543 | | Total | 53,935 | $2,370,959 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net assets increased by $18.6 million in FY2024, driven by realized and unrealized gains, though higher operating expenses reduced net investment income Portfolio and Investment Activity The portfolio's fair value was stable at $227.9 million, with Senior Secured First Lien Term Loans increasing to 50.0% of the total, while credit quality saw a minor shift toward higher-risk assets - During fiscal year 2024, the company invested $99.3 million and received $112.5 million in proceeds from investment sales and settlements[402] Investment Portfolio Composition by Type (Fair Value) | Investment Type | Fair Value 2024 ($ thousands) | Percentage 2024 | Fair Value 2023 ($ thousands) | Percentage 2023 | | :--- | :--- | :--- | :--- | :--- | | Senior Secured First Lien Term Loans | $113,990 | 50.0% | $103,004 | 45.6% | | Senior Secured Notes | $18,476 | 8.1% | $8,922 | 3.9% | | Equity/Warrants | $93,925 | 41.2% | $113,743 | 50.2% | | Fund Investment | $1,525 | 0.7% | $792 | 0.3% | | Total Investments | $227,916 | 100.0% | $226,461 | 100.0% | Investment Performance Rating Distribution (Fair Value) | Rating | Percentage 2024 | Percentage 2023 | | :--- | :--- | :--- | | 1 | 0.0% | 0.0% | | 2 | 87.9% | 87.4% | | 3 | 3.9% | 6.9% | | 4 | 7.2% | 2.8% | | 5 | 1.1% | 2.9% | Results of Operations Net assets increased by $18.6 million, as higher investment income was offset by a 28.1% rise in operating expenses, primarily from increased salary and bonus accruals Operating Results Summary ($ thousands) | Metric | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Total investment income | $22,182 | $19,878 | $15,544 | | Total net expenses | $17,448 | $13,622 | $12,113 | | Net investment income | $4,734 | $6,256 | $3,431 | | Net realized gains (losses) | $7,292 | $(11,532) | $5,221 | | Net change in unrealized gains (losses) | $5,706 | $32,194 | $(14,463) | | Net increase (decrease) in net assets | $18,619 | $26,918 | $(6,107) | - Total operating expenses increased by $3.8 million (28.1%) in FY2024, primarily driven by a $2.7 million increase in salaries and benefits from higher bonus accruals[413][418] - Net realized gains in FY2024 were $7.3 million, a significant turnaround from the $11.5 million net realized loss in FY2023[423][424] - The net change in unrealized appreciation was $5.7 million in FY2024, a substantial decrease from $31.9 million in FY2023[430][431] Financial Condition, Liquidity and Capital Resources The company's liquidity improved with cash rising to $67.6 million, supported by an upsized $87.5 million credit facility and a $35 million share repurchase program - Cash and cash equivalents increased to $67.6 million as of September 30, 2024, from $6.0 million at the end of fiscal 2023[437] - The company's revolving credit facility was increased to $87.5 million, with $78.1 million outstanding as of September 30, 2024[441][443][444] - The company has $57.5 million in aggregate principal of 5.25% unsecured notes due 2028[452][454] - The Board expanded the share repurchase program to $35 million, with $6.9 million remaining under the authorization as of September 30, 2024[440] - On May 9, 2024, the Board declared a special dividend of $2,645,925[463] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate changes, with a 100 basis point rate shift projected to alter net income by approximately $0.7 million - The company is subject to financial market risks, primarily changes in interest rates, which affect both funding costs and portfolio income[492] - As of September 30, 2024, 53.7% of the income-bearing investment portfolio (by fair value) had floating interest rates, mostly based on SOFR[493] Hypothetical Interest Rate Change Impact on Net Assets ($ thousands) | Change in Interest Rates | Interest Income | Interest Expense | Net Increase/(Decrease) | | :--- | :--- | :--- | :--- | | Up 300 basis points | $4,400 | $(2,300) | $2,100 | | Up 100 basis points | $1,500 | $(800) | $700 | | Down 100 basis points | $(1,500) | $800 | $(700) | | Down 300 basis points | $(4,400) | $2,300 | $(2,100) | Consolidated Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and supplementary data for the company for the past three fiscal years Consolidated Statements of Assets and Liabilities Total assets grew to $302.8 million and net assets rose to $160.3 million, increasing NAV per share to $79.37 from $70.75 in the prior year Consolidated Balance Sheet Summary ($ thousands) | Account | Sep 30, 2024 | Sep 30, 2023 | | :--- | :--- | :--- | | Total Investments at fair value | $227,916 | $226,461 | | Cash and cash equivalents | $67,572 | $5,988 | | Total Assets | $302,752 | $239,693 | | Credit facility and notes payable (net) | $135,724 | $84,253 | | Total Liabilities | $142,444 | $92,988 | | Total Net Assets | $160,308 | $146,706 | | Net Asset Value Per Common Share | $79.37 | $70.75 | Consolidated Statements of Operations The company generated a net increase in net assets of $18.6 million, or $9.13 per share, for the fiscal year ended September 30, 2024 Consolidated Statement of Operations Highlights ($ thousands) | Metric | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Total Investment Income | $22,182 | $20,132 | $15,544 | | Total expenses | $17,448 | $13,622 | $12,113 | | Net Investment Income | $4,734 | $6,510 | $3,432 | | Total realized and unrealized gains (losses) | $13,885 | $20,408 | $(9,538) | | Net Increase (Decrease) in Net Assets | $18,619 | $26,918 | $(6,107) | | Earnings (Loss) Per Share | $9.13 | $12.87 | $(2.63) | Consolidated Statements of Changes in Net Assets Net assets increased by $13.6 million in fiscal year 2024, reflecting $18.6 million from operations, offset by distributions and share repurchases Changes in Net Assets (FY 2024, $ thousands) | Description | Amount | | :--- | :--- | | Balance at Sep 30, 2023 | $146,706 | | Net Increase from Operations | $18,619 | | Distributions declared | $(2,646) | | Repurchase of common shares | $(2,371) | | Balance at Sep 30, 2024 | $160,308 | Consolidated Statements of Cash Flows Cash and cash equivalents increased by $61.6 million, driven by $16.1 million from operations and $45.5 million from financing activities Consolidated Statement of Cash Flows Summary (FY 2024, $ thousands) | Cash Flow Category | Amount | | :--- | :--- | | Net cash provided by operating activities | $16,105 | | Net cash provided by financing activities | $45,479 | | Net increase in cash and cash equivalents | $61,583 | | Cash and cash equivalents, beginning of period | $5,988 | | Cash and cash equivalents, end of period | $67,572 | Notes to Consolidated Financial Statements The notes detail accounting policies, investment valuations, debt facilities, and the significant subsequent event of acquiring an 80% stake in NSG - The company values illiquid investments (Level 3) using market and income approaches, with oversight from its CFO and assistance from third-party valuation firms[579][583] - As of September 30, 2024, Level 3 investments, valued using significant unobservable inputs, totaled $140.3 million[631] - The company's credit facility was increased to $87.5 million during FY2024, with total debt outstanding at year-end of $137.2 million[651][646] - A significant subsequent event occurred on October 1, 2024, with the acquisition of approximately 80% of the equity of The National Security Group (NSG)[701] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting, disclosure, or auditing matters - None[703] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal controls over financial reporting were effective as of September 30, 2024 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2024[704] - Management concluded that the company's internal controls over financial reporting were effective as of September 30, 2024[705] Other Information No directors or executive officers adopted or terminated any Rule 10b5-1 trading arrangements during the fourth fiscal quarter - No directors or executive officers adopted or terminated any Rule 10b5-1 trading arrangements during the fourth fiscal quarter of 2024[708] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company has no disclosures to report regarding foreign jurisdictions that prevent inspections - None[710] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2024 Proxy Statement - The information required by this item is incorporated by reference from the company's definitive Proxy Statement[713] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2024 Proxy Statement - The information required by this item is incorporated by reference from the company's definitive Proxy Statement[714] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2024 Proxy Statement - The information required by this item is incorporated by reference from the company's definitive Proxy Statement[715] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the company's 2024 Proxy Statement - The information required by this item is incorporated by reference from the company's definitive Proxy Statement[716] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2024 Proxy Statement - The information required by this item is incorporated by reference from the company's definitive Proxy Statement[717] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the annual report - This section lists all financial statements and exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications[719][721]