Silver Spike Investment (SSIC) - 2023 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION This section provides the comprehensive financial statements and related disclosures for the reporting period Item 1 Financial Statements This section presents the unaudited financial statements of Silver Spike Investment Corp. for the period ended March 31, 2023, including statements of assets and liabilities, operations, changes in net assets, cash flows, and a detailed schedule of investments, along with comprehensive notes explaining accounting policies and financial details Statements of Assets and Liabilities Statements of Assets and Liabilities as of March 31, 2023 (unaudited) and December 31, 2022 | Metric | March 31, 2023 | December 31, 2022 | | :------------------------------------------------------------------------------------------------ | :------------- | :---------------- | | Investments at fair value | $55,623,299 | $50,254,550 | | Cash and cash equivalents | $32,544,027 | $35,125,320 | | Total assets | $89,990,003 | $86,971,274 | | Total liabilities | $1,157,194 | $495,545 | | Total net assets | $88,832,809 | $86,475,729 | | NET ASSET VALUE PER SHARE | $14.29 | $13.91 | Statements of Operations Statements of Operations for the Three Months Ended March 31, 2023 and 2022 (unaudited) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total investment income | $2,457,839 | $10,073 | | Total expenses | $1,087,116 | $225,604 | | NET INVESTMENT INCOME (LOSS) | $1,370,723 | $(215,531) | | Net change in unrealized appreciation (depreciation) on investments | $986,357 | - | | NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $2,357,080 | $(215,531) | | NET INVESTMENT INCOME (LOSS) PER SHARE — BASIC AND DILUTED | $0.22 | $(0.06) | | NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE — BASIC AND DILUTED | $0.38 | $(0.06) | | WEIGHTED AVERAGE SHARES OUTSTANDING — BASIC AND DILUTED | 6,214,672 | 3,557,529 | Statements of Changes in Net Assets Statements of Changes in Net Assets for the Three Months Ended March 31, 2023 and 2022 (unaudited) | Metric | December 31, 2022 | March 31, 2023 | | :------------------------------------------------------------------------------------------------ | :---------------- | :------------- | | Balance, Total net assets | $86,475,729 | $88,832,809 | | Net investment income | $1,370,723 | | | Net change in unrealized appreciation (depreciation) from investments | $986,357 | | | Total net increase (decrease) in net assets resulting from operations | $2,357,080 | | Statements of Cash Flows Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (unaudited) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net increase (decrease) in net assets resulting from operations | $2,357,080 | $(215,531) | | Net cash provided by (used in) operating activities | $(2,581,293) | $(509,110) | | Net cash provided by (used in) financing activities | - | $85,269,770 | | Net increase (decrease) in cash & cash equivalents | $(2,581,293) | $84,760,660 | | Cash & cash equivalents, end of period | $32,544,027 | $84,766,060 | Schedule of Investments Schedule of Investments as of March 31, 2023 (unaudited) and December 31, 2022 | Investment Type | March 31, 2023 (Fair Value) | December 31, 2022 (Fair Value) | | :------------------------------------------------------------------------------------------------ | :---------------------------- | :----------------------------- | | Debt Securities - United States | $55,623,299 | $50,254,550 | | Cash equivalents | $32,544,027 | $35,125,320 | | Total Portfolio Investments and Cash equivalents | $88,167,326 | $85,379,870 | Schedule of Investments as of March 31, 2023 (unaudited) and December 31, 2022 | Geographic Region (March 31, 2023) | Fair Value % | | :------------------------------------------------------------------------------------------------ | :----------- | | Midwest | 44.9% | | West | 37.0% | | Northeast | 14.9% | | Southeast | 3.2% | - All portfolio companies are located in the United States and are classified under the 'Wholesale Trade' industry[23][82] Notes to Financial Statements NOTE 1 — ORGANIZATION - Silver Spike Investment Corp. was formed on January 25, 2021, as a Maryland corporation, structured as an externally managed, closed-end, non-diversified management investment company, and elected to be treated as a Business Development Company (BDC) under the 1940 Act[36] - The company's common stock began trading on the Nasdaq Global Market under the ticker symbol 'SSIC' on February 4, 2022, following its initial public offering of 6,214,286 shares for approximately $87 million[37] - The investment objective is to maximize risk-adjusted returns on equity by generating current income from debt investments and capital appreciation from equity and equity-related investments, primarily in secured/unsecured debt, equity warrants, and direct equity in private leveraged middle-market cannabis companies[39] NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES - Financial statements are prepared in accordance with U.S. GAAP, requiring management to make estimates and assumptions, particularly for investment valuation and income recognition[41][42] - Investments are recorded at estimated fair value. For non-publicly traded securities, fair value is determined in good faith by the Adviser (Valuation Designee), often using the income approach (e.g., discounted cash flow) or market approach[43][46][48] - All investments are categorized as Level 3 in the fair value hierarchy, meaning valuations are based on unobservable inputs significant to the overall measurement[52] - Interest income is recorded on an accrual basis, including accretion/amortization of discounts/premiums. No loan investments were on non-accrual status as of March 31, 2023, and December 31, 2022[60][61] NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Interest income (excluding accretion/amortization) | $2,317,020 | $10,073 | | Fee income | - | - | - The company elected to be treated as a Regulated Investment Company (RIC) for U.S. federal income tax purposes, requiring distribution of at least 90% of its investment company taxable income to avoid corporate-level taxes[70] NOTE 3 — INVESTMENTS - As of March 31, 2023, 82.3% of the portfolio (by amortized cost) pays floating interest rates with a PRIME floor, and 17.7% pays fixed interest. This represents a slight shift from December 31, 2022, where 80.9% was floating and 19.1% fixed[79] NOTE 3 — INVESTMENTS | Industry | March 31, 2023 (Amortized Cost %) | March 31, 2023 (Fair Value %) | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :---------------------------- | | Wholesale Trade | 100.0% | 100.0% | NOTE 3 — INVESTMENTS | Geographic Location (March 31, 2023) | Amortized Cost % | Fair Value % | | :------------------------------------------------------------------------------------------------ | :--------------- | :----------- | | Midwest | 44.5% | 44.9% | | West | 37.4% | 37.0% | | Northeast | 14.8% | 14.9% | | Southeast | 3.3% | 3.2% | NOTE 3 — INVESTMENTS | Investment Type (March 31, 2023) | Amortized Cost % | Fair Value % | | :------------------------------------------------------------------------------------------------ | :--------------- | :----------- | | Senior Secured First Lien Term Loan | 82.3% | 82.2% | | Senior Secured Notes | 17.7% | 17.8% | - The company manages various risks including market, credit, liquidity, interest rate, and prepayment risks, with a concentration risk in cannabis companies[87][89][90][91][92][95] NOTE 4 — FAIR VALUE OF FINANCIAL INSTRUMENTS - All portfolio investments are categorized as Level 3 in the fair value hierarchy, indicating valuations based on significant unobservable inputs[100][102] NOTE 4 — FAIR VALUE OF FINANCIAL INSTRUMENTS | Investment Type | Fair Value as of March 31, 2023 | Valuation Technique | Unobservable Input | Range | Weighted Average | | :------------------------------------------------------------------------------------------------ | :------------------------------ | :------------------ | :----------------- | :---------- | :--------------- | | Senior Secured First Lien Term Loan | $45,703,391 | Discounted Cash Flow | Discount Rate | 11.6% - 14.8% | 12.9% | | Senior Secured Notes | $9,919,908 | Discounted Cash Flow | Discount Rate | 9.7% - 15.9% | 11.4% | - Significant increases (decreases) in discount rate would result in significantly higher (lower) fair value, while significant increases (decreases) in volatility would result in significantly lower (higher) fair value[106] NOTE 4 — FAIR VALUE OF FINANCIAL INSTRUMENTS | Metric | Senior Secured First Lien Term Loan | Senior Secured Notes | Total Investments | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :------------------- | :---------------- | | Fair Value as of December 31, 2022 | $40,660,633 | $9,593,917 | $50,254,550 | | Purchases | $4,230,000 | - | $4,230,000 | | Net change in unrealized appreciation (depreciation) on investments | $738,564 | $247,793 | $986,357 | | Balance as of March 31, 2023 | $45,703,391 | $9,919,908 | $55,623,299 | NOTE 5 — RELATED PARTY TRANSACTIONS - Fees payable to Silver Spike Capital, LLC (SSC), the investment adviser, include a base management fee (1.75% of average gross assets) and a two-part incentive fee (20% of Pre-Incentive Fee Net Investment Income and 20% of realized capital gains)[107] NOTE 5 — RELATED PARTY TRANSACTIONS | Fee Type | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Management fee expense | $238,419 | - | | Income-based incentive fee expense | $203,821 | - | | Capital gains incentive fee expense | $142,602 | - | - SSC, as the seed investor, holds approximately 72% of the company's voting stock, granting it substantial control over corporate actions[115][116] NOTE 6 — COMMITMENTS AND CONTINGENCIES - The company identified no commitments or contingencies as of March 31, 2023, and December 31, 2022[118] NOTE 7 — COMMON STOCK - As of March 31, 2023, and December 31, 2022, the company had 6,214,672 shares of common stock issued and outstanding, raising approximately $85 million in capital[119] - The company's distribution reinvestment plan (DRIP) allows for automatic reinvestment of distributions into common stock unless stockholders opt out. No shares were issued under the DRIP during Q1 2023 or Q1 2022[120][121] NOTE 8 — INDEMNIFICATION - The company's officers and directors are indemnified against certain liabilities, and the company enters into contracts with general indemnifications, with any risk of loss expected to be remote[124] NOTE 9 — EARNINGS PER SHARE NOTE 9 — EARNINGS PER SHARE | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net increase (decrease) in net assets resulting from operations | $2,357,080 | $(215,531) | | Weighted Average Shares Outstanding - basic and diluted | 6,214,672 | 3,557,529 | | Net increase (decrease) in net assets resulting from operations per share - basic and diluted | $0.38 | $(0.06) | NOTE 10 — INCOME TAXES - The company elected RIC status for U.S. federal income tax purposes, requiring it to distribute at least 90% of its investment company taxable income to avoid corporate-level taxes[126] - For the tax year ended March 31, 2023, the company reclassified $121,099 from distributable earnings to additional paid-in-capital due to permanent book-to-tax differences[132] NOTE 10 — INCOME TAXES | Tax Basis Component (March 31, 2023) | Amount | | :------------------------------------------------------------------------------------------------ | :------------- | | Undistributed ordinary income | $3,418,714 | | Net unrealized appreciation (depreciation) on investments | $713,009 | | Other temporary differences | $(399,948) | | Total | $3,731,775 | NOTE 11 — FINANCIAL HIGHLIGHTS NOTE 11 — FINANCIAL HIGHLIGHTS | Metric | Three Months Ended March 31, 2023 | Period from Feb 3, 2022 to March 31, 2022 | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :---------------------------------------- | | Net asset value at beginning of period | $13.91 | $14.00 | | Net investment income (loss) | $0.22 | $(0.07) | | Net realized and unrealized gains/(losses) on investments | $0.16 | - | | Net increase/(decrease) in net assets resulting from operations | $0.38 | $(0.07) | | Net asset value at end of period | $14.29 | $13.61 | | Per share market value at end of period | $9.19 | $13.30 | | Total return based on market value | (6.22)% | (5.00)% | | Total return based on net asset value | 2.73% | (2.79)% | | Ratio of expenses to average net assets | 1.26% | 0.22% | | Ratio of net investment income (loss) to average net assets | 1.58% | (0.20)% | NOTE 12 — SUBSEQUENT EVENTS - On May 3, 2023, the company invested $4.32 million in Dreamfields Brand, Inc.'s first lien senior secured term loan[143] Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook. It details the investment strategy in the cannabis ecosystem, revenue and expense drivers, portfolio composition and quality, and liquidity management, along with critical accounting estimates and tax considerations Overview - Silver Spike Investment Corp. is an externally managed BDC focused on investing across the cannabis ecosystem through direct loans and equity ownership in privately held cannabis companies, aiming to maximize risk-adjusted returns[147][148][149] - The company primarily invests in secured debt, unsecured debt, equity warrants, and direct equity, with debt investments typically having 3-6 year terms and often secured by first or second priority liens[149] - Investment targets are private leveraged middle-market companies with up to $100 million EBITDA, with individual investments generally ranging from $4 million to $40 million[154] Revenues - Revenues are primarily generated from interest income on debt investments, which can be fixed or floating rate, and may include loan origination, OID, closing, structuring, due diligence, and managerial assistance fees[156][158] - Dividend income from equity investments is also a potential revenue source. Macro trends in base interest rates can affect net investment income[157][159] Expenses - Primary operating expenses include base management fees and incentive fees paid to the Adviser, along with various operational costs such as organization, valuation, compliance, legal, audit, and insurance expenses[161][162][167] - General and administrative expenses are expected to increase in dollar terms with asset growth but decline as a percentage of total assets[164] Portfolio Composition and Investment Activity Portfolio Composition Portfolio Composition | Metric | March 31, 2023 | December 31, 2022 | | :------------------------------------------------------------------------------------------------ | :------------- | :---------------- | | Aggregate fair value of investment portfolio | ~$55.6 million | ~$50.3 million | | Senior Secured First Lien Term Loan (Fair Value %) | 82.2% | 80.9% | | Senior Secured Notes (Fair Value %) | 17.8% | 19.1% | - The entire investment portfolio is concentrated in the 'Wholesale Trade' industry and primarily located in the Midwest (44.9%), West (37.0%), and Northeast (14.9%) regions of the United States as of March 31, 2023[171][172] - As of March 31, 2023, two portfolio companies represented 74.5% of the fair value of the portfolio, with the largest representing 37.6%[176] Investment Activity - During the three months ended March 31, 2023, the company made approximately $4.2 million of investments in one portfolio company, with no repayments or sales of investments[177][179] - No investments were made during the three months ended March 31, 2022[178] Portfolio Asset Quality - The company uses a 1 to 5 investment risk rating system, where Grade 2 indicates an investment performing in-line with expectations and an acceptable level of risk[180][181] - As of March 31, 2023, and December 31, 2022, 100% of the company's loan investments were rated Grade 2[183] Debt Investments on Non-Accrual Status - No loan investments were on non-accrual status as of March 31, 2023, and December 31, 2022[183] Results of Operations Investment Income Investment Income | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Interest income | $2,317,020 | $10,073 | | Accretion of discount and fees (amortization of premium), net | $140,819 | - | | Total investment income | $2,457,839 | $10,073 | - Total investment income for Q1 2023 was approximately $2.5 million, a significant increase from less than $0.1 million in Q1 2022, primarily driven by interest income[187] Operating Expenses - Operating expenses totaled approximately $1.1 million for the three months ended March 31, 2023, an increase from $0.2 million in the same period of 2022, mainly due to professional, management, and incentive fees[188] Net Investment Income - Net investment income for the three months ended March 31, 2023, was approximately $1.4 million, a substantial improvement from a net investment loss of $(0.2) million in the prior year period[189] Net Realized Gains and Losses - There were no net realized gains or losses from the sales, repayments, or exits of investments during the three months ended March 31, 2023, and 2022[192] Net Change in Unrealized Appreciation / (Depreciation) from Investments Net Change in Unrealized Appreciation / (Depreciation) from Investments | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total net unrealized appreciation (depreciation) on investments | $986,357 | - | - The net unrealized appreciation for Q1 2023 was primarily driven by Verano Holdings Corp. ($465,148) and Shryne Group, Inc. ($273,416)[194] Financial Condition, Liquidity and Capital Resources - Cash resources decreased to approximately $32.5 million as of March 31, 2023, from $35.1 million at December 31, 2022, with no indebtedness[197] - The company aims for a debt-to-equity ratio of 0.50x and intends to make quarterly distributions to stockholders to maintain its RIC tax treatment, requiring distribution of at least 90% of its investment company taxable income[196][198] U.S. Federal Income Taxes - The company elected and intends to qualify annually as a Regulated Investment Company (RIC) for federal income tax purposes, which generally exempts it from corporate-level federal income taxes on distributed income and capital gains[202] - To maintain RIC status, the company must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of its ordinary income and realized net short-term capital gains[202] Critical Accounting Estimates Basis of Presentation - Financial statements are prepared in accordance with U.S. GAAP, requiring management to make estimates and assumptions, particularly for investment valuation and income recognition[203][204] Investment Valuation - Investments without readily available market quotations are valued at fair value by the Adviser (Valuation Designee) using a multi-step process, considering factors like enterprise value, collateral, and cash flow[205][206][207] - All investments as of March 31, 2023, and December 31, 2022, are categorized as Level 3, relying on significant unobservable inputs such as debt investments' yield and volatility fluctuations[211] - The inherent uncertainty in valuing Level 3 investments means fair values may fluctuate and differ materially from values that would exist in a ready market or ultimately be realized[212] Other Contractual Obligations - The company has contractual obligations under its Investment Advisory Agreement (base management fee and incentive fee) and Administration Agreement (reimbursement of administrative costs) with Silver Spike Capital, LLC (SSC)[214] Common Stock - The company's common stock (SSIC) began trading on the Nasdaq Global Market on February 4, 2022[215] - As of May 9, 2023, the closing sales price of $8.62 per share represented a significant discount of approximately 39.7% to the net asset value per share of $14.29 as of March 31, 2023[216] - Shares of BDCs may trade at a market price less than their net asset value per share, and it is not possible to predict future trading prices relative to NAV[221] Distributions - The company intends to make quarterly distributions to stockholders to maintain its RIC tax status, requiring distribution of at least 90% of its investment company taxable income[222][224] - The company may be subject to a 4% excise tax on undistributed amounts if taxable income exceeds current-year distributions[227] - No distributions were made during the three months ended March 31, 2023, or the fiscal year ended December 31, 2022[233] Dividend Reinvestment Plan - The company has an 'opt out' dividend reinvestment plan (DRIP), where cash distributions are automatically reinvested into additional shares of common stock unless a stockholder elects to receive cash[234] Issuer Purchases of Equity Securities - The company did not repurchase any of its equity securities during the three months ended March 31, 2023, or the fiscal year ended December 31, 2022[235] Item 3 Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to financial market risks, specifically valuation risk due to the illiquid nature of its investments and interest rate risk given its floating-rate debt portfolio. It also provides a sensitivity analysis for interest rate changes Valuation Risk - The company's investments often lack readily available market quotations and are valued at fair value using significant judgment and unobservable inputs (Level 3), leading to inherent uncertainty and potential material differences from realized values[237] Interest Rate Risk - The company is exposed to interest rate risk, as 81.2% of its debt investments are floating-rate (based on PRIME) as of March 31, 2023[240][241] Interest Rate Risk | Change in Interest Rates | Annualized Impact on Net Income/(Loss) ($) | | :------------------------------------------------------------------------------------------------ | :----------------------------------------- | | Up 300 basis points | $1,395 | | Up 200 basis points | $930 | | Up 100 basis points | $465 | | Down 100 basis points | $(465) | | Down 200 basis points | $(866) | | Down 300 basis points | $(1,076) | Item 4 Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures - The company's disclosure controls and procedures were evaluated and determined to be effective as of March 31, 2023[243] Changes in Internal Control Over Financial Reporting - There have been no material changes in the company's internal control over financial reporting during the three months ended March 31, 2023[244] PART II OTHER INFORMATION This section covers legal, risk, equity, and control disclosures, along with exhibits and signatures Item 1 Legal Proceedings The company is not currently involved in any material legal proceedings, nor are any threatened, and expects any routine proceedings to not materially affect its financial condition or results of operations - The company is not currently subject to any material legal proceedings, nor are any material legal proceedings threatened against it[245] - Any future legal or regulatory proceedings are not expected to have a material effect upon the company's financial condition or results of operations[245] Item 1A Risk Factors There have been no material changes to the risk factors previously disclosed in the company's transition report on Form 10-K for the period from April 1, 2022, to December 31, 2022 - No material changes to the risk factors discussed in 'Item 1A. Risk Factors' in the company's transition report on Form 10-K for the period from April 1, 2022, to December 31, 2022[246] Item 2 Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported during the period - None reported[247] Item 3 Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - None reported[248] Item 4 Mine Safety Disclosures This item is not applicable to the company - Not Applicable[250] Item 5 Other Information No other information was reported during the period - None reported[251] Item 6 Exhibits This section lists the exhibits filed as part of this quarterly report on Form 10-Q, including certifications and documents incorporated by reference - Exhibits include certifications of the Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32.1, 32.2) filed herewith[252] - Articles of Amendment and Restatement and Amended and Restated Bylaws of the Company are incorporated by reference[252][253] SIGNATURES The report was officially signed on May 12, 2023, by the Chief Executive Officer and Chief Financial Officer of Silver Spike Investment Corp - The report was signed on May 12, 2023, by Scott Gordon, Chief Executive Officer, and Umesh Mahajan, Chief Financial Officer[256][257]