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 The leading web portal for pharmacy resources, news, education and careers May 23, 2017
Pharmacy Choice - Pharmaceutical News - NEXPOINT CAPITAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations. - May 23, 2017

Pharmacy News Article

 5/15/17 - NEXPOINT CAPITAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
The information contained in this section should be read in conjunction with our
unaudited financial statements and related notes thereto included elsewhere in
this quarterly report on Form 10-Q. In this report, "we," "us" and "our" refer
to NexPoint Capital, Inc.

Forward-Looking Statements

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;




    ?    changes in healthcare technologies, finance and regulations adversely
         affecting our portfolio companies or financing model;



? changes in political, economic or industry conditions, the interest rate

environment or conditions affecting the financial and capital markets,

         which could result in changes to the value of our assets;



? our business prospects and the prospects of the companies in which we may

         invest;




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




  ?   the impact of increased competition;




  ?   our contractual arrangements and relationships with third parties;



? the dependence of our future success on the general economy and its effect

         on the industries in which we may invest;




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




  ?   our current and expected financings and investments;



? the adequacy of our cash resources, financing sources and working capital;

? the timing and amount of cash flows, distributions and dividends, if any,

         from our portfolio companies;




  ?   our use of financial leverage;




    ?    the ability of the Adviser, to locate suitable investments for us and to
         monitor and administer our investments;



? the ability of the Adviser or its affiliates to attract and retain highly

         talented professionals;



? our ability to maintain our qualification as a regulated investment

         company, or RIC, and as a business development company, or BDC;




    ?    the impact on our business of the Dodd-Frank Wall Street Reform and

Consumer Protection Act and the rules and regulations issued thereunder;




  ?   the effect of changes to tax legislation and our tax position; and




  ?   the tax status of the enterprises in which we may invest.


Such forward-looking statements may include statements preceded by, followed by
or that otherwise include the words "may," "might," "will," "intend," "should,"
"could," "can," "would," "expect," "believe," "estimate," "anticipate,"
"predict," "potential," "plan" or similar 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
elsewhere in this quarterly report on Form 10-Q and as "Risk Factors" in the
prospectus relating to the continuous public offering of our common stock.

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. Except as required by the federal securities laws, we undertake no
obligation to revise or update any forward-looking statements, whether as a
result of new information, future events or otherwise. Stockholders are advised
to consult any additional disclosures that we may make directly to stockholders
or through reports that we may file in the future with the U.S. Securities and
Exchange Commission, or 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 and projections contained in this quarterly report on
Form 10-Q are excluded from the safe harbor protection provided by Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
This quarterly report on Form 10-Q may contain statistics and other data that
have been obtained from or compiled from information made available by
third-party service providers. We have not independently verified such
statistics or data.

Overview


We were formed in Delaware on September 30, 2013 and formally commenced
operations on September 2, 2014. We are an externally managed, closed-end,
non-diversified management investment company that has elected to be regulated
as a business development company (a "BDC") under the Investment Company Act of
1940, as amended (the "1940 Act"). In addition, for U.S. federal income tax
purposes, we have elected to be treated as a RIC under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") with retroactive effect
to the date we elected to be treated as a BDC. As a BDC, we are also subject to
certain constraints, including limitations imposed by the 1940 Act and the Code.

Our investment activities are managed by NexPoint Advisors, L.P. (our "Adviser")
and supervised by our board of directors (the "Board") a majority of the members
of which are independent of us.

Our investment objective is to generate high current income and long-term
capital appreciation. We seek to achieve our objective by using the experience
of the healthcare, credit and structured products teams of Highland Capital
Management, L.P. ("Highland") to source, evaluate and structure investments,
identify attractive investment opportunities that are primarily debt investments
that generate high income without creating undue risk for the portfolio, make
equity investments where we believe there will be attractive risk-adjusted
returns that compensate for the lack of current income, and make investments in
debt and equity tranches of collateralized loan obligations, or CLOs, that
deliver income and high relative value. We will focus on companies that are
stable, have positive cash flow and the ability to grow their business model.

Our investment policy is to invest, under normal circumstances, at least 80% of
our total assets in debt and equity of middle-market companies, with an emphasis
on healthcare companies, syndicated floating rate debt of large public and
nonpublic companies and mezzanine and equity tranches of CLOs. Middle-market
companies include companies with annual revenues between $50,000,000 and
$2,500,000,000 and syndicated floating rate debt refers to loans and other
instruments originated by a bank to a corporation that are sold off, or
syndicated, to investors in pieces. We consider a healthcare company to be a
company that is engaged in the design, development, production, sale, management
or distribution of products, services or facilities used for or in connection
with the healthcare industry. Additionally, we consider companies that are
materially impacted by the healthcare industry (such as a contractor that
derives significant revenue or profit from the construction of hospitals) as
being engaged in the healthcare industry. We may invest without limit in
companies that are not in the healthcare sector.

We will leverage the expertise of Highland with regard to distressed investing
and restructuring to make opportunistic investments in distressed companies. We
will utilize the Highland credit underwriting capability to identify the types
of companies we believe will provide high current income and/or long-term
capital appreciation. In addition to the investments in the healthcare industry,
we may invest a portion of our capital in other opportunistic investments in
which the Adviser has expertise and where we believe an opportunity exists to
achieve above average risk adjusted yields and returns. These types of
opportunities may include: (1) direct lending or origination investments,
(2) investments in stressed or distressed situations, (3) structured product
investments, (4) equity investments and (5) other investment opportunities not
typically available in other BDCs. Opportunistic investments may range from
broadly syndicated deals to direct lending deals in both private and public
companies and may include foreign investments. We believe this is the best
approach to achieving our dual mandate of attempting to generate a high yield
while also attempting to produce capital appreciation.

We seek to invest primarily in securities deemed by the Adviser to be high
income generating debt investments and income generating equity securities of
privately held companies in the United States. We expect the portfolio will be
concentrated primarily in senior floating rate debt securities, although we may
invest without limit in securities which rank lower than senior secured
instruments and may invest without limit in investments with a fixed rate of
interest. We will buy syndicated loans, various tranches of CLOs and other debt
instruments in the secondary market as well as originate debt so we can tailor
the investment parameters more precisely to our needs. We also intend to invest
a portion of the portfolio in equity securities that are non-income producing,
when doing so will help us achieve our objective of long-term capital
appreciation. We expect the size of our positions will range from $2,000,000 to
$25,000,000, although investments may be larger as our asset base increases. We
may selectively make investments in amounts larger than $25,000,000 in some of
our portfolio companies. While our asset base increases, we may make smaller
investments.

We expect that many of the securities in which we invest will be rated below
investment grade by independent rating agencies or would be rated below
investment grade if they were rated. These securities, which may be referred to
as "junk," have predominantly speculative characteristics with respect to the
issuer's capacity to pay interest and repay principal. In addition, we expect
that many of our debt investments will include floating interest rates that
reset on a periodic basis and typically will not require the borrowers to pay
down the outstanding principal of such debt prior to maturity.

Public Offering


We are offering on a continuous basis up to $1.6 billion of our common stock,
inclusive of shares already sold, based on an offering price of $10.66 as of
March 31, 2017, and a par value of $0.001 per share, pursuant to a registration
statement on Form N-2 filed with the U.S. Securities and Exchange Commission
(the "SEC") under the Securities Act. The SEC declared our registration
statement effective on April 29, 2016, as supplemented. We are also authorized
to issue 25,000,000 shares of preferred stock, par value $0.001 per share.
However, we currently do not anticipate issuing any preferred stock.

As a result of a series of private placements to the Adviser, we successfully
satisfied the minimum offering requirement and officially commenced operations
on September 2, 2014. In connection with the satisfaction of the minimum
offering requirement and the commencement of our operations, the Investment
Advisory Agreement became effective and the base management fee and any
incentive fees, as applicable, payable to the Adviser under the Investment
Advisory Agreement began to accrue. In aggregate through March 31, 2017 we have
issued 2,041,174 shares to the Adviser, including reinvestment of dividends, for
net proceeds of approximately $18.7 million and we have issued net 5,938,530
shares, including reinvestment of dividends, to unaffiliated investors for net
proceeds of approximately $55.5 million.

The Dealer Manager, an entity under common ownership with the Adviser, serves as
the dealer manager of our continuous public offering. The shares are being
offered on a "best efforts" basis, which means generally that the Dealer Manager
is required to use only its best efforts to sell the shares and it has no firm
commitment or obligation to purchase any of the shares. The Adviser and the
Dealer Manager are related parties and will receive fees, distributions and
other compensation for services related to our public offering and the
management of our assets.

We, Highland and the Adviser have obtained an exemptive order dated April 19,
2016 from the SEC to permit co-investments among the Company and certain other
accounts managed by the Adviser or its affiliates, subject to certain
conditions.

On August 28, 2015, the Company filed its application with the SEC pursuant to
Section 6(c) of the 1940 Act, requesting exemptions from Sections 18(c), 18(i)
and 61(a) of the 1940 Act and pursuant to Sections 17(d) and 57(i) of the 1940
Act and Rule 17d-1 under the 1940 Act, to permit the Company to offer investors
multiple classes of shares, interests or units, as the case may be, with varying
sales loads and asset-based service and/or distribution fees (the "Multi-Class
Application"). The Company may revise the Multi-Class Application in response to
comments from the SEC staff.

Revenues

We generate a significant portion of our total revenue in the form of interest
on the debt securities that we hold. We expect that the senior debt we invest in
will generally have stated terms of 3 to 5 years and that the subordinated debt
we invest in will generally have stated terms of 5 to 7 years. Our senior and
subordinated debt investments bear interest at a fixed or floating rate.
Interest on debt securities is generally payable monthly, quarterly or
semiannually. In addition, some of our investments provide for deferred interest
payments or payment-in-kind, or PIK, interest. We may also generate revenues in
the form of dividends and other distributions on the equity or other securities
we may hold. In addition, we may generate revenues in the form of commitment,
closing, origination, structuring or diligence fees, monitoring fees, fees for
providing managerial assistance, consulting fees, prepayment fees and
performance-based fees. Any such fees generated in connection with our
investments will be recognized as earned.

Expenses


We expect that our primary operating expenses will include the payment of fees
to the Adviser under the Investment Advisory Agreement, our allocable portion of
overhead expenses under the Administration Agreement and other operating costs
described below. However, at this time our Adviser is waiving most fees. We bear
all out-of-pocket costs and expenses of our operations and transactions,
including:



? our organization (expenses initially paid by the Adviser until sufficient

         equity proceeds are raised);



? calculating our net asset value and net asset value per share (including

         the costs and expenses of independent valuation firms);



? fees and expenses, including travel expenses, incurred by the Adviser or

payable to third parties in performing due diligence on prospective

         portfolio companies, monitoring our investments and, if necessary,
         enforcing our rights;



? interest payable on debt, if any, incurred to finance our investments;




    ?    the costs of this and all future offerings of common shares and other
         securities, and other incurrence of debt;

  ?   the base management fee and any incentive fee;




  ?   distributions on our shares;



? administration fees payable to the Adviser under the Administration

         Agreement;




  ?   transfer agent and custody fees and expenses;




    ?    the actual costs incurred by the Adviser as our administrator in providing
         managerial assistance to those portfolio companies that request it;




    ?    amounts payable to third parties relating to, or associated with,
         evaluating, making and disposing of investments;




  ?   brokerage fees and commissions;




  ?   registration fees;




  ?   listing fees;




  ?   taxes;




  ?   independent director fees and expenses;



? costs associated with our reporting and compliance obligations under the

         1940 Act and applicable U.S. federal and state securities laws;




    ?    the costs of any reports, proxy statements or other notices to our
         stockholders, including printing costs;




  ?   costs of holding stockholder meetings;




  ?   our fidelity bond;



? directors and officers/errors and omissions liability insurance, and any

         other insurance premiums;



? litigation, indemnification and other non-recurring or extraordinary

         expenses;



? direct costs and expenses of administration and operation, including audit

         and legal costs;




    ?    fees and expenses associated with marketing efforts, including deal
         sourcing fees and marketing to financial sponsors;



? dues, fees and charges of any trade association of which we are a member;

         and



? all other expenses reasonably incurred by us or the Adviser in connection

with administering our business.

During periods of asset growth, we expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets and increase during periods of asset declines.

Expense Limitation


Pursuant to an expense limitation agreement (the "Expense Limitation
Agreement"), the Adviser is contractually obligated to waive fees and, if
necessary, pay or reimburse certain other expenses to limit ordinary "Other
Expenses" to 1.0% of the quarter-end value of the Company's gross assets through
the one year anniversary of the effective date of the registration statement.
Under the Expense Limitation Agreement, "Other Expenses" are all expenses with
the exception of advisor and administration fees, organization and offering
costs and the following: (i) interest, taxes, dividends tied to short sales,
brokerage commissions, and other expenditures which are capitalized in
accordance with U.S. GAAP; (ii) expenses incurred indirectly as a result of
investments in other investment companies and pooled investment vehicles;
(iii) other expenses attributable to, and incurred as a result of, our
investments; (iv) expenses payable to the Adviser, as administrator, for
providing significant managerial assistance to our portfolio companies; and
(v) other extraordinary expenses (including litigation expenses) not incurred in
the ordinary course of our business. The obligation will automatically renew for
one-year terms unless it is terminated by the Company or the Adviser upon
written notice within 120 days of the end of the current term or upon
termination of the Investment Advisory Agreement. The Expense Limitation
Agreement will continue through at least April 30, 2018.

Any expenses waived or reimbursed by the Adviser pursuant to the Expense
Limitation Agreement are subject to possible recoupment by the Adviser within
three years from the date of the waiver or reimbursement. The recoupment by the
Adviser will be limited to the amount of previously waived or reimbursed
expenses and cannot cause the Company's expenses to exceed any expense
limitation in place at the time of recoupment or waiver.

Reimbursable Expenses Table


The cumulative total of fees waived by the Adviser under the Expense Limitation
Agreement which are recoupable as of March 31, 2017 are $2,113,172. This
balance, and the balances in the tables below, only include amounts pertaining
to the Expense Limitation Agreement, and do not include waived advisory and
administration fees subject to recoupment discussed elsewhere herein.

The following table reflects the 2017 quarterly fee waivers and expense reimbursements due from the Adviser as of March 31, 2017, which are subject to recoupment by the Adviser.



                                                                                 Yearly
                                                                Yearly         Cumulative       Quarterly
                                      Yearly Cumulative        Expense          Expense         Recoupable             Recoupment
Period Ended                           Other Expenses         Limitation       Limitation         Amount         Eligibility Expiration
March 31, 2017                       $           329,791     $    182,226     $    147,565     $    147,565               March 31, 2020


The following table reflects the 2016 quarterly fee waivers and expense
reimbursements due from the Adviser as of December 31, 2016, September 30, 2016,
June 30, 2016 and March 31, 2016, which are subject to recoupment by the
Adviser.



                                                                                Yearly
                                                              Yearly          Cumulative         Quarterly
                                    Yearly Cumulative        Expense            Expense          Recoupable             Recoupment
Quarter Ended                        Other Expenses         Limitation       Reimbursement         Amount         Eligibility Expiration
December 31, 2016                  $         1,263,735     $    835,904     $       427,831     $    147,943            December 31, 2019
September 30, 2016                             803,909          524,021             279,888           32,663           September 30, 2019
June 30, 2016                                  567,248          320,023             247,225           90,124                June 30, 2019
March 31, 2016                                 259,420          102,319             157,101          157,101                March 31,2019


The following table reflects the 2015 quarterly fee waivers and expense
reimbursements due from the Adviser as of December 31, 2015, September 30,
2015, June 30, 2015, and March 31, 2015, which are subject to recoupment by the
Adviser.



                                                                                Yearly
                                                              Yearly          Cumulative         Quarterly
                                    Yearly Cumulative        Expense            Expense          Recoupable             Recoupment
Quarter Ended                        Other Expenses         Limitation       Reimbursement         Amount         Eligibility Expiration
December 31, 2015                  $         1,440,686     $    309,265     $     1,131,421     $     23,484            December 31, 2018
September 30, 2015                           1,272,439          164,502           1,107,937          434,917           September 30, 2018
June 30, 2015                                  771,350           98,330             673,020          414,551                June 30, 2018
March 31, 2015                                 353,760           95,291             258,469          258,469                March 31,2018

The following table reflects the 2014 quarterly fee waivers and expense reimbursements due from the Adviser as of December 31, 2014 and September 30, 2014, which are subject to recoupment by the Adviser.



                                                                                 Yearly
                                                               Yearly          Cumulative         Quarterly
                                     Yearly Cumulative        Expense            Expense          Recoupable             Recoupment
Quarter Ended                         Other Expenses         Limitation       Reimbursement         Amount         Eligibility Expiration
December 31, 2014                   $           463,303     $     56,948     $       406,355     $    321,712            December 31, 2017
September 30, 2014                               98,723           14,081              84,642           84,642           September 30, 2017


There can be no assurance that the Expense Limitation Agreement will remain in
effect beyond April 30, 2018 or that the Adviser will reimburse any portion of
our expenses in future quarters not covered by the Expense Limitation
Agreement. Amounts shown do not include the amounts committed by the Adviser to
voluntarily reimburse the Company for unrealized losses, all of which are not
recoupable.

Portfolio Investment Activity for the three months ended March 31, 2017 and March 31, 2016.


During the three months ended March 31, 2017, we made long investments in
portfolio companies and other investments totaling $17,524,104. During the same
period, we generated proceeds from sales and principal repayments on long
investments of $33,994,813. As of March 31, 2017, our investment portfolio, with
a total fair value of $63,115,536, consisted of 38 interests in portfolio
companies (calculated as a percentage of total investments: 25.8% in first lien
senior secured loans, 16.0% in second lien senior secured loans, 38.2% in
corporate bonds, 3.3% in asset-backed securities, 1.9% in warrants, 14.7% in
common stock, and 0.1% in rights). As of March 31, 2017, the investments in our
portfolio were purchased at a weighted average price of 80.00% of par or stated
value, as applicable, and our estimated gross annual portfolio yield (which
represents the expected yield to be generated by us on our investment portfolio
based on the composition of our portfolio as of such date), prior to leverage,
was 9.01% based upon the amortized cost of our investments. The portfolio yield
does not represent an actual investment return to stockholders and does not
include income from CLO equity.

During the three months ended March 31, 2016, we made investments in portfolio
companies and other investments totaling $15,827,260, and received proceeds from
securities sold short of $165,454. During the same period, we sold investments
for proceeds of $8,437,380. As of March 31, 2016 our investment portfolio, with
a total fair value of $31,271,267 in long securities and ($204,000) in
securities sold short, consisted of interests in 21 portfolio companies (25.4%
in first lien senior secured loans, 33.4% in second lien senior secured loans,
31.8% in corporate bonds, 5.5% in asset-backed securities, 4.4% in warrants,
0.2% in common stock, and (0.7%) in common stock - short). As of March 31, 2016,
the investments in our portfolio were purchased at a weighted average price of
82.92% of par or stated value, as applicable, and our estimated gross annual
portfolio yield (which represents the expected yield to be generated by us on
our investment portfolio based on the composition of our portfolio as of such
date), prior to leverage, was 7.59% based upon the amortized cost of our
investments. The portfolio yield does not represent an actual investment return
to stockholders.

Total Portfolio Activity

The following table's present selected information regarding our portfolio
investment activity for the three months ended March 31, 2017 and March 31,
2016:



                                           For the Three         For the Three
                                            Months Ended          Months Ended
    Net Investment Activity                March 31, 2017        March 31, 2016
    Purchases                             $     17,524,104      $     15,827,260
    Proceeds from Securities Sold Short                 -                

165,454

    Purchases of Securities Sold Short                  -                  

-

    Sales and Principal Repayments             (33,994,813 )          (8,437,380 )

    Net Portfolio Activity                $    (16,470,709 )    $      7,555,334





                                                  For the Three Months Ended                   For the Three Months Ended
                                                        March 31, 2017                               March 31, 2016
New Investment Activity by Asset Class           Purchases             Percentage             Purchases             Percentage
Senior Secured Loans-First Lien              $       2,118,600                12.1 %      $       6,913,411                43.7 %
Corporate Bonds - Senior Unsecured                   9,227,770                52.6 %              5,603,750                35.4 %
Convertible Bonds - Senior Unsecured                        -                  0.0 %                560,000                 3.5 %
Equities (1)                                         6,177,734                35.3 %              2,750,099                17.4 %

Total Investments                            $      17,524,104               100.0 %      $      15,827,260               100.0 %



(1) In addition to the purchase amount shown here, the Company also sold

securities sold short for proceeds of $165,454 during the three months ended

March 31, 2016.

The following tables summarize the composition of our investment portfolio at amortized cost and fair value as of March 31, 2017 and December 31, 2016:



                                                              March 31, 2017
                                                                                Percentage of
                                            Amortized                        Portfolio (at fair
Portfolio Composition by Investment Type     Cost(1)         Fair Value     

value)

Senior Secured Loans - First Lien $ 15,664,384 $ 16,262,384

                 25.8 %
Senior Secured Loans - Second Lien           10,040,030       10,060,976                    16.0 %
Senior Secured Loans - Escrow Loan               87,816           13,125                     0.0 %
Asset-Backed Securities                       2,104,800        2,093,526                     3.3 %
Corporate Bonds                              24,572,658       24,110,996                    38.2 %
Common Stocks                                11,160,214        9,271,412                    14.7 %
Rights                                          154,404           82,808                     0.1 %
Warrants                                             -         1,220,309                     1.9 %

Total Investments                          $ 63,784,306     $ 63,115,536                   100.0 %




(1) Amortized cost represents the original cost adjusted for the amortization of

    premiums and/or accretion of discounts, as applicable, on investments.




                                                             December 31, 2016
                                                                                Percentage of
                                            Amortized                        Portfolio (at fair
Portfolio Composition by Investment Type     Cost(1)         Fair Value     

value)

Senior Secured Loans - First Lien $ 27,394,540 $ 28,864,108

                 36.9 %
Senior Secured Loans - Second Lien           12,790,248       12,673,072                    16.2 %
Senior Secured Loans - Escrow Loan               87,816           17,500                     0.0 %
Asset-Backed Securities                       2,576,709        2,614,217                     3.3 %
Convertible Bonds                               569,431          700,625                     0.9 %
Corporate Bonds                              28,847,813       28,113,471                    35.9 %
Common Stocks                                 6,170,708        4,532,375                     5.8 %
Rights                                          154,404           96,288                     0.1 %
Warrants                                             -           678,940                     0.9 %

Total Investments                          $ 78,591,669     $ 78,290,596                   100.0 %




(1) Amortized cost represents the original cost adjusted for the amortization of

premiums and/or accretion of discounts, as applicable, on investments.

The following table presents certain selected information regarding the
composition of our investment portfolio as of March 31, 2017 and December 31,
2016:



                                             March 31, 2017                   December 31, 2016
Number of Investments                                     38                                  42
% Variable Rate (based on fair
value)                                                    44 %                                53 %
% Non-Income Producing Equity or
Other Investments (based on fair
value)                                                     8 %                                 3 %
Weighted Average Purchase Price of
Investments (as a % of par or
stated value)                                          80.00 %                             87.40 %
Weighted Average Credit Rating of
Investments that were Rated                             Caa2                                Caa1
% of Fixed Income Investments on
Non-Accrual (based on fair value)                          0 % (1)                             0 % (1)



(1) Represents less than 0.5%.

Portfolio Composition by Strategy and Industry

The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of March 31, 2017 and December 31, 2016:



                                             March 31, 2017                     December 31, 2016
                                                      Percentage of                         Percentage

Portfolio Composition by Strategy Fair Value Portfolio Fair Value of Portfolio Broadly Syndicated - Private $ 5,547,257

                 8.8 %    $  3,639,776               4.7 %
Broadly Syndicated - Public            7,099,319                11.3 %       8,548,645              10.9 %
Middle-Market                         48,375,434                76.6 %      63,487,958              81.1 %
Other                                  2,093,526                 3.3 %       2,614,217               3.3 %

Total                               $ 63,115,536               100.0 %    $ 78,290,596             100.0 %



Broadly, syndicated debt refers to loans and other instruments originated by a
bank to a large corporation (both private and public) that are sold off, or
syndicated, to investors in pieces. Middle-Market companies include companies
with annual revenues between $50 million and $2.5 billion.


The table below describes investments by industry classification and enumerates
the percentage, by fair value, of the total portfolio assets in such industries
as of March 31, 2017 and December 31, 2016:



                                                  March 31, 2017                        December 31, 2016
                                                              Percentage                             Percentage
                                                                  of                                     of
Industry Classifications                   Fair Value         Portfolio           Fair Value         Portfolio
Chemicals                                 $     80,750                0.1 %      $     73,665                0.1 %
Energy                                       5,594,264                8.9 %         5,293,496                6.8 %
Financials                                   2,093,526                3.3 %         2,614,217                3.3 %
Healthcare                                  32,151,096               50.9 %        48,076,536               61.5 %
Media/Telecommunications                     7,404,125               11.7 %         4,087,500                5.2 %
Real Estate Investment Trusts (REITs)        2,311,832                3.7 %         2,200,805                2.8 %
Retail                                       3,226,114                5.1 %         4,105,999                5.2 %
Service                                        487,750                0.8 %         3,791,110                4.8 %
Technology                                   5,081,842                8.1 %         5,120,935                6.5 %
Telecommunication Services                     526,844                0.8 %           943,020                1.2 %
Utility                                      4,157,393                6.6 %         1,983,313                2.6 %

Total Assets                              $ 63,115,536              100.0 %      $ 78,290,596              100.0 %



As of March 31, 2017, we did not "control" and were not an "affiliated person,"
each as defined in the 1940 Act, of any of our portfolio companies. In general,
under the 1940 Act, we would be presumed to "control" a portfolio company if we
owned 25% or more of its voting securities or we had the power to exercise
control over the management or policies of such portfolio company, and would be
an "affiliated person" of a portfolio company if we owned 5% or more of its
voting securities.

Summary Description of Portfolio Companies/Investments


Our primary focus is to invest a majority of the portfolio in direct lending or
originated opportunities over time. However, during the "ramp up phase," the
portfolio will consist primarily of middle-market loans as well as broadly
syndicated bank loans (both private and public), corporate bonds, cash and cash
equivalents and U.S. government securities. The ramp up phase will begin to wind
down now that $50 million of total capital has been raised. We will begin
deploying a portion of the portfolio into direct lending or originated
opportunities (including, secured and unsecured debt and mezzanine financing)
and equity investments (including warrants received in connection with
originated debt investments).

Our primary holdings currently include senior secured first and second lien bank
loans and bonds. Bank loans typically accrue interest at variable rates
determined by reference to a base lending rate, such as LIBOR. The base rate
typically resets every three months, such that bank loans have a very short
duration of 90 days on average and typically have maturities of 3 to 5 years.
Corporate notes and bonds typically accrue a fixed rate of interest with
maturities of 5 to 7 years.

We focus on healthcare investments, although we may invest without limit in
non-healthcare related investments and portfolio companies. The Adviser believes
there is an excellent opportunity in the healthcare sector as a result of the
aging population (Americans are turning age 65 at a rate of approximately
10,000 per day) and the longer life span of the average American due to
increased usage of technology and pharmaceuticals in healthcare. Overarching all
of this is the multi-year long implementation of the Affordable Care Act
("ACA"), the largest structural change to the U.S. healthcare sector since the
passage of Medicare and Medicaid in the mid 1960's. The Adviser believes these
macro factors will combine to produce above average growth in the healthcare
sector for at least the next decade.

The healthcare sector has traditionally been a stable, defensive sector.
However, with the macro influences affecting the sector, particularly
implementation of the ACA, we believe there will be more volatility and upheaval
in the sector than historically has been the case. Investing in credit
potentially minimizes unwanted volatility while also positioning the portfolio
to participate in the potential growth of the healthcare sector while earning
income. We believe lending to middle-market healthcare companies may potentially
generate a higher risk adjusted yield. As we grow, it is our intention to do
more origination and direct lending, predominantly to healthcare companies,
although we will also make investments in non-healthcare companies where an
opportunity exists to achieve above average risk adjusted yields and returns.

Summary Description of Top Portfolio Companies/Investments


As of March 31, 2017 and December 31, 2016, 54% and 65% (based on fair value),
respectively, of our portfolio consisted of healthcare related and opportunistic
investments. Information regarding these investments is provided below.
Information regarding these investments is provided below. This additional
information is limited to publicly available information, and does not address
credit worthiness or financial viability of the issuer, or our future plans as
it relates to a specific investment:

Healthcare Investments


Ortho-Clinical Diagnostics: As of March 31, 2017 and December 31, 2016, we held
corporate bonds of Ortho-Clinical Diagnostics ("Ortho-Clinical") having an
aggregate fair value of $8.6 million and $11.3 million, respectively.
Ortho-Clinical is a provider of in-vitro diagnostic solutions for screening,
diagnosing, monitoring and confirming diseases, as well as immunohematology to
ensure compatibility for blood transfusions and plasma screening for infectious
diseases.

iHeart Communications, Inc.: As of March 31, 2017 and December 31, 2016 we held
first lien senior secured loans of iHeart Communications, Inc. ("iHeart") having
an aggregate fair value of $4.3 million and $4.1 million, respectively. iHeart
is the largest broadcast radio and events business in the US, and owns 90% of
Clear Channel Outdoor, one of the world's largest outdoor advertising
companies. The company owns and operates approximately 850 broadcast radio
stations in the US and almost 1 million outdoor advertising displays in 45
countries. iHeartMedia also operates the iHeartRadio streaming app with
96 million registered users.

U.S. Renal Care: As of March 31, 2017 and December 31, 2016, we held second lien
senior secured loans in US Renal Care, Inc. ("U.S. Renal Care") having an
aggregate fair value of $4.0 million and $4.0 million, respectively. U.S. Renal
Care develops, acquires, and operates a network of outpatient, home, and
specialty dialysis centers for serving patients suffering from chronic kidney
failures in the United States. The company provides in-centerand at-home
hemodialysis and peritoneal dialysis services for end stage renal diseases. It
operates outpatient, home, and specialty dialysis programs. The company also
manages various acute setting dialysis programs in conjunction with local
community hospitals. It also serves families, caregivers and physicians. U.S.
Renal Care was founded in 2000 and is based in Plano, Texas. Upon completing an
acquisition of DSI Renal in January 2016, U.S. Renal Care became third-largest
provider of dialysis services in the United States, with 300 outpatient dialysis
facilities across 34 states/territories.

Radnet Inc: As of March 31, 2017 and December 31, 2016, we held second lien
senior secured loans in Radnet Inc. ("Radnet") with an aggregate fair value of
$3.5 million and $5.4 million, respectively. Radnet provides outpatient
diagnostic imaging services in the United States. It offers various imaging
services, including magnetic resonance imaging, computed tomography, positron
emission tomography, nuclear medicine, mammography, ultrasound, diagnostic
radiology (X-ray), fluoroscopy, and other related procedures, as well as
multi-modality imaging services. The company also develops and sells
computerized systems for the imaging industry, including picture archiving
communications systems, and provides teleradiology services for remote
interpretation of images on behalf of radiology groups, hospitals, and imaging
center customers. As of January 24, 2017, it owned and/or operated 306
outpatient-imaging centers located in California, Maryland, Delaware, New
Jersey, New York, and Rhode Island. The company was founded in 1981 and is
headquartered in Los Angeles, California.

Valeant Pharmaceuticals International, Inc.: As of March 31, 2017 and
December 31, 2016, we held corporate bonds of Valeant Pharmaceuticals, Inc.
("Valeant") having an aggregate fair value of $3.5 million and $3.4 million,
respectively. Valeant is a multinational, specialty pharmaceutical and medical
device company that develops, manufacturers, and markets a broad range of
branded, generic and branded generic pharmaceuticals, over-the-counter products,
and medical devices, which are marketed directly or indirectly in over 100
countries. The company's broad portfolio of >1,800 products is primarily focused
in the areas of dermatology, gastrointestinal disorders, eye health (including
Bausch + Lomb), neurology and branded generics. Valeant is headquartered in
Laval, Quebec.

Quorum Health Corp.: As of March 31, 2017 and December 31, 2016, we held first
lien senior secured loans and corporate bonds of Quorum Health Corp. ("Quorum")
having an aggregate fair value of $6.4 million and $11.7 million, respectively.
Quorum Health Corporation is a leading provider of hospital and outpatient
healthcare services focused on facility-based acute care in rural and mid-sized
markets. As of December 31, 2016, the company owned or leased 36 hospitals
located across 16 states and licensed for 3,459 beds. Approximately 84% of the
company's hospitals are sole providers in their local markets. Quorum also
provides hospital management advisory and healthcare consulting services through
its wholly-owned subsidiary, Quorum Health Resources. Quorum was formed through
a spin-off of select assets from Community Health Systems Inc. completed in
April 2016. The company is headquartered in Nashville, TN.

Opportunistic Investments


The Adviser makes opportunistic investments when it believes it has a
differentiated view on an investment, has sourced a unique opportunity, or an
investment has, in the Adviser's opinion, an outsized return for the risk
assumed. We will typically limit opportunistic investments to 20% or less of the
portfolio, although we may invest more from time to time. The objective of
opportunistic investments is primarily to generate capital appreciation,
however, some opportunities may produce income as well.

Vistra Energy: As of March 31, 2017 and December 31, 2016, we held common stock
and rights shares of Vistra Energy (OTC:VSTE) ("Vistra Energy") having an
aggregate fair value of $3.2 million and $1.0 million, respectively. Vistra
Energy is the largest electric power generator and retail electric provider in
Texas, with other 16 GW of generation capacity and over 1.7 million retail
customers. Vistra Energy was formerly named Texas Competitive Electric Holdings.
The company emerged from bankruptcy on October 3, 2016. Upon emergence from
bankruptcy, 1st lien creditor interests were converted into equity in the
reorganized company. The reorganized equity currently trades publicly over the
counter and is anticipated to be listed on a major stock exchange in the second
quarter of 2017.

Results of Operations for the three months ended March 31, 2017 and March 31, 2016


Revenues

We generate a significant portion of our investment income in the form of
interest on the debt securities we purchase or originate. During the ramp up
phase, we have invested primarily in broadly syndicated bank loans of private
companies. Bank loans generally pay interest at rates which are periodically
determined by reference to a base lending rate plus a spread. The base lending
rate is typically the three-month LIBOR. The settlement of bank loans differs
from the settlement of many other equity or debt instruments. Bank loans are
manually settled through the agent by assignment. As a result, settlement can
take an undetermined amount of time. Currently, according to data provided by
Markit Partners, bank loans settle, on average, on the seventeenth day after the
trade date. Generally, interest does not begin to accrue to the buyer until
seven business days after the trade date.

Our CLO equity pays quarterly dividends based on excess cash flow available
after the CLO's payment "waterfall" provisions. Both Grayson and PAMCO CLOs are
past their respective investment periods, and as a result, excess cash flow is
expected to decline over time. We, therefore, expect that the quarterly
dividends paid by the investment will similarly decline.

Expenses


For the three months ended March 31, 2017 and March 31, 2016, respectively, we
had total net operating expenses of $379,472 or $0.05 per share and $132,460 or
$0.04 per share. Our operating expenses include base management fees attributed
to the Adviser of $411,325 and $171,353 for the three months ended March 31,
2017 and March 31, 2016, respectively, which were voluntarily waived for both
periods. Our expenses also include administrative services expenses attributed
to the Adviser of $82,265 and $34,268 for the three months ended March 31, 2017
and March 31, 2016, respectively, which were voluntarily waived for both
periods. Amounts waived for management fees or administrative services expenses
pertaining to periods prior to June 10, 2016 are not recoupable, but amounts
waived for management fees or administrative services expenses pertaining to
periods from and after June 10, 2016 are subject to recoupment by the Adviser
within three years from the date that such fees were otherwise payable, provided
that the recoupment will be limited to the amount of such voluntarily waived
fees from and after June 10, 2016 and will not cause the sum of the Company's
advisory fees, administration fees, Other Expenses, and any recoupment to exceed
the annual rate of 3.40% of average gross assets.

Amounts waived and subject to recoupment pertaining to advisory and administration fees are shown below:



                               Advisory Fees Waived          Administrator fees
                                  and Subject to             Waived and Subject         Recoupment Eligibility
Period Ended                      Recoupment (1)             to Recoupment (1)                Expiration
March 31, 2017                 $             390,969        $             78,194            March 31, 2020
December 31, 2016                            366,861                      73,372          December 31, 2019
September 30, 2016                           343,320                      68,664          September 30, 2019
June 30, 2016                                 74,421                      14,884            June 30, 2019

Total                          $           1,175,571        $            235,114




(1) The Advisor has permanently waived the recoupment of any advisory fees or

administration fees calculated on the portion of gross assets attributable to

the receivable from Advisor balance on the Statement of Assets and

Liabilities. The amounts shown have been reduced by this waiver.

In addition, cumulatively since inception through to June 10, 2016, the Company
has voluntarily waived $930,143 and $186,042 of advisory fees and administration
fees, respectively, all of which are not recoupable.

Our other expenses subject to the Expense Limitation Agreement for three months ended March 31, 2017 and March 31, 2016 were $329,791 and $259,420, respectively, and consisted of the following:



                                        For the Three Months               For the Three Months Ended
                                        Ended March 31, 2017                     March 31, 2016
Audit and tax fees                     $               51,287             $                     48,175
Legal fees                                             60,904                                   65,078
Custodian and accounting
service fees                                           76,886                                   54,533
Reports to stockholders                                47,679                                   26,353
Stock transfer fee                                     79,911                                   61,451
Directors' fees                                         2,867                                      847
Other expenses                                         10,257                                    2,983

Total                                  $              329,791             $                    259,420


Please refer to the Expense Limitation section above for further details on expense reimbursements.

Net Investment Income


We earned net investment income of $2,034,334 or $0.27 per share, and $542,973,
or 0.18 per share for the three months ended March 31, 2017 and March 31, 2016,
respectively.

Net Realized Gains or Losses

We had sales or principal repayments of $33,994,813 and $8,437,380 during the
three months ended March 31, 2017 and March 31, 2016, respectively, from which
we realized a net gains/(losses) of $846,625 and ($539,824), respectively.

Net Change in Unrealized Appreciation (Depreciation) on Investments


For the three months ended March 31, 2017 and March 31, 2016, the net change in
unrealized appreciation (depreciation) on investments totaled $(367,697) or
$(0.05) per share, and $1,744,425 or $0.57 per share, respectively. The net
change in unrealized appreciation (depreciation) on our investments during the
three months ended March 31, 2017 and March 31, 2016 was primarily driven by the
performance of CareDx, Inc. common stock and warrants in Galena Pharma, Inc.,
respectively.

Net Increase from Payment from Affiliates


For the three months ended March 31, 2017 and March 31, 2016, the Adviser
committed $0 and $872,000, respectively to the Company to voluntarily reimburse
the Company for unrealized losses sustained. Cumulatively since inception, the
Adviser has committed $2,275,000 to voluntarily reimburse the Company for such
losses. Had these commitments not been made, the NAV as of March 31, 2017 would
have been lower. These commitments are shown in the Statement of Operations as
net increase from amounts committed by affiliates and are not recoupable.

Amounts committed and paid by the Adviser to reimburse for unrealized losses are nonrecurring, and investors should not expect the Adviser to make similar commitments or payments in the future.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended March 31, 2017 and March 31, 2016, the net increase/(decrease) in net assets resulting from operations was $2,513,262 or $0.34 per share, and $2,619,574, or $0.86 per share, respectively.



                                           For the Three Months             For the Three Months
                                           Ended March 31, 2017             Ended March 31, 2016
Income                                     $           2,413,806            $             675,433
Net expenses                                            (379,472 )                       (132,460 )
Net realized gain/(loss)                                 846,625                         (539,824 )
Net unrealized appreciation
(depreciation)                                          (367,697 )                      1,744,425
Net increase from amounts
committed by affiliates                                       -                           872,000

Total                                      $           2,513,262            $           2,619,574


Financial Condition, Liquidity and Capital Resources


As of March 31, 2017 and December 31, 2016, we had cash and cash equivalents of
$9,418,996 and $3,948,113, respectively. As of March 31, 2017 and December 31,
2016, $9,352,714 and $3,913,546 was held in the State Street U.S. Government
Money Market Fund, and $66,282 and $34,567 was held in a custodial account with
State Street Bank and Trust Company, respectively. Cash and cash equivalents are
available to fund new investments, pay operating expenses and pay distributions.

In aggregate through March 31, 2017 we have issued 2,041,174 shares to the
Adviser, including reinvestment of dividends, for net proceeds of approximately
$18.7 million and we have issued net 5,938,530 shares, including reinvestment of
dividends, to unaffiliated investors for net proceeds of approximately
$55.5 million.

The sales commissions and dealer manager fees related to the sale of our common
stock were $691,260 and $443,198 for the three months ended March 31, 2017 and
March 31, 2016, and were offset against capital in excess of par value on the
financial statements.

We expect to generate cash primarily from the net proceeds of our continuous
public offering and from cash flows from fees, interest and dividends earned
from our investments, as well as principal repayments and proceeds from sales of
our investments. We are engaged in a continuous public offering of shares of
common stock. Through September 30, 2015 we accepted subscriptions on a
continuous basis and issued shares at monthly closings at prices that, after
deducting selling commissions and dealer manager fees, must be above our net
asset value per share. Effective October 1, 2015, we changed the frequency of
our closings, which now occur weekly.

Prior to investing in securities of portfolio companies, we invest the net
proceeds from our continuous public offering, from the issuance of shares of
common stock under our distribution reinvestment plan and from sales and
paydowns of existing investments primarily in cash, cash equivalents, U.S.
government securities, repurchase agreements, high-quality debt instruments
maturing in one year or less from the time of investment, consistent with our
BDC election and our election to be treated as a RIC. Additionally, we may
invest in higher yielding, liquid credit investments such as bank loans and
corporate notes and bonds, which are considered "junk" as they are rated below
investment grade, to the extent that at time of purchase 70% of our portfolio is
in qualified investments as required by rules and regulations under the 1940
Act.

We may borrow funds to make investments, including before we have fully invested
the proceeds of our continuous public offering, to the extent we determine that
additional capital would allow us to take advantage of additional investment
opportunities. On January 6, 2015, we entered into a senior, secured revolving
credit facility (the "Credit Facility") with State Street Bank and Trust Company
("State Street") as lender and agent. Under the Credit Facility, State Street
had agreed to extend credit to us, in an aggregate principal amount of up to
$25 million, subject to borrowing base availability and restrictions on our
total outstanding debt. Loans under


the Credit Facility bore interest (at our election) at either (1) the higher of
(i) the federal funds rate plus 1.25% per annum and (ii) the daily one-month
London Interbank Offered Rate ("LIBOR") plus 1.25% per annum or (2) one-, two-
or three-month LIBOR plus 1.15% per annum. Interest was payable monthly in
arrears. On January 5, 2016, the Company amended the Credit Facility with State
Street and extended the maturity to January 3, 2017. The amendment to the Credit
Facility did not contain any other material changes to the original agreement
which was entered into on January 6, 2015 other than increasing the commitment
fee from 0.15% to 0.25% per annum on the daily unutilized portion of the
$25 million program amount. On January 3, 2017, the Company amended the Credit
Facility with State Street and extended the maturity to March 20, 2017. The
Credit Facility was fully paid down on February 24, 2017, and expired on
March 20, 2017.

As of March 31, 2017 and December 31, 2016, $0 and $11,200,000, respectively,
were outstanding under the Credit Facility. The Company incurred costs of
$25,000 in connection with obtaining the Credit Facility. As of March 31, 2017,
all such financing costs have been amortized to interest expense.

For the three months ended March 31, 2017 and March 31, 2016 the components of total interest expense were as follows:



                                    For the Three Months       For the Three Months
                                    Ended March 31, 2017       Ended March 31, 2016
 Direct interest expense           $               42,325     $                7,907
 Commitment fees                                    8,054                     14,276
 Amortization of financing costs                       -                           0

 Total                             $               50,379     $               22,183


While we are authorized to issue preferred stock, we do not currently anticipate issuing any.

Contractual Obligations and Off-Balance Sheet Arrangements


We may become a party to financial instruments with off-balance sheet risk in
the normal course of our business to meet the financial needs of our portfolio
companies. These instruments may include commitments to extend credit and
involve, to varying degrees, elements of liquidity and credit risk in excess of
the amount recognized in the balance sheet. As of March 31, 2017 and
December 31, 2016, we had no outstanding commitments to fund investments.

We have certain contra
						



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