Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 497, Received: 05/22/2017 16:26:34)
Table of Contents

Filed pursuant to Rule 497
Registration Statement No. 333-208637

 

PROSPECTUS SUPPLEMENT

(To Prospectus Dated February 6, 2017)

 

 

LOGO

Up to $50,000,000

Common Stock

 

 

We are an externally managed specialty finance company that provides capital to lower middle market U.S. businesses (which we define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million). We operate as a closed-end, non-diversified management investment company and have elected to be treated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. For federal income tax purposes, we have elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code.

We are party to an equity distribution agreement, as amended on the date hereof, or the Sales Agreement, with Cantor Fitzgerald & Co., or Cantor Fitzgerald, relating to the shares of our common stock, par value $0.001 per share, offered pursuant to this prospectus supplement and the accompanying prospectus. The Sales Agreement provides that we may offer and sell shares of our common stock having an aggregate offering price of up to $50,000,000 from time to time through the Sales Agreement and a previous equity distribution agreement with another sales agent, or the KCM Agreement, which has been terminated as of the date of this prospectus supplement. As of the date of this prospectus supplement, we have not sold any shares of our common stock under the Sales Agreement and have sold 131,462 shares with an aggregate offering price of $1.2 million under the KCM Agreement, leaving an aggregate offering price of up to $48.8 million available under the Sales Agreement as of the date of this prospectus supplement. Subject to terms of the Sales Agreement, Cantor Fitzgerald is not required to sell any specific number or dollar amounts of securities but will act as our sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between Cantor Fitzgerald and us. There is no arrangement for funds to be received in any escrow, trust or similar arrangement.

Cantor Fitzgerald will be entitled to compensation under the terms of the Sales Agreement at a commission of up to 2.0% of the gross sales price per share sold. In connection with the sale of our common stock on our behalf, Cantor Fitzgerald will be deemed to be an “underwriter” within the meaning of the Securities Act, and the compensation of Cantor Fitzgerald will be deemed to be underwriting commissions or discounts. We have also agreed to provide indemnification and contribution to Cantor Fitzgerald against certain civil liabilities, including liabilities under the Securities Act.

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made by transactions that are deemed to be part of an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended, or the Securities Act, by means of ordinary brokers’ transactions that qualify for delivery of a prospectus to the NASDAQ Global Select Market, or NASDAQ, in accordance with Rule 153 under the Securities Act, or such other sales as may be agreed by us and Cantor Fitzgerald, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices. The offering of shares of common stock pursuant to the Sales Agreement will terminate upon the earlier of (1) the sale of shares having an aggregate offering price of $50,000,000 or (2) the termination of the Sales Agreement. See “Plan of Distribution” beginning on page S-43 of this prospectus supplement.

Our common stock is traded on NASDAQ under the symbol “GLAD.” On May 19, 2017 the last reported sale price of our common stock on NASDAQ was $9.87 per share. The net asset value, or NAV, per share of our common stock on March 31, 2017 (the last date prior to the date of this prospectus supplement as of which we determined NAV) was $8.33. You are urged to obtain current market quotations of our common stock. The sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less Cantor Fitzgerald’s commission, will not be less than the NAV per share of our common stock at the time of such sale.

The securities in which we invest generally would be rated below investment grade if they were rated by rating agencies. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be difficult to value and are illiquid.

 

 

Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their NAV. If our shares trade at a discount to our NAV, it will likely increase the risk of loss for purchasers in this offering. Investing in shares of our common stock involves a high degree of risk. Before investing, you should read the material risks described in the “Risk Factors” section beginning on page S-11 of this prospectus supplement and beginning on page 12 of the accompanying prospectus.

This prospectus supplement and the accompanying prospectus contain important information you should know before investing in our common stock, including information about risks. Please read it before you invest and retain it for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission, or the SEC, and can be accessed at its website at www.sec.gov . This information is also available free of charge by calling us collect at (703) 287-5893 or on our corporate website located at www.gladstonecapital.com . You may also call us collect at this number to request other information or to make a shareholder inquiry. See “Where You Can Find More Information” on page S-45 of this prospectus supplement. The SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.

 

 

 

LOGO

The date of this prospectus supplement is May 22, 2017


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Supplement

  

Prospectus Supplement Summary

     S-1  

The Offering

     S-5  

Fees and Expenses

     S-7  

Risk Factors

     S-11  

Special Note Regarding Forward-Looking Statements

     S-14  

Use of Proceeds

     S-15  

Price Range of Common Stock and Distributions

     S-16  

Consolidated Selected Financial Data

     S-18  

Selected Quarterly Financial Data

     S-20  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     S-21  

Plan of Distribution

     S-43  

Custodian, Transfer Agent, Dividend Disbursing Agent and Paying Agent

     S-45  

Legal Matters

     S-45  

Experts

     S-45  

Where You Can Find More Information

     S-45  

Index to Interim Consolidated Financial Statements

     S-F-1  

Prospectus

  

Prospectus Summary

     1  

The Offering

     4  

Fees and Expenses

     7  

Additional Information

     11  

Risk Factors

     12  

Special Note Regarding Forward-Looking Statements

     35  

Use of Proceeds

     35  

Price Range of Common Stock and Distributions

     35  

Common Share Price Data

     36  

Ratio of Earnings to Fixed Charges

     37  

Consolidated Selected Financial Data

     38  

Selected Quarterly Data (Unaudited)

     40  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     41  

Sales of Common Stock Below Net Asset Value

  

Senior Securities

     66  

Business

     68  

Portfolio Companies

     87  

Management

     94  

Control Persons and Principal Stockholders

     110  

Dividend Reinvestment Plan

     113  

Material U.S. Federal Income Tax Considerations

     114  

Regulation as a Business Development Company

     117  

Description of Our Securities

     119  

Certain Provisions of Maryland Law and of Our Articles of Incorporation and Bylaws

     124  

Share Repurchases

     128  

Plan of Distribution

     129  

Custodian, Transfer and Dividend Paying Agent and Registrar

     131  

Brokerage Allocation and Other Practices

     132  

Proxy Voting Policies and Procedures

     133  

Legal Matters

     134  

Experts

     134  

Index to Consolidated Financial Statements

     F-1  


Table of Contents

ABOUT THIS PROSPECTUS SUPPLEMENT

This document is presented in two parts. The first part is comprised of this prospectus supplement, which describes the specific terms of this common stock at-the-market offering and certain other matters relating to us. The second part, the accompanying prospectus, contains a description of our common stock and provides more general information, some of which does not apply to this offering, regarding securities that we may offer from time to time. To the extent that the information contained in this prospectus supplement differs or varies from the information contained in the accompanying prospectus, the information in this prospectus supplement will supersede such information.

This prospectus supplement is part of a registration statement on Form N-2 (Registration No. 333-208637) that we have filed with the SEC relating to the securities offered hereby. This prospectus supplement does not contain all of the information that we have included in the registration statement and the accompanying exhibits and schedules thereto in accordance with the rules and regulations of the SEC, and we refer you to such omitted information. It is important for you to read and consider all of the information contained in this prospectus supplement and the accompanying prospectus before making your investment decision. You should also read and consider the additional information incorporated by reference into this prospectus supplement and the accompanying prospectus. See “Where You Can Find More Information” in this prospectus supplement.

The distribution of this prospectus supplement and the accompanying prospectus and this offering of the securities may be restricted by law in certain jurisdictions. This prospectus supplement and the accompanying prospectus are not an offer to sell or a solicitation of an offer to buy shares of our common stock in any jurisdiction where such offer or any sale would be unlawful. Persons who come into possession of this prospectus supplement and the accompanying prospectus should inform themselves of and observe any such restrictions.

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus in making an investment decision. We have not, and Cantor Fitzgerald has not, authorized any other person to provide you with information that is different or additional. If anyone provides you with different or additional information, you should not rely on it. We do not, and Cantor Fitzgerald and its affiliates do not, take any responsibility for, and can provide no assurances as to, the reliability of any information that others may provide to you. You should not assume that the information in this prospectus supplement or the accompanying prospectus is accurate as of any date other than their respective dates, regardless of the time of delivery of this prospectus supplement, the accompanying prospectus or any sales of our common stock. Our business, financial condition, liquidity, results of operations, funds from operations and prospects may have changed since those dates. To the extent required by law, we will amend or supplement the information contained in this prospectus supplement and the accompanying prospectus.


Table of Contents

PROSPECTUS SUPPLEMENT SUMMARY

The following summary highlights some of the information in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all the information that you may want to consider. You should review the more detailed information contained elsewhere in this prospectus supplement and in the accompanying prospectus prior to making an investment in our common stock, and especially the information set forth under the heading “Risk Factors” in this prospectus supplement and the accompanying prospectus.

In this prospectus supplement and the accompanying prospectus, except where the context suggests otherwise, the “Company,” “we,” us” or “our” refers to Gladstone Capital Corporation; “Adviser” refers to Gladstone Management Corporation and “Administrator” refers to Gladstone Administration, LLC.

Gladstone Capital Corporation

We were incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001 and completed our initial public offering on August 24, 2001. We are externally managed and operate as a closed-end, non-diversified management investment company and have elected to be treated as a BDC under the 1940 Act. For federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. We intend to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment by meeting certain requirements, including minimum distribution requirements.

Gladstone Financial Corporation, or “Gladstone Financial,” a wholly-owned subsidiary of ours, was established on November 21, 2006 for the purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial acquired this license in February 2007. The license enables us, through Gladstone Financial, to make investments in accordance with the United States Small Business Administration guidelines for specialized small business investment companies. As of March 31, 2017, we had not made any investments in portfolio companies through Gladstone Financial.

Investment Objectives and Strategy

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% in debt investments and 10.0% in equity investments, at cost. As of March 31, 2017, our investment portfolio was made up of approximately 90.4% debt investments and 9.6% equity investments, at cost.

We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million) in the United States that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need

 



 

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funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity and have opportunistically made several co-investments with our affiliate Gladstone Investment Corporation, a BDC also managed by our Adviser, pursuant to an exemptive order granted by the SEC in July 2012. We believe this ability to co-invest will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (based on the one-month London Interbank Offered Rate, or “LIBOR”) or, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, and which may include a yield enhancement, such as a success fee or deferred interest provision and are primarily interest only with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of the portfolio company. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid together with the principal at maturity. This form of deferred interest is often called paid-in-kind, or “PIK,” interest. Typically, our equity investments take the form of preferred or common stock, limited liability company interests, or warrants or options to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.

As of March 31, 2017, our investment portfolio consisted of investments in 44 companies located in 21 states in 22 different industries with an aggregate fair value of $313.5 million. From our initial public offering in 2001 through March 31, 2017, we have invested in 211 different companies, while making 170 consecutive monthly or quarterly cash distributions to common stockholders totaling approximately $286.9 million. We expect that our investment portfolio will primarily include the following four categories of investments in private companies operating in the United States:

 

    Senior Secured Debt Securities: We seek to invest a portion of our assets in senior secured debt securities also known as senior loans, secured first lien loans, lines of credit and senior notes. Using its assets as collateral, the borrower typically uses senior debt to cover a substantial portion of the funding needs of its business. The senior secured debt security usually takes the form of first priority liens on all, or substantially all, of the assets of the business. Senior secured debt securities may include investments sourced from the syndicated loan market.

 

    Senior Secured Subordinated Debt Securities: We seek to invest a portion of our assets in secured second lien debt securities, also known as senior subordinated loans and senior subordinated notes. These secured second lien debts rank junior to the borrowers’ senior debt and may be secured by a first priority lien on a portion of the assets of the business and may be designated as second lien notes (including our participation and investment in syndicated second lien loans). Additionally, we may receive other yield enhancements, such as success fees, in connection with these senior secured subordinated debt securities.

 

    Junior Subordinated Debt Securities: We seek to invest a portion of our assets in junior subordinated debt securities, also known as subordinated loans, subordinated notes and mezzanine loans. These junior subordinated debts may be secured by certain assets of the borrower or unsecured loans. Additionally, we may receive other yield enhancements in addition to or in lieu of success fees, such as warrants to buy common and preferred stock or limited liability interests in connection with these junior subordinated debt securities.

 

   

Preferred and Common Equity/Equivalents: In some cases we will purchase equity securities which consist of preferred and common equity or limited liability company interests, or warrants or options to

 



 

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acquire such securities, and are in combination with our debt investment in a business. Additionally, we may receive equity investments derived from restructurings on some of our existing debt investments. In some cases, we will own a significant portion of the equity and in other cases we may have voting control of the businesses in which we invest.

Additionally, pursuant to the 1940 Act, we must maintain at least 70.0% of our total assets in qualifying assets, which generally include each of the investment types listed above. Therefore, the 1940 Act permits us to invest up to 30.0% of our assets in other non-qualifying assets. See “Regulation as a Business Development Company—Qualifying Assets” in the accompanying prospectus for a discussion of the types of qualifying assets in which we are permitted to invest pursuant to Section 55(a) of the 1940 Act.

Because the majority of the loans in our portfolio consist of term debt in private companies that typically cannot or will not expend the resources to have their debt securities rated by a credit rating agency, we expect that most, if not all, of the debt securities we acquire will be unrated. Investors should assume that these loans would be rated below what is today considered “investment grade” quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered higher risk, as compared to investment-grade debt instruments. In addition, many of the debt securities we hold typically do not amortize prior to maturity. With the exception of our policy to conduct our business as a BDC, these investment policies are not fundamental and may be changed without stockholder approval. See “Business—Investment Process” included in the accompanying prospectus for additional information on our investment practices.

Our Investment Adviser and Administrator

We are externally managed by the Adviser under an investment advisory and management agreement, or the Advisory Agreement. The Administrator, another of our affiliates, provides administrative services to us pursuant to a contractual agreement, or the Administration Agreement. Each of the Adviser and Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone and Terry Brubaker, our vice chairman and chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and serve as executive officers of the Adviser and the Administrator. The Administrator employs, among others, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator) and their respective staffs. The Adviser and Administrator have extensive experience in our lines of business and also provide investment advisory and administrative services, respectively, to our affiliates, including Gladstone Commercial Corporation, a publicly-traded real estate investment trust; Gladstone Investment Corporation, a publicly-traded BDC and RIC; and Gladstone Land Corporation, a publicly-traded real estate investment trust. In the future, the Adviser and Administrator may provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.

The Adviser was organized as a corporation under the laws of the State of Delaware on July 2, 2002, and is a registered investment adviser under the Investment Advisers Act of 1940, as amended. The Administrator was organized as a limited liability company under the laws of the State of Delaware on March 18, 2005. The Adviser and Administrator are headquartered in McLean, Virginia, a suburb of Washington, D.C. The Adviser also has offices in other states. We have been externally managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay the Adviser a base management fee and an incentive fee for its services.

 



 

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Recent Developments

Distributions to Stockholders

On April 11, 2017, our Board of Directors declared the following monthly cash distributions to common and preferred stockholders:

 

Record Date

   Payment Date    Distribution
per
Common
Share
     Distribution
per Series
2021 Term
Preferred
Share
 

April 21, 2017

   April 28, 2017    $ 0.07      $ 0.140625  

May 19, 2017

   May 31, 2017      0.07        0.140625  

June 21, 2017

   June 30, 2017      0.07        0.140625  
     

 

 

    

 

 

 

Total for the Quarter:

      $ 0.21      $ 0.421875  
     

 

 

    

 

 

 

Portfolio Activity

In April 2017, we invested $22.0 million in secured second lien debt to a business that provides services to local governments.

In May 2017, we invested an additional $4.1 million through a combination of secured second lien debt and equity in Lignetics, Inc., an existing portfolio company, to support an acquisition.

 



 

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THE OFFERING

 

Common stock offered   

Shares with an aggregate offering price of up to $48,800,000.

Common stock outstanding prior to this offering    25,517,866 shares.
Plan of Distribution    “At the market offering” that may be made from time to time through our sales agent, Cantor Fitzgerald. See “Plan of Distribution” beginning on page S-43 of this prospectus supplement.
  

On February 27, 2015, we established the at-the-market program to which this prospectus supplement relates and entered into separate equity distribution agreements with Cantor Fitzgerald and KeyBanc Capital Markets Inc., which we refer to collectively as the “Sales Agents”. On May 22, 2017, we amended and restated the Sales Agreement with Cantor Fitzgerald to continue the at-the-market program. Effective May 22, 2017, we terminated the KCM Agreement pursuant to which KeyBanc Capital Markets Inc. previously also served as our sales agent in connection with this at-the-market program.

 

Through the date of this prospectus supplement, 131,462 shares of common stock with an aggregate offering price of $1.2 million were issued and sold pursuant to the KCM Agreement; and no shares were issued and sold pursuant to the Sales Agreement. An aggregate offering price of up to $48.8 million of our common stock remains available for sale under this at-the-market offering.

Use of Proceeds    If we sell shares of our common stock with an aggregate offering price of $48.8 million, which is what remains available under the Sales Agreement, we anticipate that our net proceeds, after deducting Cantor Fitzgerald’s maximum commissions and estimated offering expenses payable by us, will be approximately $47.6 million. We intend to use the net proceeds from this offering to repay outstanding indebtedness under the Fifth Amended and Restated Credit Agreement, as further amended, or the “Credit Facility,” with KeyBank National Association, or “KeyBank,” as administrative agent, lead arranger and a lender, to fund new investment opportunities, and for other general corporate purposes. See “Use of Proceeds” on page S-15 of this prospectus supplement.
NASDAQ symbol    “GLAD”

 



 

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Distributions on common stock    We have paid monthly distributions to the holders of our common stock since October 2003 (and prior to that quarterly distributions since January 2002) and generally intend to continue to do so. The amount of monthly distributions on our common stock is generally determined by our Board of Directors on a quarterly basis and is based on management’s estimate of the fiscal year’s taxable income. See “Price Range of Common Stock and Distributions” beginning on page S-16 of this prospectus supplement. Because our distributions to common stockholders are based on estimates of taxable income that may differ from actual results, future distributions payable to our common stockholders may also include, and past distributions have included, a return of capital. Such return of capital distributions may increase an investor’s tax liability for capital gains upon the sale of our shares by reducing the investor’s tax basis for such shares. See “Risk Factors—Risks Related to an Investment in Our Securities—Distributions to our stockholders have included and may in the future include a return of capital” in the accompanying prospectus. Certain additional amounts may be deemed as distributed to common stockholders for income tax purposes and may also constitute a return of capital.
Tax matters    See “Material U.S. Federal Income Tax Considerations” beginning on page 114 of the accompanying prospectus for a discussion of material U.S. federal income tax considerations applicable to an investment in shares of our common stock.
Risk Factors    Investing in shares of our common stock involves substantial risks. Please carefully read and consider the information described under “Risk Factors” beginning on page S-11 of this prospectus supplement and beginning on page 12 of the accompanying prospectus before making an investment decision.

 



 

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FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “us” or “Gladstone Capital,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Gladstone Capital. The following percentages for annual expenses are annualized and have been calculated based on actual expenses incurred in the quarter ended March 31, 2017 and average net assets attributable to common stockholders for the quarter ended March 31, 2017.

 

Stockholder Transaction Expenses:

  

Sales load or other commission (as a percentage of offering price) (1)

     2.00 %

Offering expenses (as a percentage of offering price) (2)

     0.36 %

Dividend reinvestment plan expenses (3)

     None  

Total stockholder transaction expenses (as a percentage of offering price)

     2.36 %

Annual expenses (as a percentage of net assets attributable to common stock) (4) :

  

Base management fees (5)

     2.55 %

Loan Servicing fees (6)

     1.79 %

Incentive fees (20% of realized capital gains and 20% of pre-incentive fee net investment income) (7)

     2.01 %

Interest payments on borrowed funds (8)

     1.45 %

Dividend expense on mandatorily redeemable preferred stock (9)

     2.10 %

Other expenses (10)

     1.19 %
  

 

 

 

Total annual expenses (10)(11)

     11.09 %

 

(1)   Represents the estimated commission with respect to the shares of common stock being sold in this offering. Cantor Fitzgerald will be entitled to compensation up to 2.0% of the gross proceeds of the sale of any shares of our common stock under the Sales Agreement, with the exact amount of such compensation to be mutually agreed upon by us and Cantor Fitzgerald from time to time. There is no guarantee that there will be any additional sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus.
(2)   The percentage reflects estimated offering expenses of approximately $175,000 and assumes we sell all $48.8 million of common stock remaining under the Sales Agreement.
(3)   The expenses of the reinvestment plan are included in stock record expenses, a component of “other expenses.” The participants in the dividend reinvestment plan will bear a pro rata share of brokerage commissions incurred with respect to open market purchases, if any. See “Dividend Reinvestment Plan” in the accompanying prospectus for information on the dividend reinvestment plan.
(4)   The percentages presented in this table are gross of credits to any fees.
(5)   In accordance with the Advisory Agreement, our annual base management fee is 1.75% (0.4375% quarterly) of our average gross assets, which are defined as our total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. In accordance with the requirements of the SEC, the table above shows our base management fee as a percentage of average net assets attributable to common shareholders. For purposes of the table, the gross base management fee has been converted to 2.55% of the average net assets as of March 31, 2017 by dividing the total dollar amount of the management fee by our average net assets. The base management fee for the quarter ended March 31, 2017 before application of any credits was $1.4 million.

Under the Advisory Agreement, the Adviser has provided and continues to provide managerial assistance to our portfolio companies. It may also provide services other than managerial assistance to our portfolio companies and receive fees therefor. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding

 

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restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. Generally, at the end of each quarter, 100.0% of these fees are voluntarily, irrevocably and unconditionally credited against the base management fee that we would otherwise be required to pay to the Adviser; however, a small percentage of certain of such fees, primarily for valuation of the portfolio company, is retained by the Adviser in the form of reimbursement at cost for certain tasks completed by personnel of the Adviser. For the quarter ended March 31, 2017, the base management fee credit was $0.4 million. See Management—Certain Transactions– Investment Advisory and Management Agreement” in the accompanying prospectus.

(6)   In addition, the Adviser services, administers and collects on the loans held by Gladstone Business Loan, LLC, or “Business Loan,” in return for which the Adviser receives a 1.5% annual loan servicing fee payable monthly by Business Loan based on the monthly aggregate balance of loans held by Business Loan in accordance with the Credit Facility. For the three months ended March 31, 2017, the total loan servicing fee was $1.0 million. The entire loan servicing fee paid to the Adviser by Business Loan is generally voluntarily, irrevocably and unconditionally credited against the base management fee otherwise payable to the Adviser since Business Loan is a consolidated subsidiary of the Company, and overall, the base management fee (including any loan servicing fee) cannot exceed 1.75% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year pursuant to the Advisory Agreement. See “Management—Certain Transactions—Investment Advisory and Management Agreement” in the accompanying prospectus and footnote 7 below.
(7)   In accordance with our Advisory Agreement, the incentive fee consists of two parts: an income-based fee and a capital gains-based fee. The income-based fee is payable quarterly in arrears, and equals 20.0% of the excess, if any, of our pre-incentive fee net investment income that exceeds a 1.75% quarterly (7.0% annualized) hurdle rate of our net assets, subject to a “catch-up” provision measured as of the end of each calendar quarter. The “catch-up” provision requires us to pay 100.0% of our pre-incentive fee net investment income with respect to that portion of such income, if any, that exceeds the hurdle rate but is less than 125.0% of the quarterly hurdle rate (or 2.1875%) in any calendar quarter (8.75% annualized). The catch-up provision is meant to provide the Adviser with 20.0% of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 125.0% of the quarterly hurdle rate in any calendar quarter (8.75% annualized). The income-based incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash. Our pre-incentive fee net investment income used to calculate this part of the income-based incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee (see footnote 5 above). The capital gains-based incentive fee equals 20.0% of our net realized capital gains since our inception, if any, computed net of all realized capital losses and unrealized capital depreciation since our inception, less any prior payments, and is payable at the end of each fiscal year. We have not recorded any capital gains-based incentive fee from our inception through March 31, 2017. The income-based incentive fee for the quarter ended March 31, 2017 before application of any credits was $1.1 million.

From time to time, the Adviser has voluntarily, irrevocably and unconditionally agreed to waive a portion of the incentive fees, to the extent net investment income did not cover 100.0% of the distributions to common stockholders during the period. For the quarter ended March 31, 2017, the incentive fee credit was $1.1 million. There can be no guarantee that the Adviser will continue to credit any portion of the fees under the Advisory Agreement in the future

Examples of how the incentive fee would be calculated are as follows:

 

    Assuming pre-incentive fee net investment income of 0.55%, there would be no income-based incentive fee because such income would not exceed the hurdle rate of 1.75%.

 

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    Assuming pre-incentive fee net investment income of 2.00%, the income-based incentive fee would be as follows:

= 100.0% × (2.00% - 1.75%)

= 0.25%

 

    Assuming pre-incentive fee net investment income of 2.30%, the income-based incentive fee would be as follows:

= (100.0% × (“catch-up”: 2.1875% - 1.75%)) + (20.0% × (2.30% - 2.1875%))

= (100.0% × 0.4375%) + (20.0% × 0.1125%)

= 0.4375% + 0.0225%

= 0.46%

 

    Assuming net realized capital gains of 6% and realized capital losses and unrealized capital depreciation of 1%, the capital gains-based incentive fee would be as follows:

= 20.0% × (6.0% - 1.0%)

= 20.0% × 5.0%

= 1.0%

For a more detailed discussion of the calculation of the two-part incentive fee, see “Management—Certain Transactions—Investment Advisory and Management Agreement” in the accompanying prospectus.

 

(8)   Includes amortization of deferred financing costs. As of March 31, 2017, we had $54.1 million in borrowings outstanding under our Credit Facility.
(9)   Includes amortization of deferred financing costs related to our 6.75% Series 2021 Term Preferred Stock, or the “Series 2021 Term Preferred Stock,” as well as amounts paid to preferred stockholders during the three months ended March 31, 2017. See “Description of Our Securities—Preferred Stock—Series 2021 Term Preferred Stock” in the accompanying prospectus for additional information.
(10)   Includes our overhead expenses, including payments under the administration agreement based on our projected allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement. See “Management—Certain Transactions—Administrator Compensation” in the accompanying prospectus.
(11)   Total annualized gross expenses, based on actual amounts incurred for the quarter ended March 31, 2017, would be $23.6 million. After all voluntary, unconditional and irrevocable credits described in footnote 5, footnote 6 and footnote 7 above are applied to the base management fee and loan servicing fee, total annualized expenses after fee credits, based on actual amounts incurred for the quarter ended March 31, 2017, would be $13.7 million or 6.44% as a percentage of net assets.

 

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Examples

The following examples demonstrate the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our gross annual operating expenses would remain at the levels set forth in the table above and are gross of any credits to any fees. The examples below and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, incentive fees, if any, and other expenses) may be greater or less than those shown. While the example assumes, as required by the SEC, a 5.00% annual return, our performance will vary and may result in a return greater or less than 5.00%.

 

     1 Year      3 Years      5 Years      10 Years  

You would pay the following expenses on a $1,000 investment:

           

assuming a 5% annual return consisting entirely of ordinary income (1)(2)

   $ 117    $ 327      $ 510      $ 872  

assuming a 5% annual return consisting entirely of capital gains (2)(3)

   $ 125      $ 349      $ 540      $ 904  

 

(1)   For purposes of this example, we have assumed that the entire amount of the assumed 5.0% annual return would constitute ordinary income as we have not historically realized positive capital gains (computed net of all realized capital losses) on our investments. Because the assumed 5.0% annual return is significantly below the hurdle rate of 7.0% (annualized) that we must achieve under the investment advisory and management agreement to trigger the payment of an income-based incentive fee, we have assumed, for purposes of this example, that no income-based incentive fee would be payable if we realized a 5.0% annual return on our investments.
(2)   While the example assumes reinvestment of all dividends and distributions at NAV, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the distribution payable to a participant by the average cost of shares of our common stock purchased in the open market in the period beginning on or before the payment date of the distribution and ending when the plan agent has expended for such purchases all of the cash that would have been otherwise payable to participants. See “Dividend Reinvestment Plan” in the accompanying prospectus for additional information regarding our dividend reinvestment plan.
(3)   For purposes of this example, we have assumed that the entire amount of the assumed 5.0% annual return would constitute capital gains and that no accumulated capital losses or unrealized depreciation would have to be overcome first before a capital gains based incentive fee is payable.

 

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RISK FACTORS

You should carefully consider the risks described below and all other information contained in this prospectus supplement and the accompanying prospectus before making a decision to purchase our Shares. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our Securities and NAV of our common stock could decline, and you may lose all or part of your investment.

Our management will have broad discretion in the use of the net proceeds from this offering and may allocate the net proceeds from this offering in ways that you and other stockholders may not approve.

Our management will have broad discretion in the use of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used in ways with which you may not agree or may not otherwise be considered appropriate. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure of our management to use these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.

We may be unable to invest a significant portion of the net proceeds of this offering on acceptable terms.

Delays in investing the net proceeds raised in an offering or from exiting an investment, prepayment of an investment or other capital source may cause our performance to be worse than that of other fully invested BDCs or other lenders or investors pursuing comparable investment strategies. We cannot assure you that we will be able to identify any investments that meet our investment objective or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds from any offering, from exiting an investment, prepayment of an investment or other capital source on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.

Market interest rates may have an effect on the value of our common stock.

One of the factors that will influence the price of our common stock will be the distribution yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our common stock to expect a higher distribution yield and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decrease.

Our most recent NAV was calculated on March 31, 2017 and our NAV when calculated as of June 30, 2017 may be higher or lower.

As of March 31, 2017, our NAV per share was $8.33, which was based on the fair value our investments that were reviewed and approved by the Valuation Committee and Board of Directors. NAV per share as of June 30, 2017, and following quarters, may be higher or lower than $8.33 based on potential changes in valuations, issuances of securities, or distributions paid and earnings for the quarter then ended. Our Board of Directors determines the fair value of our portfolio investments on a quarterly basis, and if our June 30, 2017 fair value is less than the March 31, 2017 fair value, we will record an unrealized loss on our investment portfolio. If the fair value is greater, we will record an unrealized gain on our investment portfolio. Upon publication of our next

 

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quarterly NAV per share determination (generally in our next quarterly report on Form 10-Q), the market price of our common stock may fluctuate materially.

Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their NAV, which may restrict our ability to grow and adversely impact our ability to increase or maintain our distributions.

Shares of closed-end investment companies, including BDCs, frequently trade at a discount from NAV. This characteristic of shares of closed-end investment companies is separate and distinct from the risk that our NAV per share will decline. As with any stock, the price of our shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Whether investors will realize gains or losses upon the sale of our shares will not depend directly upon our NAV, but will depend upon the market price of the shares at the time of sale. Since the market price of our shares will be affected by such factors as the relative demand for and supply of the shares in the market, general market and economic conditions and other factors beyond our control, we cannot predict whether the shares will trade at, below or above our NAV.

Under the 1940 Act, we are generally not able to issue additional shares of our common stock at a price below NAV per share to purchasers other than our existing stockholders through a rights offering without first obtaining the approval of our common stockholders and our independent directors. At our 2017 Annual Meeting of Stockholders, we did not seek stockholder approval to issue shares of our common stock below NAV. Thus, for as long as our common stock may trade below NAV, we will be subject to significant constraints on our ability to raise capital through the issuance of common stock, including shares of common stock offered under this prospectus supplement. Although we have been able to secure access to additional liquidity, including through the Credit Facility and equity offerings, our inability to issue shares of common stock below NAV may limit our ability to raise capital needed to grow and achieve our investment objectives.

Additionally, when our common stock is trading below its NAV per share, our dividend yield may exceed the weighted average returns that we would expect to realize on new investments that would be made with the proceeds from the sale of such stock, making it unlikely that we would determine to issue additional shares in such circumstances. Therefore, an extended period of time in which we are unable to raise capital may restrict our ability to grow and adversely impact our ability to increase or maintain our distributions.

Rising interest rates may negatively impact our investments and have an adverse effect on our business, financial condition, results of operations, and cash flows.

In December 2016, the Federal Reserve again raised the federal funds rate by 0.25%, with additional gradual increases expected to occur over the next year. A substantial portion of our debt investments have variable interest rates that reset periodically and are generally based on LIBOR with a floor, so an increase in interest rates above the applicable floor may make it more difficult for our portfolio companies to meet their debt servicing obligations to us, which could result in a default under their loan documents with us. To the extent that interest rates increase, this may negatively impact the operating performance of our portfolio companies as they shift cash from other productive uses to the payment of interest or may cause our portfolio companies to refinance or otherwise repay our debt investments earlier than they otherwise would, requiring us to incur management time and expense to re-deploy such proceeds, including on terms that may not be as favorable as our existing loans. There can be no guarantee the Federal Reserve will raise rates at the gradual pace they originally proposed.

The current U.S. presidential administration, or the “Administration,” may make substantial changes to certain regulations that may adversely affect our business.

The Administration has called for substantial change to fiscal and tax policies, which may include comprehensive tax reform, including significant changes to taxation of business entities and the deductibility of interest expense.

 

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On February 3, 2017, President Trump signed an executive order calling for the Administration to review U.S. financial laws and regulations in order to determine their consistency with a set of core principles identified in the order. Some areas identified as subject to potential change, amendment or repeal include the Dodd-Frank Act, the Consumer Protection Act, the Volcker Rule, credit risk retention requirements and the authorities of the Fed and the Financial Stability Oversight Council. We cannot predict which, if any, of these or other actions will be taken or, if taken, their effect on the financial stability of the credit market in which we operate. Such actions could have a significant adverse effect on our business, financial condition, results of operations, and cash flows.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute “forward-looking statements.” These statements may relate to future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include:

 

    the recurrence of adverse changes in the economy and the capital markets, including stock price volatility;

 

    risks associated with negotiation and consummation of pending and future transactions;

 

    the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or Robert L. Marcotte;

 

    changes in our investment objective and strategy;

 

    availability, terms (including the possibility of interest rate volatility) and deployment of capital;

 

    changes in our industry, interest rates, exchange rates or the general economy;

 

    our business prospects and the prospects of our portfolio companies;

 

    the degree and nature of our competition;

 

    our ability to maintain our qualification as a RIC and as a BDC; and

 

    those factors described in the “Risk Factors” section of this prospectus supplement and the accompanying prospectus.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus supplement or the accompanying prospectus. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.

 

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USE OF PROCEEDS

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may by transactions that are deemed to be part of an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act, by means of ordinary brokers’ transactions that qualify for delivery of a prospectus to NASDAQ in accordance with Rule 153 under the Securities Act or such other sales as may be agreed by us and Cantor Fitzgerald, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at other negotiated prices. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in this paragraph depending on, among other things, the market price of our common stock at the time of any such sale. As a result, the actual net proceeds we receive may be more or less than the amount of net proceeds estimated in this prospectus supplement. However, assuming the sale of the remaining $48.8 million of common stock offered under this prospectus supplement and the accompanying prospectus, we anticipate that our net proceeds from this offering will be approximately $47.6 million, after deducting the maximum estimated sales commission payable to Cantor Fitzgerald and our estimated offering expenses of $175,000. Through the date of this prospectus supplement, shares of common stock with an aggregate offering price of $1.2 million have been issued and sold pursuant to this at-the-market program, and net proceeds to us (net of sales agent commissions and other offering expenses borne by us) from our at-the-market program were approximately $1.0 million.

We intend to use the net proceeds from this offering to repay a portion of the amount outstanding under the Credit Facility, to fund new investment opportunities, and for other general corporate purposes. As of the date of this prospectus supplement, we had $80.2 million outstanding under the Credit Facility. Advances under the Credit Facility generally bear interest at a 30-day LIBOR plus 3.25% per annum, with a commitment fee of 0.5% per annum on undrawn amounts. The Credit Facility has a revolving period end date of January 19, 2019. If our Credit Facility is not renewed or extended by January 19, 2019, all principal and interest will be due and payable on or before April 19, 2020.

We intend to re-borrow under our Credit Facility to make investments in portfolio companies in accordance with our investment objectives depending on the availability of appropriate investment opportunities consistent with our investment objectives and market conditions.

Pending such uses, we will invest a portion of the net proceeds of this offering in short-term investments, such as cash and cash equivalents, which we expect will earn yields substantially lower than the interest income that we anticipate receiving in respect of investments in accordance with our investment objectives.

 

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

We currently intend to distribute in the form of cash dividends, for each taxable year, a minimum of 90% of our annual ordinary income and short-term capital gains, if any, to our stockholders in the form of monthly dividends. We intend to retain long-term capital gains and treat them as deemed distributions for tax purposes. We report the estimated tax characterization of each dividend when declared while the actual tax characterization of dividends for each calendar year are reported to each stockholder on IRS Form 1099-DIV. There is no assurance that we will achieve investment results or maintain a tax status that will permit any specified level of cash distributions or year-to-year increases in cash distributions. At the option of a holder of record of common stock, all cash distributions paid with respect to our common stock can be reinvested automatically under our dividend reinvestment plan in additional whole and fractional shares of our common stock. A stockholder whose shares are held in the name of a broker or other nominee should contact the broker or nominee regarding participation in a dividend reinvestment plan. See “Risk Factors—Risks Related to Our Regulation and Structure—We will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification;” “Dividend Reinvestment Plan;” and “Material U.S. Federal Income Tax Considerations” in the accompanying prospectus.

Our common stock is quoted on NASDAQ under the symbol “GLAD.” Our common stock has historically traded at prices both above and below its NAV. There can be no assurance that any premium to NAV will be attained or maintained. As of May 19, 2017 there were 39 stockholders of record, meaning individuals or entities that we carry in our records as the registered holder (although not necessarily the beneficial owner) of our common stock.

The following table sets forth the range of high and low intraday sale prices of our common stock as reported on the NASDAQ and the distributions declared by us for the last two completed fiscal years and the current fiscal year through May 19, 2017.

Common Share Price Data

 

     NAV (1)      High      Low      Distributions
Declared
     (Discount)
or
Premium
of High
Sales
Price to
NAV (2)
    (Discount)
or
Premium
of
Low Sales
Price to
NAV (2)
 

Fiscal Year ended September 30, 2015

                

First Quarter

   $ 9.31      $ 9.41      $ 8.02      $ 0.21        1.1 %     (13.9 )%

Second Quarter

     9.55        9.10        7.25        0.21        (4.7 )     (24.1 )

Third Quarter

     9.49        8.99        7.84        0.21        (5.3 )     (17.4 )

Fourth Quarter

     9.06        9.25        7.58        0.21        2.1       (16.3 )

Fiscal Year ended September 30, 2016

                

First Quarter

     8.38        9.09        6.39        0.21        8.5       (23.8 )

Second Quarter

     7.92        7.59        4.71        0.21        (4.2 )     (40.5 )

Third Quarter

     7.95        7.67        6.80        0.21        (3.5 )     (14.5 )

Fourth Quarter

     8.62        8.75        7.24        0.21        1.5       (16.0 )

Fiscal Year ending September 30, 2017

                

First Quarter

     8.36        9.62        7.33        0.21        15.1       (12.3

Second Quarter

     8.33        9.92        8.67        0.21        19.1       4.1  

Third Quarter (through May 19, 2017)

     *        10.12        9.15        0.21        *       *  

 

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(1) NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low intraday sale prices. The NAV per shares shown are based on outstanding shares at the end of each period.
(2) The (discounts) premiums to NAV per share set forth in these columns represent the high or low, as applicable, intraday sale price per share for the relevant quarter minus the NAV per share as of the end of such quarter, and therefore may not reflect the (discount) premium to NAV per share on the date of the high and low intraday sale prices.
* Not yet available, as the NAV per share as of the end of this quarter has not yet been determined.

 

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CONSOLIDATED SELECTED FINANCIAL DATA

The following consolidated selected financial data for the fiscal years ended September 30, 2016, 2015, 2014, 2013 and 2012 are derived from our audited consolidated financial statements. The consolidated selected financial data for the six months ended March 31, 2017 and 2016 are derived from our unaudited consolidated financial statements included in this prospectus supplement. The other data included in the second table below is also unaudited. The data should be read in conjunction with our Consolidated Financial Statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus supplement and the accompanying prospectus.

(dollar amounts in thousands, except per share data)

 

    Six Months Ended
March 31,
    Year Ended September 30,  
    2017     2016     2016     2015     2014     2013     2012  

Statement of Operations Data:

             

Total Investment Income

  $ 18,767     $ 19,518     $ 39,112     $ 38,058     $ 36,585     $ 36,154     $ 40,322  

Total Expenses, Net of Credits from Adviser

    8,201       9,841       19,625       20,358       18,217       17,768       21,278  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income

    10,566       9,677       19,487       17,700       18,368       18,386       19,044  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Realized and Unrealized (Loss) Gain on Investments, Borrowings and Other

    (4,994 )     (24,521 )     (8,120 )     (9,216 )     (7,135 )     13,833       (27,052 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

  $ 5,572     $ (14,844 )   $ 11,367     $ 8,484     $ 11,233     $ 32,219     $ (8,008 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Net Investment Income per Common Share—Basic and Diluted (A)

  $ 0.42     $ 0.42     $ 0.84     $ 0.84     $ 0.87     $ 0.88     $ 0.91  

Net Increase (Decrease) in Net Assets Resulting from Operations per Common Share—Basic and Diluted (A)

    0.22       (0.64 )     0.49       0.40       0.53       1.53       (0.38 )

Distributions Declared Per Common Share (B)

    0.42       0.42       0.84       0.84       0.84       0.84       0.84  

Statement of Assets and Liabilities Data:

             

Total Assets

  $ 328,637     $ 311,000     $ 337,178     $ 382,482     $ 301,429     $ 295,091     $ 293,402  

Net Assets

    212,670       185,204       201,207       191,444       199,660       205,992       188,564  

Net Asset Value Per Common Share

    8.33       7.92       8.62       9.06       9.81       9.81       8.98  

Common Shares Outstanding

    25,517,866       23,385,836       23,344,422       21,131,622       21,000,160       21,000,160       21,000,160  

Weighted Common Shares Outstanding—Basic and Diluted

    25,144,358       23,048,110       23,200,642       21,066,844       21,000,160       21,000,160       21,011,123  

Senior Securities Data:

             

Borrowings under Credit Facility, at cost (C)

  $ 54,100     $ 57,300     $ 71,300     $ 127,300     $ 36,700     $ 46,900     $ 58,800  

Mandatorily redeemable preferred stock (C)

    61,000       61,000       61,000       61,000       61,000       38,497       38,497  

 

(A)   Per share data is based on the weighted average common stock outstanding for both basic and diluted.
(B)   The tax character of our distributions is determined on an annual basis.

 

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(C)   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding our level of indebtedness.

 

    Six Months Ended
March 31,
    Year Ended September 30,  
    2017     2016     2016     2015     2014     2013     2012  

Other Unaudited Data:

             

Number of Portfolio Companies at Period End

    44       44       45       48       45       47       50  

Average Size of Portfolio Company Investment at Cost

  $ 8,521     $ 8,460     $ 8,484     $ 8,547     $ 7,762     $ 7,069     $ 7,300  

Principal Amount of New Investments

    56,241       22,300       79,401       102,299       81,731       80,418       45,050  

Proceeds from Loan Repayments and Investments Sold

    65,067       78,036       121,144       40,273       72,560       117,048       73,857  

Weighted Average Yield on Investments (D)

    11.4 %     11.2 %     11.1 %     10.93 %     11.47 %     11.63 %     11.25 %

Total Return (E)

    22.35       (3.02 )     11.68       2.40       9.62       9.90       41.39  

 

(D)   Weighted average yield on investments equals interest income on investments divided by the weighted average interest-bearing principal balance throughout the period.
(E)   Total return equals the change in the ending market value of our common stock from the beginning of the period, taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9—Distributions to Common Stockholders elsewhere in the accompanying prospectus.

 

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SELECTED QUARTERLY FINANCIAL DATA

(UNAUDITED)

The following tables set forth certain quarterly financial information for each of the eight quarters in the two years ended September 30, 2016 and the first two quarters of the fiscal year ending September 30, 2017. The information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the past fiscal year or for any future quarter.

 

     Quarter Ended  
     December 31,
2016
     March 31,
2017
 

Total investment income

   $ 9,974      $ 8,793  

Net investment income

     5,207        5,359  

Net increase (decrease) in net assets resulting from operations

     916        4,656  

Net increase (decrease) in net assets resulting from operations per weighted average common share (basic and diluted)

   $ 0.04      $ 0.18  

 

     Quarter Ended  
     December 31,
2015
    March 31,
2016
    June 30,
2016
    September 30,
2016
 

Total investment income

   $ 10,060     $ 9,456     $ 9,844     $ 9,750  

Net investment income

     4,759       4,917       4,907       4,905  

Net increase (decrease) in net assets resulting from operations

     (8,704 )     (6,139 )     5,516       20,697  

Net increase (decrease) in net assets resulting from operations per weighted average common share (basic and diluted)

   $ (0.38 )   $ (0.26 )   $ 0.24     $ 0.89  
     Quarter Ended  
     December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
 

Total investment income

   $ 8,726     $ 9,223     $ 9,935     $ 10,174  

Net investment income

     3,691       3,693       4,836       5,480  

Net increase (decrease) in net assets resulting from operations

     331       9,542       3,307       (4,696 )

Net increase (decrease) in net assets resulting from operations per weighted average common share (basic and diluted)

   $ 0.02     $ 0.45     $ (0.16 )   $ (0.22 )

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the notes thereto contained elsewhere in this prospectus supplement and the accompanying prospectus. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods. Except per share amounts or unless otherwise indicated, dollar amounts in the tables included herein are in thousands.

OVERVIEW

General

We were incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under Subchapter M of the Code. As a BDC and a RIC, we are subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of March 31, 2017, our investment portfolio was made up of approximately 90.4% debt investments and 9.6% equity investments, at cost.

We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million) in the United States that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity and have opportunistically made several co-investments with our affiliate Gladstone Investment Corporation, a BDC also managed by our Adviser, pursuant to an exemptive order granted by the SEC. We believe this ability to co-invest will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

We are externally managed by the Adviser, an investment adviser registered with the SEC and an affiliate of ours, pursuant to the Advisory Agreement. The Adviser manages our investment activities. We have also entered into the Administration Agreement with the Administrator, an affiliate of ours and the Adviser, whereby we pay separately for administrative services.

 

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Additionally, since February 2011, Gladstone Securities, LLC, or “Gladstone Securities,” a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee.

Our shares of common stock and the Series 2021 Term Preferred Stock are traded on NASDAQ under the trading symbols “GLAD” and “GLADO,” respectively.

Business

Portfolio and Investment Activity

During the six months ended March 31, 2017, we invested $56.2 million in five new portfolio companies and extended $5.7 million of investments to existing portfolio companies. In addition, during the six months ended March 31, 2017, we exited six portfolio companies through sales and early payoffs. We received a total of $65.1 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits as well as existing portfolio companies during the six months ended March 31, 2017. This activity resulted in a net reduction in our overall portfolio of one portfolio company to 44 and a net decrease of 1.8% in our portfolio at cost since September 30, 2016. We intend to continue to make new conservative investments in businesses with steady cash flows. We are focused on building our pipeline and making investments that meet our objectives and strategies and that provide appropriate returns, in light of the accompanying risks. Since our initial public offering in August 2001 and through March 31, 2017, we have made 453 different loans to, or investments in, 211 companies for a total of approximately $1.6 billion, before giving effect to principal repayments on investments and divestitures.

During the six months ended March 31, 2017, the following significant transactions occurred:

 

    In October 2016, RP Crown Parent, LLC paid off at par for proceeds of $2.0 million.

 

    In October 2016, our $3.9 million secured first lien debt investment in Vertellus Specialties, Inc. was restructured. As a result of the restructure, we received a new $1.1 million secured second lien debt investment in Vertellus Holdings LLC and common equity with a cost basis of $3.0 million.

 

    In November 2016, we completed the sale of substantially all the assets of RBC Acquisition Corp., or “RBC,” for net proceeds of $36.3 million, which resulted in a realized loss of $2.3 million. In connection with the sale, we received success fee income of $1.1 million and net receivables of $1.5 million, which are recorded within Other assets, net.

 

    In November 2016, we invested $5.2 million in Sea Link International IRB, Inc. through secured second lien debt and equity.

 

    In December 2016, we sold our investment in Behrens Manufacturing, LLC, or “Behrens,” which resulted in success fee income of $0.4 million and a realized gain of $2.5 million. In connection with the sale, we received net cash proceeds of $8.2 million, including the repayment of our debt investment of $4.3 million at par.

 

    In December 2016, we invested $7.0 million in Vacation Rental Pros Property Management, LLC through secured second lien debt.

 

    In December 2016, Autoparts Holdings Limited paid off at par for proceeds of $0.7 million.

 

    In December 2016, we invested $5.0 million in LDiscovery, LLC through secured second lien debt.

 

    In February 2017, we invested $10.0 million in Belnick, Inc. through secured second lien debt.

 

    In February 2017, we invested $29.0 million in NetFortris Corp. through secured first lien debt.

 

    In February 2017, Vitera Healthcare Solutions, LLC paid off at par for proceeds of $4.5 million.

 

    In March 2017, LCR Contractors, LLC paid off at par for net cash proceeds of $8.6 million. In connection with the payoff, we received a prepayment fee of $0.2 million.

 

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Subsequent to March 31, 2017, the following significant transactions occurred:

 

    In April 2017, we invested $22.0 million in secured second lien debt to a business that provides services to local governments.

 

    In May 2017, we invested an additional $4.1 million through a combination of secured second lien debt and equity in Lignetics, Inc., an existing portfolio company, to support an acquisition.

Capital Raising

We have been able to meet our capital needs through extensions of and increases to the Credit Facility and by accessing the capital markets in the form of public equity offerings. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to January 2019, and currently have a total commitment amount of $170.0 million. Additionally, we issued 2.3 million shares of common stock for gross proceeds of $19.8 million in October 2015, inclusive of the November 2015 overallotment, and we issued approximately 2.2 million shares of our common stock for gross proceeds of $17.3 million in October 2016, inclusive of the November 2016 overallotment. Refer to “—Liquidity and Capital Resources—Equity—Common Stock” for further discussion of our common stock and “—Liquidity and Capital Resources — Revolving Credit Facility” for further discussion of our Credit Facility.

Although we were able to access the capital markets over the last year, we believe uncertain market conditions continue to affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity. During times of increased price volatility, our common stock may be more likely to trade at a price below our NAV per share, which is not uncommon for BDCs like us.

When our stock trades below NAV per common share, as it has often done over the last several years, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering. At our annual meeting of stockholders held on February 11, 2016, our stockholders approved a proposal which authorizes us to sell shares of our common stock at a price below our then current NAV per common share subject to certain limitations (including, but not limited to, that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each such sale) for a period of one year from the date of approval, provided that our Board of Directors makes certain determinations prior to any such sale. We completed the abovementioned October 2016 common stock offering as a result of the stockholder approval of the proposal at our 2016 Annual Meeting of Stockholders and additional Board of Directors approval. We did not request that our stockholders approve the Company’s ability to issue shares of common stock at a price below NAV at our annual meeting of stockholders held on February 9, 2017. Should we decide to issue shares of common stock at a price below NAV, we will seek the requisite approval of our stockholders at such time.

On May 19, 2017, the closing market price of our common stock was $9.87, an 18.5% premium to our March 31, 2017 NAV per share of $8.33.

Regulatory Compliance

Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage ratio (as defined in Sections 18 and 61 of the 1940 Act) of at least 200% on our “senior securities representing indebtedness” and our “senior securities that are stock.” As of March 31, 2017, our asset coverage ratio on our “senior securities representing indebtedness” was 599.1% and our asset coverage ratio on our “senior securities that are stock” was 282.1%.

 

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Recent Developments

Distributions

On April 11, 2017, our Board of Directors declared the following monthly cash distributions to common and preferred stockholders:

 

Record Date

   Payment Date      Distribution
per
Common
Share
     Distribution
per Series
2021 Term
Preferred
Share
 

April 21, 2017

     April 28, 2017      $ 0.07      $ 0.140625  

May 19, 2017

     May 31, 2017        0.07        0.140625  

June 21, 2017

     June 30, 2017        0.07        0.140625  
     

 

 

    

 

 

 
Total for the Quarter:       $ 0.21      $ 0.421875  
     

 

 

    

 

 

 

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2017, to the Three Months Ended March 31, 2016

 

     Three Months Ended March 31,  
     2017     2016     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 8,588     $ 8,668     $ (80 )     (0.9 )%

Other income

     205       788       (583 )     (74.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     8,793       9,456       (663 )     (7.0
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     1,359       1,362       (3 )     (0.2

Loan servicing fee

     955       973       (18 )     (1.8

Incentive fee

     1,070       1,064       6       0.6  

Administration fee

     286       277       9       3.2  

Interest expense on borrowings

     587       633       (46 )     (7.3

Dividend expense on mandatorily redeemable preferred stock

     1,029       1,029       —       0.0  

Amortization of deferred financing fees

     274       273       1       0.4  

Other expenses

     349       752       (403 )     (53.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, before credits from Adviser

     5,909       6,363       (454 )     (7.1

Credit to base management fee—loan servicing fee

     (955 )     (973 )     18       (1.8

Credits to fees from Adviser—other

     (1,520 )     (851 )     (669 )     78.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     3,434       4,539       (1,105 )     (24.3
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,359       4,917       442       9.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss) on investments

     45       (5,460 )     5,505       (100.8

Net realized loss on other

         (61 )     61       100.0  

Net unrealized depreciation of investments

     (647 )     (5,596 )     4,949       88.4  

Net unrealized (depreciation) appreciation of other

     (101 )     61       (162 )     (265.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from investments and other

     (703 )     (11,056 )     10,353       93.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 4,656     $ (6,139 )   $ 10,795       175.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

NM = Not Meaningful

 

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Investment Income

Interest income decreased slightly by 0.9% for the three months ended March 31, 2017, as compared to the prior year period. This decrease was due primarily to exits that occurred during the first quarter of fiscal year 2017. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended March 31, 2017, was $305.7 million, compared to $312.6 million for the prior year period, a decrease of 2.2%. The weighted average yield on our interest-bearing investment portfolio is based on the current stated interest rate on interest-bearing investments which increased to 11.4% for the three months ended March 31, 2017, compared to 11.2% for the three months ended March 31, 2016, inclusive of any allowances on interest receivables made during those periods.

As of March 31, 2017, certain loans to two portfolio companies were on non-accrual status, with an aggregate debt cost basis of approximately $24.4 million, or 7.2%, of the cost basis of all debt investments in our portfolio. As of March 31, 2016, certain loans to one portfolio company were on non-accrual status, with an aggregate debt cost basis of approximately $22.6 million, or 6.1%, of the cost basis of all debt investments in our portfolio.

For the three months ended March 31, 2017, other income decreased by 74.0% as compared to the prior year period. For the three months ended March 31, 2017, other income consisted primarily of $0.2 million in prepayment fees received. Other income for the three months ended March 31, 2016, consisted primarily of $0.6 million in success fees recognized and $0.2 million in dividend income received.

The following tables list the investment income for our five largest portfolio company investments at fair value during the respective periods:

 

     As of March 31, 2017     Three Months Ended
March 31, 2017
 

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

NetFortris Corp.

   $ 29,000        9.3 %   $ 291        3.3 %

IA Tech, LLC

     23,460        7.5       690        7.8  

WadeCo Specialties, Inc.

     18,332        5.8       476        5.4  

United Flexible, Inc.

     17,798        5.7       560        6.4  

Lignetics, Inc.

     14,165        4.5       420        4.8  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     102,755        32.8       2,437        27.7  

Other portfolio companies

     210,762        67.2       6,356        72.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Portfolio

   $ 313,517        100.0 %   $ 8,793        100.0 %
  

 

 

    

 

 

   

 

 

    

 

 

 
     As of March 31, 2016     Three Months Ended
March 31, 2016
 

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

WadeCo Specialties, Inc.

   $ 20,266        6.9 %   $ 514        5.4 %

RBC Acquisition Corp.

     20,685        7.0       752        8.0  

United Flexible, Inc.

     17,239        5.9       512        5.4  

Francis Drilling Fluids, Ltd.

     15,840        5.4       704        7.4  

Lignetics, Inc.

     16,121        5.5       425        4.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     90,151        30.7       2,907        30.7  

Other portfolio companies

     203,277        69.3       6,549        69.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Portfolio

   $ 293,428        100.0 %   $ 9,456        100.0 %

 

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Expenses

Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, decreased by 24.3% for the three months ended March 31, 2017, as compared to the prior year period. This decrease was primarily due to a decrease in the net incentive fee and a decrease in professional fees and shareholder related costs.

Interest expense on borrowings decreased by $46,000, or 7.3%, during the three months ended March 31, 2017, as compared to the prior year period, due primarily to a decrease in the borrowings outstanding under our Credit Facility during the period due to the sales and payoffs discussed above. The weighted average balance outstanding under our Credit Facility during the three months ended March 31, 2017, was $42.4 million, as compared to $52.7 million in the prior year period, a decrease of 19.5%.

Net base management fee earned by the Adviser decreased by $0.3 million, or 21.8%, during the three months ended March 31, 2017, as compared to the prior year period, resulting from an increase in portfolio company fee credits. Our Board of Directors accepted a non-contractual, unconditional and irrevocable credit of $1.1 million from the Adviser to reduce the income-based incentive fee to the extent net investment income for the quarter ended March 31, 2017 did not cover 100.0% of the distributions to common stockholders during the period. The credit granted for the quarter ended March 31, 2016 was $0.7 million.

The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4—Related Party Transactions of the notes to our Consolidated Financial Statements found elsewhere in this prospectus supplement and are summarized in the following table:

 

     Three Months Ended
March 31,
 
     2017     2016  

Average total assets subject to base management fee (A)

   $ 310,628     $ 311,200  

Multiplied by prorated annual base management fee of 1.75%

     0.4375 %     0.4375 %
  

 

 

   

 

 

 

Base management fee (B)

   $ 1,359     $ 1,362  

Portfolio company fee credit

     (434 )     (169 )

Senior syndicated loan fee credit

     (9 )     (22 )
  

 

 

   

 

 

 

Net Base Management Fee

   $ 916     $ 1,171  
  

 

 

   

 

 

 

Loan servicing fee (B)

     955       973  

Credit to base management fee—loan servicing fee (B)

     (955 )     (973 )
  

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —     $ —  
  

 

 

   

 

 

 

Incentive fee (B)

     1,070       1,064  

Incentive fee credit

     (1,077 )     (661 )
  

 

 

   

 

 

 

Net Incentive Fee

   $ (7 )   $ 403  
  

 

 

   

 

 

 

Portfolio company fee credit

     (434 )     (169 )

Senior syndicated loan fee credit

     (9 )     (22 )

Incentive fee credit

     (1,077 )     (661 )
  

 

 

   

 

 

 

Credits to Fees From Adviser—other (B)

   $ (1,520 )   $ (852 )
  

 

 

   

 

 

 

 

(A)   Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B)   Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations found elsewhere in this prospectus supplement.

 

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Net Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

For the three months ended March 31, 2017, we recorded a net realized gain on investments of $45,000, which resulted primarily from escrow payments received from a previously exited investment. For the three months ended March 31, 2016, we recorded a net realized loss on investments of $5.5 million, which resulted primarily from the restructure of our investment in Targus Group International, Inc., or “Targus,” during the period.

Net Unrealized Appreciation (Depreciation) of Investments

The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended March 31, 2017, were as follows:

 

     Three Months Ended March 31, 2017  

Portfolio Company

   Realized Gain
(Loss)
     Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
    Net
Gain (Loss)
 

SourceHOV, LLC

   $ —      $ 1,492     $ —     $ 1,492  

Defiance Integrated Technologies, Inc.

     —        1,026       —       1,026  

Lignetics, Inc.

     —        357       —       357  

New Trident Holdcorp, Inc.

     —        328       —       328  

Meridian Rack & Pinion Inc.

     —        317       —       317  

Edge Adhesives Holdings, Inc.

     —        259       —       259  

Vision Government Solutions, Inc.

     —        224       —       224  

The Mochi Ice Cream Company

     —        148       —       148  

WadeCo Specialties, Inc.

     —        139       —       139  

IA Tech, LLC

     —        115       —       115  

Vitera Healthcare Solutions, LLC

     —        —       115       115  

PIC 360, LLC

     —        (184 )     —       (184 )

Sunshine Media Holdings

     —        (221 )     —       (221 )

Targus Group International, Inc.

     —        (357 )     —       (357 )

United Flexible, Inc.

     —        (397 )     —       (397 )

Flight Fit N Fun LLC

     —        (490 )     —       (490 )

Vertellus Specialties Inc.

     —        (670 )     —       (670 )

Francis Drilling Fluids, Ltd.

     —        (748 )     —       (748 )

LWO Acquisitions Company LLC

     —        (791 )     —       (791 )

Alloy Die Cast, Co.

     —        (1,244 )     —       (1,244 )

Other, net (<$250)

     45        31       (96 )     (20 )
  

 

 

    

 

 

   

 

 

   

 

 

 

Total:

   $ 45      $ (666 )   $ 19     $ (602 )
  

 

 

    

 

 

   

 

 

   

 

 

 

The largest driver of our net unrealized depreciation for the three months ended March 31, 2017 was a decline in financial and operational performance on certain portfolio companies and, to a lesser extent, decreases in comparable multiples used in valuations, most notably, Alloy Die Cast, Co., or “ADC,” of $1.2 million and LWO Acquisitions Company LLC of $0.8 million. This depreciation was partially offset by the appreciation on SourceHOV, LLC, or “Source,” of $1.5 million and Defiance Integrated Technologies, Inc., or “Defiance,” of $1.0 million.

 

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The net realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended March 31, 2016, were as follows:

 

     Three Months Ended March 31, 2016  

Portfolio Company

   Realized Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
     Net
Gain (Loss)
 

Behrens Manufacturing, LLC

   $ —     $ 1,026     $ —      $ 1,026  

Sunshine Media Holdings

     —       457       —        457  

Ashland Acquisitions, LLC

     —       351       —        351  

Meridian Rack & Pinion Inc.

     —       310       —        310  

Alloy Die Cast, Co.

     —       275       —        275  

Mikawaya

     —       (221 )     —        (221 )

Lignetics, Inc.

     —       (245 )     —        (245 )

AG Transportation Holdings, LLC

     —       (272 )     —        (272 )

Flight Fit N Fun LLC

     —       (293 )     —        (293 )

Vertellus Specialties Inc.

     —       (532 )     —        (532 )

RBC Acquisition Corp.

     —       (568 )     —        (568 )

Vision Government Solutions, Inc.

     —       (575 )     —        (575 )

Southern Petroleum Laboratories, Inc.

     —       (589 )     —        (589 )

Vitera Healthcare Solutions, LLC

     —       (766 )     —        (766 )

Precision Acquisition Group Holdings, Inc.

     —       (941 )     —        (941 )

WadeCo Specialties, Inc.

     —       (1,039 )     —        (1,039 )

LWO Acquisitions Company LLC

     —       (1,200 )     —        (1,200 )

SourceHOV, LLC

     —       (1,307 )     —        (1,307 )

Targus Group International, Inc.

     (5,500 )     (32 )     4,198        (1,334 )

Francis Drilling Fluids, Ltd.

     —       (1,575 )     —        (1,575 )

Defiance Integrated Technologies, Inc.

     —       (1,772 )     —        (1,772 )

Other, net (<$250)

     40       (313 )     27        (246 )
  

 

 

   

 

 

   

 

 

    

 

 

 

Total:

   $ (5,460 )   $ (9,821 )   $ 4,225      $ (11,056 )
  

 

 

   

 

 

   

 

 

    

 

 

 

The largest driver of our net unrealized depreciation for the three months ended March 31, 2016 was a decline in financial and operational performance on several portfolio companies and, to a lesser extent, decreases in comparable multiples used in valuations, most notably, Defiance of $1.8 million, Francis Drilling Fluids, Ltd., or “FDF,” of $1.6 million, and Source of $1.3 million. This depreciation was partially offset by the appreciation on Behrens of $1.0 million and the reversal of previously recorded unrealized depreciation on Targus upon restructure during the quarter.

Net Realized Loss on Other

During the three months ended March 31, 2016, we recorded a net realized loss of $0.1 million due to the expiration of our interest rate cap agreement in January 2016. No such amounts were incurred during the three months ended March 31, 2017.

Net Unrealized Appreciation on Other

During the three months ended March 31, 2017, we recorded $0.1 million of net unrealized depreciation on our Credit Facility recorded at fair value. During the three months ended March 31, 2016, we reversed $0.1 million of unrealized depreciation related to the expiration of our interest rate cap agreement in January 2016.

 

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Comparison of the Six Months Ended March 31, 2017, to the Six Months Ended March 31, 2016

 

     For the Six Months Ended March 31,  
     2017     2016     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 17,221     $ 17,854     $ (633 )     (3.5 )%

Other income

     1,546       1,664       (118 )     (7.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     18,767       19,518       (751 )     (3.8
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     2,737       2,890       (153 )     (5.3

Loan servicing fee

     1,938       1,981       (43 )     (2.2

Incentive fee

     2,363       2,182       181       8.3  

Administration fee

     586       612       (26 )     4.2  

Interest expense on borrowings

     1,143       1,418       (275 )     (19.4

Dividend expense on mandatorily redeemable preferred stock

     2,058       2,058       —       —    

Amortization of deferred financing fees

     547       528       19       3.6  

Other expenses

     986       1,392       (406 )     (29.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, before credits from Adviser

     12,358       13,061       (703 )     (5.4

Credits to base management fee—loan servicing fee

     (1,938 )     (1,981 )     43       (2.2

Credits to fees from Adviser—other

     (2,219 )     (1,239 )     (980 )     (79.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     8,201       9,841       (1,640 )     (16.7
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     10,566       9,677       889       9.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized (loss) gain on investments

     (3,403 )     9,920       (13,223 )     (133.3

Net realized loss on other

     —       (63 )     63       100.0  

Net unrealized depreciation of investments

     (1,702 )     (34,439 )     32,737       (95.1

Net unrealized appreciation of other

     111       61       50       82.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from investments and other

     (4,994 )     (24,521 )     19,527       (79.6
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 5,572     $ (14,844 )   $ 20,416       (137.5 )%
  

 

 

   

 

 

   

 

 

   

 

 

 

NM = Not Meaningful

Investment Income

Interest income, net decreased by 3.5% for the six months ended March 31, 2017, as compared to the prior year period. This decrease was due primarily to a lower weighted average principal balance for the six months ended March 31, 2017, as compared to the prior year period. The weighted average principal balance of our interest-bearing investment portfolio during the six months ended March 31, 2017 was $302.2 million, compared to $318.5 million for the prior year period, a decrease of 5.1%. The weighted average yield on our interest-bearing investment portfolio is based on the current stated interest rate on interest-bearing investments and increased to 11.4% for the six months ended March 31, 2017 compared to 11.2% for the six months ended March 31, 2016 inclusive of any allowances on interest receivables made during that period.

Other income decreased by 7.1% during the six months ended March 31, 2017, as compared to the prior year period. For the six months ended March 31, 2017, other income consisted primarily of $1.5 million in success fees recognized. For the six months ended March 31, 2016, other income consisted primarily of $1.3 million in success fees recognized and $0.3 million in dividend income received.

 

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The following tables list the investment income for our five largest portfolio company investments at fair value during the respective periods:

 

     As of March 31, 2017     Six Months Ended March 31, 2017  

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

NetFortris Corp.

   $ 29,000        9.3 %   $ 291        1.6 %

IA Tech, LLC

     23,460        7.5       1,395        7.4  

WadeCo Specialties, Inc.

     18,332        5.8       953        5.1  

United Flexible, Inc.

     17,798        5.7       1,128        6.0  

Lignetics, Inc.

     14,165        4.5       849        4.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     102,755        32.8       4,616        24.6  

Other portfolio companies

     210,762        67.2       14,151        75.4  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Portfolio

   $ 313,517        100.0 %   $ 18,767        100.0 %
  

 

 

    

 

 

   

 

 

    

 

 

 
     As of March 31, 2016     Six Months Ended
March 31, 2016
 

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

WadeCo Specialties, Inc.

   $ 20,266        6.9 %   $ 1,038        5.3 %

RBC Acquisition Corp.

     20,685        7.0       1,536        7.8  

United Flexible, Inc.

     17,239        5.9       988        5.1  

Francis Drilling Fluids, Ltd.

     15,840        5.4       1,346        6.9  

Lignetics, Inc.

     16,121        5.5       854        4.4  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     90,151        30.7       5,762        29.5  

Other portfolio companies

     203,277        69.3       13,756        70.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Portfolio

   $ 293,428        100.0 %   $ 19,518        100.0 %
  

 

 

    

 

 

   

 

 

    

 

 

 

Expenses

Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, decreased for the six months ended March 31, 2017 by 16.7%, as compared to the prior year period. This decrease was primarily due to decreases in net base management fee, interest expense on borrowings, and professional fees and shareholder related costs.

Interest expense decreased by $0.3 million, or 19.4%, during the six months ended March 31, 2017, as compared to the prior year period, primarily due to decreased borrowings outstanding throughout the period on our Credit Facility. The weighted average balance outstanding under our Credit Facility during the six months ended March 31, 2017, was approximately $40.8 million, as compared to $63.5 million in the prior year period, a decrease of 35.7%.

Net base management fee earned by the Adviser decreased by $1.0 million, or 37.2%, during the six months ended March 31, 2017, as compared to the prior year period, resulting from an increase in portfolio company fee credits due to new investments made in the current year period.

Our Board of Directors accepted non-contractual, unconditional and irrevocable credits totaling $1.1 million from the Adviser to reduce the income-based incentive fee to the extent that net investment income did not cover 100.0% of the distributions to common stockholders during the six months ended March 31, 2017. The credits granted during the six months ended March 31, 2016, totaled $0.9 million.

 

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Base management, loan servicing and incentive fees and associated non-contractual, unconditional and irrevocable credits are computed quarterly, as described under “Investment Advisory and Management Agreement” in Note 4—Related Party Transactions of the notes to our Consolidated Financial Statements found elsewhere in this prospectus supplement and are summarized in the following table:

 

     Six Months Ended
March 31,
 
     2017     2016  

Average total assets subject to base management fee (A)

   $ 312,800     $ 330,300  

Multiplied by prorated annual base management fee of 1.75%

     0.875 %     0.875 %
  

 

 

   

 

 

 

Base management fee (B)

   $ 2,737     $ 2,890  

Portfolio company fee credit

     (1,083 )     (234 )

Senior syndicated loan fee credit

     (22 )     (56 )
  

 

 

   

 

 

 

Net Base Management Fee

   $ 1,632     $ 2,600  
  

 

 

   

 

 

 

Loan servicing fee (B)

     1,938       1,981  

Credits to base management fee—loan servicing fee (B)

     (1,938 )     (1,981 )
  

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —     $ —  
  

 

 

   

 

 

 

Incentive fee (B)

     2,363       2,182  

Incentive fee credit

     (1,114 )     (949 )
  

 

 

   

 

 

 

Net Incentive Fee

   $ 1,249     $ 1,233  
  

 

 

   

 

 

 

Portfolio company fee credit

     (1,083 )     (234 )

Senior syndicated loan fee credit

     (22 )     (56 )

Incentive fee credit

     (1,114 )     (949 )
  

 

 

   

 

 

 

Credit to Fees From Adviser—other (B)

   $ (2,219 )   $ (1,239 )
  

 

 

   

 

 

 

 

(A)   Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B)   Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations found elsewhere in this prospectus supplement.

Net Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

For the six months ended March 31, 2017, we recorded a net realized loss on investments of $3.4 million, which resulted primarily from the sale of substantially all the assets of RBC for a $2.3 million realized loss and the write-off of $5.0 million of our investment in Sunshine Media Holdings, or “Sunshine,” partially offset by the sale of Behrens for a $2.5 million realized gain and a $1.3 million realized gain related to an additional earn-out from Funko, LLC, or “Funko”, which was exited in the prior year.

For the six months ended March 31, 2016, we recorded a net realized gain on investments of $9.9 million, which resulted primarily from a realized gain of $17.0 million from the sale of Funko, partially offset by a realized loss of $5.5 million recognized from the restructure of Targus and a realized loss of $2.4 million from the sale of Heartland Communications Group LLC during the period.

 

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Net Unrealized Appreciation (Depreciation) of Investments

The net realized gain (losses) and unrealized appreciation (depreciation) across our investments for the six months ended March 31, 2017, were as follows:

 

     Six Months Ended March 31, 2017  

Portfolio Company

   Realized
Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
(Appreciation)
    Net Gain
(Loss)
 

SourceHOV, LLC

   $ —       $ 1,733     $ —       $ 1,733  

Funko, LLC

     1,251       (7 )     —         1,244  

Edge Adhesives Holdings, Inc.

     —         925       —         925  

Meridian Rack & Pinion, Inc.

     —         922       —         922  

The Mochi Ice Cream Company

     —         424       —         424  

Vitera Healthcare Solutions, Inc.

     —         213       115       328  

Defiance Integrated Technologies, Inc.

     —         316       —         316  

IA Tech, LLC

     —         230       —         230  

Drumcree, LLC

     —         154       —         154  

Vision Government Solutions, Inc.

     —         150       —         150  

TWS Acquisition Corporation

     —         103       —         103  

WadeCo Specialties, Inc.

     —         103       —         103  

Leeds Novamark Capital I, L.P.

     —         101       —         101  

AG Transportation Holdings, LLC

     —         98       —         98  

Autoparts Holdings Limited

     1       —         90       91  

B+T Group Acquisition Inc.

     —         90       —         90  

Merlin International, Inc.

     —         88       —         88  

United Flexible, Inc.

     —         (296 )     —         (296 )

Targus Group International, Inc.

     —         (521 )     —         (521 )

Sunshine Media Holdings

     (5,000 )     763       3,612       (625 )

Lignetics, Inc.

     —         (655 )     —         (655 )

Behrens Manufacturing, LLC

     2,544       —         (3,211 )     (667 )

LWO Acquisitions Company LLC

     —         (696 )     —         (696 )

Flight Fit N Fun LLC

     —         (727 )     —         (727 )

Vertellus Holdings LLC

     109       (1,244 )     —         (1,135 )

RBC Acquisition Corp.

     (2,330 )     —         1,119       (1,211 )

Alloy Die Casting, Corp.

     —         (1,215 )     —         (1,215 )

Francis Drilling Fluids, Ltd.

     —         (4,546 )     —         (4,546 )

Other, net (<$250)

     22       187       (120 )     89  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total:

   $ (3,403 )   $ (3,307 )   $ 1,605     $ (5,105 )
  

 

 

   

 

 

   

 

 

   

 

 

 

The largest driver of our net unrealized depreciation for the six months ended March 31, 2017 was derived from a decline in financial and operation performance of certain portfolio companies, most notably FDF of $4.5 million, Vertellus Holdings LLC of $1.2 million, ADC of $1.2 million, and the reversal of previously recorded unrealized appreciation on Behrens upon exit. This depreciation was partially offset by the appreciation on Source of $1.7 million and Edge Adhesives Holdings, Inc. of $0.9 million and the reversal of previously recorded depreciation on our investment in Sunshine upon partial write-off.

 

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The net realized gain (losses) and unrealized appreciation (depreciation) across our investments for the six months ended March 31, 2016, were as follows:

 

     Six Months Ended March 31, 2016  

Portfolio Company

   Realized Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
(Appreciation)
    Net Gain
(Loss)
 

Legend Communications of Wyoming, LLC

   $ —       $ 2,857     $ 27     $ 2,884  

Behrens Manufacturing, LLC

     —         1,421       —         1,421  

Funko, LLC

     17,039       55       (16,009 )     1,085  

J. America, Inc.

     —         482       —         482  

Triple H Food Processors

     —         376       —         376  

Heartland Communications Group, LLC

     (2,355 )     —         2,390       35  

Lindmark Acquisition LLC

     (317 )     —         297       (20 )

GFRC Holdings, LLC

     —         (250 )     —         (250 )

United Flexible, Inc.

     —         (351 )     —         (351 )

Flight Fit N Fun LLC

     —         (404 )     —         (404 )

AG Transportation Holdings, LLC

     —         (681 )     —         (681 )

Vision Solutions, Inc.

     —         (768 )     —         (768 )

Vitera Healthcare Solutions, Inc.

     —         (924 )     —         (924 )

Southern Petroleum Laboratories, Inc.

     —         (1,034 )     —         (1,034 )

Vision Government Solutions, Inc.

     —         (1,136 )     —         (1,136 )

Vertellus Specialties, Inc.

     —         (1,251 )     —         (1,251 )

WadeCo Specialties, Inc.

     —         (1,263 )     —         (1,263 )

Sunburst Media—Louisiana, LLC

     —         (1,293 )     —         (1,293 )

SourceHOV, LLC

     —         (1,365 )     —         (1,365 )

Precision Acquisition Group Holdings, Inc.

     —         (1,879 )     —         (1,879 )

LWO Acquisitions Company LLC

     —         (1,997 )     —         (1,997 )

RBC Acquisition Corp.

     1,207       (4,415 )     —         (3,208 )

Targus Group International, Inc.

     (5,500 )     (2,192 )     4,198       (3,494 )

Defiance Integrated Technologies, Inc.

     —         (4,177 )     —         (4,177 )

Francis Drilling Fluids, Ltd.

     —         (4,275 )     —         (4,275 )

Other, net (<$250)

     (154 )     (1,095 )     217       (1,032 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Total:

   $ 9,920     $ (25,559 )   $ (8,880 )   $ (24,519 )
  

 

 

   

 

 

   

 

 

   

 

 

 

The largest driver of our net unrealized depreciation for the six months ended March 31, 2016 was derived from a decline in financial and operation performance of certain portfolio companies and, to a lesser extent, decreases in comparable multiples used in valuations, most notably RBC of $4.4 million, FDF of $4.3 million and Defiance of $4.2 million. The change was also driven by the reversal of $16.0 million of previously recorded unrealized appreciation on our investment in Funko upon exit. This depreciation was partially offset by the appreciation on Behrens of $1.4 million and Legend Communications of Wyoming, LLC of $2.9 million and the reversal of $4.1 million of previously recorded unrealized depreciation on our investment in Targus upon restructure.

Net Realized Loss on Other

During the six months ended March 31, 2016, we recorded a net realized loss of $0.1 million, due to the expiration of our interest rate cap agreement in January 2016. No such amounts were incurred during the six months ended March 31, 2017.

 

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Net Unrealized Appreciation of Other

During the six months ended March 31, 2017, we recorded $0.1 million of net unrealized appreciation on our Credit Facility recorded at fair value. During the six months ended March 31, 2016, we reversed $0.1 million of unrealized depreciation related to the expiration of our interest rate cap agreement in January 2016.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility, make distributions to our stockholders, pay management fees to the Adviser, and for other operating expenses. Net cash provided by operating activities for the six months ended March 31, 2017 was $10.2 million as compared to $63.5 million for the six months ended March 31, 2016. The change was primarily due to the increase in purchases of investments and the decrease in net unrealized depreciation period over period. Purchases of investments were $59.7 million during the six months ended March 31, 2017 compared to $25.9 million during the prior year period. Net unrealized depreciation totaled $1.6 million during the six months ended March 31, 2017 compared to $34.4 million during the prior year period.

As of March 31, 2017, we had loans to, syndicated participations in or equity investments in 44 private companies, with an aggregate cost basis of approximately $374.9 million. As of March 31, 2016, we had loans to, syndicated participations in or equity investments in 44 private companies, with an aggregate cost basis of approximately $372.2 million.

The following table summarizes our total portfolio investment activity during the six months ended March 31, 2017 and 2016:

 

     Six Months Ended
March 31,
 
     2017      2016  

Beginning investment portfolio, at fair value

   $ 322,114      $ 365,891  

New investments

     56,241        22,300  

Disbursements to existing portfolio companies

     3,417        3,568  

Scheduled principal repayments

     (2,319 )      (738 )

Unscheduled principal repayments

     (54,436 )      (57,385 )

Net proceeds from sales

     (8,311 )      (19,913 )

Net unrealized depreciation

     (3,307 )      (25,559 )

Reversal of prior period depreciation (appreciation)

     1,605        (8,880 )

Net realized (loss) gain

     (3,403 )      9,920  

Increase in investments due to PIK (A) or other

     2,289        3,739  

Cost adjustments on non-accrual loans

          388  

Net change in premiums, discounts and amortization

     (373 )      97  
  

 

 

    

 

 

 

Investment Portfolio, at Fair Value

   $ 313,517      $ 293,428  
  

 

 

    

 

 

 

 

(A)   PIK interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan.

 

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The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of March 31, 2017:

 

     Amount  

For the remaining six months ending September 30:

   2017    $ 19,277  

For the fiscal year ending September 30:

   2018      53,839  
   2019      45,159  
   2020      80,296  
   2021      80,104  
   Thereafter      66,220  
     

 

 

 
  

Total contractual repayments

   $ 344,895  
   Equity investments      35,896  
   Adjustments to cost basis on debt investments      (5,885 )
     

 

 

 
  

Cost basis of investments held at March 31, 2017:

   $ 374,906  
     

 

 

 

Financing Activities

Net cash used in financing activities totaled $11.4 million for the six months ended March 31, 2017 and consisted primarily of net repayments on our Credit Facility of $17.2 million and $10.6 million of distributions to common stockholders, partially offset by $16.5 million in net proceeds from our common stock offering during the six months ended March 31, 2017. Net cash used in financing activities totaled $61.5 million for the six months ended March 31, 2016 and consisted primarily of net repayments on our Credit Facility of $70.0 million and $9.7 million of distributions to common stockholders, partially offset by $18.5 million in net proceeds from our common stock offering during the six months ended March 31, 2016.

Distributions and Dividends to Stockholders

Common Stock Distributions

To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90.0% of our investment company taxable income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts deemed to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, we paid monthly cash distributions of $0.07 per common share for each month during the six months ended March 31, 2017 and 2016, which totaled an aggregate of $10.6 million and $9.7 million, respectively. In April 2017, our Board of Directors declared a monthly distribution of $0.07 per common share for each of April, May and June 2017. Our Board of Directors declared these distributions based on our estimates of our investment company taxable income for the fiscal year ending September 30, 2017.

For the year ended September 30, 2016, our current and accumulated earnings and profits (after taking into account mandatorily redeemable preferred stock dividends) exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $5.5 million of the first common distributions paid in fiscal year 2017 as having been paid in the respective prior year.

The characterization of the common stockholder distributions declared and paid for the fiscal year ending September 30, 2017 will be determined at fiscal year-end based upon our investment company taxable income for the full fiscal year and distributions paid during the full fiscal year. Such a characterization made on a quarterly basis may not be representative of the actual full fiscal year characterization.

 

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Preferred Stock Dividends

We paid monthly cash dividends of $0.140625 per share of our Series 2021 Term Preferred Stock for each month during the six months ended March 31, 2017 and 2016, which totaled an aggregate of $2.1 million. In April 2017, our Board of Directors declared a monthly distribution of $0.140625 per share of Series 2021 Term Preferred stock for each of April, May, and June 2017. For federal income tax purposes, distributions paid by us to preferred stockholders generally constitute ordinary income to the extent our current and accumulated earnings and profits have been characterized as ordinary income to our preferred stockholders.

Equity

Registration Statement

We filed Post-Effective Amendment No. 2 to our current Registration Statement on Form N-2 (File No. 333-208637) with the SEC on December 22, 2016, which was declared effective by the SEC on February 6, 2017. Our Registration Statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt securities. We currently have the ability to issue up to $282.7 million in securities under the Registration Statement.

Common Stock

Pursuant to our current Registration Statement, in October 2016, we completed a public offering of 2.0 million shares of our common stock at a public offering price of $7.98 per share, which was below our then current NAV per share. In November 2016, the underwriters partially exercised their overallotment option to purchase an additional 173,444 shares of our common stock. Gross proceeds totaled $17.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $16.4 million. The net proceeds of this offering were used to repay borrowings under our Credit Facility.

In January 2016, our Board of Directors authorized a share repurchase program for up to an aggregate of $7.5 million of the Company’s common stock. The program expired on January 31, 2017. During the year ended September 30, 2016, we repurchased 87,200 shares of our common stock at an average share price of $6.53, resulting in aggregate gross purchases of $0.6 million. We did not repurchase any shares during the six months ended March 31, 2017.

Pursuant to our prior registration statement, on October 27, 2015, we completed a public offering of 2.0 million shares of our common stock at a public offering price of $8.55 per share, which was below our then current NAV per share. In November 2015, the underwriters exercised their option to purchase an additional 300,000 shares. Gross proceeds totaled $19.7 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $18.4 million. The net proceeds of this offering were used to repay borrowings under our Credit Facility.

Pursuant to our prior registration statement, on February 27, 2015, we entered into equity distribution agreements with the Sales Agents under which we may issue and sell, from time to time, through the Sales Agents, up to an aggregate offering price of $50.0 million shares of our common stock. We did not sell any shares under the Sales Agreements during the year ended September 30, 2016 or the six months ended March 31, 2017.

We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock trades at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders. We completed the abovementioned October 2016 common stock offering as a result of the stockholder approval of

 

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the proposal at our 2016 Annual Meeting of Stockholders and additional Board of Directors approval. We did not request that our stockholders approve the Company’s ability to issue shares of common stock at a price below NAV at our annual meeting of stockholders held on February 9, 2017. Should we decide to issue shares of common stock at a price below NAV, we will seek the requisite approval of our stockholders.

On May 19, 2017, the closing market price of our common stock was $9.87, an 18.5% premium to our March 31, 2017 NAV per share of $8.33.

Term Preferred Stock

Pursuant to our prior registration statement on Form N-2, in May 2014, we completed a public offering of approximately 2.4 million shares of our Series 2021 Term Preferred Stock, par value $0.001 per share, at a public offering price of $25.00 per share and a 6.75% rate. Gross proceeds totaled $61.0 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were $58.5 million, a portion of which was used to voluntarily redeem all 1.5 million outstanding shares of our then existing 7.125% Series 2016 Term Preferred Stock, par value $0.001 per share, and the remainder was used to repay a portion of outstanding borrowings under our Credit Facility.

Our Series 2021 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend rate equal to 6.75% per year, payable monthly (which equates in total to approximately $4.1 million per year). We are required to redeem all of the outstanding Series 2021 Term Preferred Stock on June 30, 2021 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions on such share accumulated to (but excluding) the date of redemption (the “Redemption Price”). We may additionally be required to mandatorily redeem some or all of the shares of our Series 2021 Term Preferred Stock early, at the Redemption Price, in the event of the following: (1) upon the occurrence of certain events that would constitute a change in control, and (2) if we fail to maintain an asset coverage ratio of at least 200% on our “senior securities that are stock” (which, currently is only the Series 2021 Term Preferred Stock) and the failure remains for a period of 30 days following the filing date of our next SEC quarterly or annual report. We may also voluntarily redeem all or a portion of the Series 2021 Term Preferred Stock at our option at the Redemption Price at any time on or after June 30, 2017. The asset coverage on our “senior securities that are stock” (thus, our Series 2021 Term Preferred Stock) as of March 31, 2017 was 282.1%.

If we fail to redeem our Series 2021 Term Preferred Stock pursuant to the mandatory redemption required on June 30, 2021, or in any other circumstance in which we are required to mandatorily redeem our Series 2021 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of March 31, 2017, we have not redeemed, nor have we been required to redeem, any shares of our outstanding Series 2021 Term Preferred Stock.

Revolving Credit Facility

On May 1, 2015, we, through Business Loan, entered into a Fifth Amended and Restated Credit Agreement with KeyBank, as administrative agent, lead arranger and a lender, which increased the commitment amount of our Credit Facility from $137.0 million to $140.0 million, extended the revolving period end date by three years to January 19, 2019, decreased the marginal interest rate added to 30-day LIBOR from 3.75% to 3.25% per annum, set the unused commitment fee at 0.50% on all undrawn amounts, expanded the scope of eligible collateral, and amended other terms and conditions to among other items. If our Credit Facility is not renewed or extended by January 19, 2019, all principal and interest will be due and payable on or before April 19, 2020. Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of $250.0 million through additional commitments of new or existing lenders. We incurred fees of approximately $1.1 million in connection with this amendment, which are being amortized through our Credit Facility’s revolving period end date of January 19, 2019. On June 19, 2015, we, through Business Loan, entered into certain joinder and assignment agreements with three new lenders to increase borrowing capacity on our Credit Facility by $30.0

 

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million to $170.0 million. We incurred fees of approximately $0.6 million in connection with this expansion, which are being amortized through our Credit Facility’s revolving period end date of January 19, 2019.

On October 9, 2015 and August 18, 2016, we entered into Amendments No. 1 and 2 to our Credit Facility, respectively, each of which clarified various constraints on available borrowings.

Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank, which also serves as the trustee of the account, generally remits the collected funds to us once a month.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consents. Our Credit Facility generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts deemed to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 20 obligors required in the borrowing base. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $205.0 million plus 50% of all equity and subordinated debt raised after May 1, 2015 less 50% of any equity and subordinated debt retired or redeemed after May 1, 2015, which equates to $223.2 million as of March 31, 2017, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Sections 18 and 61 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of March 31, 2017, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $273.9 million, asset coverage on our “senior securities representing indebtedness” of 599.1% and an active status as a BDC and RIC. In addition, we had 29 obligors in our Credit Facility’s borrowing base as of March 31, 2017. As of March 31, 2017, we were in compliance with all of our Credit Facility covenants. Refer to Note 5— Borrowings of the notes to our Consolidated Financial Statements included elsewhere in this prospectus supplement for additional information regarding our Credit Facility.

Off-Balance Sheet Arrangements

We generally recognize success fee income only when the payment has been received. As of March 31, 2017 and September 30, 2016, we had off-balance sheet success fee receivables on our accruing debt investments of $2.9 million and $3.4 million (or approximately $0.12 per common share and $0.14 per common share), respectively, that would be owed to us based on our current portfolio if fully paid off. Consistent with GAAP, we have not recognized our success fee receivable on our balance sheet or income statement. Due to our success fees’ contingent nature, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections.

 

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Contractual Obligations

We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans and the uncalled capital commitment as of March 31, 2017 and September 30, 2016 to be immaterial. The following table shows our contractual obligations as of March 31, 2017, at cost:

 

     Payments Due by Fiscal Years  

Contractual Obligations (A)

   Less than
1 Year
     1-3 Years      4-5 Years      After 5 Years      Total  

Credit Facility (B)

   $ —        $ 54,100      $ —        $ —        $ 54,100  

Series 2021 Term Preferred Stock

     —          —          61,000        —          61,000  

Interest expense on debt obligations (C)

     3,519        16,247        3,088        —          22,854  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,519      $ 70,347      $ 64,088      $ —        $ 137,954  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A)   Excludes unused line of credit commitments, unused delayed draw term loans and uncalled capital commitments to our portfolio companies in the aggregate principal amount of $13.4 million as of March 31, 2017.
(B)   Principal balance of borrowings under our Credit Facility as of March 31, 2017, based on the current revolving period end date of January 19, 2019.
(C)   Includes estimated interest payments on our Credit Facility and distribution obligations on our Series 2021 Term Preferred Stock. The amount of interest expense calculated for purposes of this table was based upon rates and outstanding balances as of March 31, 2017. Distribution payments on our Series 2021 Term Preferred Stock assume quarterly distribution declarations and monthly distributions to stockholders through the date of mandatory redemption.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy.

Investment Valuation

Fair value measurements of our investments may involve subjective judgments and estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Refer to Note 2—Summary of Significant Accounting Policies and Note 3 — Investments in the notes to our Consolidated Financial Statements included elsewhere in this prospectus supplement for additional information regarding fair value measurements.

Credit Monitoring and Risk Rating

The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio

 

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companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics.

The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by a Nationally Recognized Statistical Rating Organization, or “NRSRO” (as defined in Rule 2a-7 under the 1940 Act), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.

The following table reflects risk ratings for all proprietary loans in our portfolio at March 31, 2017 and September 30, 2016, representing approximately 91.2% and 90.0%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:

 

Rating

   As of
March 31,
2017
     As of
September 30,
2016
 

Highest

     9.0        8.0  

Average

     5.3        5.3  

Weighted Average

     5.4        5.3  

Lowest

     1.0        1.0  

The following table reflects the risk ratings for all syndicated loans in our portfolio that were rated by an NRSRO at March 31, 2017 and September 30, 2016, representing approximately 6.9% and 7.3%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:

 

Rating

   As of
March 31,
2017
     As of
September 30,
2016
 

Highest

     5.0        5.0  

Average

     4.0        3.9  

Weighted Average

     3.8        4.0  

Lowest

     3.0        2.0  

The following table reflects the risk ratings for all syndicated loans in our portfolio that were not rated by an NRSRO at March 31, 2017 and September 30, 2016, representing approximately 1.9% and 2.7%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:

 

Rating

   As of
March 31,
2017
     As of
September 30,
2016
 

Highest

     8.0        5.0  

Average

     5.5        4.0  

Weighted Average

     4.8        3.5  

Lowest

     3.0        3.0  

 

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Tax Status

We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes and also to limit certain federal excise taxes imposed on RICs. Refer to Note 9—Distributions to Common Stockholders in the notes to our Consolidated Financial Statements included elsewhere in this prospectus supplement for additional information regarding our tax status.

Revenue Recognition

Interest Income Recognition

Interest income, including the amortization of premiums, acquisition costs and amendment fees, the accretion of original issue discount, and PIK interest, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company, typically from an exit or sale. Dividend income on equity investments is accrued to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash. We generally record prepayment fees upon receipt of cash. Prepayment fees are contractually due at the time of an investment’s exit, based on the prepayment fee schedule. Success fees, prepayment fees and dividend income are all recorded in other income in our Consolidated Statements of Operations included elsewhere in this prospectus supplement.

Refer to Note 2— S ummary of Significant Accounting Policies in the notes to our Consolidated Financial Statements included elsewhere in this prospectus supplement for additional information regarding revenue recognition.

Recent Accounting Pronouncements

Refer to Note 2—Summary of Significant Accounting Policies in the notes to our Consolidated Financial Statements included elsewhere in this prospectus supplement for a description and our application of recent accounting pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies whose securities are owned by us; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and interest rate fluctuations.

The primary risk we believe we are exposed to is interest rate risk. Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We use a combination of debt and equity capital to finance our investing activities. We may use interest rate risk management techniques from time to time to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.

 

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All of our variable-rate debt investments have rates generally associated with either the current LIBOR or prime rate. As of March 31, 2017, our portfolio of debt investments on a principal basis consisted of the following:

 

Variable rates

     88.8 %

Fixed rates

     11.2  
  

 

 

 

Total:

     100.0 %
  

 

 

 

There have been no material changes in the quantitative and qualitative market risk disclosures for the six months ended March 31, 2017 from that disclosed in “Management’s Discussion and Analysis of Financial condition and Results of Operations–Quantitative and Qualitative Disclosures About Market Risk” in the accompanying prospectus.

 

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PLAN OF DISTRIBUTION

We have entered into the Sales Agreement with Cantor Fitzgerald, pursuant to which we may issue and sell shares of our common stock, par value $0.001 per share, from time to time through Cantor Fitzgerald acting as agent that have an aggregate offering price (together with sales through the KCM Agreement) of up to $50.0 million. As of the date of this prospectus supplement, we have not sold any shares of our common stock under the Sales Agreement and have sold 131,462 shares with an aggregate offering price of $1.2 million under the KCM Agreement, leaving an aggregate offering price of up to $48.8 million available under the Sales Agreement as of the date of this prospectus supplement. The KCM Agreement was terminated effective May 22, 2017.

Upon delivery of a placement notice and subject to the terms and conditions of the Sales Agreement, Cantor Fitzgerald will use its commercially reasonable efforts consistent with its sales and trading practices to sell by any method permitted by law deemed to be part of an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act, by means of ordinary brokers’ transactions that qualify for delivery of a prospectus to NASDAQ in accordance with Rule 153 under the Securities Act or such other sales as may be agreed by us and Cantor Fitzgerald, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices. We will instruct Cantor Fitzgerald as to the amount of common stock to be sold. We may instruct Cantor Fitzgerald not to sell common stock if the sales cannot be effected at or above the price designated by us in any instruction. We or Cantor Fitzgerald may suspend the offering of shares of common stock upon proper notice and subject to other conditions.

Cantor Fitzgerald will provide written confirmation of a sale to us no later than the opening of the trading day on NASDAQ following each trading day in which shares of our common stock are sold under the Sales Agreement. Each confirmation will include the number of shares of common stock sold on the preceding day, the net proceeds to us and the compensation payable by us to Cantor Fitzgerald in connection with the sales.

Cantor Fitzgerald will receive from us a commission to be negotiated from time to time but in no event in excess of 2.0% of the gross sales price of all shares of common stock sold through it as sales agent under the Sales Agreement. We estimate that the total expenses for the offering, excluding compensation payable to Cantor Fitzgerald under the terms of the Sales Agreement, will be approximately $175,000, which includes our legal, accounting and printing costs and various other fees associated with the offering.

In addition, as shares of common stock sold under the Sales Agreement and KCM Agreement during the first 18 months of this offering had an aggregate offering price of less than $25.0 million, in September 2016, we reimbursed an aggregate of $32,033 to the Sales Agents for certain out-of-pocket expenses, including the fees and disbursements of counsel, incurred by the Sales Agents in connection with this offering.

Settlement for sales of shares of common stock will occur on the third trading day following the date on which such sales are made, or on some other date that is agreed upon by the Company and Cantor Fitzgerald in connection with a particular transaction, in each case in accordance with applicable rules and regulations, in return for payment of the net proceeds to the Company. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.

In connection with the sale of the common stock on our behalf, Cantor Fitzgerald will be deemed to be an “underwriter” within the meaning of the Securities Act, and the compensation of Cantor Fitzgerald will be deemed to be underwriting commissions or discounts. We have agreed to provide indemnification and contribution to Cantor Fitzgerald against certain civil liabilities, including liabilities under the Securities Act and the 1940 Act.

The offering of our shares of common stock pursuant to the Sales Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the Sales Agreement or (ii) the termination of the Sales Agreement in accordance with its terms. The Sales Agreement may be terminated by us in our sole discretion under the

 

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circumstances specified in the Sales Agreement by giving five days’ notice to Cantor Fitzgerald. In addition, Cantor Fitzgerald may terminate the Sales Agreement under the circumstances specified in such Sales Agreement by giving five days’ notice to us.

Cantor Fitzgerald and its affiliates may in the future provide various investment banking, commercial banking and other financial services for us and our affiliates, for which services they may in the future receive customary fees. In addition, in the ordinary course of their business activities, Cantor Fitzgerald and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers.

The principal business address of Cantor Fitzgerald & Co. is 499 Park Avenue, New York, New York 10022.

 

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CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PAYING AGENT

The custodian of our assets is The Bank of New York Mellon Corp. The custodian’s address is: 500 Ross Street, Suite 935, Pittsburgh, PA 15262. Our assets are held under bank custodianship in compliance with the 1940 Act. Securities held through our wholly owned subsidiary, Gladstone Business Loan, are held under a custodian agreement with The Bank of New York Mellon Corp., which acts as collateral custodian pursuant to the Credit Facility with Branch Banking and Trust Company and certain other parties. The address of the collateral custodian is 500 Ross Street, Suite 935, Pittsburgh, PA 15262. Computershare acts as our transfer and dividend paying agent and registrar. The principal business address of Computershare Inc. is 250 Royall Street, Canton, Massachusetts 02021, telephone number 781-575-2000. Computershare also maintains an internet website at www.computershare.com.

LEGAL MATTERS

Certain legal matters will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. Certain matters of Maryland law, including the validity of the common stock to be issued in connection with this offering, will be passed upon for us by Venable LLP, Baltimore, Maryland. Cantor Fitzgerald & Co. is being represented in connection with this offering by Cooley LLP, New York, New York. Bass, Berry & Sims PLC and Cooley LLP may rely as to certain matters of Maryland law upon the opinion of Venable LLP.

EXPERTS

The financial statements as of September 30, 2016 and September 30, 2015 and for each of the three years in the period ended September 30, 2016 and management’s assessment of the effectiveness of internal control over financial reporting (which is included in the Report of Management on Internal Controls) as of September 30, 2016 included in the accompanying prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Securities Exchange Act of 1943, as amended, or the “Exchange Act,” and are required to file reports, proxy statements and other information with the SEC. These documents may be inspected and copied for a fee at the SEC’s public reference room, 100 F Street, N.E., Washington, D.C. 20549.

This prospectus supplement and the accompanying prospectus do not contain all of the information in our registration statement, including amendments, exhibits and schedules. Statements in this prospectus supplement and in the accompanying prospectus about the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by this reference.

Additional information about the Company may be found in our registration statement on Form N-2 (including the related amendments, exhibits and schedules thereto) filed with the SEC. The SEC maintains a web site ( http://www.sec.gov ) that contains our registration statement, other documents incorporated by reference in the registration statement and other information that we have filed electronically with the SEC, including proxy statements and reports filed under the Exchange Act.

 

S-45


Table of Contents

INDEX TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidated Statements of Assets and Liabilities as of March 31, 2017 and September 30, 2016

     S-F-2  

Consolidated Statements of Operations for the three and six months ended March 31, 2017 and 2016

     S-F-3  

Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2017 and 2016

     S-F-4  

Consolidated Statements of Cash Flows for the six months ended March  31, 2017 and 2016

     S-F-5  

Consolidated Schedules of Investments as of March  31, 2017 and September 30, 2016

     S-F-6  

Notes to Consolidated Financial Statements

     S-F-18  

 

S-F-1


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     March 31,     September 30,  
     2017     2016  

ASSETS

    

Investments, at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $287,342 and $250,991, respectively)

   $ 256,149     $ 226,401  

Affiliate investments (Cost of $46,949 and $85,013, respectively)

     37,583       75,473  

Control investments (Cost of $40,615 and $45,797 respectively)

     19,785       20,240  
  

 

 

   

 

 

 

Total investments at fair value (Cost of  $374,906  and  $381,801 respectively)

     313,517       322,114  
  

 

 

   

 

 

 

Cash and cash equivalents

     5,014       6,152  

Restricted cash and cash equivalents

     310       406  

Interest receivable, net

     2,066       2,333  

Due from custodian

     2,148       2,164  

Deferred financing fees

     1,225       1,521  

Other assets, net

     4,357       848  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 328,637     $ 335,538  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings, at fair value (Cost of $54,100 and $71,300, respectively)

   $ 53,989     $ 71,300  

Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 4,000,000 shares authorized and 2,440,000 shares issued and outstanding, net

     59,536       59,360  

Accounts payable and accrued expenses

     455       1,019  

Interest payable

     174       201  

Fees due to Adviser (A)

     209       1,222  

Fee due to Administrator (A)

     286       282  

Other liabilities

     1,318       947  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 115,967     $ 134,331  
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

    

Common stock, $0.001 par value per share, 46,000,000 shares authorized; 25,517,866 shares issued and outstanding as of March 31, 2017 and 23,344,422 shares issued and outstanding as of September 30, 2016

   $ 26     $ 23  

Capital in excess of par value

     343,741       327,678  

Cumulative net unrealized depreciation of investments

     (61,389     (59,687

Cumulative net unrealized depreciation of other

     111       —    

(Over) under distributed net investment income

     (518     4,277  

Accumulated net realized losses

     (69,301     (71,084
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 212,670     $ 201,207  
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE

   $ 8.33     $ 8.62  
  

 

 

   

 

 

 

 

(A)   Refer to Note 4— Related Party Transactions for additional information.
(B) Refer to Note 10— Commitments and Contingencies for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
March 31,
     Six Months Ended
March 31,
 
     2017      2016      2017      2016  

INVESTMENT INCOME

           

Interest income

           

Non-Control/Non-Affiliate investments

   $ 7,021      $ 6,416      $ 13,827      $ 13,324  

Affiliate investments

     1,129        1,945        2,509        3,910  

Control investments

     433        306        878        618  

Other

     5        1        7        2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     8,588        8,668        17,221        17,854  

Other income

           

Non-Control/Non-Affiliate investments

     205        788        404        1,289  

Affiliate investments

     —          —          1,142        —    

Control investments

     —          —          —          375  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

     205        788        1,546        1,664  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment income

     8,793        9,456        18,767        19,518  
  

 

 

    

 

 

    

 

 

    

 

 

 

EXPENSES

           

Base management fee (A)

     1,359        1,362        2,737        2,890  

Loan servicing fee (A)

     955        973        1,938        1,981  

Incentive fee (A)

     1,070        1,064        2,363        2,182  

Administration fee (A)

     286        277        586        612  

Interest expense on borrowings

     587        633        1,143        1,418  

Dividend expense on mandatorily redeemable preferred stock

     1,029        1,029        2,058        2,058  

Amortization of deferred financing fees

     274        273        547        528  

Professional fees

     206        358        442        711  

Other general and administrative expenses

     143        394        544        681  
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses, before credits from Adviser

     5,909        6,363        12,358        13,061  

Credit to base management fee—loan servicing fee (A)

     (955      (973      (1,938      (1,981

Credits to fees from Adviser—other (A)

     (1,520      (851      (2,219      (1,239
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses, net of credits

     3,434        4,539        8,201        9,841  
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INVESTMENT INCOME

     5,359        4,917        10,566        9,677  
  

 

 

    

 

 

    

 

 

    

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

           

Net realized gain (loss):

           

Non-Control/Non-Affiliate investments

     44        (5,460      3,926        9,030  

Affiliate investments

     —          —          (2,330      1,207  

Control investments

     1        —          (4,999      (317

Other

     —          (61      —          (63
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net realized gain (loss)

     45        (5,521      (3,403      9,857  

Net unrealized (depreciation) appreciation:

           

Non-Control/Non-Affiliate investments

     (736      (2,503      (6,603      (22,733

Affiliate investments

     (532      (1,778      174        (6,533

Control investments

     621        (1,315      4,727        (5,173

Other

     (101      61        111        61  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net unrealized (depreciation) appreciation

     (748      (5,535      (1,591      (34,378
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized and unrealized (loss) gain

     (703      (11,056      (4,994      (24,521
  

 

 

    

 

 

    

 

 

    

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 4,656      $ (6,139    $ 5,572      $ (14,844
  

 

 

    

 

 

    

 

 

    

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

           

Net investment income

   $ 0.21      $ 0.21      $ 0.42      $ 0.42  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 0.18      $ (0.26    $ 0.22      $ (0.64
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributions declared and paid

   $ 0.21      $ 0.21      $ 0.42      $ 0.42  
  

 

 

    

 

 

    

 

 

    

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING : Basic and Diluted

     25,517,866        23,413,131        25,144,358        23,048,110  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(A)   Refer to Note 4— Related Party Transactions for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-3


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended March 31,  
             2017                      2016          

OPERATIONS

     

Net investment income

   $ 10,566      $ 9,677  

Net realized (loss) gain on investments

     (3,403      9,857  

Net unrealized depreciation of investments

     (1,702      (34,439

Net unrealized appreciation of other

     111        61  
  

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations

     5,572        (14,844
  

 

 

    

 

 

 

DISTRIBUTIONS

     

Distributions to common stockholders from net investment income

     (10,566      (6,489

Distributions to common stockholders from realized gains

     —          (3,188
  

 

 

    

 

 

 

Total distributions to common stockholders

     (10,566      (9,677
  

 

 

    

 

 

 

CAPITAL TRANSACTIONS

     

Issuance of common stock

     17,344        19,665  

Offering costs for issuance of common stock

     (887      (1,102

Repurchase of common stock

     —          (282
  

 

 

    

 

 

 

Net increase in net assets resulting from capital transactions

     16,457        18,281  
  

 

 

    

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS

     11,463        (6,240

NET ASSETS, BEGINNING OF PERIOD

     201,207        191,444  
  

 

 

    

 

 

 

NET ASSETS, END OF PERIOD

   $ 212,670      $ 185,204  
  

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-4


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended March 31,  
             2017                     2016          

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase (decrease) in net assets resulting from operations

   $ 5,572     $ (14,844

Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash provided by (used in) operating activities:

    

Purchase of investments

     (59,658     (25,868

Principal repayments on investments

     56,755       58,123  

Net proceeds from sale of investments

     8,311       19,913  

Increase in investments due to paid-in-kind interest or other

     (2,289     (3,739

Net change in premiums, discounts and amortization

     373       (97

Cost adjustments on non-accrual loans

     —         (388

Net realized loss (gain) on investments

     3,403       (9,920

Net realized loss on other

     —         63  

Net unrealized depreciation of investments

     1,702       34,439  

Net unrealized appreciation of other

     (111     (61

Decrease in restricted cash and cash equivalents

     96       123  

Amortization of deferred financing fees

     547       528  

Decrease in interest receivable, net

     267       2,828  

Decrease in due from custodian

     16       473  

Increase in other assets, net

     (3,509     (2,865

Decrease in accounts payable and accrued expenses

     (564     (123

Decrease in interest payable

     (27     (111

Decrease in fees due to Adviser (A)

     (1,013     (45

Increase in fee due to Administrator (A)

     4       27  

Increase in other liabilities

     371       5,010  
  

 

 

   

 

 

 

Net cash provided by operating activities

     10,246       63,466  
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     70,300       36,000  

Repayments on borrowings

     (87,500     (106,000

Deferred financing fees

     (75     (76

Proceeds from issuance of common stock

     17,344       19,665  

Offering costs for issuance of common stock

     (887     (1,102

Repurchases of common stock

     —         (282

Distributions paid to common stockholders

     (10,566     (9,677
  

 

 

   

 

 

 

Net cash used in financing activities

     (11,384     (61,472
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (1,138     1,994  

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     6,152       3,808  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 5,014     $ 5,802  
  

 

 

   

 

 

 

NON-CASH ACTIVITIES (B)

   $ —       $ 3,921  

 

(A)   Refer to Note 4— Related Party Transactions for additional information.
(B)   Significant non-cash operating activities consisted principally of the following transaction:

In February 2016, our investment in Targus Group International, Inc. was restructured resulting in non-cash activity of $3.9 million and a new investment in Targus Cayman HoldCo Limited, which is listed on the accompanying Consolidated Schedule of Investments as of March 31, 2017 and September 30, 2016.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-5


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
NON-CONTROL/NON-AFFILIATE INVESTMENTS (N) :                     

Proprietary Investments:

        

AG Transportation Holdings, LLC

   Cargo transport    Secured Second Lien Debt (13.3%, Due 3/2018) (D)    $ 13,000      $ 13,000      $ 13,098  
      Member Profit Participation (18.0% ownership) (F)(H)         1,000        —    
      Profit Participation Warrants (7.0% ownership) (F)(H)         244        —    
           

 

 

    

 

 

 
              14,244        13,098  

Alloy Die Casting Corp. (S)

  

Diversified/conglomerate

manufacturing

   Secured First Lien Debt (13.5%, Due 10/2018) (D)(I)      5,235        5,235        4,188  
      Secured First Lien Debt (13.5%, Due 10/2018) (D)(I)      75        75        60  
      Secured First Lien Debt (Due 10/2018) (D) (Q)      390        390        314  
      Preferred Stock (2,102 shares) (F)(H)         2,102        —    
      Common Stock (270 shares) (F)(H)         18        —    
           

 

 

    

 

 

 
              7,820        4,562  

B+T Group Acquisition Inc. (S)

   Telecommunications    Secured First Lien Debt (13.0%, Due 12/2019) (D)      6,000        6,000        5,880  
      Preferred Stock (5,503 shares) (F)(H)(K)         1,799        —    
           

 

 

    

 

 

 
              7,799        5,880  

Belnick, Inc.

   Home and Office Furnishings, Housewares and Durable Consumer Products    Secured Second Lien Debt (11.0%, Due 8/2023) (J)(G)      10,000        10,000        10,000  

Canopy Safety Brands, LLC

   Personal and non-durable consumer products    Secured First Lien Line of Credit, $500 available
(7.5%, Due 9/2019) (D)
     —          —          —    
      Secured First Lien Debt (10.5%, Due 9/2021) (D)      7,000        7,000        7,035  
      Participation Warrant (F)(H)         500        390  
           

 

 

    

 

 

 
              7,500        7,425  

Chinese Yellow Pages Company

   Printing and publishing    Secured First Lien Line of Credit, $0 available (8.0%, Due 2/2015) (F)      107        107        —    

Drumcree, LLC

   Broadcasting and entertainment    Secured First Lien Debt (13.0% PIK, Due 1/2017) (F)(G)(V)      5,159        5,159        5,159  

Flight Fit N Fun LLC

   Leisure, Amusement, Motion Pictures, Entertainment    Secured First Lien Debt (15.0%, Due 9/2020) (D)      7,800        7,800        7,371  
      Preferred Stock (700,000 units) (F)(H)         700        671  
           

 

 

    

 

 

 
              8,500        8,042  

 

S-F-6


Table of Contents

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
NON-CONTROL/NON-AFFILIATE INVESTMENTS (N)  (Continued):                     

Francis Drilling Fluids, Ltd.

   Oil and gas    Secured Second Lien Debt (11.9% PIK, Due 4/2020) (D)      15,761        15,611        5,910  
      Secured Second Lien Debt (10.8% PIK, Due 4/2020) (D)      7,321        7,252        2,746  
      Preferred Equity Units (1,656 units) (F)(H)         1,215        —    
      Common Equity Units (1,656 units) (F)(H)         1        —    
           

 

 

    

 

 

 
              24,079        8,656  

Funko Acquisition Holdings,

   Personal and non-durable    Preferred Equity Units (260 units) (H)(F)         167        258  

LLC (S)

   consumer products    Common Stock (975 units)  (H)(F)         —          —    
           

 

 

    

 

 

 
              167        258  

GFRC Holdings, LLC

   Buildings and real estate    Secured First Lien Line of Credit, $195 available (9.0%, Due 9/2018) (F)      1,005        1,005        1,005  
      Secured First Lien Debt (9.0%, Due 9/2018) (F)      1,000        1,000        1,000  
      Preferred Stock (1,000 shares) (F)(H)         1,025        811  
      Common Stock Warrants (45.0% ownership) (F)(H)         —          —    
           

 

 

    

 

 

 
              3,030        2,816  

IA Tech, LLC

  

Diversified/conglomerate

service

   Secured First Lien Debt (12.0%, Due 6/2021) (D)      23,000        23,000        23,460  
              

Leeds Novamark Capital I, L.P.

   Private equity fund–healthcare, education and childcare    Limited Partnership Interest (3.5% ownership, $1,581 uncalled capital commitment) (H)(M)(R)         1,414        1,303  

Meridian Rack & Pinion, Inc. (S)

   Automobile    Secured First Lien Debt (13.5%, Due 12/2018) (D)      4,140        4,140        3,705  
      Preferred Stock (1,449 shares) (F)(H)         1,449        1,239  
           

 

 

    

 

 

 
              5,589        4,944  

Merlin International, Inc.

   Healthcare, education, and childcare    Secured Second Lien Debt (11.0%, Due 8/2022) (D)      10,000        10,000        10,087  

The Mochi Ice Cream Company (T)

   Beverage, Food and Tobacco    Secured Second Lien Debt (11.5%, Due 1/2021) (D)      6,750        6,750        6,843  
      Common Stock (450 units) (F)(H)         450        402  
           

 

 

    

 

 

 
              7,200        7,245  

NetFortris Corp.

   Telecommunications    Secured First Lien Line of Credit, $2,000 available (11.0%, Due 11/2017) (J)      —          —          —    
      Secured First Lien Debt (9.4%, Due 2/2021) (J)      29,000        29,000        29,000  
      Common Stock Warrant (F)         1        —    
           

 

 

    

 

 

 
              29,001        29,000  

 

S-F-7


Table of Contents

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
NON-CONTROL/NON-AFFILIATE INVESTMENTS (N)  (Continued):                     

Precision International, LLC

   Machinery    Secured First Lien Debt (10.0% PIK, Due 9/2021) (D)(G)      776        776        769  
      Secured First Lien Mortgage Note (3.0%, Due 9/2017) (D)(G)      10        10        10  
      Membership Unit Warrant (33.3% ownership) (F)(H)         —          19  
           

 

 

    

 

 

 
              786        798  

Sea Link International IRB, Inc.

   Automobile    Secured Second Lien Debt (11.3%, Due 11/2021) (D)(G)      5,000        5,000        5,012  
      Secured Second Lien Delayed Draw Term Loan, $2,000 available (11.3%, Due 11/2021) (D)(G)      —          —          —    
      Common Equity Units (240,000 units) (F)(H)         240        240  
           

 

 

    

 

 

 
              5,240        5,252  

Travel Sentry, Inc.

   Diversified/conglomerate service    Secured First Lien Debt (10.0%, Due 12/2021) (D)      9,329        9,329        9,422  

Triple H Food Processors, LLC

   Beverage, Food and Tobacco    Secured First Lien Line of Credit, $1,500 available (7.8%, Due 8/2018) (D)      —          —          —    
      Secured First Lien Debt (9.8%, Due 8/2020) (D)      7,200        7,200        7,344  
      Common Stock (250,000 units) (F)(H)         250        523  
           

 

 

    

 

 

 
              7,450        7,867  

TWS Acquisition Corporation

   Healthcare, education and childcare    Secured First Lien Line of Credit, $1,500 available (9.0%, Due 7/2017) (D)      —          —          —    
      Secured First Lien Debt (9.0%, Due 7/2020) (D)      9,432        9,432        9,586  
           

 

 

    

 

 

 
              9,432        9,586  

United Flexible, Inc.

   Diversified/conglomerate manufacturing    Secured Second Lien Debt (10.5%, 2.0% PIK, Due 2/2022) (D)      17,812        17,722        17,323  
      Preferred Stock (538 shares) (F)(H)         538        475  
      Common Stock (1,158 shares) (F)(H)         148        —    
           

 

 

    

 

 

 
              18,408        17,798  

Vacation Rental Pros Property Management, LLC

   Hotels, motels, inns, and gaming    Secured Second Lien Debt (11.0%, 3.0% PIK, Due 6/2023) (D)      7,037        7,037        7,028  

Vision Government Solutions, Inc.

   Diversified/conglomerate service    Secured First Lien Line of Credit, $0 available (7.5%, Due 4/2017) (D)      1,450        1,450        1,373  
      Secured First Lien Delayed Draw Term Loan, $1,200 available (10.0%, Due 4/2017) (D)(G)      1,300        1,300        1,211  
      Secured First Lien Debt (9.8%, Due 4/2017) (D)      9,000        9,000        8,421  
           

 

 

    

 

 

 
              11,750        11,005  

 

S-F-8


Table of Contents

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
NON-CONTROL/NON-AFFILIATE INVESTMENTS (N)  (Continued):                     

WadeCo Specialties, Inc.

   Oil and gas    Secured First Lien Line of Credit, $1,825 available (8.0%, Due 4/2017) (D)(U)      1,175        1,174        1,116  
      Secured First Lien Debt (8.0%, Due 3/2019) (D)      10,941        10,941        10,394  
      Secured First Lien Debt (12.0%, Due 3/2019) (D)      7,000        7,000        6,545  
      Preferred Stock (1,000 shares) (F)(H)         618        277  
           

 

 

    

 

 

 
              19,733        18,332  
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Proprietary Investments

      $ 253,774      $ 229,023  
           

 

 

    

 

 

 

Syndicated Investments:

              

DataPipe, Inc.

   Diversified/conglomerate service    Secured Second Lien Debt (9.0%, Due 9/2019) (E)      2,000        1,958        2,005  

LDiscovery, LLC

   Diversified/conglomerate service    Secured Second Lien Debt (11.0%, Due 12/2023) (E)      5,000        4,805        4,750  

NetSmart Technologies, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.5%, Due 10/2023) (E)      3,660        3,606        3,660  

New Trident Holdcorp, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.3%, Due 7/2020) (E)      4,000        3,983        3,320  

PLATO Learning, Inc.

   Healthcare, education and childcare    Unsecured Debt (10.0% PIK, Due 6/2020) (D)(G)    $ 3,161      $ 3,126      $ 3,185  
      Common Stock (21,429 shares) (F)(H)         2,637        —    
           

 

 

    

 

 

 
              5,763        3,185  

PSC Industrial Holdings Corp.

   Diversified/conglomerate service    Secured Second Lien Debt (9.3%, Due 12/2021) (E)      3,500        3,448        3,220  

SourceHOV LLC

   Finance    Secured Second Lien Debt (11.5%, Due 4/2020) (E)      5,000        4,870        4,750  

The Active Network, Inc.

   Electronics    Secured Second Lien Debt (10.5%, Due 11/2021) (E)      519        519        514  

Vertellus Holdings LLC

   Chemicals, plastics and rubber    Secured Second Lien Debt (13.0%, Due 10/2021) (E)      1,099        1,099        923  
      Common Stock Units (879,121 units) (E)         3,018        659  
           

 

 

    

 

 

 
              4,117        1,582  

W3 Co.

   Oil and gas    Common Equity (435 shares) (F)(H)      499        499        140  
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Syndicated Investments

      $ 33,568      $ 27,126  
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 81.7% of total investments at fair value)

 

   $ 287,342      $ 256,149  
           

 

 

    

 

 

 

AFFILIATE INVESTMENTS (O) :

        

Proprietary Investments:

           

Edge Adhesives Holdings, Inc. (S)

   Diversified/conglomerate    Secured First Lien Debt (12.5%, Due 2/2019) (D)    $ 6,200      $ 6,200      $ 6,138  
   manufacturing    Secured First Lien Debt (13.8%, Due 2/2019) (D)      1,600        1,600        1,592  
      Preferred Stock (2,516 units) (F)(H)         2,516        847  
           

 

 

    

 

 

 
              10,316        8,577  

 

S-F-9


Table of Contents

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
AFFILIATE INVESTMENTS (O) (Continued):                     

FedCap Partners, LLC

   Private equity fund – aerospace and defense    Class A Membership Units (80 units, $0 Uncalled Commitment) (H)(L)(R)         1,634        1,265  

Lignetics, Inc.

   Diversified natural resources, precious metals and minerals    Secured Second Lien Debt (12.0%, Due 2/2021) (D)      6,000        6,000        5,932  
      Secured Second Lien Debt (12.0%, Due 2/2021) (D)      8,000        8,000        7,910  
      Common Stock (152,603 shares) (F)(H)         1,855        323  
           

 

 

    

 

 

 
              15,855        14,165  

LWO Acquisitions Company LLC

   Diversified/conglomerate manufacturing    Secured First Lien Line of Credit, $0 available (6.5%, 2.0% PIK, Due 3/2018) (D)      2,621        2,617        1,966  
      Secured First Lien Debt (9.5%, 2.0% PIK, Due 12/2019) (D)      10,831        10,806        8,123  
      Common Units (921,000 units) (F)(H)         921        —    
           

 

 

    

 

 

 
              14,344        10,089  
           

 

 

    

 

 

 

Subtotal – Affiliate Proprietary Investments

      $ 42,149      $ 34,096  
           

 

 

    

 

 

 

Syndicated Investments:

              

Targus Cayman HoldCo Limited

   Textiles and leather    Secured First Lien Debt (15.0% PIK, Due 12/2019) (D)(G)      2,457        2,457        2,460  
      Common Stock (526,141 shares) (F)(H)         2,343        1,027  
           

 

 

    

 

 

 
              4,800        3,487  
           

 

 

    

 

 

 

Total Affiliate Investments (represented 12.0% of total investments at fair value)

      $ 46,949      $ 37,583  
           

 

 

    

 

 

 

CONTROL INVESTMENTS (P) :

 

Proprietary Investments:

              

Defiance Integrated Technologies, Inc.

   Automobile    Secured Second Lien Debt (11.0%, Due 2/2019) (F)    $ 6,065      $ 6,065      $ 6,065  
      Common Stock (33,321 shares) (F)(H)         580        4,297  
           

 

 

    

 

 

 
            $ 6,645      $ 10,362  

PIC 360, LLC

   Machinery    Secured First Lien Debt (14.0%, Due 12/2017) (F)(G)      4,000        4,000        4,000  
      Common Equity Units (750 units) (F)         1        37  
           

 

 

    

 

 

 
              4,001