Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 497, Received: 08/11/2017 16:01:37)
Table of Contents

Filed Pursuant to Rule 497

Securities Act File No. 333-208637

 

LOGO

Supplement No. 1, dated August 11, 2017

to

Prospectus Supplement, dated May 22, 2017

This supplement contains information which amends, supplements or modifies certain information contained in the Prospectus of Gladstone Capital Corporation (the “Company”), dated February 6, 2017 as supplemented by the Prospectus Supplement dated May 22, 2017. Capitalized terms used but not defined herein shall have the same meaning given them in the Prospectus Supplement or Prospectus, as applicable.

Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their net asset value (“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 the Prospectus Supplement and beginning on page 8 of the Prospectus before you decide to invest.

STATUS OF THE OFFERING

In February 2015, we entered into equity distribution agreements (commonly referred to as “at-the-market agreements” or the “Sales Agreements”) with KeyBanc Capital Markets Inc. and Cantor Fitzgerald & Co., each a “Sales Agent,” under which we had the ability to 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. In May 2017, we terminated the Sales Agreement with KeyBanc Capital Markets Inc. and amended the Sales Agreement with Cantor Fitzgerald & Co. to reference our current registration statement. All other material terms of the Sales Agreement with Cantor Fitzgerald & Co. remained unchanged.

The gross proceeds raised, the related sales agent commissions, the offering expenses and the average price at which these shares were issued pursuant to the ATM program from the period from May 22, 2017 through August 10, 2017 are as follows:

 

Fiscal Year 2017 Issuance of Common Stock

   Number of
Shares
     Gross
Proceeds
     Sales
Commission
     Offering
Expenses
     Average
Offering Price
 

Third Quarter ended June 30, 2017

     362,600      $ 3,587,444      $ 53,812      $ 130,096      $ 9.89  

Fourth Quarter (through August 10, 2017)

     235,004        2,321,883        34,828               9.88  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     597,604      $ 5,909,327      $ 88,640      $ 130,096      $ 9.89  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The aforementioned shares sold under the ATM Program were all sold at a premium to the then estimated NAV per share.

FILING OF OUR FORM 10-Q

On August 2, 2017, we filed our Quarterly Report on Form 10-Q (“Form 10-Q”) for the quarter ended June 30, 2017 with the Securities and Exchange Commission. We have attached the Form 10-Q to this supplement as Annex A.

 

 

Cantor Fitzgerald & Co


Table of Contents

Annex A

 


Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one):

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 814-00237

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

MARYLAND   54-2040781

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 100

MCLEAN, VIRGINIA

(Address of principal executive office)

 

22102

(Zip Code)

(703) 287-5800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
Emerging growth company   ☐                       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding as of August 1, 2017 was 26,115,470.

 

 

 


Table of Contents

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I.

  

FINANCIAL INFORMATION

  
Item 1.   

Financial Statements (Unaudited)

  
  

Consolidated Statements of Assets and Liabilities as of June  30, 2017 and September 30, 2016

     3  
  

Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016

     4  
  

Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2017 and 2016

     5  
  

Consolidated Statements of Cash Flows for the nine months ended June 30, 2017 and 2016

     6  
  

Consolidated Schedules of Investments as of June  30, 2017 and September 30, 2016

     7  
  

Notes to Consolidated Financial Statements

     17  
Item 2.   

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

     41  
  

Overview

     41  
  

Results of Operations

     45  
  

Liquidity and Capital Resources

     54  
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     60  
Item 4.   

Controls and Procedures

     60  
PART II.   

OTHER INFORMATION

  
Item 1.   

Legal Proceedings

     61  
Item 1A.   

Risk Factors

     61  
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     61  
Item 3.   

Defaults Upon Senior Securities

     61  
Item 4.   

Mine Safety Disclosures

     61  
Item 5.   

Other Information

     61  
Item 6.   

Exhibits

     61  

SIGNATURES

     62  

 

2


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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,     September 30,  
              2017                       2016           

ASSETS

    

Investments, at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $314,071 and $250,991, respectively)

   $ 283,161     $ 226,401  

Affiliate investments (Cost of $51,217 and $85,013, respectively)

     42,041       75,473  

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

     20,301       20,240  
  

 

 

   

 

 

 

Total investments at fair value (Cost of $405,903 and $381,801 respectively)

     345,503       322,114  
  

 

 

   

 

 

 

Cash and cash equivalents

     7,002       6,152  

Restricted cash and cash equivalents

     273       406  

Interest receivable, net

     2,284       2,333  

Due from custodian

     2,857       2,164  

Deferred financing fees

     1,039       1,521  

Other assets, net

     2,387       848  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 361,345     $ 335,538  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings, at fair value (Cost of $82,200 and $71,300, respectively)

   $ 82,271     $ 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

     59,624       59,360  

Accounts payable and accrued expenses

     219       1,019  

Interest payable

     235       201  

Fees due to Adviser (A)

     460       1,222  

Fee due to Administrator (A)

     272       282  

Other liabilities

     1,281       947  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 144,362     $ 134,331  
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

    

Common stock, $0.001 par value per share, 46,000,000 shares authorized; 25,880,466 shares issued and outstanding as of June 30, 2017 and 23,344,422 shares issued and outstanding as of September 30, 2016

   $ 26     $ 23  

Capital in excess of par value

     347,061       327,678  

Cumulative net unrealized depreciation of investments

     (60,400     (59,687

Cumulative net unrealized depreciation of other

     (71     —    

(Over) under distributed net investment income

     (313     4,277  

Accumulated net realized losses

     (69,320     (71,084
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 216,983     $ 201,207  
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE

   $ 8.38     $ 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.

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2017     2016     2017     2016  

INVESTMENT INCOME

        

Interest income, net

        

Non-Control/Non-Affiliate investments

   $ 8,047     $ 5,878     $ 21,874     $ 19,203  

Affiliate investments

     1,204       2,069       3,713       5,980  

Control investments

     371       304       1,249       921  

Other

     7       2       14       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     9,629       8,253       26,850       26,107  

Other income

        

Non-Control/Non-Affiliate investments

     3       542       407       1,831  

Affiliate investments

     —         466       1,142       466  

Control investments

     —         583       —         958  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     3       1,591       1,549       3,255  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,632       9,844       28,399       29,362  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee (A)

     1,480       1,369       4,217       4,258  

Loan servicing fee (A)

     1,071       896       3,009       2,876  

Incentive fee (A)

     1,116       1,187       3,479       3,369  

Administration fee (A)

     272       287       858       900  

Interest expense on borrowings

     904       648       2,047       2,066  

Dividend expense on mandatorily redeemable preferred stock

     1,029       1,029       3,087       3,088  

Amortization of deferred financing fees

     274       273       821       802  

Professional fees

     223       214       665       925  

Other general and administrative expenses

     230       426       774       1,106  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, before credits from Adviser

     6,599       6,329       18,957       19,390  

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

     (1,071     (896     (3,009     (2,876

Credits to fees from Adviser - other (A)

     (1,275     (496     (3,494     (1,736
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     4,253       4,937       12,454       14,778  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,379       4,907       15,945       14,584  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized (loss) gain:

        

Non-Control/Non-Affiliate investments

     (23     (153     3,903       8,875  

Affiliate investments

     —         72       (2,330     1,280  

Control investments

     —         (3     (4,999     (318

Other

     —         —         —         (64
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized (loss) gain

     (23     (84     (3,426     9,773  

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     283       4,176       (6,320     (18,558

Affiliate investments

     190       (2,012     364       (8,546

Control investments

     516       (1,471     5,243       (6,643

Other

     (182     —         (71     62  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation)

     807       693       (784     (33,685
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     784       609       (4,210     (23,912
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 6,163     $ 5,516     $ 11,735     $ (9,328
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.21     $ 0.21     $ 0.63     $ 0.63  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 0.24     $ 0.24     $ 0.46     $ (0.40
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared and paid

   $ 0.21     $ 0.21     $ 0.63     $ 0.63  
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and Diluted

     25,576,149       23,363,952       25,288,289       23,145,842  

 

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

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

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2017     2016  

OPERATIONS

    

Net investment income

   $ 15,945     $ 14,584  

Net realized (loss) gain on investments and other

     (3,426     9,773  

Net unrealized depreciation of investments

     (713     (33,747

Net unrealized (depreciation) appreciation of other

     (71     62  
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     11,735       (9,328
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income

     (15,945     (11,395

Distributions to common stockholders from realized gains

     —         (3,189
  

 

 

   

 

 

 

Total distributions to common stockholders

     (15,945     (14,584
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Issuance of common stock

     20,932       19,665  

Offering costs for issuance of common stock

     (946     (1,111

Repurchase of common stock

     —         (572
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     19,986       17,982  
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS

     15,776       (5,930

NET ASSETS, BEGINNING OF PERIOD

     201,207       191,444  
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 216,983     $ 185,514  
  

 

 

   

 

 

 

 

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

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

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2017     2016  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase (decrease) in net assets resulting from operations

   $ 11,735     $ (9,328

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

    

Purchase of investments

     (95,449     (59,862

Principal repayments on investments

     62,792       78,596  

Net proceeds from sale of investments

     8,289       19,829  

Net realized loss (gain) on investments

     3,426       (9,837

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

     (3,599     (4,311

Net change in premiums, discounts and amortization

     439       (109

Cost adjustments on non-accrual loans

     —         (388

Net unrealized depreciation of investments

     713       33,747  

Net realized loss on other

     —         64  

Net unrealized depreciation (appreciation) of other

     71       (62

Changes in assets and liabilities:

    

Decrease in restricted cash and cash equivalents

     133       223  

Amortization of deferred financing fees

     821       802  

Decrease in interest receivable, net

     49       2,927  

Decrease in due from custodian

     (693     (593

Increase in other assets, net

     (1,539     (2,803

Decrease in accounts payable and accrued expenses

     (800     (163

Increase (decrease) in interest payable

     34       (108

(Decrease) increase in fees due to Adviser (A)

     (762     460  

(Decrease) increase in fee due to Administrator (A)

     (10     37  

Increase in other liabilities

     334       2,770  
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (14,016     51,891  
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     108,000       77,000  

Repayments on borrowings

     (97,100     (131,000

Deferred financing fees

     (75     (75

Proceeds from issuance of common stock

     20,932       19,665  

Offering costs for issuance of common stock

     (946     (1,111

Repurchases of common stock

     —         (572

Distributions paid to common stockholders

     (15,945     (14,584
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     14,866       (50,677
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     850       1,214  

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     6,152       3,808  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 7,002     $ 5,022  
  

 

 

   

 

 

 

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 June 30, 2017 and September 30, 2016.

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

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

NON-CONTROL/NON-AFFILIATE INVESTMENTS (M) :

        

Proprietary Investments:

              

AG Transportation Holdings, LLC

   Cargo transport    Secured Second Lien Debt (13.3%, Due 3/2018) (C)    $ 13,000      $ 13,000      $ 13,065  
      Member Profit Participation (18.0% ownership) (E)(G)         1,000        —    
      Profit Participation Warrants (7.0% ownership) (E)(G)         244        —    
           

 

 

    

 

 

 
              14,244        13,065  

Alloy Die Casting Corp. (R)

   Diversified/conglomerate    Secured First Lien Debt (13.5%, Due 10/2018) (C)(H)      5,235        5,235        3,665  
   manufacturing    Secured First Lien Debt (13.5%, Due 10/2018) (C)(H)      75        75        53  
      Secured First Lien Debt (Due 10/2018) (C)(P)      390        390        275  
      Preferred Stock (2,192 shares) (E)(G)         2,192        —    
      Common Stock (270 shares) (E)(G)         18        —    
           

 

 

    

 

 

 
              7,910        3,993  

B+T Group Acquisition Inc. (R)

   Telecommunications    Secured First Lien Debt (13.0%, Due 12/2019) (C)      6,000        6,000        5,940  
      Preferred Stock (5,503 shares) (E)(G)(J)         1,799        1,374  
           

 

 

    

 

 

 
              7,799        7,314  

Belnick, Inc.

   Home and Office Furnishings, Housewares and Durable Consumer Products    Secured Second Lien Debt (11.0%, Due 8/2023) (C)(F)      10,000        10,000        10,025  

Canopy Safety Brands, LLC

   Personal and non-durable consumer products    Secured First Lien Line of Credit, $500 available
(7.7%, Due 9/2019) (C)
     —          —          —    
      Secured First Lien Debt (10.7%, Due 9/2021) (C)      6,850        6,850        6,859  
      Participation Warrant (E)(G)         500        286  
           

 

 

    

 

 

 
              7,350        7,145  

Chinese Yellow Pages Company

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

Drumcree, LLC

   Broadcasting and entertainment    Secured First Lien Debt (15.0% PIK, Due 8/2017) (E)(F)      6,192        6,177        6,192  

Flight Fit N Fun LLC

   Leisure, Amusement, Motion Pictures, Entertainment    Secured First Lien Debt (15.2%, Due 9/2020) (C)      7,800        7,800        7,488  
      Preferred Stock (700,000 units) (E)(G)         700        759  
           

 

 

    

 

 

 
              8,500        8,247  

Francis Drilling Fluids, Ltd.

   Oil and gas    Secured Second Lien Debt (11.9% PIK, Due 4/2020) (C)      16,243        16,103        5,685  
      Secured Second Lien Debt (10.8% PIK, Due 4/2020) (C)      7,524        7,459        2,634  
      Preferred Equity Units (1,656 units) (E)(G)         1,215        —    
      Common Equity Units (1,656 units) (E)(G)         1        —    
           

 

 

    

 

 

 
              24,778        8,319  

Funko Acquisition Holdings,

   Personal and non-durable    Preferred Equity Units (260 units) (E)(G)         167        245  

LLC (R)

   consumer products    Common Stock (975 units) (E)(G)         —          —    
           

 

 

    

 

 

 
              167        245  

GFRC Holdings, LLC

   Buildings and real estate    Secured First Lien Line of Credit, $95 available (9.0%, Due 9/2018) (E)      1,105        1,105        1,105  
      Secured First Lien Debt (9.0%, Due 9/2018) (E)      1,000        1,000        1,000  
      Preferred Stock (1,000 shares) (E)(G)         1,025        869  
      Common Stock Warrants (45.0% ownership) (E)(G)         —          —    
           

 

 

    

 

 

 
              3,130        2,974  

HB Capital Resources, Ltd.

   Diversified/conglomerate    Secured Second Lien Debt (11.5%, Due 10/2022) (I)      22,000        22,000        22,000  
   service            

IA Tech, LLC

   Diversified/conglomerate    Secured First Lien Debt (12.2%, Due 6/2021) (C)      23,000        23,000        23,518  
   service            

Leeds Novamark Capital I, L.P.

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

Meridian Rack & Pinion, Inc. (R)

   Automobile    Secured First Lien Debt (13.5%, Due 12/2018) (C)      4,140        4,140        3,726  
     

Preferred Stock (1,449 shares) (E)(G)

        1,449        429  
           

 

 

    

 

 

 
              5,589        4,155  

 

7


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

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

Merlin International, Inc.

   Healthcare, education, and childcare    Secured Second Lien Debt (11.2%, Due 8/2022) (C)      10,000        10,000        10,112  

The Mochi Ice Cream Company (T)

   Beverage, Food and Tobacco    Secured Second Lien Debt (11.7%, Due 1/2021) (C)      6,750        6,750        6,885  
      Common Stock (450 units) (E)(G)         450        606  
           

 

 

    

 

 

 
              7,200        7,491  

NetFortris Corp.

   Telecommunications    Secured First Lien Line of Credit, $2,000 available (11.2%, Due 11/2017) (C)      —          —          —    
      Secured First Lien Debt (9.6%, Due 2/2021) (C)      24,000        24,000        24,120  
      Common Stock Warrant (E)(G)         1        —    
           

 

 

    

 

 

 
              24,001        24,120  

Precision International, LLC

   Machinery    Secured First Lien Debt (10.0% PIK, Due 9/2021) (C)(F)      795        795        789  
      Membership Unit Warrant (33.3% ownership) (E)(G)         —          —    
           

 

 

    

 

 

 
              795        789  

Sea Link International IRB, Inc.

   Automobile    Secured Second Lien Debt (11.3%, Due 11/2021) (C)(F)      5,000        5,000        5,037  
      Secured Second Lien Delayed Draw Term Loan, $2,000 available (11.3%, Due 11/2021) (C)(F)      —          —          —    
      Common Equity Units (240,000 units) (E)(G)         240        177  
           

 

 

    

 

 

 
              5,240        5,214  

Travel Sentry, Inc.

   Diversified/conglomerate service    Secured First Lien Debt (10.3%, Due 12/2021) (C)      8,902        8,902        9,047  

Triple H Food Processors, LLC

   Beverage, Food and Tobacco    Secured First Lien Line of Credit, $1,500 available (8.0%, Due 8/2018) (C)      —          —          —    
      Secured First Lien Debt (10.0%, Due 8/2020) (C)      7,000        7,000        7,166  
      Common Stock (250,000 units) (E)(G)         250        452  
           

 

 

    

 

 

 
              7,250        7,618  

TWS Acquisition Corporation

   Healthcare, education and childcare    Secured First Lien Line of Credit, $1,500 available (9.2%, Due 7/2017) (C)      —          —          —    
      Secured First Lien Debt (9.2%, Due 7/2020) (C)      9,432        9,432        9,598  
           

 

 

    

 

 

 
              9,432        9,598  

United Flexible, Inc.

   Diversified/conglomerate manufacturing    Secured Second Lien Debt (10.7%, 2.0% PIK, Due 2/2022) (C)      17,902        17,815        17,723  
      Preferred Stock (538 shares) (E)(G)         538        479  
      Common Stock (1,158 shares) (E)(G)         148        —    
           

 

 

    

 

 

 
              18,501        18,202  

Vacation Rental Pros Property Management, LLC

   Hotels, motels, inns, and gaming    Secured Second Lien Debt (11.2%, 3.0% PIK, Due 6/2023) (C)      7,091        7,091        7,091  

Vision Government Solutions, Inc.

   Diversified/conglomerate service    Secured First Lien Line of Credit, $0 available
(10.0%, Due 1/2019) (C)
     1,450        1,450        1,399  
      Secured First Lien Delayed Draw Term Loan, $900 available (10.0%, Due 1/2019) (C)(F)      1,600        1,600        1,450  
      Secured First Lien Debt (10.0%, Due 1/2019) (C)      9,000        9,000        8,261  
           

 

 

    

 

 

 
              12,050        11,110  

WadeCo Specialties, Inc.

   Oil and gas    Secured First Lien Line of Credit, $425 available
(8.2%, Due 4/2018) (C)
     2,575        2,575        2,510  
      Secured First Lien Debt (8.2%, Due 3/2019) (C)      10,691        10,671        10,424  
      Secured First Lien Debt (12.0%, Due 3/2019) (C)      7,000        7,000        6,720  
      Preferred Stock (1,000 shares) (E)(G)         618        1,554  
           

 

 

    

 

 

 
              20,864        21,208  
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Proprietary Investments

      $ 273,491      $ 250,095  
        

 

 

    

 

 

 

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

Syndicated Investments:

 

DataPipe, Inc.

   Diversified/conglomerate service    Secured Second Lien Debt (9.2%, Due 9/2019) (D)    $ 2,000      $ 1,962      $ 2,005  

Keystone Acquisition Corp.

   Diversified/conglomerate service    Secured Second Lien Debt (10.5%, Due 5/2025) (D)      4,000        3,921        3,960  

LDiscovery, LLC

   Diversified/conglomerate service    Secured Second Lien Debt (11.2%, Due 12/2023) (D)      5,000        4,810        4,700  

Medical Solutions Holdings, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (9.5%, Due 12/2023) (I)      3,000        2,955        3,000  

NetSmart Technologies, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.7%, Due 10/2023) (D)      3,660        3,607        3,642  

New Trident Holdcorp, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.7%, Due 7/2020) (D)      4,000        3,984        2,700  

Edmentum Ultimate Holdings, LLC (S)

   Healthcare, education and childcare    Unsecured Debt (10.0% PIK, Due 6/2020) (C)(F)      3,241        3,241        3,249  
      Common Stock (21,429 shares) (E)(G)         2,636        —    
           

 

 

    

 

 

 
              5,877        3,249  

PSC Industrial Holdings Corp.

   Diversified/conglomerate service    Secured Second Lien Debt (9.5%, Due 12/2021) (D)      3,500        3,450        3,010  

SourceHOV LLC

   Finance    Secured Second Lien Debt (11.8%, Due 4/2020) (D)      5,000        4,879        4,781  

The Active Network, Inc.

   Electronics    Secured Second Lien Debt (10.7%, Due 11/2021) (D)      519        519        517  

Vertellus Holdings LLC

   Chemicals, plastics and rubber    Secured Second Lien Debt (13.2%, Due 10/2021) (D)      1,099        1,099        923  
      Common Stock Units (879,121 units) (D)(G)         3,018        440  
           

 

 

    

 

 

 
              4,117        1,363  

W3 Co.

   Oil and gas    Common Equity (435 shares) (D)(G)      499        499        139  
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Syndicated Investments

 

   $ 40,580      $ 33,066  
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 81.9% of total investments at fair value)

 

   $ 314,071      $ 283,161  
  

 

 

    

 

 

 

AFFILIATE INVESTMENTS (N) :

              

Proprietary Investments:

              

Edge Adhesives Holdings, Inc. (R)

   Diversified/conglomerate    Secured First Lien Debt (12.5%, Due 2/2019) (C)    $ 6,200      $ 6,200      $ 5,642  
   manufacturing    Secured First Lien Debt (13.8%, Due 2/2019) (C)      1,600        1,600        1,464  
      Preferred Stock (2,516 units) (E)(G)         2,516        —    
           

 

 

    

 

 

 
              10,316        7,106  

FedCap Partners, LLC

   Private equity fund – aerospace and defense    Class A Membership Units (80 units, $0 Uncalled Commitment) (G)(K)(Q)         1,634        1,562  

Lignetics, Inc.

   Diversified natural resources, precious metals and minerals    Secured Second Lien Debt (12.0%, Due 2/2021) (C)      6,000        6,000        6,000  
      Secured Second Lien Debt (12.0%, Due 2/2021) (C)      8,000        8,000        8,000  
      Secured Second Lien Debt (12.0%, Due 2/2021) (C)      3,300        3,300        3,300  
      Preferred Stock (40,000 shares) (E)(G)         800        809  
      Common Stock (152,603 shares) (E)(G)         1,855        637  
           

 

 

    

 

 

 
              19,955        18,746  

LWO Acquisitions Company LLC

   Diversified/conglomerate manufacturing    Secured First Lien Line of Credit, $0 available (6.7%, 2.0% PIK, Due 3/2018) (C)      2,635        2,632        2,206  
      Secured First Lien Debt (9.7%, 2.0% PIK, Due 12/2019) (C)      10,886        10,863        9,117  
      Common Units (921,000 units) (E)(G)         921        —    
           

 

 

    

 

 

 
              14,416        11,323  
           

 

 

    

 

 

 

Subtotal – Affiliate Proprietary Investments

      $ 46,321      $ 38,737  
           

 

 

    

 

 

 

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

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

Syndicated Investments:

              

Targus Cayman HoldCo Limited

   Textiles and leather    Secured First Lien Debt (15.0% PIK, Due 12/2019) (C)(F)      2,553        2,553        2,563  
      Common Stock (526,141 shares) (E)(G)         2,343        741  
           

 

 

    

 

 

 
              4,896        3,304  
           

 

 

    

 

 

 

Total Affiliate Investments (represented 12.2% of total investments at fair value)

 

   $ 51,217      $ 42,041  
  

 

 

    

 

 

 

CONTROL INVESTMENTS (O) :

           

Proprietary Investments:

              

Defiance Integrated Technologies, Inc.

   Automobile    Secured Second Lien Debt (11.0%, Due 2/2019) (E)    $ 6,065      $ 6,065      $ 6,065  
      Common Stock (33,321 shares) (E)(G)         580        4,990  
           

 

 

    

 

 

 
            $ 6,645      $ 11,055  

PIC 360, LLC

   Machinery    Secured First Lien Debt (14.0%, Due 12/2017) (E)(F)      4,000        4,000        4,000  
      Common Equity Units (750 units) (E)(G)         1        173  
           

 

 

    

 

 

 
              4,001        4,173  

Sunshine Media Holdings

   Printing and publishing    Secured First Lien Line of Credit, $672 available (8.0%, Due 5/2018) (E)(F)      1,328        1,328        1,328  
      Secured First Lien Debt (8.0%, Due 5/2018) (E)(F)(H)      5,000        3,525        1,105  
      Secured First Lien Debt (4.8%, Due 5/2018) (E)(H)      11,948        8,401        2,640  
      Secured First Lien Debt (5.5%, Due 5/2018) (E)(H)      10,700        10,700        —    
      Preferred Stock (15,270 shares) (E)(G)(J)         5,275        —    
      Common Stock (1,867 shares) (E)(G)         740        —    
      Common Stock Warrants (72 shares) (E)(G)         —          —    
           

 

 

    

 

 

 
              29,969        5,073  
           

 

 

    

 

 

 

Total Control Proprietary Investments (represented 5.9% of total investments at fair value)

 

   $ 40,615      $ 20,301  
  

 

 

    

 

 

 

TOTAL INVESTMENTS

            $ 405,903      $ 345,503  
           

 

 

    

 

 

 

 

(A)   Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $302.8 million at fair value, are pledged as collateral to our revolving line of credit, as described further in Note 5— Borrowings. Under the Investment Company Act of 1940, as amended, (the “1940 Act”), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of June 30, 2017, two of our investments (FedCap Partners, LLC and Leeds Novamark Capital I, L.P.) are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 0.8% of total investments, at fair value, as of June 30, 2017.
(B)   Percentages represent cash interest rates (which are generally indexed off of the 30-day London Interbank Offered Rate (“LIBOR”)) in effect at June 30, 2017, and due dates represent the contractual maturity date. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates and any unused line of credit fees are excluded. Secured first lien debt securities generally take the form of first priority liens on substantially all of the assets of the underlying portfolio company businesses.
(C)   Fair value was based on an internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”).
(D)   Fair value was based on the indicative bid price on or near June 30, 2017, offered by the respective syndication agent’s trading desk.
(E)   Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
(F) Debt security has a fixed interest rate.
(G)   Security is non-income producing.
(H) Debt security is on non-accrual status.
(I) New investment valued at cost, as it was determined that the price paid during the quarter ended June 30, 2017 best represents fair value as of June 30, 2017.
(J) Aggregates all shares of such class of stock owned without regard to specific series owned within such class, some series of which may or may not be voting shares.
(K) There are certain limitations on our ability to transfer our units owned, withdraw, or resign prior to dissolution of the entity, which must occur no later than May 3, 2020.
(L) There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than May 9, 2024 or two years after all outstanding leverage has matured.
(M) Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(N) Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(O) Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

 

10


Table of Contents
(P) Debt security does not have a stated current interest rate.
(Q) Fair value was based on net asset value provided by the fund as a practical expedient.
(R) One of our affiliated funds, Gladstone Investment Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.
(S) Investment formerly known as PLATO Learning, Inc.
(T) Investment formerly known as Mikawaya.

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

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

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      $ 13,000  
      Member Profit Participation (18.0% ownership) (F)(H)         1,000        —    
      Profit Participation Warrants (7.0% ownership) (F)(H)         244        —    
           

 

 

    

 

 

 
              14,244        13,000  

Alloy Die Casting Corp. (T)

   Diversified/conglomerate    Secured First Lien Debt (13.5%, Due 10/2018) (D)      5,235        5,235        4,973  
   manufacturing    Secured First Lien Debt (13.5%, Due 10/2018) (D)      75        75        71  
      Secured First Lien Debt (Due 10/2018) (D) (Q)      390        390        372  
      Preferred Stock (1,742 shares) (F)(H)         1,742        —    
      Common Stock (270 shares) (F)(H)         18        —    
           

 

 

    

 

 

 
              7,460        5,416  

Behrens Manufacturing, LLC (T)

   Diversified/conglomerate    Secured First Lien Debt (13.0%, Due 12/2018) (R)      4,275        4,275        4,638  
   manufacturing    Preferred Stock (1,253 shares) (H)(R)         1,253        4,100  
           

 

 

    

 

 

 
              5,528        8,738  

B+T Group Acquisition Inc. (T)

   Telecommunications    Secured First Lien Debt (13.0%, Due 12/2019) (D)      6,000        6,000        5,790  
      Preferred Stock (5,503 shares) (F)(H)(K)         1,799        —    
           

 

 

    

 

 

 
              7,799        5,790  

Canopy Safety Brands, LLC

   Personal and non-durable consumer products    Secured First Lien Line of Credit, $500 available (7.0%, Due 9/2019) (J)      —          —          —    
      Secured First Lien Debt (10.5%, Due 9/2021) (J)      7,000        7,000        7,000  
      Participation Warrant (J)         500        500  
           

 

 

    

 

 

 
              7,500        7,500  

Chinese Yellow Pages Company

   Printing and publishing    Secured First Lien Line of Credit, $0 available (7.3%, Due 2/2015) (F)      108        108        —    

Drumcree, LLC

   Broadcasting and entertainment    Secured First Lien Debt (13.0% PIK, Due 1/2017) (F)(G)      4,836        4,836        4,682  

Flight Fit N Fun LLC

   Leisure, Amusement, Motion Pictures, Entertainment    Secured First Lien Debt (12.0%, Due 9/2020) (D)      7,800        7,800        7,800  
      Preferred Stock (700,000 units) (F)(H)         700        969  
           

 

 

    

 

 

 
              8,500        8,769  

Francis Drilling Fluids, Ltd.

   Oil and gas    Secured Second Lien Debt (11.4%, Due 4/2020) (D)      15,000        15,000        8,250  
      Secured Second Lien Debt (10.8%, Due 4/2020) (D)      7,000        7,000        3,850  
      Preferred Equity Units (1,277 units) (F)(H)         976        —    
      Common Equity Units (1,277 units) (F)(H)         1        —    
           

 

 

    

 

 

 
              22,977        12,100  

Funko Acquisition Holdings,
LLC (T)

   Personal and non-durable    Preferred Equity Units (260 units) (H)(F)         260        358  
   consumer products    Common Stock (975 units) (H)(F)         —          —    
           

 

 

    

 

 

 
              260        358  

GFRC Holdings, LLC

   Buildings and real estate    Secured First Lien Line of Credit, $295 available (9.0%, Due 9/2018) (F)      905        905        905  
      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        754  
      Common Stock Warrants (45.0% ownership) (F)(H)         —          —    
           

 

 

    

 

 

 
              2,930        2,659  

IA Tech, LLC

   Diversified/conglomerate service    Secured First Lien Debt (12.0%, Due 6/2021) (D)      23,000        23,000        23,230  

LCR Contractors, LLC

   Buildings and Real Estate    Secured First Lien Debt (10.0%, Due 1/2021) (D)      8,500        8,500        8,564  

Leeds Novamark Capital I, L.P.

   Private equity fund–healthcare, education and childcare    Limited Partnership Interest (3.5% ownership, $2,004 uncalled capital commitment) (H)(M)(S)         991        779  

 

12


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

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

Meridian Rack & Pinion, Inc. (T)

   Automobile    Secured First Lien Debt (13.5%, Due 12/2018) (D)      4,140        4,140        3,767  
      Preferred Stock (1,449 shares) (F)(H)         1,449        255  
           

 

 

    

 

 

 
              5,589        4,022  

Merlin International, Inc.

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

Mikawaya

   Beverage, Food and Tobacco    Secured Second Lien Debt (11.5%, Due 1/2021) (D)      6,750        6,750        6,649  
      Common Stock (450 units) (F)(H)         450        172  
           

 

 

    

 

 

 
              7,200        6,821  

Precision International, LLC

   Machinery    Secured First Lien Debt (10.0% PIK, Due 9/2021) (F)(G)      600        600        600  
      Secured First Lien Mortgage Note (3.0%, Due 9/2017) (F)(G)      1,000        1,000        996  
      Membership Unit Warrant (33.3% ownership) (F)(H)         —          —    
           

 

 

    

 

 

 
              1,600        1,596  

Travel Sentry, Inc.

   Diversified/conglomerate service    Secured First Lien Debt (9.5%, Due 12/2021) (D)      9,665        9,665        9,677  

Triple H Food Processors

   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)      7,600        7,600        7,676  
      Common Stock (250,000 units) (F)(H)         250        525  
           

 

 

    

 

 

 
              7,850        8,201  

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)      10,000        10,000        10,050  
           

 

 

    

 

 

 
              10,000        10,050  

United Flexible, Inc.

   Diversified/conglomerate manufacturing    Secured Second Lien Debt (10.5%, 2.0% PIK, Due 2/2022) (D)      17,632        17,632        17,280  
      Preferred Stock (382 shares) (F)(H)         382        428  
      Common Stock (852 shares) (F)(H)         44        36  
           

 

 

    

 

 

 
              18,058        17,744  

Vision Government Solutions, Inc.

   Diversified/conglomerate service    Secured First Lien Line of Credit, $0 available (7.5%, Due 1/2017) (D)      1,450        1,450        1,355  
      Secured First Lien Delayed Draw Term Loan, $1,300 available (10.0%, Due 1/2017) (D)(G)      1,200        1,200        1,106  
      Secured First Lien Debt (9.8%, Due 1/2017) (D)      9,000        9,000        8,293  
           

 

 

    

 

 

 
              11,650        10,754  

WadeCo Specialties, Inc.

   Oil and gas    Secured First Lien Line of Credit, $1,125 available (8.0%, Due 4/2017) (D)      1,175        1,174        1,127  
      Secured First Lien Debt (8.0%, Due 3/2019) (D)      11,691        11,691        11,216  
      Secured First Lien Debt (12.0%, Due 3/2019) (D)      7,000        7,000        6,637  
      Preferred Stock (1,000 shares) (F)(H)         618        —    
           

 

 

    

 

 

 
              20,483        18,980  
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Proprietary Investments

      $ 216,728      $ 199,430  
           

 

 

    

 

 

 

Syndicated Investments:

              

Autoparts Holdings Limited

   Automobile    Secured Second Lien Debt (11.0%, Due 1/2018) (E)    $ 700      $ 699      $ 609  

DataPipe, Inc.

   Diversified/conglomerate service    Secured Second Lien Debt (9.0%, Due 9/2019) (E)      2,000        1,951        1,965  

NetSmart Technologies, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.5%, Due 10/2023) (E)      2,000        1,952        1,960  

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
Syndicated Investments (Continued):                     

New Trident Holdcorp, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.3%, Due 7/2020) (E)      4,000        3,990        3,280  

PLATO Learning, Inc.

   Healthcare, education and childcare    Unsecured Debt (10.0% PIK, Due 6/2020) (D)(G)      3,000        2,960        3,012  
      Common Stock (21,429 shares) (F)(H)         2,637        —    
           

 

 

    

 

 

 
              5,597        3,012  

PSC Industrial Holdings Corp.

   Diversified/conglomerate service    Secured Second Lien Debt (9.3%, Due 12/2021) (E)      3,500        3,443        3,273  

RP Crown Parent, LLC

   Electronics    Secured Second Lien Debt (11.3%, Due 12/2019) (R)      2,000        1,976        2,000  

SourceHOV LLC

   Finance    Secured Second Lien Debt (11.5%, Due 4/2020) (E)      5,000        4,854        3,000  

The Active Network, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 11/2021) (E)      1,000        996        980  

Vertellus Specialties Inc.

   Chemicals, plastics and rubber    Secured First Lien Debt (10.5%, Due 10/2019) (E)(I)      3,940        3,831        2,541  

Vitera Healthcare Solutions, LLC

   Healthcare, education and childcare    Secured Second Lien Debt (9.3%, Due 11/2021) (E)      4,500        4,479        4,151  

W3 Co.

   Oil and gas    Secured Second Lien Debt (9.3%, Due 9/2020) (E)      499        495        200  
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Syndicated Investments

      $ 34,263      $ 26,971  
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 70.3% of total investments at fair value)

      $ 250,991      $ 226,401  
           

 

 

    

 

 

 

AFFILIATE INVESTMENTS (O) :

           

Proprietary Investments:

              

Edge Adhesives Holdings, Inc. (T)

   Diversified/conglomerate    Secured First Lien Debt (12.5%, Due 2/2019) (D)    $ 6,200      $ 6,200      $ 6,076  
  

manufacturing

   Secured First Lien Debt (13.8%, Due 2/2019) (D)      1,600        1,600        1,576  
      Preferred Stock (2,516 units) (F)(H)         2,516        —    
           

 

 

    

 

 

 
              10,316        7,652  

FedCap Partners LLC

   Private equity fund – aerospace and defense    Class A Membership Units (80 units, $0 Uncalled Commitment) (H)(L)(S)         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        5,850  
      Secured Second Lien Debt (12.0%, Due 2/2021) (D)      8,000        8,000        7,800  
      Common Stock (152,603 shares) (F)(H)         1,856        1,171  
           

 

 

    

 

 

 
              15,856        14,821  

LWO Acquisitions Company LLC

   Diversified/conglomerate manufacturing    Secured First Lien Line of Credit, $125 available (6.5%, 2.0% PIK, Due 3/2018) (D)      2,471        2,471        1,977  
      Secured First Lien Debt (9.5%, 2.0% PIK, Due 12/2019) (D)      10,723        10,723        8,578  
      Common Units (921,000 units) (F)(H)         921        —    
           

 

 

    

 

 

 
              14,115        10,555  

RBC Acquisition Corp.

   Healthcare, education and childcare    Secured First Lien Debt (8.0%, Due 2/2019) (G)(R)      6,954        6,954        7,219  
      Secured First Lien Line of Credit, $0 available (6.0%, 3% PIK, Due 12/2016) (G)(R)      4,629        4,629        4,629  
      Secured First Lien Debt (8.0%, 4.0% PIK, Due
12/2016) (C)(G)(R)
     13,808        13,808        14,582  
      Secured First Lien Mortgage Note (Due 12/2017) (Q)(R)      7,704        7,704        7,704  
      Preferred Stock (4,999,000 shares) (H)(K)(R)         4,999        3,211  
      Common Stock (2,000,000 shares) (H)(R)         370        —    
           

 

 

    

 

 

 
              38,464        37,345  
           

 

 

    

 

 

 

Subtotal – Affiliate Proprietary Investments

      $ 80,385      $ 71,638  
           

 

 

    

 

 

 

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

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

Syndicated Investments:

              

Targus Cayman HoldCo Limited

   Textiles and leather    Secured First Lien Debt (15.0% PIK, Due 12/2019) (D)(G)      2,285        2,285        2,279  
     

Common Stock (526,141 shares) (F)(H)

        2,343        1,556  
           

 

 

    

 

 

 
              4,628        3,835  
           

 

 

    

 

 

 

Total Affiliate Investments (represented 23.4% of total investments at fair value)

      $ 85,013      $ 75,473  
           

 

 

    

 

 

 

CONTROL INVESTMENTS (P) :

        

Proprietary Investments:

              

Defiance Integrated Technologies, Inc.

   Automobile    Secured Second Lien Debt (11.0%, Due 2/2019) (F)    $ 6,225      $ 6,225      $ 6,225  
     

Common Stock (33,321 shares) (F)(H)

        580        3,981  
           

 

 

    

 

 

 
            $ 6,805      $ 10,206  
           

 

 

    

 

 

 

PIC 360, LLC

   Machinery    Secured First Lien Debt (14.0%, Due 12/2017) (F)      4,000        4,000        4,000  
     

Common Equity Units (750 units) (F)

        1        1  
           

 

 

    

 

 

 
              4,001        4,001  
           

 

 

    

 

 

 

Sunshine Media Holdings

   Printing and publishing    Secured First Lien Line of Credit, $672 available (8.0%, Due 5/2018) (F)(G)      1,328        1,328        1,328  
      Secured First Lien Debt (8.0%, Due 5/2018) (F)(G)      5,000        5,000        1,388  
      Secured First Lien Debt (4.8%, Due 5/2018) (F)(I)      11,948        11,948        3,317  
      Secured First Lien Debt (5.5%, Due 5/2018) (C)(F)(I)      10,700        10,700        —    
      Preferred Stock (15,270 shares) (F)(H)(K)         5,275        —    
      Common Stock (1,867 shares) (F)(H)         740        —    
      Common Stock Warrants (72 shares) (F)(H)         —          —    
           

 

 

    

 

 

 
              34,991        6,033  
           

 

 

    

 

 

 

Total Control Proprietary Investments (represented 6.3% of total investments at fair value)

      $ 45,797      $ 20,240  
           

 

 

    

 

 

 

TOTAL INVESTMENTS (U)

      $ 381,801      $ 322,114  
           

 

 

    

 

 

 

 

(A)   Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $282.2 million at fair value, are pledged as collateral to our Credit Facility, as described further in Note 5— Borrowings. Under the Investment Company Act of 1940, as amended, (the “1940 Act”), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of September 30, 2016, two of our investments (FedCap Partners, LLC and Leeds Novamark Capital I, L.P.) are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 6.6% of total investments, at fair value, as of September 30, 2016.
(B)   Percentages represent cash interest rates (which are generally indexed off of the 30-day London Interbank Offered Rate (“LIBOR”)) in effect at September 30, 2016, and due dates represent the contractual maturity date. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates and any unused line of credit fees are excluded. Secured first lien debt securities generally take the form of first priority liens on substantially all of the assets of the underlying portfolio company businesses.
(C)   Last out tranche (“LOT”) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT is generally paid after the other secured first lien debt holders but before all other debt and equity holders.
(D)   Fair value was based on an internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”).
(E)   Fair value was based on the indicative bid price on or near September 30, 2016, offered by the respective syndication agent’s trading desk.
(F)   Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
(G) Debt security has a fixed interest rate.
(H)   Investment is non-income producing.
(I) Investment is on non-accrual status.
(J) New investment valued at cost, as it was determined that the price paid during the quarter ended September 30, 2016 best represents fair value as of September 30, 2016.
(K) Aggregates all shares of such class of stock owned without regard to specific series owned within such class, some series of which may or may not be voting shares.
(L) There are certain limitations on our ability to transfer our units owned, withdraw or resign prior to dissolution of the entity, which must occur no later than May 3, 2020.
(M) There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than May 9, 2024 or two years after all outstanding leverage has matured.
(N) Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(O) Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.

 

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(P) Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(Q) This investment does not have a stated interest rate that is payable thereon.
(R) Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.
(S) Fair value was based on net asset value provided by the fund as a practical expedient.
(T) One of our affiliated funds, Gladstone Investment Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.
(U) Cumulative gross unrealized depreciation for federal income tax purposes is $75.3 million; cumulative gross unrealized appreciation for federal income tax purposes is $8.8 million. Cumulative net unrealized depreciation is $66.5 million, based on a tax cost of $388.6 million.

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

 

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GLADSTONE CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 2001. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and is applying the guidance of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 946 Financial Services-Investment Companies (“ASC 946”). In addition, we have elected to be treated for tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S”). Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established 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 U.S. 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.

Gladstone Business Loan, LLC (“Business Loan”), a wholly-owned subsidiary of ours, was established on February 3, 2003, for the sole purpose of owning a portion of our portfolio of investments in connection with our Credit Facility (defined in Note 5 – Borrowings ).

Gladstone Financial Corporation (“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 to make investments in accordance with the United States Small Business Administration guidelines for specialized small business investment companies. As of June 30, 2017 and September 30, 2016, we held no investments in portfolio companies through Gladstone Financial.

The financial statements of Business Loan and Gladstone Financial are consolidated with ours. We also have significant subsidiaries whose financial statements are not consolidated with ours. Refer to Note 12— Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

We are externally managed by Gladstone Management Corporation (the “Adviser”), a Delaware corporation and a U.S. Securities and Exchange Commission (the “SEC”) registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). Administrative services are provided by our affiliate, Gladstone Administration, LLC (the “Administrator”), a Delaware limited liability company, pursuant to an administration agreement (the “Administration Agreement”). Refer to Note 4— Related Party Transactions for additional information regarding these arrangements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, we have not included in this quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and nine months ended June 30, 2017, are not necessarily indicative of results that ultimately may be achieved for the fiscal year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, as filed with the SEC on November 21, 2016.

Our accompanying fiscal year-end Consolidated Statement of Assets and Liabilities was derived from audited financial statements, but does not include all disclosures required by GAAP.

 

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Table of Contents

Use of Estimates

Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.

Reclassifications

Certain amounts have been reclassified to conform to the current year presentation.

In April 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs ” (“ASU 2015-03”), which simplifies the presentation of debt issuance costs. ASU 2015-03 requires the presentation of debt issuance costs as a deduction from the carrying amount of the related debt liability instead of as a deferred financing cost asset on the balance sheet. In August 2015, the FASB issued Accounting Standards Update 2015-15, Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements ” (“ASU 2015-15”), which codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line of credit arrangements as assets. ASU 2015-03 was effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-03 during the three months ended December 31, 2016. ASU 2015-15 was effective immediately and, as a result, we continue to present debt issuance costs related to line of credit arrangements as assets.

As of December 31, 2016 and September 30, 2016, we had unamortized deferred financing costs related to our mandatorily redeemable preferred stock of $1.6 million. These costs have been reclassified from Deferred financing costs, net, to Mandatorily redeemable preferred stock, net. All periods presented have been retrospectively adjusted.

The following table summarizes the retrospective adjustment and the overall impact on the previously reported consolidated financial statements:

 

     September 30, 2016  
     As Previously
Reported
     Retrospective
Application
 

Deferred financing costs, net

   $ 3,161      $ 1,521  

Mandatorily redeemable preferred stock, net

     61,000        59,360  

Investment Valuation Policy

Accounting Recognition

We record our investments at fair value in accordance with the FASB Accounting Standards Codification Topic 820, “ Fair Value Measurements and Disclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized depreciation or appreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized depreciation or appreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized depreciation or appreciation when gains or losses are realized.

Board Responsibility

In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our investment valuation policy, which has been approved by our Board of Directors (the “Policy”). Such review occurs in three phases. First, prior to its quarterly meetings, our Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from our chief valuation officer, who reports directly to our Board of Directors (the “Valuation Team”). Second, the Valuation Committee of our Board of Directors, comprised entirely of independent directors, meets to review the valuation recommendations and supporting materials. Third, after the Valuation Committee concludes its meeting, it and our chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors and, after discussion, the Board of Directors ultimately approves the value of our portfolio of investments in accordance with the Policy.

There is no single method for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by our chief valuation officer, uses the Policy and each quarter the Valuation Committee and Board of Directors reviews the Policy to determine if changes are advisable and also reviews whether the Valuation Team has applied the Policy consistently.

 

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Use of Third Party Valuation Firms

The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.

Standard & Poor’s Securities Evaluation, Inc. (“SPSE”), a valuation specialist, generally provides estimates of fair value on our proprietary debt investments. The Valuation Team, in accordance with the Policy, generally assigns SPSE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates SPSE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimate of value on a specific debt investment may significantly differ from SPSE’s. When this occurs, the Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended fair value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.

We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review our valuation of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our total enterprise value, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value, whether it is reasonable in light of the Policy, as well as other relevant facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.

Valuation Techniques

In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:

 

    Total Enterprise Value — In determining the fair value using a total enterprise value (“TEV”), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes, depreciation and amortization (“EBITDA”)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, inputs provided by an independent valuation firm, if any, and other pertinent factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team generally allocates the TEV to the portfolio company’s securities based on the facts and circumstances of the securities, which typically results in the allocation of fair value to securities based on the order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.

TEV is primarily calculated using EBITDA or revenue multiples; however, TEV may also be calculated using a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses the DCF to calculate the TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit impaired portfolio companies.

 

    Yield Analysis — The Valuation Team generally determines the fair value of our debt investments (where we don’t have the ability to effectuate a sale of the portfolio company) using the yield analysis, which includes a DCF calculation and the Valuation Team’s own assumptions, including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes.

 

    Market Quotes — For our syndicate investments for which a limited market exists, fair value is generally based on readily available and reliable market quotations which are corroborated by the Valuation Team (generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar syndicated investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (“IBP”) in the bid-to-ask price range obtained from the respective originating syndication agent’s trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy.

 

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    Investments in Funds — For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our invested capital at the net asset value (“NAV”) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.

In addition to the above valuation techniques, the Valuation Team may also consider other factors when determining fair values of our investments, including, but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; timing of expected loan repayments; and the markets in which the portfolio company operates. If applicable, new and follow-on proprietary debt and equity investments made during the current reporting quarter (the quarter ended June 30, 2017) are generally valued at original cost basis.

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 and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our exit of such securities. 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. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.

Refer to Note 3— Investments for additional information regarding fair value measurements and our application of ASC 820.

Revenue Recognition Policy

Interest Income Recognition

Interest income, including the amortization of premiums, acquisition costs and amendment fees, the accretion of original issue discounts (“OID”), and paid-in-kind (“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. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current, or due to a restructuring, the interest income is deemed to be collectible. At June 30, 2017, certain loans to two portfolio companies, Sunshine Media Holdings and Alloy Die Casting Corp., were on non-accrual status with an aggregate debt cost basis of $27.9 million, or 7.6% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $7.5 million, or 2.3% of the fair value of all debt investments in our portfolio. At September 30, 2016, certain loans to two portfolio companies, Sunshine Media Holdings and Vertellus Specialties, Inc. were on non-accrual status with an aggregate debt cost basis of $26.5 million, or 7.7% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $5.9 million, or 1.9% of the fair value of all debt investments in our portfolio.

We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both of our OID and PIK non-cash income amounts in the form of distributions, even though we have not yet collected the cash on either.

We recorded OID income of $0.1 million during the three and nine months ended June 30, 2017 and 2016. We recorded PIK interest income of $1.3 million and $3.8 million during the three and nine months ended June 30, 2017, respectively, as compared to $0.6 million and $1.6 million during the three and nine months ended June 30, 2016, respectively. We collected $0 and $1.0 million in PIK interest in cash during the three and nine months ended June 30, 2017, respectively, as compared to $0 and $0.1 million during the three and nine months ended June 30, 2016, respectively.

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. We recorded success fee income of $0 and $1.5 million during the three and nine months ended June 30, 2017, respectively, as compared to $1.5 million and $2.8 million during the three and nine months ended June 30, 2016, respectively.

 

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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 recorded $0 and $36 of dividend income during the three and nine months ended June 30, 2017, respectively, as compared to $5 and $0.3 million during the three and nine months ended June 30, 2016, respectively.

During the nine months ended June 30, 2017, we recharacterized $0.2 million of dividend income from our investment in Behrens Manufacturing, LLC (“Behrens”) recorded during our fiscal year ended September 30, 2016 as a return of capital.

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. We recorded $3 and $0.2 million in prepayment fees during the three and nine months ended June 30, 2017, as compared to $0.1 million and $0.2 million during the three and nine months ended June 30, 2016, respectively.

Success fees, prepayment fees, dividend income, and any other income amounts are all recorded in other income in our accompanying Consolidated Statements of Operations .

Recent Accounting Pronouncements

In November 2016, the FASB issued Accounting Standards Update 2016-18, “Restricted Cash (a consensus of the Emerging Issues Task Force)” (“ASU 2016-18”), which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. We are currently assessing the impact of ASU 2016-18 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.

In August 2016, the FASB issued Accounting Standards Update 2016-15, “Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU 2016-15”), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. We are currently assessing the impact of ASU 2016-15 and do not anticipate a material impact on our cash flows. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.

In March 2016, the FASB issued Accounting Standards Update 2016-06, Contingent Put and Call Options in Debt Instruments ” (“ASU 2016-06”), which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related. We assessed the impact of ASU 2016-06 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-06 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted.

In January 2016, the FASB issued Accounting Standards Update 2016-01, “Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which changes how entities measure certain equity investments and how entities present changes in the fair value of financial liabilities measured under the fair value option that are attributable to instrument-specific credit risk. We are currently assessing the impact of ASU 2016-01 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for certain aspects of ASU 2016-01 relating to the recognition of changes in fair value of financial liabilities when the fair value option is elected.

In February 2015, the FASB issued Accounting Standards Update 2015-02, Amendments to the Consolidation Analysis ” (“ASU 2015-02”), which amends or supersedes the scope and consolidation guidance under existing GAAP. The adoption of ASU 2015-02 did not have a material impact on our financial position, results of operations or cash flows. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-02 effective April 1, 2016. In October 2016, the FASB issued Accounting Standards Update 2016-17, Interests Held through Related Parties That Are under Common Control ” (“ASU 2016-17”), which amends the consolidation guidance in ASU 2015-02 regarding the treatment of indirect interests held through related parties that are under common control. We assessed the impact of ASU 2016-17 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-17 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those years, with early adoption permitted.

In August 2014, the FASB issued Accounting Standards Update 2014–15, “ Presentation of Financial Statements – Going Concern (Subtopic 205 – 40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern ” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. This guidance relates primarily to certain disclosures to the financial statements. We assessed the impact of ASU 2014-15 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter, with early adoption permitted.

 

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In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers ” (“ASU 2014-09”), which was amended in March 2016 by FASB Accounting Standards Update 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”), in April 2016 by FASB Accounting Standards Update 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), in May 2016 by FASB Accounting Standards Update 2016-12, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), and in December 2016 by FASB Accounting Standards Update 2016-20, “Technical Corrections and Improvements to Topic 606” (“ASU 2016-20”). ASU 2014-09, as amended, supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. In July 2015, the FASB issued Accounting Standards Update 2015-14, Deferral of the Effective Date, ” which deferred the effective date of ASU 2014-09. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20, is now effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years, with early adoption permitted for annual reporting periods beginning after December 15, 2016 and interim periods within those years. We continue to assess the impact of ASU 2014-09, as amended, and expect to identify similar performance obligations as compared to existing guidance. As a result, we do not anticipate a material change in the timing of revenue recognition or a material impact on our financial position, results of operations, or cash flows from adopting this standard.

NOTE 3. INVESTMENTS

Fair Value

In accordance with ASC 820, the fair value of each investment is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.

 

    Level  1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;

 

    Level  2 — inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

 

    Level  3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Team’s assumptions based upon the best available information.

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. As of June 30, 2017 and September 30, 2016, all of our investments were valued using Level 3 inputs and during the three and nine months ended June 30, 2017 and 2016, there were no investments transferred into or out of Levels 1, 2 or 3.

 

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The following table presents our investments carried at fair value as of June 30, 2017 and September 30, 2016, by caption on our accompanying Consolidated Statements of Assets and Liabilities and by security type, all of which are valued using level 3 inputs:

 

     Total Recurring Fair Value Measurements Reported in
Consolidated Statements of Assets  and Liabilities  Using
Significant Unobservable Inputs (Level 3)
 
     June 30, 2017      September 30, 2016  

Non-Control/Non-Affiliate Investments

     

Secured first lien debt

   $ 141,303      $ 134,067  

Secured second lien debt

     129,496        80,446  

Unsecured debt

     3,249        3,012  

Preferred equity

     5,710        7,051  

Common equity/equivalents

     3,403        1,825  
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 283,161      $ 226,401  
  

 

 

    

 

 

 

Affiliate Investments

     

Secured first lien debt

   $ 20,993      $ 54,620  

Secured second lien debt

     17,300        13,650  

Preferred equity

     809        3,211  

Common equity/equivalents

     2,939        3,992  
  

 

 

    

 

 

 

Total Affiliate Investments

   $ 42,041      $ 75,473  
  

 

 

    

 

 

 

Control Investments

     

Secured first lien debt

   $ 9,073      $ 10,034  

Secured second lien debt

     6,065        6,224  

Common equity/equivalents

     5,163        3,982  
  

 

 

    

 

 

 

Total Control Investments

   $ 20,301      $ 20,240  
  

 

 

    

 

 

 

Total Investments, at Fair Value

   $ 345,503      $ 322,114  
  

 

 

    

 

 

 

 

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In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of June 30, 2017 and September 30, 2016. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.

 

    Quantitative Information about Level 3 Fair Value Measurements  
                      Range / Weighted Average (D) as of  
    June 30,
2017
    September 30,
2016
    Valuation
Technique/
Methodology
    Unobservable
Input
    June 30,
2017
    September 30,
2016
 

Secured first lien debt (A)

  $ 160,191     $ 141,550       Yield Analysis       Discount Rate       8.5% - 22.1% / 12.8%       8.1% - 18.5% / 12.1%  
    11,178       54,630       TEV       EBITDA multiples       3.2x – 3.2x / 3.2x       3.2x – 5.5x / 2.3x  
          EBITDA       $1,327 - $1,327 / $1,327       $1,262 - $20,269 / $4,619
          Revenue multiples       0.4x – 0.4x / 0.4x       0.2x – 0.4x / 0.4x  
          Revenue       $6,934 - $12,682 / $12,293       $4,696 - $15,083 / $14,139  
    —         2,541       Market Quote       IBP       —         64.5% - 64.5% / 64.5%  

Secured second lien debt (B)

    117,558       72,678       Yield Analysis       Discount Rate       10.9% - 21.0% / 13.4%       12.0% - 22.0% / 15.1%
    29,238       21,417       Market Quote       IBP       67.5% - 100.3% / 93.7%       40.0% - 98.3% / 83.7%  
    6,065       6,225       TEV       EBITDA multiples       4.7x – 4.7x / 4.7x       4.7x – 4.7x / 4.7x
          EBITDA       $4,005 - $4,005 / $4,005       $2,759 - $2,759 / $2,759  

Unsecured debt

    3,249       3,012       Yield Analysis       Discount Rate       9.9% - 9.9% / 9.9%       9.9% - 9.9% /9.9%  

Preferred and common equity / equivalents (C)

    14,580       18,017       TEV       EBITDA multiples       3.2x – 10.5x / 6.1x       3.2x – 7.5x  / 5.8x  
          EBITDA       $1,017 - $94,854 / $7,644       $1,132 - $86,041 / $7,714  
          Revenue multiples       0.4x – 1.2x / 0.4x       0.4x – 0.4x / 0.4x  
          Revenue       $6,934 - $69,470 / $14,078       $7,708 - $15,083 / $14,009  
          Discount Rate       12.2% - 12.2% / 12.2%       11.7% - 11.7% / 11.7%  
    579       —         Market Quotes       IBP       14.6% - 27.9% /16.5%       —    
    2,865       2,044      
Investments in
Funds (D)
 
 
     
 

 

 

   

 

 

         

Total Investments, at Fair Value

  $ 345,503     $ 322,114          
 

 

 

   

 

 

         

 

(A) Fair value as of September 30, 2016 includes one new proprietary debt investment and two restructured proprietary debt investments totaling $12.6 million, which were valued at cost, and two proprietary debt investments totaling $38.8 million, which were valued at the expected exit amount.
B)   Fair value as of June 30, 2017 includes one new proprietary debt investment and one new syndicated debt investment totaling $25.0 million, which were valued at cost. Fair value as of September 30, 2016 includes one new proprietary debt investment for $10.0 million which was valued at cost.
(C) Fair value as of September 30, 2016 includes one new proprietary investment and one restructured proprietary investment totaling $0.5 million, which were valued at cost, and two proprietary investments for $7.3 million, which were valued at the expected payoff amount.
(D) Fair value as of June 30, 2017 and September 30, 2016 is based on net asset value as a practical expedient and is not subject to leveling within the fair value hierarchy.

 

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Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in market yields, discounts rates, leverage, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase or decrease in market yields, discount rates or leverage or a decrease in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a corresponding decrease or increase, respectively, in the fair value of certain of our investments.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and nine months ended June 30, 2017 and 2016 for all investments for which the Adviser determines fair value using unobservable (Level 3) factors.

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 
FISCAL YEAR 2017:    Secured     Secured                 Common        

Three Months Ended June 30, 2017

   First Lien
Debt
    Second
Lien Debt
    Unsecured
Debt
    Preferred
Equity
    Equity/
Equivalents
    Total  

Fair Value as of March 31, 2017

   $ 174,033     $ 121,097     $ 3,185     $ 4,666     $ 10,536     $ 313,517  

Total gains (losses):

 

         

Net realized loss (A)

     (14     —         —         (8     (1     (23

Net unrealized (depreciation) appreciation (B)

     387       (1,280     (50     963       969       989  

New investments, repayments and settlements: (C)

 

         

Issuances/originations

     3,001       33,128       80       890       —         37,099  

Settlements/repayments

     (6,052     (84     34       —         —         (6,102

Net proceeds from sales

     14       —         —         8       1       23  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2017

   $ 171,369     $ 152,861     $ 3,249     $ 6,519     $ 11,505     $ 345,503  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 
     Secured     Secured                 Common        

Nine Months Ended June 30, 2017

   First Lien
Debt
    Second
Lien Debt
    Unsecured
Debt
    Preferred
Equity
    Equity/
Equivalents
    Total  

Fair Value as of September 30, 2016

   $ 198,721     $ 100,320     $ 3,012     $ 10,262     $ 9,799     $ 322,114  

Total gains (losses):

  

Net realized (loss) gain (A)

     (4,913     1       —         1,465       21       (3,426

Net unrealized (depreciation) appreciation (B)

     1,253       (3,262     (43     2,016       (2,282     (2,318

Reversal of prior period net depreciation (appreciation) on realization (B)

     2,114       180       —         (1,059     370       1,605  

New investments, repayments and settlements: (C)

  

Issuances/originations

     33,130       63,264       241       1,644       769       99,048  

Settlements/repayments

     (54,909     (8,361     39       —         —         (63,231

Net proceeds from sales

     (87     (1     —         (7,809     (392     (8,289

Transfers

     (3,940     720       —         —         3,220       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2017

   $ 171,369     $ 152,861     $ 3,249     $ 6,519     $ 11,505     $ 345,503  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 
FISCAL YEAR 2016:   Secured     Secured                 Common        

Three Months Ended June 30, 2016

  First
Lien Debt
    Second
Lien Debt
    Unsecured
Debt
    Preferred
Equity
    Equity/
Equivalents
    Total  

Fair Value as of March 31, 2016

  $ 182,660     $ 91,955     $ —       $ 7,263     $ 11,550     $ 293,428  

Total gains (losses):

 

Net realized loss (A)

    —         —         —         (80     (4     (84

Net unrealized (depreciation) appreciation (B)

    (28     454       4       1,962       (1,128     1,264  

Reversal of prior period net depreciation on realization (B)

    (390     —         —         (169     (13     (572

New investments, repayments and settlements: (C)

 

         

Issuances/originations

    31,733       2,044       71       137       580       34,565  

Settlements/repayments

    (8,944     (11,078     3       (440     —         (20,459

Net proceeds from sales

    —         —         —         80       4       84  

Transfers

    (16,888     14,042       2,846       582       (582     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2016

  $ 188,143     $ 97,417     $ 2,924     $ 9,335     $ 10,407     $ 308,226  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 
    Secured     Secured                 Common        

Nine Months Ended June 30, 2016

  First
Lien Debt
    Second
Lien Debt
    Unsecured
Debt
    Preferred
Equity
    Equity/
Equivalents
    Total  

Fair Value as of September 30, 2015

  $ 206,840     $ 120,303     $ —       $ 24,315     $ 14,433     $ 365,891  

Total gains (losses):

 

Net realized (loss) gain (A)

    (6,568     (167     —         16,959       (387     9,837  

Net unrealized (depreciation) appreciation (B)

    (12,405     (6,979     4       1,762       (6,677     (24,295

Reversal of prior period net depreciation (appreciation) on realization (B)

    6,209       147       —         (16,178     370       (9,452

New investments, repayments and settlements: (C)

 

Issuances/originations

    62,157       2,280       71       339       3,246       68,093  

Settlements/repayments

    (49,380     (32,202     3       (440     —         (82,019

Net proceeds from sales

    (1,822     (7     —         (18,004     4       (19,829

Transfers

    (16,888     14,042       2,846       582       (582     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2016

  $ 188,143     $ 97,417     $ 2,924     $ 9,335     $ 10,407     $ 308,226  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Included in net realized gain (loss) on our accompanying Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016.
(B)   Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016.
(C)   Includes increases in the cost basis of investments resulting from new portfolio investments, the accretion of discounts, and PIK, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.

 

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Investment Activity

Proprietary Investments

As of June 30, 2017 and September 30, 2016, we held 34 and 32 proprietary investments with an aggregate fair value of $309.1 million and $291.3 million, or 89.5% and 90.4% of the total aggregate portfolio, respectively. The following significant proprietary investment transactions occurred during the nine months ended June 30, 2017:

 

    In November 2016, we completed the sale of substantially all the assets of RBC Acquisition Corp. 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, 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 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 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.

 

    In April 2017, we invested $22.0 million in HB Capital Resources, Ltd. through secured second lien debt.

 

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

Syndicated Investments

As of June 30, 2017 and September 30, 2016, we held 13 syndicated investments with an aggregate fair value of $36.4 million and $30.8 million, or 10.5% and 9.6% of the total portfolio at fair value, respectively. The following significant syndicated investment transactions occurred during the nine months ended June 30, 2017:

 

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

 

    In May 2017, we invested $4.0 million in Keystone Acquisition Corp. through secured second lien debt.

 

    In June 2017, we invested $3.0 million in Medical Solutions Holdings, Inc. through secured second lien debt.

Investment Concentrations

As of June 30, 2017, our portfolio consisted of investments in 47 portfolio companies located in 23 states in 22 different industries, with an aggregate fair value of $345.5 million. The five largest investments at fair value totaled $109.6 million, or 31.7% of our total investment portfolio as of June 30, 2017, as compared to $112.1 million, or 34.8% of our total investment portfolio as of September 30,

 

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2016. As of June 30, 2017 and September 30, 2016, our average investment by obligor was $8.6 million at cost. The following table outlines our investments by security type as of June 30, 2017 and September 30, 2016:

 

     June 30, 2017     September 30, 2016  
     Cost      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
    Cost      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Secured first lien debt

   $ 196,107        48.3   $ 171,369        49.6   $ 227,439        59.6   $ 198,721        61.7

Secured second lien debt

     169,769        41.8       152,861        44.2       113,796        29.8       100,320        31.2  

Unsecured debt

     3,241        0.8       3,249        1.0       2,995        0.8       3,012        0.9  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Debt Investments

     369,117        90.9       327,479        94.8       344,230        90.2       302,053        93.8  

Preferred equity

     18,293        4.5       6,519        1.9       22,988        6.0       10,262        3.2  

Common equity/equivalents

     18,493        4.6       11,505        3.3       14,583        3.8       9,799        3.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Equity Investments

     36,786        9.1       18,024        5.2       37,571        9.8       20,061        6.2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 405,903        100.0   $ 345,503        100.0   $ 381,801        100.0   $ 322,114        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Our investments at fair value consisted of the following industry classifications at June 30, 2017 and September 30, 2016:

 

     June 30, 2017     September 30, 2016  

Industry Classification

   Fair Value      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Diversified/Conglomerate Service

   $ 79,349        23.0   $ 48,898        15.2

Diversified/Conglomerate Manufacturing

     40,624        11.8       50,106        15.6  

Healthcare, education, and childcare

     33,603        9.7       70,577        21.9  

Telecommunications

     31,434        9.1       5,790        1.8  

Oil and gas

     29,666        8.6       31,279        9.7  

Automobile

     20,425        5.9       14,837        4.6  

Diversified natural resources, precious metals and minerals

     18,746        5.4       14,821        4.6  

Beverage, food and tobacco

     15,110        4.3       15,022        4.7  

Cargo Transportation

     13,065        3.8       13,000        4.0  

Home and Office Furnishings, Housewares and Durable Consumer Products

     10,025        2.9       —          —    

Leisure, Amusement, Motion Pictures, Entertainment

     8,247        2.4       8,769        2.7  

Personal and non-durable consumer products

     7,389        2.1       7,858        2.4  

Hotels, motels, inns, and gaming

     7,091        2.1       —          —    

Broadcast and entertainment

     6,192        1.8       4,682        1.5  

Printing and publishing

     5,073        1.5       6,033        1.9  

Machinery

     4,962        1.4       5,597        1.7  

Finance

     4,782        1.4       3,000        0.9  

Textiles and leather

     3,304        1.0       3,836        1.2  

Buildings and real estate

     2,974        0.9       11,223        3.5  

Electronics

     517        0.1       2,980        0.9  

Other, < 2.0%

     2,925        0.8       3,806        1.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 345,503        100.0   $ 322,114        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Our investments at fair value were included in the following geographic regions of the U.S. as of June 30, 2017 and September 30, 2016:

 

     June 30, 2017     September 30, 2016  

Geographic Region

   Fair Value      Percentage of
Total
Investments
    Fair Value      Percentage of
Total
Investments
 

South

   $ 141,545        41.0   $ 131,181        40.8

West

     104,486        30.2       57,786        17.9  

Midwest

     58,537        16.9       100,142        31.1  

Northeast

     40,935        11.9       33,005        10.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 345,503        100.0   $ 322,114        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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The geographic region indicates the location of the headquarters of our portfolio companies. A portfolio company may also have a number of other business locations in other geographic regions.

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2017:

 

For the remaining three months ending September 30:

   2017    $ 6,499  

For the fiscal year ending September 30:

   2018      56,527  
   2019      57,209  
   2020      81,213  
   2021      60,973  
   Thereafter      112,663  
     

 

 

 
  

Total contractual repayments

   $ 375,084  
   Equity investments      36,786  
   Adjustments to cost basis on debt investments      (5,967
     

 

 

 
  

Cost basis of investments held at June 30, 2017:

   $ 405,903  
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs incurred on behalf of such portfolio companies and are included in other assets on our accompanying Consolidated Statements of Assets and Liabilities . We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write-off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of June 30, 2017 and September 30, 2016, we had gross receivables from portfolio companies of $0.4 million. The allowance for uncollectible receivables was $36 and $0 at June 30, 2017 and September 30, 2016, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with the Adviser

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. The Advisory Agreement originally included administrative services; however, it was amended and restated on October 1, 2006. Simultaneously, we entered into the Administration Agreement with the Administrator (discussed further below) to provide those services. With the unanimous approval of our Board of Directors, the Advisory Agreement was later amended in October 2015 to reduce the base management fee payable under the agreement from 2.0% per annum to 1.75% per annum, effective July 1, 2015, with all other terms remaining unchanged. On July 11, 2017, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, unanimously approved the annual renewal of the Advisory Agreement through August 31, 2018.

We also pay the Adviser a loan servicing fee for its role of servicer pursuant to our Credit Facility (defined in Note 5 – Borrowings ). The entire loan servicing fee paid to the Adviser by Business Loan is voluntarily, irrevocably and unconditionally credited against the base management fee otherwise payable to the Adviser, since Business Loan is a consolidated subsidiary of ours, 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.

Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. Robert Marcotte (our president) also serves as an executive managing director of the Adviser.

 

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The following table summarizes the base management fee, incentive fee, and loan servicing fee and associated non-contractual, unconditional and irrevocable credits reflected in our accompanying Consolidated Statements of Operations :

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2017     2016     2017     2016  

Average total assets subject to base management fee (A)

   $ 338,286     $ 312,914     $ 321,295     $ 324,419  

Multiplied by prorated annual base management fee of 1.75%

     0.4375     0.4375     1.3125     1.3125
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee (B)

   $ 1,480     $ 1,369     $ 4,217     $ 4,258  

Portfolio company fee credit

     (261     (319     (1,344     (553

Syndicated loan fee credit

     (100     (17     (122     (73
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Base Management Fee

   $ 1,119     $ 1,033     $ 2,751     $ 3,632  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee (B)

     1,071       896       3,009       2,876  

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

     (1,071     (896     (3,009     (2,876
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee (B)

     1,116       1,187       3,479       3,369  

Incentive fee credit

     (914     (160     (2,028     (1,110
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Incentive Fee

   $ 202     $ 1,027     $ 1,451     $ 2,259  
  

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio company fee credit

     (261     (319     (1,344     (553

Syndicated loan fee credit

     (100     (17     (122     (73

Incentive fee credit

     (914     (160     (2,028     (1,110
  

 

 

   

 

 

   

 

 

   

 

 

 

Credits to Fees From Adviser - other (B)

   $ (1,275   $ (496   $ (3,494   $ (1,736
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)   Average total assets subject to the base management fee is defined in the Advisory Agreement 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 accompanying Consolidated Statements of Operations .

Base Management Fee

The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period.

Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. 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 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. The Adviser voluntarily, unconditionally, and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $11 and $57 for the three and nine months ended June 30, 2017 and $35 and $0.1 million for the three and nine months ended June 30, 2016, respectively, was retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser primarily for the valuation of portfolio companies.

Our Board of Directors accepted a non-contractual, unconditional and irrevocable credit from the Adviser to reduce the annual base management fee on syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations, for each of the nine months ended June 30, 2017 and 2016.

Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the “hurdle rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is generally payable quarterly to the Adviser and is computed as follows:

 

    no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized);

 

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    100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized); and

 

    20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized).

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the entire portfolio’s aggregate unrealized capital depreciation, if any and excluding any unrealized capital appreciation, as of the date of the calculation. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less the entire portfolio’s aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since our inception through June 30, 2017, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded or paid from our inception through June 30, 2017.

Our Board of Directors accepted a non-contractual, unconditional and irrevocable credit from the Adviser to reduce the income-based incentive fee to the extent net investment income did not 100.0% cover distributions to common stockholders for the nine months ended June 30, 2017, and 2016.

Loan Servicing Fee

The Adviser also services the loans held by Business Loan (the borrower under the Credit Facility), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the aggregate outstanding balance of loans pledged under our Credit Facility (defined in Note 5 – Borrowings ). As discussed in the notes to the table above, we treat payment of the loan servicing fee pursuant to our line of credit as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% voluntarily, irrevocably and unconditionally credited back to us by the Adviser.

Transactions with the Administrator

We pay the Administrator pursuant to the Administration Agreement for the portion of expenses the Administrator incurs while performing services for us. The Administrator’s expenses are primarily rent and the salaries, benefits and expenses of the Administrator’s employees, including, but not limited to, our chief financial officer and treasurer, chief compliance officer, chief valuation officer, and general counsel and secretary (who also serves as the Administrator’s president, general counsel and secretary) and their respective staffs. Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Brubaker (our vice chairman and chief operating officer) serve as members of the board of managers and executive officers of the Administrator, which is 100% indirectly owned and controlled by Mr. Gladstone.

Our portion of the Administrator’s expenses are generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. These administrative fees are accrued at the end of the quarter when the services are performed and recorded on our accompanying Consolidated Statements of Operations and generally paid the following quarter to the Administrator. On July 11, 2017, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, approved the annual renewal of the Administration Agreement through August 31, 2018.

 

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Other Transactions

Gladstone Securities, LLC (“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. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional and irrevocable credits against the base management fee or incentive fee. Gladstone Securities received fees from portfolio companies totaling $0.3 million and $0.7 million during the three and nine months ended June 30, 2017, respectively, and $0.3 million and $0.4 million during the three and nine months ended June 30, 2016.

Related Party Fees Due

Amounts due to related parties on our accompanying Consolidated Statements of Assets and Liabilities were as follows:

 

     June 30, 2017      September 30, 2016  

Base management fee due to Adviser

   $ 9      $ 162  

Loan servicing fee due to Adviser

     256        236  

Incentive fee due to Adviser

     195        824  
  

 

 

    

 

 

 

Total fees due to Adviser

     460        1,222  
  

 

 

    

 

 

 

Fee due to Administrator

     272        282  
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 732      $ 1,504  
  

 

 

    

 

 

 

In addition to the above fees, other operating expenses due to the Adviser as of June 30, 2017 and September 30, 2016, totaled $14 and $10, respectively. In addition, other net co-investment expenses payable to Gladstone Investment Corporation (for reimbursement purposes) totaled $38 and $8 as of June 30, 2017 and September 30, 2016, respectively. These amounts are generally settled in the quarter subsequent to being incurred and have been included in other assets, net and other liabilities, as appropriate, on the accompanying Consolidated Statements of Assets and Liabilities as of June 30, 2017 and September 30, 2016, respectively .

NOTE 5. BORROWINGS

Revolving Credit Facility

On May 1, 2015, we, through Business Loan, entered into a Fifth Amended and Restated Credit Agreement with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and a lender (our “Credit Facility”), which increased the commitment amount 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 certain other terms and conditions. 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 (fifteen months after the revolving period end date). 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 under our Credit Facility by $30.0 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 our ability to draw on available borrowings.

 

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The following tables summarize noteworthy information related to our Credit Facility (at cost):

 

     June 30, 2017      September 30, 2016  

Commitment amount

   $ 170,000      $ 170,000  

Borrowings outstanding, at cost

     82,200        71,300  

Availability (A)

     71,048        31,053  

 

     For the Three Months
Ended June 30,
    For the Nine Months
Ended June 30,
 
     2017     2016     2017     2016  

Weighted average borrowings outstanding, at cost

   $ 72,555     $ 52,481     $ 51,398     $ 59,824  

Weighted average interest rate (B)

     5.0     4.9     5.3     4.6

Commitment (unused) fees incurred

   $ 123     $ 147     $ 449     $ 417  

 

(A)   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.
(B) Includes unused commitment fees and excludes the impact of deferred financing fees.

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. KeyBank is also the trustee of the account and 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’ consent. Our Credit Facility also generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected 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 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 50.0% 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 $225.0 million as of June 30, 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 June 30, 2017, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $275.6 million, asset coverage on our “senior securities representing indebtedness” of 434.4%, calculated in compliance with the requirements of Section 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 32 obligors in our Credit Facility’s borrowing base as of June 30, 2017. As of June 30, 2017, we were in compliance with all of our Credit Facility covenants.

Fair Value

We elected to apply the fair value option of ASC 825, “ Financial Instruments ,” specifically for the Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and also takes into account the Valuation Team’s own assumptions, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of June 30, 2017, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.15% per annum, plus a 0.54% unused fee. As of September 30, 2016, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.25% per annum, plus a 0.50% unused fee. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding increase or decrease, respectively, in the fair value of our Credit Facility. As of June 30, 2017 and September 30, 2016, our Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations .

 

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The following tables present our Credit Facility carried at fair value as of June 30, 2017 and September 30, 2016, on our accompanying Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three and nine months ended June 30, 2017 and 2016:

 

     Total Recurring Fair Value Measurement Reported in  
     Consolidated Statements of
Assets and Liabilities  Using  Significant Unobservable Inputs
(Level 3)
 
     June 30, 2017      September 30, 2016  

Credit Facility

   $ 82,271      $ 71,300  
  

 

 

    

 

 

 

 

Fair Value Measurements Using Significant

Unobservable Data Inputs (Level 3)

 
     Three Months Ended June 30,  
     2017      2016  

Fair value as of March 31, 2017 and 2016, respectively

   $ 53,989      $ 57,300  

Borrowings

     37,700        41,000  

Repayments

     (9,600      (25,000

Net unrealized appreciation (A)

     182        —    
  

 

 

    

 

 

 

Fair Value as of June 30, 2017 and 2016, respectively

   $ 82,271      $ 73,300  
  

 

 

    

 

 

 
     Nine Months Ended June 30,  
     2017      2016  

Fair value as of September 30, 2016 and 2015, respectively

   $ 71,300      $ 127,300  

Borrowings

     108,000        77,000  

Repayments

     (97,100      (131,000

Net unrealized appreciation (A)

     71        —    
  

 

 

    

 

 

 

Fair Value as of June 30, 2017 and 2016, respectively

   $ 82,271      $ 73,300  
  

 

 

    

 

 

 

 

(A)   Included in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016.

The fair value of the collateral under our Credit Facility totaled approximately $302.8 million and $282.0 million as of June 30, 2017 and September 30, 2016, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In May 2014, we completed a public offering of approximately 2.4 million shares of 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share (“Series 2021 Term Preferred Stock”), at a public offering price of $25.00 per share. Gross proceeds totaled $61.0 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were approximately $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. We incurred $2.5 million in total offering costs related to the issuance of our Series 2021 Term Preferred Stock, which are recorded as deferred financing fees on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending June 30, 2021, the mandatory redemption date.

The shares of our Series 2021 Term Preferred Stock are traded under the ticker symbol “GLADO” on the NASDAQ Global Select Market. Our Series 2021 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend 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 of at least 200% on our “senior securities that are stock” (which is currently only our 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 after June 30, 2017.

The asset coverage on our “senior securities that are stock” as of June 30, 2017 was 249.6%, calculated in accordance with Sections 18 and 61 of the 1940 Act. 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 June 30, 2017, we have not redeemed, nor have we been required to redeem, any shares of our outstanding Series 2021 Term Preferred Stock.

 

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We paid the following monthly dividends on our Series 2021 Term Preferred Stock for the nine months ended June 30, 2017:

 

Fiscal Year

   Declaration Date    Record Date    Payment Date    Dividend per
Series 2021 Term
Preferred Share
 

2017

   October 11, 2016    October 21, 2016    October 31, 2016    $ 0.1406250  
   October 11, 2016    November 17, 2016    November 30, 2016      0.1406250  
   October 11, 2016    December 20, 2016    December 30, 2016      0.1406250  
   January 10, 2017    January 20, 2017    January 31, 2017      0.1406250  
   January 10, 2017    February 16, 2017    February 28, 2017      0.1406250  
   January 10, 2017    March 22, 2017    March 31, 2017      0.1406250  
   April 11, 2017    April 21, 2017    April 28, 2017      0.1406250  
   April 11, 2017    May 19, 2017    May 31, 2017      0.1406250  
   April 11, 2017    June 21, 2017    June 30, 2017      0.1406250  
           

 

 

 
      Nine Months Ended June 30, 2017:    $ 1.2656250  
        

 

 

 

We paid the following monthly dividends on our Series 2021 Term Preferred Stock for the nine months ended June 30, 2016:

 

Fiscal Year

   Declaration Date    Record Date    Payment Date    Dividend per
Series 2021 Term
Preferred Share
 

2016

   October 13, 2015    October 26, 2015    November 4, 2015    $ 0.1406250  
   October 13, 2015    November 17, 2015    November 30, 2015      0.1406250  
   October 13, 2015    December 18, 2015    December 31, 2015      0.1406250  
   January 12, 2016    January 22, 2016    February 2, 2016      0.1406250  
   January 12, 2016    February 18, 2016    February 29, 2016      0.1406250  
   January 12, 2016    March 21, 2016    March 31, 2016      0.1406250  
   April 12, 2016    April 22, 2016    May 2, 2016      0.1406250  
   April 12, 2016    May 19, 2016    May 31, 2016      0.1406250  
   April 12, 2016    June 17, 2016    June 30, 2016      0.1406250  
           

 

 

 
      Nine Months Ended June 30, 2016:    $ 1.2656250  
        

 

 

 

The tax character of dividends paid by us to our preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.

In accordance with ASC 480, “ Distinguishing Liabilities from Equity ,” mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet and we have recorded our mandatorily redeemable preferred stock at cost, as of June 30, 2017 and September 30, 2016. The related dividend payments to our mandatorily redeemable preferred stockholders are treated as dividend expense on our statement of operations as of the ex-dividend date. Aggregate preferred stockholder dividends declared and paid on our Series 2021 Term Preferred Stock for the nine months ended June 30, 2017 and 2016, was $3.1 million.

For disclosure purposes, the fair value, based on the last quoted closing price, for our Series 2021 Term Preferred Stock as of June 30, 2017 and September 30, 2016, was approximately $62.4 million. We consider our mandatorily redeemable preferred stock to be a Level 1 liability within the ASC 820 hierarchy.

NOTE 7. REGISTRATION STATEMENT, COMMON EQUITY OFFERINGS AND SHARE REPURCHASES

Registration Statement

We filed Post-Effective Amendment No. 2 to our current universal shelf registration statement (our “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. As of June 30, 2017, we have the ability to issue up to $279.1 million in securities under the Registration Statement.

Common Stock Offerings

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.

 

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Pursuant to our prior registration statement, in October 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.

In February 2015, we entered into equity distribution agreements (commonly referred to as “at-the-market agreements” or the “Sales Agreements”) with KeyBanc Capital Markets Inc. and Cantor Fitzgerald & Co., each a “Sales Agent,” under which we had the ability to 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. In May 2017, we terminated the Sales Agreement with KeyBanc Capital Markets Inc. and amended the Sales Agreement with Cantor Fitzgerald & Co. to reference our current registration statement. All other material terms of the Sales Agreement with Cantor Fitzgerald & Co. remained unchanged. 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. During the three months ended June 30, 2017, we sold 362,600 shares of our common stock under the Sales Agreement with Cantor Fitzgerald & Co., at a weighted-average price of $9.89 per share and raised $3.6 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $3.4 million. As of June 30, 2017, we had a remaining capacity to sell up to $45.2 million of common stock under the Sales Agreement with Cantor Fitzgerald & Co.

Share Repurchases

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 nine months ended June 30, 2017.

NOTE 8. NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted average common share for the three and nine months ended June 30, 2017 and 2016:

 

     Three Months Ended
June 30,
     Nine Months Ended
June 30,
 
     2017      2016      2017      2016  

Numerator for basic and diluted net increase (decrease) in net assets resulting from operations per common share

   $ 6,163      $ 5,516      $ 11,735      $ (9,328

Denominator for basic and diluted weighted average common shares

     25,576,149        23,363,952        25,288,289        23,145,842  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted net increase (decrease) in net assets resulting from operations per common share

   $ 0.24      $ 0.24      $ 0.46      $ (0.40
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC, we are required to distribute to our stockholders 90.0% of our investment company taxable income. The amount to be paid out as distributions to our stockholders is determined by our Board of Directors quarterly and is based on management’s estimate of the fiscal year earnings. Based on that estimate, our Board of Directors declares three monthly distributions to common stockholders each quarter.

The federal income tax characteristics of all distributions will be reported to stockholders on the Internal Revenue Service Form 1099 at the end of each calendar year.

 

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We paid the following monthly distributions to common stockholders for the nine months ended June 30, 2017 and 2016:

 

Fiscal Year

   Declaration Date    Record Date    Payment Date    Distribution per
Common Share
 

2017

   October 11, 2016    October 21, 2016    October 31, 2016    $ 0.07  
   October 11, 2016    November 17, 2016    November 30, 2016      0.07  
   October 11, 2016    December 20, 2016    December 30, 2016      0.07  
   January 10, 2017    January 20, 2017    January 31, 2017      0.07  
   January 10, 2017    February 16, 2017    February 28, 2017      0.07  
   January 10, 2017    March 22, 2017    March 31, 2017      0.07  
   April 11, 2017    April 21, 2017    April 28, 2017      0.07  
   April 11, 2017    May 19, 2017    May 31, 2017      0.07  
   April 11, 2017    June 21, 2017    June 30, 2017      0.07