Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 10-Q, Received: 02/05/2018 16:10:45)

 

 

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 DECEMBER 31, 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.)

Fat-the  

1521 WESTBRANCH DRIVE, SUITE 100

MCLEAN, VIRGINIA

  22102
 
(Address of principal executive office)   (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 February 2, 2018 was 26,632,182.

 

 

 


GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I.    FINANCIAL INFORMATION   
Item 1.    Financial Statements (Unaudited)   
   Consolidated Statements of Assets and Liabilities as of December 31, 2017 and September 30, 2017      2  
   Consolidated Statements of Operations for the three months ended December 31, 2017 and 2016      3  
   Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2017 and 2016      5  
   Consolidated Statements of Cash Flows for the three months ended December 31, 2017 and 2016      6  
   Consolidated Schedules of Investments as of December 31, 2017 and September 30, 2017      7  
   Notes to Consolidated Financial Statements      17  
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      39  
   Overview      39  
   Results of Operations      42  
   Liquidity and Capital Resources      47  
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      53  
Item 4.    Controls and Procedures      53  
PART II.    OTHER INFORMATION   
Item 1.    Legal Proceedings      54  
Item 1A.    Risk Factors      54  
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      54  
Item 3.    Defaults Upon Senior Securities      54  
Item 4.    Mine Safety Disclosures      54  
Item 5.   

Other Information

     54  
Item 6.   

Exhibits

     55  
SIGNATURES      56  

 

1


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,
2017
    September 30,
2017
 

ASSETS

    

Investments, at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $357,481 and $318,952, respectively)

   $ 330,297     $ 290,860  

Affiliate investments (Cost of $50,036 and $49,868, respectively)

     43,856       42,648  

Control investments (Cost of $42,615 and $42,615 respectively)

     18,277       18,865  

Cash and cash equivalents

     4,503       5,012  

Restricted cash and cash equivalents

     228       258  

Interest receivable, net

     2,167       1,699  

Due from custodian

     7,418       3,086  

Deferred financing fees

     668       853  

Other assets, net

     2,308       2,579  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 409,722     $ 365,860  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings, at fair value (Cost of $130,500 and $93,000, respectively)

   $ 130,833     $ 93,115  

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 5,440,000 and 5,440,000 shares authorized, respectively, and 2,070,000 and 2,070,000 shares issued and outstanding, respectively

     49,870       49,849  

Accounts payable and accrued expenses

     511       522  

Interest payable

     330       264  

Fees due to Adviser (A)

     1,291       1,292  

Fee due to Administrator (A)

     272       244  

Other liabilities

     898       924  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 184,005     $ 146,210  
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

    

Common stock, $0.001 par value, 44,560,000 and 44,560,000 shares authorized, respectively, and 26,632,182 and 26,160,684 shares issued and outstanding, respectively

   $ 27     $ 26  

Capital in excess of par value

     352,540       348,248  

Cumulative net unrealized depreciation of investments

     (57,702     (59,062

Cumulative net unrealized depreciation of other

     (333     (115

Over distributed net investment income

     (207     (139

Accumulated net realized losses

     (68,608 )       (69,308
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 225,717     $ 219,650  
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE

   $ 8.48     $ 8.40  
  

 

 

   

 

 

 

 

(A)   Refer to Note 4— Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.
(B) Refer to Note 10— Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information.

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

 

 

2


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
December 31,
 
     2017     2016  

INVESTMENT INCOME

    

Interest income

    

Non-Control/Non-Affiliate investments

   $ 7,684     $ 5,809  

Affiliate investments

     1,111       1,162  

Control investments

     687       445  

Cash and cash equivalents

     12       2  
  

 

 

   

 

 

 

Total interest income (excluding PIK interest income)

     9,494       7,418  

PIK interest income

    

Non-Control/Non-Affiliate investments

     1,106       997  

Affiliate investments

     70       218  
  

 

 

   

 

 

 

Total PIK interest income

     1,176       1,215  

Total interest income

     10,670       8,633  

Success fee income

    

Non-Control/Non-Affiliate investments

     —         391  

Affiliate investments

     —         1,142  
  

 

 

   

 

 

 

Total success fee income

     —         1,533  

Other income

     189       (192
  

 

 

   

 

 

 

Total investment income

     10,859       9,974  
  

 

 

   

 

 

 

EXPENSES

    

Base management fee (A)

     1,676       1,378  

Loan servicing fee (A)

     1,186       983  

Incentive fee (A)

     1,373       1,293  

Administration fee (A)

     272       300  

Interest expense on borrowings

     1,231       556  

Dividend expense on mandatorily redeemable preferred stock

     776       1,029  

Amortization of deferred financing fees

     248       273  

Professional fees

     255       236  

Other general and administrative expenses

     292       401  
  

 

 

   

 

 

 

Expenses, before credits from Adviser

     7,309       6,449  

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

     (1,186     (983

Credit to fees from Adviser - other (A)

     (841     (699
  

 

 

   

 

 

 

Total expenses, net of credits

     5,282       4,767  
  

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,577       5,207  
  

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

    

Net realized (loss) gain:

    

Non-Control/Non-Affiliate investments

     602       3,882  

Affiliate investments

     —         (2,330

Control investments

     (28     (5,000

Other

     (133     —    
  

 

 

   

 

 

 

Total net realized gain (loss)

     441       (3,448

Net unrealized appreciation (depreciation):

    

Non-Control/Non-Affiliate investments

     908       (5,867

Affiliate investments

     1,040       706  

Control investments

     (588     4,106  

Other

     (218     212  
  

 

 

   

 

 

 

Total net unrealized appreciation (depreciation)

     1,142       (843
  

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     1,583       (4,291
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 7,160     $ 916  
  

 

 

   

 

 

 

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

 

3


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

BASIC AND DILUTED PER COMMON SHARE:

     

Net investment income

   $ 0.21      $ 0.21  
  

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 0.27      $ 0.04  
  

 

 

    

 

 

 

Distributions declared and paid per common share

   $ 0.21      $ 0.21  
  

 

 

    

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and Diluted

     26,522,788        24,778,970  

 

(A)   Refer to Note 4— Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

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

 

4


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended
December 31,
 
     2017     2016  

OPERATIONS

    

Net investment income

   $ 5,577     $ 5,207  

Net realized gain (loss) on investments

     574       (3,448

Realized loss on other

     (133     —    

Net unrealized appreciation (depreciation) of investments

     1,360       (1,055

Net unrealized (depreciation) appreciation of other

     (218     212  
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     7,160       916  
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income

     (5,577     (5,207
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (5,577     (5,207
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Issuance of common stock

     4,567       17,344  

Discounts, commissions and offering costs for issuance of common stock

     (83     (875
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     4,484       16,469  
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS

     6,067       12,178  

NET ASSETS, BEGINNING OF PERIOD

     219,650       201,207  
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 225,717     $ 213,385  
  

 

 

   

 

 

 

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

 

5


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended
December 31,
 
     2017     2016  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 7,160     $ 916  

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

    

Purchase of investments

     (56,938     (20,047

Principal repayments on investments

     18,569       42,234  

Net proceeds from sale of investments

     1,274       8,219  

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

     (983     (1,095

Net change in premiums, discounts and amortization

     (45     54  

Net realized (gain) loss on investments

     (574     3,448  

Net unrealized (appreciation) depreciation of investments

     (1,360     1,055  

Net unrealized appreciation (depreciation) of other

     218       (213

Changes in assets and liabilities:

    

Decrease in restricted cash and cash equivalents

     30       355  

Amortization of deferred financing fees

     248       273  

(Increase) decrease in interest receivable, net

     (468     380  

Increase in due from custodian

     (4,332     (779

Decrease (increase) in other assets, net

     256       (3,495

Decrease in accounts payable and accrued expenses

     (11     (405

Increase (decrease) in interest payable

     66       (91

Decrease in fees due to Adviser (A)

     (1     (11

Increase in fee due to Administrator (A)

     28       18  

(Decrease) increase in other liabilities

     (26     650  
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (36,889     31,466  
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     61,100       24,200  

Repayments on borrowings

     (23,600     (67,300

Deferred financing fees

     (42     —    

Proceeds from issuance of common stock

     4,567       17,344  

Discounts, commissions and offering costs for issuance of common stock

     (68     (875

Distributions paid to common stockholders

     (5,577     (5,207
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     36,380       (31,838
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (509     (372

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     5,012       6,152  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 4,503     $ 5,780  
  

 

 

   

 

 

 

 

(A) Refer to Note 4— Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

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

 

6


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment (A)(B)(W)(Y)

   Principal/
Shares/
Units (J)(X)
     Cost      Fair
Value
 

NON-CONTROL/NON-AFFILIATE INVESTMENTS (M) – 146.3%

        

Secured First Lien Debt – 74.8%

        

Automobile – 1.5%

        

Meridian Rack & Pinion, Inc. (S) – Term Debt (L + 11.5%, 13.5% Cash, Due 12/2018)  (C)

   $ 4,140      $ 4,140      $ 3,312  

Beverage, Food, and Tobacco – 3.0%

        

Triple H Food Processors, LLC - Line of Credit, $1,500 available (L + 6.8%, 8.3% Cash, Due 8/2018) (C)

     —          —          —    

Triple H Food Processors, LLC – Term Debt (L + 8.3%, 9.8% Cash, Due 8/2020) (C)

     6,600        6,600        6,666  
     

 

 

    

 

 

 
        6,600        6,666  

Buildings and Real Estate – 0.9%

        

GFRC Holdings, LLC – Line of Credit, $165 available (L + 8.0%, 9.6% Cash, Due 9/2018) (E)

     1,035        1,035        1,035  

GFRC Holdings, LLC – Term Debt (L + 8.0%, 9.6% Cash, Due 9/2018) (E)

     1,000        1,000        1,000  
     

 

 

    

 

 

 
        2,035        2,035  

Diversified/Conglomerate Service – 19.7%

        

IA Tech, LLC – Term Debt (L + 11.0%, 12.6% Cash, Due 6/2021) (C)

     23,000        23,000        23,690  

Travel Sentry, Inc. – Term Debt (L + 8.0%, 9.7% Cash, Due 12/2021) (C)(U)

     8,902        8,902        9,192  

Vision Government Solutions, Inc. – Line of Credit, $0 available (L + 8.8%, 10.3% Cash, Due 1/2019) (C)

     1,450        1,450        1,431  

Vision Government Solutions, Inc. – Delayed Draw Term Loan, $900 available (10.0% Cash, Due 1/2019) (C)(F)

     1,600        1,600        1,511  

Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 10.3% Cash, Due 1/2019) (C)

     9,000        9,000        8,531  
     

 

 

    

 

 

 
        43,952        44,355  

Healthcare, education, and childcare – 8.7%

        

EL Academies, Inc. – Line of Credit, $2,000 available (L + 8.8%, 10.3% Cash, Due 8/2020) (C)

     —          —          —    

EL Academies, Inc. – Delayed Draw Term Loan, $10,000 available (L + 8.8%, 10.3% Cash, Due 8/2022) (C)

     —          —          —    

EL Academies, Inc. – Term Debt (L + 8.8%, 10.3% Cash, Due 8/2022) (C)

     12,000        12,000        12,030  

TWS Acquisition Corporation – Term Debt (L + 8.0%, 9.6% Cash, Due 7/2020) (C)

     7,353        7,353        7,537  
     

 

 

    

 

 

 
        19,353        19,567  

Machinery – 3.0%

        

Arc Drilling Holdings LLC – Line of Credit, $1,000 available (L + 8.0%, 9.6% Cash, Due 11/2020) (I)

     —          —          —    

Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 11.1% Cash, Due 11/2022) (I)

     5,880        5,880        5,880  

Precision International, LLC – Term Debt (10.0% PIK, Due 9/2021) (C)(F)

     830        830        822  
     

 

 

    

 

 

 
        6,710        6,702  

Oil and Gas – 16.9%

        

Impact! Chemical Technologies, Inc. – Line of Credit, $2,164 available (L + 8.8%, 10.3% Cash, Due 12/2020) (I)

     336        336        336  

Impact! Chemical Technologies, Inc. – Term Debt (L + 8.8%, 10.8% Cash, Due 12/2020) (I)

     20,000        20,000        20,000  

WadeCo Specialties, Inc. – Line of Credit, $2,425 available (L + 7.0%, 8.6% Cash, Due 4/2018) (C)

     575        575        580  

WadeCo Specialties, Inc. – Term Debt (L + 7.0% 8.6% Cash, Due 3/2019) (C)

     10,191        10,191        10,292  

WadeCo Specialties, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 3/2019) (C)

     7,000        7,000        7,035  
     

 

 

    

 

 

 
        38,102        38,243  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 2.8%

        

Canopy Safety Brands, LLC – Line of Credit, $500 available (L + 6.5%, 8.1% Cash, Due 9/2019) (C)

     —          —          —    

Canopy Safety Brands, LLC – Term Debt (L + 9.5%, 11.1% Cash, Due 9/2021) (C)

     6,500        6,500        6,598  
     

 

 

    

 

 

 
        6,500        6,598  

Printing and Publishing – 0.0%

        

Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 8.5% Cash, Due 2/2015) (E)(V)

     107        107        —    

Telecommunications – 18.3%

        

Applied Voice & Speech Technologies, Inc. – Term Debt (L + 9.3%, 10.8% Cash, Due 10/2022) (I)

     11,000        11,000        11,000  

B+T Group Acquisition Inc. (S) – Term Debt (L + 11.0%, 13.0% Cash,
Due 12/2019) (C)

     6,000        6,000        5,978  

NetFortris Corp. – Term Debt (L + 8.4%, 10.0% Cash, Due 2/2021) (C)

     24,000        24,000        24,420  
     

 

 

    

 

 

 
        41,000        41,398  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 168,499      $ 168,876  
     

 

 

    

 

 

 

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

 

7


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment (A)(B)(W)(Y)

   Principal/
Shares/
Units (J)(X)
     Cost      Fair
Value
 

Secured Second Lien Debt – 65.1%

        

Automobile – 2.2%

        

Sea Link International IRB, Inc. – Term Debt (11.3% Cash, Due 3/2023) (C)(F)

   $ 5,000      $ 4,976      $ 5,031  

Beverage, Food, and Tobacco – 3.0%

        

The Mochi Ice Cream Company – Term Debt (L + 10.5%, 12.1% Cash, Due 1/2021) (C)

     6,750        6,750        6,826  

Cargo Transportation – 5.9%

        

AG Transportation Holdings, LLC. – Term Debt (L + 10.0%, 13.3% Cash, Due 3/2020) (C)

     13,000        13,000        13,098  

Chemicals, Plastics, and Rubber – 0.4%

        

Vertellus Holdings LLC – Term Debt (L + 12.0%, 13.6% Cash, Due 10/2021) (C)

     1,099        1,099        922  

Diversified/Conglomerate Manufacturing – 9.6%

        

Alloy Die Casting Co. (S) – Term Debt (L + 11.5%, 13.5% Cash, Due 4/2021) (C)(H)

     5,235        5,235        3,350  

Alloy Die Casting Co. (S) – Term Debt (L + 11.5%, 13.5% Cash, Due 4/2021) (C)(H)

     75        75        48  

Alloy Die Casting Co. (S) – Term Debt (Due 4/2021) (C)(P)

     390        390        252  

United Flexible, Inc. – Term Debt (L + 9.5%, 11.1% Cash, 2.0% PIK, Due 2/2022) (C)

     18,085        18,005        18,107  
     

 

 

    

 

 

 
        23,705        21,757  

Diversified/Conglomerate Service – 20.5%

        

DigiCert Holdings, Inc. – Term Debt (L + 8.0%, 9.6% Cash, Due 10/2025) (D)

     5,000        4,975        5,013  

Gray Matter Systems, LLC – Delayed Draw Term Loan, $2,000 available (12.0% Cash, Due 11/2023) (F)(I)

     —          —          —    

Gray Matter Systems, LLC – Term Debt (12.0% Cash, Due 11/2023) (F)(I)

     7,500        7,500        7,500  

Keystone Acquisition Corp. – Term Debt (L + 9.3%, 10.9% Cash, Due 5/2025) (D)(U)

     4,000        3,924        3,980  

LDiscovery, LLC – Term Debt (L + 10.0%, 11.6% Cash, Due 12/2023) (D)

     5,000        4,820        4,000  

Red Ventures, LLC – Term Debt (L + 8.0%, 9.6% Cash, Due 11/2025) (D)

     3,625        3,566        3,625  

TapRoot Partners, Inc. – Term Debt (L + 10.3%, 11.8% Cash, Due 10/2022) (C)

     22,000        22,000        22,220  
  

 

 

    

 

 

    

 

 

 
        46,785        46,338  

Healthcare, education, and childcare – 8.0%

        

Medical Solutions Holdings, Inc. – Term Debt (L + 8.3%, 9.8% Cash, Due 12/2023) (D)

     3,000        2,957        2,970  

Merlin International, Inc. – Term Debt (L + 10.0%, 11.6% Cash, Due 8/2022) (C)

     10,000        10,000        10,225  

NetSmart Technologies, Inc. – Term Debt (L + 9.5%, 11.1% Cash, Due 10/2023) (D)

     3,660        3,610        3,660  

New Trident Holdcorp, Inc. – Term Debt (L + 10.0%, 11.7% PIK, Due 7/2020) (D)(U)

     4,000        4,000        1,191  
     

 

 

    

 

 

 
        20,567        18,046  

Home and Office Furnishings, Housewares and Durable Consumer Products – 4.5%

        

Belnick, Inc. – Term Debt (11.0% Cash, Due 8/2023) (C)(F)

     10,000        10,000        10,150  

Hotels, Motels, Inns, and Gaming – 3.2%

        

Vacation Rental Pros Property Management, LLC – Term Debt (L + 10.0%, 11.6% Cash, 3.0% PIK,
Due 6/2023) (C)

     7,199        7,199        6,938  

Oil and Gas – 7.0%

        

Francis Drilling Fluids, Ltd. – Term Debt (L + 10.4%, 11.9% PIK, Due 4/2020) (C)

     17,245        17,128        10,766  

Francis Drilling Fluids, Ltd. – Term Debt (L + 9.3%, 10.8% PIK, Due 4/2020) (C)

     7,945        7,891        4,954  
     

 

 

    

 

 

 
        25,019        15,720  

Telecommunications – 0.4%

        

Neustar, Inc. – Term Debt (L + 8.0%, 9.6% Cash, Due 8/2025) (D)

     1,000        1,000        1,008  

Textiles and Leather – 0.4%

        

ABG Intermediate Holdings 2 LLC – Term Debt (L + 7.8%, 9.4% Cash, Due 9/2025) (D)(U)

     1,000        1,000        1,010  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 161,100      $ 146,844  
     

 

 

    

 

 

 

Unsecured Debt – 1.5%

        

Healthcare, education, and childcare – 1.5%

        

Edmentum Ultimate Holdings, LLC – Term Debt (10.0% PIK, Due 6/2020) (C)(F)

   $ 3,352      $ 3,352      $ 3,356  

Preferred Equity – 1.9%

        

Automobile – 0.1%

        

Meridian Rack & Pinion, Inc. (S) – Preferred Stock (E)(G)

     1,449      $ 1,449      $ 161  

Buildings and Real Estate – 0.3%

        

GFRC Holdings, LLC – Preferred Stock (E)(G)

     1,000        1,025        674  

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

 

8


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment (A)(B)(W)(Y)

   Principal/
Shares/
Units (J)(X)
    Cost      Fair
Value
 

Diversified/Conglomerate Manufacturing – 0.3%

       

Alloy Die Casting, Co. (S) – Preferred Stock (E)(G)

     2,192       2,192        —    

United Flexible, Inc. – Preferred Stock (E)(G)

     538       538        631  
    

 

 

    

 

 

 
       2,730        631  

Diversified/Conglomerate Service – 0.2%

       

Frontier Financial Group Inc. – Preferred Stock (E)(G)

     766       500        500  

Frontier Financial Group Inc. – Preferred Stock Warrant (E)(G)

     168       —          —    
    

 

 

    

 

 

 
       500        500  

Oil and Gas – 0.8%

       

Francis Drilling Fluids, Ltd. – Preferred Equity Units (E)(G)

     1,656       1,215        —    

WadeCo. Specialties, Inc. – Preferred Stock (E)(G)

     1,000       618        2,098  
    

 

 

    

 

 

 
       1,833        2,098  

Telecommunications – 0.2%

       

B+T Group Acquisition, Inc. (S) – Preferred Stock (E)(G)(J)

     5,503       1,799        —    

NetFortris Corp. – Preferred Stock (E)(G)

     1,250,000       125        375  
    

 

 

    

 

 

 
       1,924        375  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 9,461      $ 4,439  
    

 

 

    

 

 

 

Common Equity – 3.0%

       

Aerospace and Defense – 0.3%

       

FedCap Partners, LLC – Class A Membership Units ($0 Uncalled
Commitment) (G)(K)(R)

     80     $ 1,634      $ 751  

Automobile – 0.2%

       

Sea Link International IRB, Inc. – Common Equity Units (E)(G)

     494,902       495        378  

Beverage, Food, and Tobacco – 0.2%

       

The Mochi Ice Cream Company – Common Stock (E)(G)

     450       450        —    

Triple H Food Processors, LLC – Common Stock (E)(G)

     250,000       250        442  
    

 

 

    

 

 

 
       700        442  

Buildings and Real Estate – 0.0%

       

GFRC Holdings, LLC – Common Stock Warrants (E)(G)

     45.0     —          —    

Cargo Transportation – 0.0%

       

AG Transportation Holdings, LLC – Member Profit Participation (E)(G)

     18.0     1,000        —    

AG Transportation Holdings, LLC – Profit Participation Warrants (E)(G)

     12.0     244        —    
    

 

 

    

 

 

 
       1,244        —    

Chemicals, Plastics, and Rubber – 0.2%

       

Vertellus Holdings LLC – Common Stock Units (E)(G)

     879,121       3,017        527  

Diversified/Conglomerate Manufacturing – 0.0%

       

Alloy Die Casting, Co. (S) – Common Stock (E)(G)

     270       18        —    

United Flexible, Inc. – Common Stock (E)(G)

     1,158       148        —    
    

 

 

    

 

 

 
       166        —    

Healthcare, education, and childcare – 1.1%

       

Edmentum Ultimate Holdings, LLC – Common Stock (E)(G)

     21,429       2,636        —    

EL Academies, Inc. – Common Stock (E)(G)

     500       500        432  

Leeds Novamark Capital I, L.P. – Limited Partnership Interest ($986 uncalled capital commitment) (G)(L)(R)

     3.5     2,010        2,098  
    

 

 

    

 

 

 
       5,146        2,530  

Machinery – 0.7%

       

Arc Drilling Holdings LLC – Common Stock (I)(G)

     16.7     1,500        1,500  

Precision International, LLC – Membership Unit Warrant (E)(G)

     33.3     —          41  
    

 

 

    

 

 

 
       1,500        1,541  

Oil and Gas – 0.1%

       

Francis Drilling Fluids, Ltd. – Common Equity Units (E)(G)

     1,656       1        —    

W3, Co. – Common Equity (D)(G)

     435       499        131  
    

 

 

    

 

 

 
       500        131  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.2%

       

Canopy Safety Brands, LLC – Participation Warrant (E)(G)

     1       500        325  

Funko Acquisition Holdings, LLC (S) – Common Units (G)(T)

     67,873       166        157  
    

 

 

    

 

 

 
       666        482  

Telecommunications – 0.0%

       

NetFortris Corp. – Common Stock Warrant (E)(G)

     1       1        —    
    

 

 

    

 

 

 

Total Common Equity

     $ 15,069      $ 6,782  
    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     $ 357,481      $ 330,297  
    

 

 

    

 

 

 

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

 

9


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment (A)(B)(W)(Y)

   Principal/
Shares/
Units (J)(X)
     Cost      Fair
Value
 

AFFILIATE INVESTMENTS (N) – 19.4%

        

Secured First Lien Debt – 8.9%

        

Diversified/Conglomerate Manufacturing – 8.9%

        

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 10.5%, 12.5% Cash, Due 2/2019) (C)

   $ 6,200      $ 6,200      $ 5,781  

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 11.8%, 13.8% Cash, Due 2/2019) (C)

     1,600        1,600        1,500  

LWO Acquisitions Company LLC – Line of Credit, $0 available (L + 5.5%. 7.1% Cash, 2.0% PIK, Due 12/2019) (C)

     2,762        2,761        2,555  

LWO Acquisitions Company LLC – Term Debt (L + 8.5%, 10.1% Cash, 2.0% PIK, Due 12/2019) (C)

     10,998        10,979        10,173  
     

 

 

    

 

 

 
        21,540        20,009  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 21,540      $ 20,009  
     

 

 

    

 

 

 

Secured Second Lien Debt – 7.4%

        

Diversified Natural Resources, Precious Metals and Minerals – 7.4%

        

Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 11/2022) (C)

   $ 6,000      $ 6,000      $ 5,820  

Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 11/2022) (C)

     8,000        8,000        7,760  

Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 11/2022) (C)

     3,300        3,300        3,201  
     

 

 

    

 

 

 
        17,300        16,781  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 17,300      $ 16,781  
     

 

 

    

 

 

 

Unsecured Debt – 0.0%

        

Diversified/Conglomerate Manufacturing – 0.0%

        

LWO Acquisitions Company LLC – Term Debt (Due 12/2019) (C)(P)

   $ 95      $ 95      $ 88  

Preferred Equity – 0.5%

        

Diversified/Conglomerate Manufacturing – 0.2%

        

Edge Adhesives Holdings, Inc. (S) – Preferred Stock (E)(G)

     2,516      $ 2,516      $ 385  

Diversified Natural Resources, Precious Metals and Minerals – 0.3%

        

Lignetics, Inc. – Preferred Stock (E)(G)

     40,000        800        837  
     

 

 

    

 

 

 

Total Preferred Equity

      $ 3,316      $ 1,222  
     

 

 

    

 

 

 

Common Equity – 2.6%

        

Diversified/Conglomerate Manufacturing – 0.0%

        

LWO Acquisitions Company LLC – Common Units (E)(G)

     921,000      $ 921      $ —    

Diversified Natural Resources, Precious Metals and Minerals – 0.5%

        

Lignetics, Inc. – Common Stock (E)(G)

     152,603        1,855        1,126  

Textiles and Leather – 2.1%

        

Targus Cayman HoldCo, Ltd. – Common Stock (E)(G)

     3,076,414        5,009        4,630  
     

 

 

    

 

 

 

Total Common Equity

      $ 7,785      $ 5,756  
     

 

 

    

 

 

 

Total Affiliate Investments

      $ 50,036      $ 43,856  
     

 

 

    

 

 

 

CONTROL INVESTMENTS (O) – 8.2%

        

Secured First Lien Debt – 3.3%

        

Machinery – 1.8%

        

PIC 360, LLC – Term Debt (14.0%, Due 12/2017) (E)(F)

   $ 4,000      $ 4,000      $ 4,000  

Printing and Publishing – 1.5%

        

Sunshine Media Holdings – Line of Credit, $672 available (8.0% Cash, Due 5/2018) (E)(F)

     1,328        1,328        1,328  

Sunshine Media Holdings – Term Debt (8.0% Cash, Due 5/2018) (E)(F)(H)

     5,000        3,525        585  

Sunshine Media Holdings – Term Debt (L + 3.8%, 5.3% Cash, Due 5/2018) (E)(H)

     11,948        8,401        1,397  

Sunshine Media Holdings – Term Debt (L + 4.0%, 5.6% Cash, Due 5/2018) (E)(H)

     10,700        10,700        —    
     

 

 

    

 

 

 
        23,954        3,310  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 27,954      $ 7,310  
     

 

 

    

 

 

 

Secured Second Lien Debt – 3.6%

        

Automobile – 3.6%

        

Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.1% Cash, Due 8/2023) (E)

   $ 8,065      $ 8,065      $ 8,065  

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

 

10


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment (A)(B)(W)(Y)

   Principal/
Shares/
Units (J)(X)
     Cost      Fair
Value
 

Preferred Equity – 0.0%

        

Printing and Publishing – 0.0%

        

Sunshine Media Holdings – Preferred Stock (E)(G)(J)

     15,270      $ 5,275      $ —    

Common Equity – 1.3%

        

Automobile – 1.2%

        

Defiance Integrated Technologies, Inc. – Common Stock (E)(G)

     33,321      $ 580      $ 2,643  

Machinery – 0.1%

        

PIC 360, LLC – Common Equity Units (E)(G)

     1        1        259  

Printing and Publishing – 0.0%

        

Sunshine Media Holdings – Common Stock (E)(G)

     1,867        740        —    

Sunshine Media Holdings – Common Stock Warrants (E)(G)

     72        —          —    
     

 

 

    

 

 

 
        740        —    
     

 

 

    

 

 

 

Total Common Equity

      $ 1,321      $ 2,902  
     

 

 

    

 

 

 

Total Control Investments

      $ 42,615      $ 18,277  
     

 

 

    

 

 

 

TOTAL INVESTMENTS – 173.9%

      $ 450,132      $ 392,430  
     

 

 

    

 

 

 

 

(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 $348.9 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 December 31, 2017, our investments in FedCap Partners, LLC (“FedCap”), Leeds Novamark Capital I, L.P. (“Leeds”), and Funko Acquisition Holdings, LLC (“Funko”) 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 December 31, 2017.
(B)   Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 1.56% as of December 31, 2017. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or LIBOR plus a spread. Due dates represent the contractual maturity date.
(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 December 31, 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 December 31, 2017 best represents fair value as of December 31, 2017.
(J) Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(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.
(P) Debt security does not have a stated interest rate that is payable thereon.
(Q)   Reserved.
(R)   Fair value was based on net asset value provided by the fund as a practical expedient.
(S)   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.
(T)   Our investment in Funko was valued using Level 2 inputs within the ASC 820 fair value hierarchy. Our common units in Funko are convertible to class A common stock in Funko, Inc. upon the expiration of a lock-up agreement and meeting other requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of marketability. Funko, Inc. is traded on the Nasdaq Stock Market under the trading symbol “FNKO.” Refer to Note 3— Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(U) The cash interest rate on this investment was indexed to 90-day LIBOR, which was 1.69% as of December 31, 2017.
(V) The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 4.50% as of December 31, 2017.
(W) Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the FASB Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) fair value hierarchy. Refer to Note 3— Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(X) Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.
(Y) Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of December 31, 2017.
(Z) Investment formerly known as HB Capital Resources, Ltd.

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

 

11


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment (A)(B)(W)(Z)

   Principal/
Shares/
Units (J)(X)
     Cost      Fair
Value
 

NON-CONTROL/NON-AFFILIATE INVESTMENTS (M) – 132.4%

        

Secured First Lien Debt – 67.2%

        

Automobile – 1.7%

        

Meridian Rack & Pinion, Inc. (S) – Term Debt (L + 11.5% 13.5% Cash, Due 12/2018)  (C)

   $ 4,140      $ 4,140      $ 3,643  

Beverage, Food, and Tobacco – 3.2%

        

Triple H Food Processors, LLC - Line of Credit, $1,500 available (L + 6.8%, 8.0% Cash, Due 8/2018) (C)

     —          —          —    

Triple H Food Processors, LLC – Term Debt (L + 8.3%, 9.5% Cash, Due 8/2020) (C)

     6,800        6,800        6,928  
     

 

 

    

 

 

 
        6,800        6,928  

Buildings and Real Estate – 1.0%

        

GFRC Holdings, LLC – Line of Credit, $20 available (L + 8.0%, 9.2% Cash, Due 9/2018) (E)

     1,180        1,180        1,180  

GFRC Holdings, LLC – Term Debt (L + 8.0%, 9.2% Cash, Due 9/2018) (E)

     1,000        1,000        1,000  
     

 

 

    

 

 

 
        2,180        2,180  

Diversified/Conglomerate Service – 20.1%

        

IA Tech, LLC – Term Debt (L + 11.0%, 12.2% Cash, Due 6/2021) (C)

     23,000        23,000        23,633  

Travel Sentry, Inc. – Term Debt (L + 9.0%, 10.3% Cash, Due 12/2021) (C)(U)

     8,902        8,902        9,170  

Vision Government Solutions, Inc. – Line of Credit, $0 available (L + 8.8%, 10.0% Cash, Due 1/2019) (C)

     1,450        1,450        1,420  

Vision Government Solutions, Inc. – Delayed Draw Term Loan, $900 available (10.0% Cash, Due 1/2019) (C)(F)

     1,600        1,600        1,485  

Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 10.0% Cash, Due 1/2019) (C)

     9,000        9,000        8,390  
     

 

 

    

 

 

 
        43,952        44,098  

Diversified/Conglomerate Manufacturing – 1.6%

        

Alloy Die Casting Co. (S) – Term Debt (L + 11.5%, 13.5% Cash, Due 10/2018) (C)(H)

     5,235        5,235        3,272  

Alloy Die Casting Co. (S) – Term Debt (L + 11.5%, 13.5% Cash, Due 10/2018) (C)(H)

     75        75        47  

Alloy Die Casting Co. (S) – Term Debt (Due 10/2018) (C)(P)

     390        390        246  
     

 

 

    

 

 

 
        5,700        3,565  

Healthcare, education, and childcare – 9.8%

        

EL Academies, Inc. – Line of Credit (L + 9.5%, 10.7% Cash, Due 8/2020) (I)

     —          —          —    

EL Academies, Inc. – Delayed Draw Term Loan (L + 9.5%, 10.7% Cash, Due 8/2022) (I)

     —          —          —    

EL Academies, Inc. – Term Debt (L + 9.5%, 10.7% Cash, Due 8/2022) (I)

     12,000        12,000        12,000  

TWS Acquisition Corporation – Term Debt (L + 8.0%, 9.2% Cash, Due 7/2020) (C)

     9,432        9,432        9,609  
     

 

 

    

 

 

 
        21,432        21,609  

Leisure, Amusement, Motion Pictures, Entertainment – 3.6%

        

Flight Fit N Fun LLC – Term Debt (L + 14.0%, 15.2% Cash, Due 9/2020) (Q)(Y)

     7,800        7,800        7,800  

Machinery – 0.4%

        

Precision International, LLC – Term Debt (10.0% PIK, Due 9/2021) (C)(F)

     808        808        798  

Oil and Gas – 9.2%

        

WadeCo Specialties, Inc. – Line of Credit, $425 available (L + 7.0%, 8.2% Cash, Due 4/2018) (E)

     2,575        2,575        2,575  

WadeCo Specialties, Inc. – Term Debt (L + 7.0%, 8.2% Cash, Due 3/2019) (E)

     10,441        10,427        10,440  

WadeCo Specialties, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 3/2019) (E)

     7,000        7,000        7,000  
     

 

 

    

 

 

 
        20,002        20,015  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 3.0%

        

Canopy Safety Brands, LLC – Line of Credit, $500 available (L + 6.5%, 7.7% Cash, Due 9/2019) (C)

     —          —          —    

Canopy Safety Brands, LLC – Term Debt (L + 9.5%, 10.7% Cash, Due 9/2021) (C)

     6,600        6,600        6,616  
     

 

 

    

 

 

 
        6,600        6,616  

Printing and Publishing – 0.0%

        

Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 8.0% Cash, Due 2/2015) (E)(V)

     107        107        —    

Telecommunications – 13.6%

        

B+T Group Acquisition Inc. (S) – Term Debt (L + 11.0%, 13.0% Cash, Due 12/2019) (C)

     6,000        6,000        5,955  

NetFortris Corp. – Line of Credit, $2,000 available (L + 8.4%, 9.6% Cash, Due 11/2017) (C)

     —          —          —    

NetFortris Corp. – Term Debt (L + 8.4%, 9.6% Cash, Due 2/2021) (C)

     24,000        24,000        24,240  
     

 

 

    

 

 

 
        30,000        30,195  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 149,521      $ 147,447  
     

 

 

    

 

 

 

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

 

12


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment (A)(B)(W)(Z)

   Principal/
Shares/
Units (J)(X)
     Cost      Fair
Value
 

Secured Second Lien Debt – 59.1%

        

Automobile – 2.2%

        

Sea Link International IRB, Inc. – Term Debt (11.3%, Due 11/2021) (C)(F)

   $ 5,000      $ 4,975      $ 5,025  

Beverage, Food, and Tobacco – 3.1%

        

The Mochi Ice Cream Company – Term Debt (L + 10.5%, 11.7% Cash, Due 1/2021) (C)

     6,750        6,750        6,809  

Cargo Transportation– 6.0%

        

AG Transportation Holdings, LLC. – Term Debt (L + 10.0%, 13.3% Cash, Due 3/2020)  (C)

     13,000        13,000        13,081  

Chemicals, Plastics, and Rubber – 0.4%

        

Vertellus Holdings LLC – Term Debt (L + 12.0%, 13.2% Cash, Due 10/2021) (D)

     1,099        1,099        929  

Diversified/Conglomerate Service – 16.4%

        

DataPipe, Inc. – Term Debt (L + 8.0%, 9.2% Cash, Due 9/2019) (D)(Y)

     2,000        1,966        2,005  

HB Capital Resources, Ltd. – Term Debt (L + 10.3%, 11.5% Cash, Due 10/2022) (C)

     22,000        22,000        22,110  

Keystone Acquisition Corp.– Term Debt (L + 9.3%, 10.5% Cash, Due 5/2025) (D)

     4,000        3,922        3,960  

LDiscovery, LLC – Term Debt (L + 10.0%, 11.2% Cash, Due 12/2023) (D)

     5,000        4,815        4,550  

PSC Industrial Holdings Corp.– Term Debt (L + 8.3%, 9.5% Cash, Due 12/2021) (Q)(Y)

     3,500        3,452        3,500  
     

 

 

    

 

 

 
        36,155        36,125  

Diversified/Conglomerate Manufacturing – 8.2%

        

United Flexible, Inc.– Term Debt (L + 9.5%, 10.7% Cash, 2.0% PIK, Due 2/2022) (C)

     17,993        17,909        17,903  

Healthcare, education, and childcare – 8.8%

        

Medical Solutions Holdings, Inc. – Term Debt (L + 8.3%, 9.5% Cash, Due 12/2023) (D)

     3,000        2,956        2,970  

Merlin International, Inc. – Term Debt (L + 10.0%, 11.2% Cash, Due 8/2022) (C)

     10,000        10,000        10,150  

NetSmart Technologies, Inc.– Term Debt (L + 9.5%, 10.7% Cash, Due 10/2023) (D)

     3,660        3,609        3,678  

New Trident Holdcorp, Inc.– Term Debt (L + 9.5%, 10.7% Cash, Due 7/2020) (D)

     4,000        4,000        2,412  
     

 

 

    

 

 

 
        20,565        19,210  

Home and Office Furnishings, Housewares and Durable Consumer Products – 4.6%

        

Belnick, Inc. – Term Debt (11.0%, Due 8/2023) (C)(F)

     10,000        10,000        10,100  

Hotels, Motels, Inns, and Gaming – 3.2%

        

Vacation Rental Pros Property Management, LLC – Term Debt (L + 10.0%, 11.2% Cash, 3.0% PIK, Due 6/2023) (C)

     7,145        7,145        7,136  

Oil and Gas – 5.7%

        

Francis Drilling Fluids, Ltd. – Term Debt (L + 10.4%, 11.9% PIK, Due 4/2020) (C)

     16,739        16,611        8,626  

Francis Drilling Fluids, Ltd. – Term Debt (L + 9.3% 10.8% PIK, Due 4/2020) (C)

     7,733        7,673        3,931  
     

 

 

    

 

 

 
        24,284        12,557  

Telecommunications – 0.5%

        

Neustar, Inc. – Term Debt (L + 8.0%, 9.2% Cash, Due 8/2025) (D)

     1,000        1,000        1,015  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 142,882      $ 129,890  
     

 

 

    

 

 

 

Unsecured Debt – 1.5%

        

Healthcare, education, and childcare – 1.5%

        

Edmentum Ultimate Holdings, LLC – Term Debt (10.0% PIK, Due 6/2020) (C)(F)

   $ 3,324      $ 3,324      $ 3,324  

Preferred Equity – 2.6%

        

Automobile – 0.1%

        

Meridian Rack & Pinion, Inc. (S) – Preferred Stock (E)(G)

     1,449      $ 1,449      $ 133  

Buildings and Real Estate – 0.3%

        

GFRC Holdings, LLC – Preferred Stock (E)(G)

     1,000        1,025        824  

Diversified/Conglomerate Service – 0.2%

        

Frontier Financial Group Inc. – Preferred Stock (I)(G)

     766        500        500  

Frontier Financial Group Inc. – Preferred Stock Warrant (I)(G)

     168        —          —    
     

 

 

    

 

 

 
        500        500  

Diversified/Conglomerate Manufacturing – 0.3%

        

Alloy Die Casting, Co. (S) – Preferred Stock (E)(G)

     2,192        2,192        —    

United Flexible, Inc.– Preferred Stock (E)(G)

     538        538        554  
     

 

 

    

 

 

 
        2,730        554  

Leisure, Amusement, Motion Pictures, Entertainment – 0.6%

        

Flight Fit N Fun LLC – Preferred Stock (G)(Q)(Y)

     700,000        700        1,425  

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

 

13


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment (A)(B)(W)(Z)

   Principal/
Shares/
Units (J)(X)
    Cost      Fair
Value
 

Oil and Gas – 0.9%

       

Francis Drilling Fluids, Ltd. – Preferred Equity Units (E)(G)

  

 

1,656

 

    1,215        —    

WadeCo. Specialties, Inc. – Preferred Stock (E)(G)

     1,000       618        2,000  
    

 

 

    

 

 

 
           1,833      2,000  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.1%

       

Funko Acquisition Holdings, LLC (S) – Preferred Equity Units (E)(G)

     260       167        159  

Telecommunications – 0.1%

       

B+T Group Acquisition, Inc. (S) – Preferred Stock (E)(G)(J)

     5,503       1,799        140  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 10,203      $ 5,735  
    

 

 

    

 

 

 

Common Equity – 2.0%

       

Aerospace and Defense – 0.3%

       

FedCap Partners, LLC – Class A Membership Units ($0 Uncalled Commitment) (G)(K)(R)

     80     $ 1,634      $ 751  

Automobile– 0.2%

       

Sea Link International IRB, Inc.– Common Equity Units (E)(G)

     494,902       495        362  

Beverage, Food, and Tobacco – 0.2%

       

The Mochi Ice Cream Company – Common Stock (E)(G)

     450       450        —    

Triple H Food Processors, LLC – Common Stock (E)(G)

     250,000       250        366  
    

 

 

    

 

 

 
           700      366  

Buildings and Real Estate – 0.0%

       

GFRC Holdings, LLC – Common Stock Warrants (E)(G)

     45.0     —          —    

Cargo Transportation – 0.0%

       

AG Transportation Holdings, LLC – Member Profit Participation (E)(G)

     18.0     1,000        —    

AG Transportation Holdings, LLC – Profit Participation Warrants (E)(G)

     12.0     244        —    
    

 

 

    

 

 

 
           1,244      —    

Chemicals, Plastics, and Rubber – 0.2%

       

Vertellus Holdings LLC – Common Stock Units (E)(G)

     879,121       3,018        442  

Diversified/Conglomerate Manufacturing – 0.0%

       

Alloy Die Casting, Co. (S) – Common Stock (E)(G)

     270       18        —    

United Flexible, Inc. – Common Stock (E)(G)

     1,158       148        —    
    

 

 

    

 

 

 
           166      —    

Healthcare, education, and childcare – 0.9%

       

Edmentum Ultimate Holdings, LLC – Common Stock (E)(G)

     21,429       2,636        —    

EL Academies, Inc. – Common Stock (G)(I)

     500       500        500  

Leeds Novamark Capital I, L.P. – Limited Partnership Interest ($1,581 uncalled capital commitment) (G)(L)(R)

     3.5     1,628        1,645  
    

 

 

    

 

 

 
           4,764      2,145  

Machinery – 0.0%

       

Precision International, LLC – Membership Unit Warrant (E)(G)

     33.3     —          —    

Oil and Gas – 0.1%

       

Francis Drilling Fluids, Ltd. – Common Equity Units (E)(G)

     1,656       1        —    

W3, Co. – Common Equity (D)(G)

     435       499        139  
    

 

 

    

 

 

 
           500      139  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.1%

       

Canopy Safety Brands, LLC – Participation Warrant (E)(G)

     1       500        259  

Funko Acquisition Holdings, LLC (S) – Common Stock (E)(G)

     975       —          —    
    

 

 

    

 

 

 
           500      259  

Telecommunications – 0.0%

       

NetFortris Corp.– Common Stock Warrant (E)(G)

     1       1        —    
    

 

 

    

 

 

 

Total Common Equity

     $ 13,022      $ 4,464  
    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     $ 318,952      $ 290,860  
    

 

 

    

 

 

 

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

 

14


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment (A)(B)(W)(Z)

   Principal/
Shares/
Units (J)(X)
     Cost      Fair Value  

AFFILIATE INVESTMENTS (N) – 19.4%

        

Secured First Lien Debt – 8.6%

        

Diversified/Conglomerate Manufacturing – 8.6%

        

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 10.5%, 12.5% Cash, Due 2/2019) (C)

   $ 6,200      $ 6,200      $ 5,704  

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 11.8%, 13.8% Cash, Due 2/2019) (C)

     1,600        1,600        1,480  

LWO Acquisitions Company LLC – Line of Credit, $0 available (L + 5.5%, 6.7% Cash, 2.0% PIK, Due 3/2018) (C)

     2,748        2,746        2,336  

LWO Acquisitions Company LLC – Term Debt (L + 8.5%, 9.7% Cash, 2.0% PIK, Due 12/2019) (C)

     10,942        10,921        9,301  
     

 

 

    

 

 

 
        21,467        18,821  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 21,467      $ 18,821  
     

 

 

    

 

 

 

Secured Second Lien Debt – 7.8%

        

Diversified Natural Resources, Precious Metals and Minerals – 7.8%

        

Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 2/2021) (C)

   $ 6,000      $ 6,000      $ 5,998  

Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 2/2021) (C)

     8,000        8,000        7,997  

Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 2/2021) (C)

     3,300        3,300        3,299  
     

 

 

    

 

 

 
        17,300        17,294  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 17,300      $ 17,294  
     

 

 

    

 

 

 

Preferred Equity – 0.4%

        

Diversified/Conglomerate Manufacturing – 0.0%

        

Edge Adhesives Holdings, Inc. (S) – Preferred Stock (E)(G)

     2,516      $ 2,516      $ —    

Diversified Natural Resources, Precious Metals and Minerals – 0.4%

        

Lignetics, Inc. – Preferred Stock (E)(G)

     40,000        800        826  
     

 

 

    

 

 

 

Total Preferred Equity

      $ 3,316      $ 826  
     

 

 

    

 

 

 

Common Equity – 2.6%

        

Diversified/Conglomerate Manufacturing – 0.0%

        

LWO Acquisitions Company LLC – Common Units (E)(G)

     921,000      $ 921      $ —    

Diversified Natural Resources, Precious Metals and Minerals – 0.4%

        

Lignetics, Inc. – Common Stock (E)(G)

     152,603        1,855        828  

Textiles and Leather – 2.2%

        

Targus Cayman HoldCo, Ltd. – Common Stock (E)(G)

     3,076,414        5,009        4,879  
     

 

 

    

 

 

 

Total Common Equity

      $ 7,785      $ 5,707  
     

 

 

    

 

 

 

Total Affiliate Investments

      $ 49,868      $ 42,648  
     

 

 

    

 

 

 

CONTROL INVESTMENTS (O) – 8.6%

        

Secured First Lien Debt – 3.5%

        

Machinery – 1.8%

        

PIC 360, LLC – Term Debt (14.0%, Due 12/2017) (E)(F)

   $ 4,000      $ 4,000      $ 4,000  

Printing and Publishing – 1.7%

        

Sunshine Media Holdings – Line of Credit, $672 available (8.0% Cash, Due 5/2018) (E)(F)

     1,328        1,328        1,328  

Sunshine Media Holdings – Term Debt (8.0% Cash, Due 5/2018) (E)(F)(H)

     5,000        3,525        679  

Sunshine Media Holdings – Term Debt (L + 3.8%, 5.0% Cash, Due 5/2018) (E)(H)

     11,948        8,401        1,621  

Sunshine Media Holdings – Term Debt (L + 4.0%, 5.5% Cash, Due 5/2018) (E)(H)

     10,700        10,700        —    
     

 

 

    

 

 

 
        23,954        3,628  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 27,954      $ 7,628  
     

 

 

    

 

 

 

Secured Second Lien Debt – 3.7%

        

Automobile – 3.7%

        

Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.0% Cash, Due 2/2019) (E)

   $ 8,065      $ 8,065      $ 8,065  

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

 

15


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

 

Company and Investment (A)(B)(W)(Z)

   Principal/
Shares/
Units (J)(X)
     Cost      Fair
Value
 

Preferred Equity – 0.0%

        

Printing and Publishing – 0.0%

        

Sunshine Media Holdings – Preferred Stock (E)(G)(J)

     15,270      $ 5,275      $ —    

Common Equity – 1.4%

        

Automobile– 1.3%

        

Defiance Integrated Technologies, Inc. – Common Stock (E)(G)

     33,321      $ 580      $ 2,856  

Machinery – 0.1%

        

PIC 360, LLC – Common Equity Units (E)(G)

     1        1        316  

Printing and Publishing – 0.0%

        

Sunshine Media Holdings – Common Stock (E)(G)

     1,867        740        —    

Sunshine Media Holdings – Common Stock Warrants (E)(G)

     72        —          —    
     

 

 

    

 

 

 
        740        —    
     

 

 

    

 

 

 

Total Common Equity

      $ 1,321      $ 3,172  
     

 

 

    

 

 

 

Total Control Investments

      $ 42,615      $ 18,865  
     

 

 

    

 

 

 

TOTAL INVESTMENTS (T) – 160.4%

      $ 411,435      $ 352,373  
     

 

 

    

 

 

 

 

(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 $317.4 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 September 30, 2017, our investments in FedCap and Leeds are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 0.7% of total investments, at fair value, as of September 30, 2017.
(B)   Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 1.23% as of September 30, 2017. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or LIBOR plus a spread. Due dates represent the contractual maturity date.
(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 September 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 September 30, 2017 best represents fair value as of September 30, 2017.
(J) Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(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.
(P)   Debt security does not have a stated interest rate that is payable thereon.
(Q) Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.
(R) Fair value was based on net asset value provided by the fund as a practical expedient.
(S) 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.
(T) Cumulative gross unrealized depreciation for federal income tax purposes is $71.7 million; cumulative gross unrealized appreciation for federal income tax purposes is $7.5 million. Cumulative net unrealized depreciation is $64.3 million, based on a tax cost of $416.6 million.
(U) The cash interest rate on this investment was indexed to 90-day LIBOR, which was 1.33% as of September 30, 2017.
(V) The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 4.25% as of September 30, 2017.
(W) Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the FASB Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) fair value hierarchy. Refer to Note 3— Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(X) Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.
(Y) Investment was exited subsequent to September 30, 2017. Refer to Note 15— Subsequent Events in the accompanying Notes to Consolidated Financial Statements for additional information.
(Z) Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of September 30, 2017.

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

 

16


GLADSTONE CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DECEMBER 31, 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 line of credit. The financial statements of Business Loan are consolidated with ours. We also have significant subsidiaries (as defined under Rule 1-02(w) of the U.S. Securities and Exchange Commission’s (“SEC”) Regulation S-X) 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 an 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 months ended December 31, 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, 2017, as filed with the SEC on November 20, 2017.

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.

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.

 

17


Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation in the Consolidated Financial Statements and the accompanying notes. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities or total net assets, or Statement of Changes in Net Assets and Statement of Cash Flows classifications.

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 presented by the chief valuation officer. 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.

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

 

18


 

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 do not have the ability to effectuate a sale of a portfolio company) using the yield analysis, which includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, 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.

 

    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 debt and equity investments made during the current reporting quarter are generally valued at our original cost basis, as near-measurement date transaction value is a reasonable indicator of fair value.

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.

 

19


Revenue Recognition

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 such that the interest income is deemed to be collectible. At December 31, 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 approximately $27.9 million, or 6.8% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $5.4 million, or 1.5% of the fair value of all debt investments in our portfolio. At September 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 approximately $27.9 million, or 7.5% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $5.6 million, or 1.7% 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.

As of each of December 31, 2017 and September 30, 2017, we had six OID loans, primarily from the syndicated loans in our portfolio. We recorded OID income of $0.1 million and $20 for the three months ended December 31, 2017 and 2016, respectively. The unamortized balance of OID investments as of December 31, 2017 and September 30, 2017 totaled $0.4 million. As of December 31, 2017 and September 30, 2017, we had seven and six investments which had a PIK interest component, respectively. We recorded PIK interest income of $1.2 million for each of the three months ended December 31, 2017, and 2016. We collected $0 and $1.0 million of PIK interest in cash for the three months ended December 31, 2017 and 2016, respectively.

Success Fee Income Recognition

We record success fees as income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically resulting from an exit or sale.

Dividend Income Recognition

We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration. During the year ended September 30, 2017, we recharacterized $0.2 million of dividend income from our investment in Behrens Manufacturing, LLC recorded during our fiscal year ended September 30, 2016 as a return of capital.

Deferred Financing and Offering Costs

Deferred financing and offering costs consist of costs incurred to obtain financing, including lender fees and legal fees. Costs associated with our revolving line of credit are deferred and amortized using the straight-line method, which approximates the effective interest method, over the term of the revolving line of credit. Costs associated with the issuance of our mandatorily redeemable preferred stock are presented as discounts to the liquidation value of the mandatorily redeemable preferred stock and are amortized using the straight-line method, which approximates the effective interest method, over the terms of the respective financings. See Note 5 — Borrowings and Note 6 — Mandatorily Redeemable Preferred Stock for further discussion.

Related Party Fees

In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms of our Fifth Amended and Restated Credit Agreement with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and a lender (our “Credit Facility”). These fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter.

We pay separately for administrative services pursuant to the Administration Agreement. These administrative fees are accrued at the

end of the quarter when the services are performed and generally paid the following quarter. Refer to Note 4— Related Party Transactions for additional information regarding these related party fees and agreements.

 

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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. The adoption of ASU 2016-06 did not have 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, and we adopted ASU 2016-06 effective October 1, 2017.

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. The adoption of ASU 2016-17 did not have 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, and we adopted ASU 2015-02 effective October 1, 2017.

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

 

21


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 December 31, 2017, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko, which was valued using Level 2 inputs and our investments in FedCap and Leeds, which were valued using net asset value as a practical expedient. As of September 30, 2017, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investments in FedCap and Leeds, which were valued using net asset value as a practical expedient.

We transfer investments in and out of Level 1, 2 and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three months ended December 31, 2017, we transferred our investment in Funko from Level 3 to Level 2 as a result of the initial public offering of Funko, Inc. in November 2017 due to convertibility of our investment into shares of Funko, Inc. During the three months ended December 31, 2016, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.

As of December 31, 2017 and September 30, 2017, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:

 

           Fair Value Measurements  
     Fair Value     Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

As of December 31, 2017:

         

Secured first lien debt

   $ 196,195     $ —        $ —       $ 196,195  

Secured second lien debt

     171,690       —          —         171,690  

Unsecured debt

     3,444       —          —         3,444  

Preferred equity

     5,661       —          —         5,661  

Common equity/equivalents

     12,591  (B)       —          157  (A)       12,434  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Investments at December 31, 2017

   $ 389,581     $ —        $ 157     $ 389,424  
  

 

 

   

 

 

    

 

 

   

 

 

 
           Fair Value Measurements  
     Fair Value     Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

As of September 30, 2017:

         

Secured first lien debt

   $ 173,896     $ —        $ —       $ 173,896  

Secured second lien debt

     155,249       —          —         155,249  

Unsecured debt

     3,324       —          —         3,324  

Preferred equity

     6,561       —          —         6,561  

Common equity/equivalents

     13,343  (B)       —          —         13,343  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Investments at September 30, 2017

   $ 352,373     $ —        $ —       $ 352,373  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(A) Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into shares of Funko, Inc.) at the reporting date less a discount for lack of marketability as our investment was subject to a 180-day lock-up period, which expires in May 2018, and other restrictions.
(B) Excludes our investments in FedCap and Leeds with fair values of $0.8 million and $2.1 million, respectively, as of December 31, 2017 and fair values of $0.8 million and $1.6 million, respectively, as of September 30, 2017. FedCap and Leeds were valued using net asset value as a practical expedient.

 

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The following table presents our portfolio investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy, and carried at fair value as of December 31, 2017 and September 30, 2017, by caption on our accompanying Consolidated Statements of Assets and Liabilities, and by security type:

 

    Total Recurring Fair Value Measurements Reported in  
    Consolidated Statements of Assets and Liabilities Using
Significant Unobservable Inputs (Level 3)
 
    December 31, 2017     September 30, 2017  

Non-Control/Non-Affiliate Investments

   

Secured first lien debt

  $ 168,876     $ 147,447  

Secured second lien debt

    146,844       129,890  

Unsecured debt

    3,356       3,324  

Preferred equity

    4,439       5,735  

Common equity/equivalents

    3,776   (A)       2,068   (B)  
 

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

  $ 327,291     $ 288,464  
 

 

 

   

 

 

 

Affiliate Investments

   

Secured first lien debt

  $ 20,009     $ 18,821  

Secured second lien debt

    16,781       17,294  

Unsecured debt

    88       —    

Preferred equity

    1,222       826  

Common equity/equivalents

    5,756       5,707  
 

 

 

   

 

 

 

Total Affiliate Investments

  $ 43,856     $ 42,648  
 

 

 

   

 

 

 

Control Investments

   

Secured first lien debt

  $ 7,310     $ 7,628  

Secured second lien debt

    8,065       8,065  

Common equity/equivalents

    2,902       3,172  
 

 

 

   

 

 

 

Total Control Investments

  $ 18,277     $ 18,865  
 

 

 

   

 

 

 

Total Investments at Fair Value Using Level 3 Inputs

  $ 389,424     $ 349,977  
 

 

 

   

 

 

 

 

(A) Excludes our investments in FedCap, Leeds, and Funko with fair values of $0.8 million, $2.1 million, and $0.2 million, respectively, as of December 31, 2017. FedCap and Leeds were valued using net asset value as a practical expedient and Funko was valued using Level 2 inputs.
(B) Excludes our investments in FedCap and Leeds with fair values of $0.8 million and $1.6 million, respectively, as of September 30, 2017, which were valued using net asset value as a practical expedient.

 

23


In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of December 31, 2017 and September 30, 2017. 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 as of
    December 31,
2017
    September 30,
2017
    Valuation
Techniques/
Methodologies
  Unobservable
Input
  December 31,
2017
  September 30,
2017

Secured first lien debt (A)

  $ 186,850     $ 136,272     Yield Analysis   Discount Rate   7.6% - 22.9% /11.6%   8.0% - 25.0% / 12.5%
    9,345       37,624     TEV   EBITDA multiple   3.1x – 3.1x /3.1x   3.2x – 10.1x / 8.2x
        EBITDA   $1,408 - $1,408 / $1,408   $1,378 - $9,420 / $6,676
        Revenue multiple   0.3x – 0.4x / 0.3x   0.3x – 0.4x / 0.3x
        Revenue   $6,219 - $11,035 /$10,719   $6,934 - $12,094 / $11,733

Secured second lien
debt (B)

    137,168       122,165     Yield Analysis   Discount Rate   10.7% - 23.9% /14.4%   10.8% - 23.3% /14.0%
    25,266       22,607     Market Quote   IBP   80.0% - 101.0% / 96.1%   84.5% - 101.5% /97.2%
    9,256       10,477     TEV   EBITDA multiple   4.6x – 6.4x /5.2x   4.8x – 6.6x /5.4x
        EBITDA   $3,004 - $70,276 / $25,308   $3,000 - $73,650 / $26,424

Unsecured debt

    3,444       3,324     Yield Analysis   Discount Rate   10.0% - 13.9% /10.1%   10.0% - 10.0% /10.0%

Preferred and common equity /
equivalents (C)(D)

    17,964       17,370     TEV   EBITDA multiple   3.1x – 9.7x / 6.0x   3.2x – 10.1x / 6.1x
        EBITDA   $301 -$30,531 /$12,270   $890 -$84,828/ $12,835
        Revenue multiple   0.3x – 1.7x / 0.5x   0.3x – 6.5 x /0.7x
        Revenue   $6,219 -$513,299 /$130,351   $2,317 -$503,620/ $128,819
    131       138     Market Quotes   IBP   26.2% - 26.2% /26.2%   27.9% - 27.9% /27.9%
 

 

 

   

 

 

         

Total Level 3 Investments, at Fair Value

  $ 389,424     $ 349,977          
 

 

 

   

 

 

         

 

(A) Fair value as of December 31, 2017 includes three new proprietary debt investments totaling $37.2 million, which were valued at cost, using the transaction price as the unobservable input. Fair value as of September 30, 2017 includes one new proprietary debt investment totaling $12.0 million, which was valued at cost, using the transaction price as the unobservable input, and one proprietary debt investment totaling $7.8 million, which was valued at the expected payoff amount as the unobservable input.
(B) Fair value as of December 31, 2017 includes one new proprietary debt investment totaling $7.5 million, which was valued at cost, using the transaction price as the unobservable input. Fair value as of September 30, 2017 includes one proprietary debt investment totaling $3.5 million which was valued at the expected payoff as the unobservable input.
(C) Fair value as of December 31, 2017 includes one new proprietary investment totaling $1.5 million, which was valued at cost, using transaction price as the unobservable input. Fair value as of September 30, 2017 includes two new proprietary investments totaling $1.0 million, which were valued at cost, using transaction price as the unobservable input, and one proprietary investment totaling $1.4 million, which was valued at the expected payoff amount as the unobservable input.
(D) Fair value as of December 31, 2017 excludes our investments in FedCap, Leeds and Funko with fair values of $0.8 million, $2.1 million, and $0.2 million, respectively, as of December 31, 2017. FedCap and Leeds were valued using net asset value as a practical expedient and Funko was valued using Level 2 inputs as of December 31, 2017. Fair value as of September 30, 2017 excludes our investments in FedCap and Leeds with fair values of $0.8 million and $1.6 million, respectively, as of September 30, 2017, which were valued using net asset value as a practical expedient.

 

24


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 months ended December 31, 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)

 

Three months ended December 31, 2017

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

Fair Value as of September 30, 2017

   $ 173,896     $ 155,249     $ 3,324     $ 6,561     $ 10,947     $ 349,977  

Total gains (losses):

            

Net realized gain (loss) (A)

     —         —         —         602       (28     574  

Net unrealized appreciation (depreciation) (B)

     1,115       445       (3     558       (12     2,103  

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

     —         (87     —         (725     —         (812

New investments, repayments and settlements: (C)

            

Issuances/originations

     37,426       18,365       123       125       1,500       57,539  

Settlements/repayments

     (12,677     (5,847     —         —         —         (18,524

Net proceeds from sales

     —         —         —         (1,301     27       (1,274

Transfers

     (3,565     3,565       —         (159     —         (159
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of December 31, 2017

   $ 196,195     $ 171,690     $ 3,444     $ 5,661     $ 12,434     $ 389,424  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended December 31, 2016

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

Fair Value as of September 30, 2016

   $ 198,721     $ 100,320     $ 3,012     $ 10,262     $ 7,755     $ 320,070  

Total gains (losses):

            

Net realized (loss) gain (A)

     (4,899     25       —         1,426       —         (3,448

Net unrealized appreciation (depreciation) (B)

     2,656       (3,220     1       1,116       (3,246     (2,693

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

     2,210       66       —         (1,059     370       1,587  

New investments, repayments and settlements: (C)

            

Issuances/originations

     548       19,358       75       394       344       20,719  

Settlements/repayments

     (38,865     (3,426     3       —         —         (42,288

Net proceeds from sales

     (101     (25     —         (7,724     (370     (8,220

Transfers

     (3,940     923       —         —         3,017       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of December 31, 2016

   $ 156,330     $ 114,021     $ 3,091     $ 4,415     $ 7,870     $ 285,727  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the three months ended December 31, 2017 and 2016.
(B)   Included in net unrealized appreciation (depreciation) on investments on our accompanying Consolidated Statements of Operations for the three months ended December 31, 2017 and 2016.
(C)   Includes increases in the cost basis of investments resulting from new portfolio investments, accretion of discounts, PIK, and other non-cash disbursements to portfolio companies, 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.

 

25


Investment Activity

Proprietary Investments

As of December 31, 2017 and September 30, 2017, we held 38 and 35 proprietary investments with an aggregate fair value of $356.4 million and $318.6 million, or 90.8% and 90.4% of the total aggregate portfolio, respectively. The following significant proprietary investment transactions occurred during the three months ended December 31, 2017:

 

    In October 2017, we sold our investment in Flight Fit N Fun LLC for a realized gain of $0.6 million. In connection with the sale, we received net cash proceeds of approximately $9.4 million, including the repayment of our debt investment of $7.8 million at par.

 

    In October 2017, we invested $11.0 million in Applied Voice & Speech Technologies, Inc. through secured first lien debt.

 

    In November 2017, we invested $7.5 million in Arc Drilling Holdings, LLC through secured first lien debt and equity.

 

    In November 2017, we invested $7.5 million in Gray Matter Systems, LLC through secured second lien debt.

 

    In December 2017, we invested $20.0 million in Impact! Chemical Technologies, Inc. through secured first lien debt.

Syndicated Investments

As of December 31, 2017 and September 30, 2017, we held 13 and 12 syndicated investments with an aggregate fair value of $36.0 million and $33.8 million, or 9.2% and 9.6% of the total portfolio at fair value, respectively. The following significant syndicated investment transactions occurred during the three months ended December 31, 2017:

 

    In October 2017, PSC Industrial Holdings, LLC paid off at par for net proceeds of $3.5 million.

 

    In November 2017, DataPipe, Inc. paid off at par for net proceeds of $2.0 million.

 

    In November 2017, we invested $5.0 million in DigiCert Holdings, Inc. through secured second lien debt.

 

    In November 2017, we invested $4.0 million in Red Ventures, LLC through secured second lien debt.

 

    In November 2017, we invested $1.0 million in ABG Intermediate Holdings 2, LLC through secured second lien debt.

Investment Concentrations

As of December 31, 2017, our investment portfolio consisted of investments in 51 portfolio companies located in 24 states in 18 different industries, with an aggregate fair value of $392.4 million. The five largest investments at fair value totaled $111.0 million, or 28.3% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2017 totaling $110.9 million, or 31.5% of our total investment portfolio. As of December 31, 2017 and September 30, 2017 our average investment by obligor was $8.8 million at cost.

The following table outlines our investments by security type at December 31, 2017 and September 30, 2017:

 

     December 31, 2017     September 30, 2017  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 217,993        48.4   $ 196,195        50.0   $ 198,942        48.4   $ 173,896        49.4

Secured second lien debt

     186,465        41.4       171,690        43.7       168,247        40.9       155,249        44.1  

Unsecured debt

     3,447        0.8       3,444        0.9       3,324        0.8       3,324        0.9  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt investments

     407,905        90.6       371,329        94.6       370,513        90.1       332,469        94.4  

Preferred equity

     18,052        4.0       5,661        1.5       18,794        4.5       6,561        1.9  

Common equity/equivalents

     24,175        5.4       15,440        3.9       22,128        5.4       13,343        3.7  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity investments

     42,227        9.4       21,101        5.4       40,922        9.9       19,904        5.6  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 450,132        100.0   $ 392,430        100.0   $ 411,435        100.0   $ 352,373        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

26


Our investments at fair value consisted of the following industry classifications at December 31, 2017 and September 30, 2017:

 

     December 31, 2017     September 30, 2017  

Industry Classification

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

Diversified/Conglomerate Service

   $ 91,193        23.2   $ 80,723        22.9

Oil and gas

     56,192        14.3       34,712        9.9  

Healthcare, education and childcare

     43,499        11.1       46,288        13.1  

Diversified/Conglomerate Manufacturing

     42,870        10.9       40,843        11.6  

Telecommunications

     42,781        10.9       31,350        8.9  

Automobile

     19,590        5.0       20,082        5.7  

Diversified natural resources, precious metals and minerals

     18,744        4.8       18,949        5.4  

Beverage, food and tobacco

     13,934        3.6       14,103        4.0  

Cargo Transportation

     13,098        3.3       13,081        3.7  

Machinery

     12,502        3.2       5,114        1.4  

Home and Office Furnishings, Housewares and Durable Consumer Products

     10,150        2.6       10,100        2.9  

Personal and non-durable consumer products

     7,080        1.8       7,035        2.0  

Hotels, Motels, Inns, and Gaming

     6,938        1.8       7,136        2.0  

Textiles and leather

     5,640        1.4       4,879        1.4  

Printing and publishing

     3,310        0.8       3,628        1.0  

Leisure, Amusement, Motion Pictures, Entertainment

     —          —         9,225        2.6  

Other, < 2.0%

     4,909        1.3       5,125        1.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 392,430        100.0   $ 352,373        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Our investments at fair value were included in the following U.S. geographic regions at December 31, 2017 and September 30, 2017:

 

     December 31, 2017     September 30, 2017  

Geographic Region

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

South

   $ 163,988        41.8   $ 150,727        42.8

West

     128,806        32.8       116,302        33.0  

Midwest

     66,481        17.0       58,915        16.7  

Northeast

     33,155        8.4       26,429        7.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 392,430        100.0   $ 352,373        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

Investment Principal Repayments

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

 

          Amount (A)  

For the remaining nine months ending September 30:

   2018    $ 33,643  

For the fiscal years ending March 31:

   2019      53,920  
   2020      82,103  
   2021      81,813  
   2022      45,022  
   Thereafter      117,154  
     

 

 

 
  

Total contractual repayments

   $ 413,655  
   Adjustments to cost basis of debt investments      (5,750
   Investments in equity securities      42,227  
     

 

 

 
  

Investments held as of December 31, 2017 at Cost:

   $ 450,132  
     

 

 

 

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 December 31, 2017 and September 30, 2017, we had gross receivables from portfolio companies of $0.4 million and $0.5 million, respectively. The allowance

for uncollectible receivables was $32 and $44 at December 31, 2017 and September 30, 2017, respectively.

 

27


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. The entire loan servicing fee paid to the Adviser by Business Loan is non-contractually, unconditionally and irrevocably 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 Lee 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.

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
December 31,
 
     2017     2016  

Average total assets subject to base management fee (A)

   $ 383,086     $ 315,000  

Multiplied by prorated annual base management fee of 1.75%

     0.4375     0.4375
  

 

 

   

 

 

 

Base management fee (B)

   $ 1,676     $ 1,378  

Portfolio company fee credit

     (664     (649

Senior syndicated loan fee credit

     (92     (13
  

 

 

   

 

 

 

Net Base Management Fee

   $ 920     $ 716  
  

 

 

   

 

 

 

Loan servicing fee (B)

     1,186       983  

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

     (1,186     (983
  

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —       $ —    
  

 

 

   

 

 

 

Incentive fee (B)

     1,373       1,293  

Incentive fee credit

     (85     (37
  

 

 

   

 

 

 

Net Incentive Fee

   $ 1,288     $ 1,256  
  

 

 

   

 

 

 

Portfolio company fee credit

     (664     (649

Senior syndicated loan fee credit

     (92     (13

Incentive fee credit

     (85     (37
  

 

 

   

 

 

 

Credits to Fees From Adviser - other (B)

   $ (841   $ (699
  

 

 

   

 

 

 

 

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

 

28


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 non-contractually, 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 $8 and $28 for the three months ended December 31, 2017 and 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 three months ended December 31, 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);

 

  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 December 31, 2017, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

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 December 31, 2017.

Our Board of Directors accepted non-contractual, unconditional and irrevocable credits 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 three months ended December 31, 2017 and 2016.

 

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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. 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% non-contractually, unconditionally and irrevocably 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 Lee 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 Administration Agreement or interested persons of such party, approved the annual renewal of the Administration Agreement through August 31, 2018.

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 $0.5 million and $0.1 million during the three months ended December 31, 2017 and 2016, respectively.

Related Party Fees Due

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

 

     December 31,
2017
     September 30,
2017
 

Base management fee due (from) to Adviser

   $ (267    $ 45  

Loan servicing fee due to Adviser

     270        242  

Incentive fee due to Adviser

     1,288        1,005  
  

 

 

    

 

 

 

Total fees due to Adviser

     1,291        1,292  
  

 

 

    

 

 

 

Fee due to Administrator

     272        244  
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 1,563      $ 1,536  
  

 

 

    

 

 

 

In addition to the above fees, other operating expenses due to the Adviser as of December 31, 2017 and September 30, 2017, totaled $16 and $12, respectively. In addition, net expenses payable to Gladstone Investment Corporation (for reimbursement purposes), which includes certain co-investment expenses, totaled $24 and $55 as of December 31, 2017 and September 30, 2017, 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 December 31, 2017 and September 30, 2017.

NOTE 5. BORROWINGS

Revolving Credit Facility

On May 1, 2015, we, through Business Loan, entered into our Credit Facility with KeyBank, 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

 

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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, August 18, 2016, and August 24, 2017, we entered into Amendments No. 1, 2 and 3 to our Credit Facility, respectively, each of which clarified or modified various constraints on available borrowings.

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

 

     December 31,
2017
     September 30,
2017
 

Commitment amount

   $ 170,000      $ 170,000  

Borrowings outstanding, at cost

     130,500        93,000  

Availability (A)

     28,940        58,576  

 

     For the Three Months
Ended December 31,
 
     2017     2016  

Weighted average borrowings outstanding, at cost

   $ 98,228     $ 39,278  

Weighted average interest rate (B)

     5.0     5.7

Commitment (unused) fees incurred

   $ 92     $ 166  

 

(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 25 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 $224.1 million as of December 31, 2017, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Sections 18 and 61 of the 1940 Act, and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of December 31, 2017, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $274.9 million, asset coverage on our “senior securities representing indebtedness” of 310.4%, 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 35 obligors in our Credit Facility’s borrowing base as of December 31, 2017. As of December 31, 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 the assumptions that the Valuation Team believes market participants would use, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of

 

31


similar securities as of the measurement date. As of December 31, 2017, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.00% per annum, plus a 0.50% unused fee. As of September 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 0.50% 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 December 31, 2017 and September 30, 2017, 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 .

The following tables present our Credit Facility carried at fair value as of December 31, 2017 and September 30, 2017, 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 months ended December 31, 2017 and 2016:

 

     Total Recurring Fair Value Measurement Reported in  
     Consolidated Statements of Assets and Liabilities Using
Significant Unobservable Inputs (Level 3)
 
     December 31, 2017      September 30, 2017  

Credit Facility

   $ 130,833      $ 93,115  
  

 

 

    

 

 

 

 

Fair Value Measurements Using Significant Unobservable Data Inputs (Level 3)

 
     Three Months Ended
December 31,
 
     2017      2016  

Fair value as of September 30, 2017 and 2016, respectively

   $ 93,115      $ 71,300  

Borrowings

     61,100        24,200  

Repayments

     (23,600      (67,300

Net unrealized appreciation (depreciation) (A)

     218        (213
  

 

 

    

 

 

 

Fair Value as of December 31, 2017 and 2016, respectively

   $ 130,833      $ 27,987  
  

 

 

    

 

 

 

 

(A)   Included in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations for the three months ended December 31, 2017 and 2016.

The fair value of the collateral under our Credit Facility totaled approximately $348.8 million and $317.4 million as of December 31, 2017 and September 30, 2017, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In September 2017, we completed a public offering of approximately 2.1 million shares of 6.00% Series 2024 Term Preferred Stock, par value $0.001 per share (“Series 2024 Term Preferred Stock”), at a public offering price of $25.00 per share. Gross proceeds totaled $51.8 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were approximately $49.8 million. We incurred approximately $1.9 million in total underwriting discounts and offering costs related to the issuance of the Series 2024 Term Preferred Stock, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized from issuance through September 30, 2024, the mandatory redemption date. The proceeds plus borrowings under our Credit Facility were used to voluntarily redeem all 2.4 million outstanding shares of our then existing 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share (“Series 2021 Term Preferred Stock”). In connection with the voluntary redemption of our Series 2021 Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.3 million during the three months ended September 30, 2017, which is primarily comprised of the unamortized deferred issuance costs at the time of redemption.

The shares of our Series 2024 Term Preferred Stock are traded under the ticker symbol “GLADN” on the Nasdaq Global Select Market. Our Series 2024 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.00% per year, payable monthly (which equates in total to approximately $3.1 million per year). We are required to redeem all of the outstanding Series 2024 Term Preferred Stock on September 30, 2024 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 2024 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 2024 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. The asset coverage on our “senior securities that are stock” as of December 31, 2017 was 222.4%, calculated in accordance with Sections 18 and 61 of the 1940 Act.

We may also voluntarily redeem all or a portion of the Series 2024 Term Preferred Stock at our option at the Redemption Price at any

 

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time after September 30, 2019. If we fail to redeem our Series 2024 Term Preferred Stock pursuant to the mandatory redemption date of September 30, 2024, or in any other circumstance in which we are required to mandatorily redeem our Series 2024 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of December 31, 2017, we have not redeemed, nor have we been required to redeem, any shares of our outstanding Series 2024 Term Preferred Stock.

In May 2014, we completed a public offering of approximately 2.4 million shares of 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 were recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and were amortized over the redemption period ending June 30, 2021. In September 2017, when we voluntarily redeemed all of our outstanding Series 2021 Term Preferred Stock, the remaining unamortized costs were fully written off as part of the realized loss discussed above.

We paid the following monthly distributions on our Series 2024 Term Preferred Stock for the three months ended December 31, 2017:

 

Fiscal Year

  

Declaration Date

  

Record Date

  

Payment Date

   Distribution per
Series 2024 Term
Preferred Share (A)
 

2018

  

October 10, 2017

  

October 20, 2017

  

October 31, 2017

   $ 0.141667  
  

October 10, 2017

  

November 20, 2017

  

November 30, 2017

     0.125  
  

October 10, 2017

  

December 19, 2017

  

December 29, 2017

     0.125  
           

 

 

 
      Three Months Ended December 31, 2017:    $ 0.391667  
        

 

 

 

 

(A) The dividend paid on October 31, 2017 included the pro-rated period from and including the issuance date of September 27, 2017 to and including September 30, 2017, and the full month of October 2017.

We paid the following monthly distributions on our Series 2021 Term Preferred Stock for the three months ended December 31, 2016:

 

Fiscal Year

  

Declaration Date

  

Record Date

  

Payment Date

   Distribution 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  
           

 

 

 
      Three Months Ended December 31, 2016:    $ 0.4218750  
        

 

 

 

The federal income tax characteristics of dividends paid to our preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year. Estimates of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of dividends for the full year. Estimates made on a quarterly basis are updated as of each interim reporting date. The tax characterization of dividends paid to our preferred stockholders during the calendar years ended December 31, 2017 and 2016 was 100% from ordinary income.

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 as a liability at cost, as of December 31, 2017 and September 30, 2017. 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 2024 Term Preferred Stock for the three months ended December 31, 2017 was $0.8 million. Aggregate preferred stockholder dividends declared and paid on our Series 2021 Term Preferred Stock for the three months ended December 31, 2016 was $1.0 million.

For disclosure purposes, the fair value, based on the last quoted closing price, for our Series 2024 Term Preferred Stock as of December 31, 2017 was approximately $53.5 million. The fair value, based on the last quoted closing price, for our Series 2024 Term Preferred Stock as of September 30, 2017 was approximately $52.7 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

We filed Post-Effective Amendment No. 2 to our current universal shelf registration statement on Form N-2 (our “Registration Statement”) on Form N-2 (File No. 333-208637) with the SEC on December 19, 2017, which was declared effective by the SEC on February 1, 2018. 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 December 31, 2017, we have the ability to issue up to $220.0 million in

securities under the Registration Statement.

 

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Common Stock Offerings

Pursuant to our prior 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.

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. During the three months ended December 31, 2017, we sold 471,498 shares of our common stock under the Sales Agreement with Cantor Fitzgerald & Co., at a weighted-average price of $9.69 per share and raised $4.6 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $4.5 million. As of December 31, 2017, we had a remaining capacity to sell up to $37.9 million of common stock under the Sales Agreement with Cantor Fitzgerald & Co. We did not sell any shares under the Sales Agreements during the three months ended December 31, 2016.

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

The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per wei