10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one):

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 814-00237

 

 

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   54-2040781

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 100

MCLEAN, VIRGINIA

  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 every Interactive Data File required to be submitted 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 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 July 30, 2018 was 27,800,899.

 

 

 


Table of Contents

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Consolidated Statements of Assets and Liabilities as of June  30, 2018 and September 30, 2017

     2  
 

Consolidated Statements of Operations for the three and nine months ended June 30, 2018 and 2017

     3  
 

Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2018 and 2017

     5  
 

Consolidated Statements of Cash Flows for the nine months ended June  30, 2018 and 2017

     6  
 

Consolidated Schedules of Investments as of June  30, 2018 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

     42  
 

Overview

     42  
 

Results of Operations

     46  
 

Liquidity and Capital Resources

     56  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     62  

Item 4.

 

Controls and Procedures

     62  

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     63  

Item 1A.

 

Risk Factors

     63  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     64  

Item 3.

 

Defaults Upon Senior Securities

     64  

Item 4.

 

Mine Safety Disclosures

     64  

Item 5.

 

Other Information

     64  

Item 6.

 

Exhibits

     65  

SIGNATURES

     66  

 

1


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,     September 30,  
     2018     2017  

ASSETS

    

Investments, at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $357,598 and $318,952, respectively)

   $ 336,772     $ 290,860  

Affiliate investments (Cost of $54,195 and $49,868, respectively)

     51,892       42,648  

Control investments (Cost of $41,865 and $42,615 respectively)

     16,224       18,865  

Cash and cash equivalents

     2,421       5,012  

Restricted cash and cash equivalents

     186       258  

Interest receivable, net

     2,699       1,699  

Due from administrative agent

     3,236       3,086  

Deferred financing fees

     1,531       853  

Other assets, net

     463       2,579  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 415,424     $ 365,860  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings, at fair value (Cost of $117,000 and $93,000, respectively)

   $ 117,000     $ 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

     50,007       49,849  

Accounts payable and accrued expenses

     281       522  

Interest payable

     319       264  

Fees due to Adviser(A)

     2,004       1,292  

Fee due to Administrator(A)

     310       244  

Other liabilities

     552       924  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 170,473     $ 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 27,660,432 and 26,160,684 shares issued and outstanding, respectively

   $ 28     $ 26  

Capital in excess of par value

     361,549       348,248  

Cumulative net unrealized depreciation of investments

     (48,770     (59,062

Cumulative net unrealized depreciation of other

     —         (115

Over distributed net investment income

     (237     (139

Accumulated net realized losses

     (67,619     (69,308
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 244,951     $ 219,650  
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE

   $ 8.86     $ 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


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2018     2017     2018     2017  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 8,675     $ 6,885     $ 24,642     $ 18,651  

Affiliate investments

     1,243       1,042       3,531       3,176  

Control investments

     375       371       1,438       1,249  

Cash and cash equivalents

     9       7       28       14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income (excluding PIK interest income)

     10,302       8,305       29,639       23,090  

PIK interest income

        

Non-Control/Non-Affiliate investments

     1,063       1,162       3,257       3,223  

Affiliate investments

     70       162       209       537  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total PIK interest income

     1,133       1,324       3,466       3,760  

Total interest income

     11,435       9,629       33,105       26,850  

Success fee income

        

Non-Control/Non-Affiliate investments

     430       —         430       391  

Affiliate investments

     —         —         —         1,142  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total success fee income

     430       —         430       1,533  

Other income

     514       3       789       16  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     12,379       9,632       34,324       28,399  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     1,801       1,480       5,261       4,217  

Loan servicing fee(A)

     1,294       1,071       3,754       3,009  

Incentive fee(A)

     1,499       1,116       4,082       3,479  

Administration fee(A)

     310       272       894       858  

Interest expense on borrowings

     1,556       904       4,356       2,047  

Dividend expense on mandatorily redeemable preferred stock

     776       1,029       2,328       3,087  

Amortization of deferred financing fees

     237       274       777       821  

Professional fees

     200       223       745       665  

Other general and administrative expenses

     266       230       828       774  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, before credits from Adviser

     7,939       6,599       23,025       18,957  

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

     (1,294     (1,071     (3,754     (3,009

Credits to fees from Adviser - other(A)

     (262     (1,275     (2,133     (3,494
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     6,383       4,253       17,138       12,454  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,996       5,379       17,186       15,945  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     158       (23     984       3,903  

Affiliate investments

     41       —         145       (2,330

Control investments

     —         —         (32     (4,999

Other

     —         —         (133     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     199       (23     964       (3,426

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     3,755       283       7,266       (6,320

Affiliate investments

     2,252       190       4,917       364  

Control investments

     (109     516       (1,891              5,243  

Other

     —         (182     115       (71
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation)

     5,898                   807              10,407       (784
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

             6,097       784       11,371       (4,210
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 12,093     $ 6,163     $ 28,557     $ 11,735  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

3


Table of Contents

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

   $ 0.22      $ 0.21      $ 0.64      $ 0.63  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 0.45      $ 0.24      $ 1.07      $ 0.46  
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributions declared and paid

   $ 0.21      $ 0.21      $ 0.63      $ 0.63  
  

 

 

    

 

 

    

 

 

    

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and Diluted

     27,134,305        25,576,149        26,788,172        25,288,289  

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

 

4


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2018     2017  

OPERATIONS

    

Net investment income

   $ 17,186     $ 15,945  

Net realized gain (loss) on investments

     1,097       (3,426

Realized loss on other

     (133     —    

Net unrealized appreciation (depreciation) of investments

     10,292       (713

Net unrealized appreciation (depreciation) of other

     115       (71
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     28,557       11,735  
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income

     (16,898     (15,945
  

 

 

   

 

 

 

Total distributions to common stockholders

     (16,898     (15,945
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Issuance of common stock

     13,893       20,932  

Discounts, commissions and offering costs for issuance of common stock

     (251     (946
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     13,642       19,986  
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS

     25,301       15,776  

NET ASSETS, BEGINNING OF PERIOD

     219,650       201,207  
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 244,951     $ 216,983  
  

 

 

   

 

 

 

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

 

5


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2018     2017  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 28,557     $ 11,735  

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

    

Purchase of investments

     (96,520 )      (95,449

Principal repayments on investments

     57,096       62,792  

Net proceeds from sale of investments

     1,567       8,289  

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

     (3,454 )      (3,599

Net change in premiums, discounts and amortization

     (45 )      439  

Net realized (gain) loss on investments

     (1,097 )      3,426  

Net unrealized (appreciation) depreciation of investments

     (10,292 )      713  

Net unrealized (appreciation) depreciation of other

     (115 )      71  

Changes in assets and liabilities:

    

Decrease in restricted cash and cash equivalents

     72       133  

Amortization of deferred financing fees

     777       821  

(Increase) decrease in interest receivable, net

     (1,000 )      49  

Increase in due from administrative agent

     (150 )      (693

Decrease (increase) in other assets, net

     2,105       (1,539

Decrease in accounts payable and accrued expenses

     (241 )      (800

Increase in interest payable

     55       34  

Increase (decrease) in fees due to Adviser(A)

     712       (762

Increase (decrease) in fee due to Administrator(A)

     66       (10

(Decrease) increase in other liabilities

     (141     334  
  

 

 

   

 

 

 

Net cash used in operating activities

     (22,048     (14,016
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     109,600       108,000  

Repayments on borrowings

     (85,600     (97,100

Deferred financing fees

     (1,329     (75

Proceeds from issuance of common stock

     13,893       20,932  

Discounts, commissions and offering costs for issuance of common stock

     (209     (946

Distributions paid to common stockholders

     (16,898     (15,945
  

 

 

   

 

 

 

Net cash provided by financing activities

     19,457       14,866  
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (2,591     850  

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     5,012       6,152  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 2,421     $ 7,002  
  

 

 

   

 

 

 

 

(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


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2018

(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) – 137.5%

        

Secured First Lien Debt – 71.1%

        

Automobile – 1.4%

        

Meridian Rack & Pinion, Inc. (S) – Term Debt (L + 11.5%, 13.6% Cash, Due 6/2019) (C)

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

Beverage, Food, and Tobacco – 2.6%

        

Triple H Food Processors, LLC - Line of Credit, $1,500 available (L + 6.8%, 8.8% Cash, Due 8/2018)(C)

     —          —          —    

Triple H Food Processors, LLC – Term Debt (L + 8.3%, 10.3% Cash, Due 8/2020)(C)

     6,200        6,200        6,324  
     

 

 

    

 

 

 
        6,200        6,324  

Buildings and Real Estate – 0.9%

        

GFRC Holdings, LLC – Line of Credit, $50 available (L + 8.0%, 10.1% Cash, Due 9/2018)(E)

     1,150        1,150        1,150  

GFRC Holdings, LLC – Term Debt (L + 8.0%, 10.1% Cash, Due 9/2018)(E)

     1,000        1,000        1,000  
     

 

 

    

 

 

 
        2,150        2,150  

Diversified/Conglomerate Service – 20.3%

        

IA Tech, LLC – Term Debt (L + 11.0%, 13.1% Cash, Due 6/2023)(C)

     30,000        30,000        30,000  

Travel Sentry, Inc. – Term Debt (L + 8.0%, 10.3% Cash, Due 12/2021)(Q)(U)

     8,415        8,415        8,415  

Vision Government Solutions, Inc. – Line of Credit, $0 available (L + 8.8%, 10.8% 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        1,414  

Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 10.8% Cash, Due 1/2019)(C)

     9,000        9,000        8,344  
     

 

 

    

 

 

 
        50,465        49,604  

Healthcare, education, and childcare – 7.4%

        

EL Academies, Inc. – Line of Credit, $2,000 available (L + 8.8%, 10.8% Cash, Due 8/2020)(C)

     —          —          —    

EL Academies, Inc. – Delayed Draw Term Loan, $8,560 available (L + 8.8%, 10.8% Cash, Due 8/2022)(C)

     1,440        1,440        1,460  

EL Academies, Inc. – Term Debt (L + 8.8%, 10.8% Cash, Due 8/2022)(C)

     12,000        12,000        12,165  

TWS Acquisition Corporation – Term Debt (L + 8.0%, 10.1% Cash, Due 7/2020)(Q)

     4,500        4,500        4,500  
     

 

 

    

 

 

 
        17,940        18,125  

Machinery – 2.6%

        

Arc Drilling Holdings LLC – Line of Credit, $1,000 available (L + 8.0%, 10.1% Cash, Due 11/2020)(C)

     —          —          —    

Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 11.6% Cash, 3.0% PIK, Due 11/2022)(C)

     5,915        5,915        5,752  

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

     836        836        834  
     

 

 

    

 

 

 
        6,751        6,586  

Oil and Gas – 16.3%

        

Impact! Chemical Technologies, Inc. – Line of Credit, $0 available (L + 8.8%, 10.8% Cash, Due 12/2020)(C)

     2,500        2,500        2,519  

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

     20,000        20,000        20,150  

WadeCo Specialties, Inc. – Term Debt (L + 7.0%, 9.1% Cash, Due 3/2019)(C)

     9,941        9,941        10,090  

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

     7,000        7,000        7,070  
     

 

 

    

 

 

 
        39,441        39,829  

Printing and Publishing – 0.0%

        

Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 9.0% Cash, Due 2/2015)(E)(V)

     107        107        —    

Telecommunications – 19.6%

        

Applied Voice & Speech Technologies, Inc. – Term Debt (L + 9.3%, 11.3% Cash, Due 10/2022)(C)

     10,450        10,450        10,346  

B+T Group Acquisition, Inc.(S) – Term Debt (L + 11.0%, 13.1% Cash, Due 12/2019)(C)

     6,000        6,000        5,985  

NetFortris Corp. – Term Debt (L + 8.4%, 10.5% Cash, Due 2/2021)(C)

     23,700        23,700        24,174  

XMedius Solutions Inc. – Term Debt (L + 9.3%, 11.3% Cash, Due 10/2022)(C)

     7,695        7,695        7,714  
     

 

 

    

 

 

 
        47,845        48,219  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 175,039      $ 174,149  
     

 

 

    

 

 

 

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

 

7


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

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

Secured Second Lien Debt – 59.5%

        

Automobile – 2.1%

        

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

   $ 5,000      $ 4,979      $ 5,063  

Beverage, Food, and Tobacco – 2.8%

        

The Mochi Ice Cream Company – Term Debt (L + 10.5%, 12.6% Cash, Due 12/2023)(C)

     6,750        6,725        6,818  

Cargo Transportation– 5.4%

        

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

     13,000        13,000        13,163  

Chemicals, Plastics, and Rubber – 0.4%

        

Vertellus Holdings LLC – Term Debt (L + 12.0%, 14.0% Cash, Due 10/2021)(C)

     1,099        1,099        1,098  

Diversified/Conglomerate Manufacturing – 8.5%

        

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.1% Cash, Due 4/2021)(C)

     5,235        5,235        4,712  

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.1% Cash, Due 4/2021)(C)

     75        75        68  

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.1% Cash, Due 4/2021)(C)

     390        390        353  

United Flexible, Inc.– Term Debt (L + 9.3%, 11.3% Cash, Due 2/2022)(C)

     15,300        15,227        15,663  
     

 

 

    

 

 

 
        20,927        20,796  

Diversified/Conglomerate Service – 11.8%

        

CHA Holdings, Inc. – Term Debt (L + 8.8%, 10.8% Cash, Due 4/2026)(D)

     3,000        2,941        3,030  

DigiCert Holdings, Inc. – Term Debt (L + 8.0%, 10.1% Cash, Due 10/2025)(D)

     3,000        2,977        2,940  

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

     —          —          —    

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

     11,100        11,100        11,128  

Keystone Acquisition Corp. – Term Debt (L + 9.3%, 11.6% Cash, Due 5/2025)(D)(U)

     4,000        3,927        4,010  

LDiscovery, LLC – Term Debt (L + 10.0%, 12.1% Cash, Due 12/2023)(D)

     5,000        4,830        4,500  

Red Ventures, LLC – Term Debt (L + 8.0%, 10.1% Cash, Due 11/2025)(D)

     3,313        3,256        3,379  
     

 

 

    

 

 

 
        29,031        28,987  

Healthcare, education, and childcare – 11.9%

        

Medical Solutions Holdings, Inc. – Term Debt (L + 8.3%, 10.3% Cash, Due 6/2025)(D)

     3,000        2,959        3,000  

Merlin International, Inc. – Term Debt (L + 10.0%, 12.1% Cash, Due 10/2022)(C)

     20,000        20,000        20,650  

NetSmart Technologies, Inc. – Term Debt (L + 9.5%, 11.6% Cash, Due 10/2023)(Q)

     3,660        3,613        3,696  

New Trident Holdcorp, Inc. – Term Debt (L + 10.0%, 5.4% Cash, 6.7% PIK, Due 7/2020)(E)(U)

     4,309        4,309        1,745  
     

 

 

    

 

 

 
        30,881        29,091  

Home and Office Furnishings, Housewares and Durable Consumer Products – 4.2%

        

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

     10,000        10,000        10,200  

Hotels, Motels, Inns, and Gaming – 2.5%

        

Vacation Rental Pros Property Management, LLC – Term Debt (L + 10.0%, 12.1% Cash, 3.0% PIK, Due 6/2023)(C)

     7,310        7,310        6,213  

Oil and Gas – 8.3%

        

Francis Drilling Fluids, Ltd. – Term Debt (L + 10.4%, 12.4% PIK, Due 4/2020)(C)

     18,321        18,227        13,896  

Francis Drilling Fluids, Ltd. – Term Debt (L + 9.3%, 11.3% PIK, Due 4/2020)(C)

     8,395        8,349        6,338  
     

 

 

    

 

 

 
        26,576        20,234  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 1.6%

        

Canopy Safety Brands, LLC – Term Debt (L + 10.5%, 12.6% Cash, Due 7/2022)(C)

     4,000        4,000        4,035  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 154,528      $ 145,698  
     

 

 

    

 

 

 

Unsecured Debt – 1.4%

        

Healthcare, education, and childcare – 1.4%

        

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

   $ 3,523      $ 3,523      $ 3,531  

Preferred Equity – 1.6%

        

Automobile – 0.0%

        

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

     1,449      $ 1,449      $ —    

Buildings and Real Estate – 0.1%

        

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

     1,000        1,025        125  

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

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

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

Diversified/Conglomerate Manufacturing – 0.4%

       

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

     2,192       2,192        241  

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

     538       538        691  
    

 

 

    

 

 

 
       2,730        932  

Diversified/Conglomerate Service – 0.1%

       

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

     766       500        123  

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

     168       —          —    
    

 

 

    

 

 

 
       500        123  

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        2,257  
    

 

 

    

 

 

 
       1,833        2,257  

Telecommunications – 0.1%

       

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

     5,503       1,799        —    

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

     1,250,000       125        375  
    

 

 

    

 

 

 
       1,924        375  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 9,461      $ 3,812  
    

 

 

    

 

 

 

Common Equity – 3.9%

       

Aerospace and Defense – 0.3%

       

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

     80     $ 1,449      $ 616  

Automobile– 0.3%

       

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

     494,902       495        684  

Beverage, Food, and Tobacco – 0.3%

       

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

     450       450        258  

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

     250,000       250        586  
    

 

 

    

 

 

 
       700        844  

Buildings and Real Estate – 0.0%

       

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

     45.0     —          —    

Cargo Transportation – 0.5%

       

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

     18.0     1,000        922  

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

     12.0     244        348  
    

 

 

    

 

 

 
       1,244        1,270  

Chemicals, Plastics, and Rubber – 0.3%

       

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

     879,121       3,017        634  

Diversified/Conglomerate Manufacturing – 0.2%

       

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

     270       18        —    

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

     1,158       148        597  
    

 

 

    

 

 

 
       166        597  

Healthcare, education, and childcare – 1.2%

       

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

     21,429       2,636        —    

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

     520       520        553  

Leeds Novamark Capital I, L.P. – Limited Partnership Interest ($843 uncalled capital commitment)(G)(L)(R)

     3.5     2,152        2,523  
    

 

 

    

 

 

 
       5,308        3,076  

Machinery – 0.3%

       

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

     16.7     1,500        490  

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

     33.3     —          168  
    

 

 

    

 

 

 
       1,500        658  

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) – 0.4%

       

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

     1       500        360  

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

     67,873       167        712  
    

 

 

    

 

 

 
       667        1,072  

Telecommunications – 0.0%

       

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

     1       1        —    
    

 

 

    

 

 

 

Total Common Equity

     $ 15,047      $ 9,582  
    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     $ 357,598      $ 336,772  
    

 

 

    

 

 

 

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

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

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

AFFILIATE INVESTMENTS(N) – 21.2%

        

Secured First Lien Debt – 8.1%

        

Diversified/Conglomerate Manufacturing – 8.1%

        

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 10.5%, 12.6% Cash, Due 2/2019)(C)

   $ 6,200      $ 6,200      $ 6,045  

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

     1,600        1,600        1,568  

LWO Acquisitions Company LLC – Line of Credit, $0 available (L + 5.5%. 7.6% Cash, 2.0% PIK, Due 12/2019)(C)

     2,790        2,790        2,706  

LWO Acquisitions Company LLC – Term Debt (L + 8.5%, 10.6% Cash, 2.0% PIK, Due 12/2019)(C)

     11,109        11,109        9,469  
     

 

 

    

 

 

 
        21,699        19,788  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 21,699      $ 19,788  
     

 

 

    

 

 

 

Secured Second Lien Debt – 8.7%

        

Diversified Natural Resources, Precious Metals and Minerals – 8.7%

        

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

   $ 6,000      $ 6,000      $ 6,007  

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

     8,000        8,000        8,010  

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

     3,300        3,300        3,304  

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

     4,000        4,000        4,005  
     

 

 

    

 

 

 
        21,300        21,326  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 21,300      $ 21,326  
     

 

 

    

 

 

 

Unsecured Debt – 0.0%

        

Diversified/Conglomerate Manufacturing – 0.0%

        

LWO Acquisitions Company LLC – Term Debt (Due 6/2020)(C)(P)

   $ 95      $ 95      $ 81  

Preferred Equity – 1.4%

        

Diversified/Conglomerate Manufacturing – 1.0%

        

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

     2,516      $ 2,516      $ 2,562  

Diversified Natural Resources, Precious Metals and Minerals – 0.4%

        

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

     40,000        800        867  
     

 

 

    

 

 

 

Total Preferred Equity

      $ 3,316      $ 3,429  
     

 

 

    

 

 

 

Common Equity – 3.0%

        

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        853  

Textiles and Leather – 2.6%

        

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

     3,076,414        5,009        6,415  
     

 

 

    

 

 

 

Total Common Equity

      $ 7,785      $ 7,268  
     

 

 

    

 

 

 

Total Affiliate Investments

      $ 54,195      $ 51,892  
     

 

 

    

 

 

 

CONTROL INVESTMENTS(O) – 6.6%

        

Secured First Lien Debt – 2.2%

        

Machinery – 1.3%

        

PIC 360, LLC – Term Debt (14.0%, Due 9/2019)(E)(F)

   $ 3,250      $ 3,250      $ 3,250  

Printing and Publishing – 0.9%

        

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

     1,328        1,328        1,328  

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

     5,000        3,525        289  

Sunshine Media Holdings – Term Debt (L + 3.8%, 5.8% Cash, Due 5/2018)(E)(H)(Z)

     11,948        8,401        692  

Sunshine Media Holdings – Term Debt (L + 4.0%, 6.1% Cash, Due 5/2018)(E)(H)(Z)

     10,700        10,700        —    
     

 

 

    

 

 

 
        23,954        2,309  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 27,204      $ 5,559  
     

 

 

    

 

 

 

Secured Second Lien Debt – 3.3%

        

Automobile– 3.3%

        

Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.6% Cash, Due 8/2023)(E)

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

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

 

10


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2018

(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)(Z)

     15,270      $ 5,275      $ —    

Common Equity – 1.1%

        

Automobile– 0.6%

        

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

     33,321      $ 580      $ 1,400  

Machinery – 0.5%

        

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

     75        1        1,200  

Printing and Publishing – 0.0%

        

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

     1,867        740        —    

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

     72        —          —    
     

 

 

    

 

 

 
        740         
     

 

 

    

 

 

 

Total Common Equity

      $ 1,321      $ 2,600  
     

 

 

    

 

 

 

Total Control Investments

      $ 41,865      $ 16,224  
     

 

 

    

 

 

 

TOTAL INVESTMENTS – 165.3%

      $ 453,658      $ 404,888  
     

 

 

    

 

 

 

 

(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 $354.9 million at fair value, are pledged as collateral to our revolving line of credit, as described further in Note 5—Borrowings in the accompanying Notes to Consolidated Financial Statements. Under the Investment Company Act of 1940, as amended, (the “1940 Act”), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of June 30, 2018, our investments in FedCap Partners, LLC (“FedCap”), Leeds Novamark Capital I, L.P. (“Leeds”), Funko Acquisition Holdings, LLC (“Funko”), and XMedius Solutions Inc. (“XMedius”) are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 2.9% of total investments, at fair value, as of June 30, 2018.
(B)  Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 2.09% as of June 30, 2018. 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 ICE Data Pricing and Reference Data, LLC (“ICE”)(formerly Standard and Poor’s Securities Evaluations, Inc.).
(D)  Fair value was based on the indicative bid price on or near June 30, 2018, 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) Reserved.
(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) Our investment in Funko was valued using Level 2 inputs within the FASB Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) fair value hierarchy. Our common units in Funko are convertible to class A common stock in Funko, Inc. upon meeting certain 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 2.34% as of June 30, 2018.
(V) The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 5.00% as of June 30, 2018.
(W) Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the 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 June 30, 2018.
(Z) We are in the process of restructuring this investment.

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

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 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


Table of Contents

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


Table of Contents

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


Table of Contents

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


Table of Contents

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 and Poor’s Securities Evaluations, Inc.
(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.
(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.

 

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GLADSTONE CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2018

(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 (“EBITDA”) 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 those of Gladstone Capital Corporation. 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 Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and nine months ended June 30, 2018, are not necessarily indicative of results that ultimately may be achieved for the fiscal year or any future interim periods. 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.

Use of Estimates

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

Reclassifications

Certain 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.

 

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Investment Valuation Policy

Accounting Recognition

We record our investments at fair value in accordance with the FASB ASC 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 generally measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation 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, the Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer (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 the chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors so that the full Board of Directors may review and approve the fair value of our investments in accordance with the Policy.

There is no single standard 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 the chief valuation officer, uses the Policy and each quarter the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and also review 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. ICE, Data Pricing and Reference Data, LLC (“ICE”) (formerly Standard and Poor’s Securities Evaluations, Inc.), a valuation specialist, generally provides estimates of fair value on our proprietary debt investments. The Valuation Team generally assigns ICE’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 ICE’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 ICE’s. When this occurs, our 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 (“TEV”) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the valuation of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, 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, and whether it is reasonable in light of the Policy, and 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 TEV, the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or EBITDA); EBITDA obtained from our indexing methodology whereby the original transaction EBITDA at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, 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,

 

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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; however, TEV may also be calculated using revenue multiples or 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 a DCF analysis to calculate 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 ICE and market quotes.

 

    Market Quotes — For our investments for which a limited market exists, we generally base fair value 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 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. For securities that are publicly traded, we generally base fair value on the closing market price of our shares as of the reporting date. For restricted securities that are publicly traded, we generally base fair value on the closing market price of our shares as of the reporting date less a discount for the restriction, which includes consideration of the nature and term to expiration of the restriction.

 

    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 valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value 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. New and follow-on debt and equity investments made during the current reporting quarter are generally valued at our original cost basis, as appropriate, as near-measurement date transaction value generally is a reasonable indicator of fair value.

Fair value measurements of our investments may involve subjective judgments and estimates and due to the uncertainty inherent in valuing these securities, the determinations of fair value 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 disposal 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.

 

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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 June 30, 2018, certain loans to one portfolio company, Sunshine Media Holdings, were on non-accrual status with an aggregate debt cost basis of approximately $22.6 million, or 5.5% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $1.0 million, or 0.3% 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 Co., 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 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 June 30, 2018 and September 30, 2017, we had seven and six OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $12 and $122 for the three and nine months ended June 30, 2018, respectively, and $57 and $144 during the three and nine months ended June 30, 2017, respectively. The unamortized balance of OID investments as of June 30, 2018 and September 30, 2017 totaled $0.5 million and $0.4 million, respectively. As of each of June 30, 2018 and September 30, 2017, we had six investments which had a PIK interest component. We recorded PIK interest income of $1.1 million and $3.5 million during the three and nine months ended June 30, 2018, respectively, as compared to $1.3 million and $3.8 million during the three and nine months ended June 30, 2017, respectively. We collected $0 and $0.8 million in PIK interest in cash during the three and nine months ended June 30, 2018, respectively, as compared to $0 and $1.0 million during the three and nine months ended June 30, 2017, 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. Certain 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. Refer to 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.

 

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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.

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 have assessed 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 have assessed 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. 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. The adoption of ASU 2016-06 did not have a material impact on our financial position, results of operations or cash flows.

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. 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. The adoption of ASU 2016-17 did not have a material impact on our financial position, results of operations or cash flows.

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.

 

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NOTE 3. INVESTMENTS

Fair Value

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

 

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

 

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

 

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

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Investments in funds measured using net asset value as a practical expedient are not categorized within the fair value hierarchy.

As of June 30, 2018, 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 nine months ended June 30, 2018, 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 and nine months ended June 30, 2017, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.

 

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As of June 30, 2018 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 June 30, 2018:

         

Secured first lien debt

   $ 199,496     $ —        $ —       $ 199,496  

Secured second lien debt

     175,089       —          —         175,089  

Unsecured debt

     3,612       —          —         3,612  

Preferred equity

     7,241       —          —         7,241  

Common equity/equivalents

     16,311 (B)      —          712 (A)      15,599  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Investments at June 30, 2018

   $ 401,749     $ —        $ 712     $ 401,037  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

           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

     10,947 (B)      —          —          10,947  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Investments at September 30, 2017

   $ 349,977     $ —        $ —        $ 349,977  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(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 certain restrictions.
(B) Excludes our investments in FedCap and Leeds with fair values of $0.6 million and $2.5 million, respectively, as of June 30, 2018 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 June 30, 2018 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)
 
     June 30, 2018     September 30, 2017  

Non-Control/Non-Affiliate  Investments

    

Secured first lien debt

   $ 174,149     $ 147,447  

Secured second lien debt

     145,698       129,890  

Unsecured debt

     3,531       3,324  

Preferred equity

     3,812       5,735  

Common equity/equivalents

     5,731 (A)       2,068 (B) 
  

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 332,921     $ 288,464  
  

 

 

   

 

 

 

Affiliate Investments

    

Secured first lien debt

   $ 19,788     $ 18,821  

Secured second lien debt

     21,326       17,294  

Unsecured debt

     81       —    

Preferred equity

     3,429       826  

Common equity/equivalents

     7,268       5,707  
  

 

 

   

 

 

 

Total Affiliate Investments

   $ 51,892     $ 42,648  
  

 

 

   

 

 

 

Control Investments

    

Secured first lien debt

   $ 5,559     $ 7,628  

Secured second lien debt

     8,065       8,065  

Common equity/equivalents

     2,600       3,172  
  

 

 

   

 

 

 

Total Control Investments

   $ 16,224     $ 18,865  
  

 

 

   

 

 

 

Total Investments at Fair Value Using Level 3 Inputs

   $ 401,037     $ 349,977  
  

 

 

   

 

 

 

 

(A) Excludes our investments in FedCap, Leeds, and Funko with fair values of $0.6 million, $2.5 million, and $0.7 million, respectively, as of June 30, 2018. 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.

 

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Table of Contents

In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of June 30, 2018 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  
     June 30,
2018
     September 30,
2017
    

Valuation

Techniques/

Methodologies

  

Unobservable

Input

   June 30,
2018
     September 30,
2017
 

Secured first lien debt(A)

   $ 191,787      $ 136,272      Yield Analysis    Discount Rate     

6.8% - 23.7% /

12.2%

 

 

    

8.0% - 25.0% /

12.5%

 

 

     7,709        37,624      TEV    EBITDA multiple   

 

 

 

3.3x – 3.3x

/3.3x

 

 

 

    

3.2x – 10.1x /

8.2x

 

 

            EBITDA   

 

 

 

$1,467 - $1,467

/ $1,467

 

 

 

    

$1,378 - $9,420 /

$6,676

 

 

            Revenue multiple   

 

 

 

0.3x – 0.5x

/ 0.3x

 

 

 

    

0.3x – 0.4x /

0.3x

 

 

            Revenue   

 

 

 

$4,574 - $7,698

/$7,482

 

 

 

    

$6,934  - $12,094 /

$11,733

 

 

 

Secured second lien debt(B)

     140,724        122,165      Yield Analysis    Discount Rate   

 

 

 

10.5% - 22.2%

/13.8%

 

 

 

    

10.8% - 23.3% /

14.0%

 

 

     24,555        22,607      Market Quote    IBP   

 

 

 

90.0% - 102.0%

/ 98.3%

 

 

 

    

84.5% - 101.5% /

97.2%

 

 

     9,810        10,477      TEV    EBITDA multiple   

 

 

 

4.7x – 6.5x

/5.3x

 

 

 

     4.8x – 6.6x /5.4x  
            EBITDA   

 

 

 

$2,954 - $72,564

/ $27,196

 

 

 

    
$3,000 - $73,650 /
$26,424
 
 

 

Unsecured debt

     3,612        3,324      Yield Analysis    Discount Rate   

 

 

 

9.9% - 14.3% /

10.0%

 

 

 

    

10.0% - 10.0% /

10.0%

 

 

 

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

     22,709        17,370      TEV    EBITDA multiple   

 

 

 

3.3x – 9.7x /

6.4x

 

 

 

    

3.2x – 10.1x /

6.1x

 

 

            EBITDA   

 

 

 

$374 -$30,047

/$14,271

 

 

 

    

$890 -$84,828/

$12,835

 

 

            Revenue multiple   

 

 

 

0.3x – 1.7x /

0.5x

 

 

     0.3x – 6.5 x /0.7x  
            Revenue   

 

 

 

$2,973 - $529,389

/$155,219

 

 

 

    

$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

   $ 401,037      $ 349,977              
  

 

 

    

 

 

             

 

(A)

Fair value as of June 30, 2018 includes two proprietary debt investments totaling $12.9 million, which were valued at the expected payoff amount 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 June 30, 2018 includes one syndicated debt investment totaling $3.7 million, which was valued at the expected payoff amount 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 amount as the unobservable input.

(C) 

Fair value as of September 30, 2017 includes two new proprietary investments totaling $1.0 million, which were valued at cost, using the 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 June 30, 2018 excludes our investments in FedCap, Leeds and Funko with fair values of $0.6 million, $2.5 million, and $0.7 million, respectively, as of June 30, 2018. FedCap and Leeds were valued using net asset value as a practical expedient and Funko was valued using Level 2 inputs as of June 30, 2018. 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.

 

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Table of Contents

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

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and nine months ended June 30, 2018 and 2017 for all investments for which the Adviser determines fair value using unobservable (Level 3) factors.

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
     Secured     Secured                 Common        

Three months ended June 30, 2018

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

Fair Value as of March 31, 2018

   $ 195,793     $ 180,045     $ 3,540     $ 6,175     $ 13,447     $ 399,000  

Total gains (losses):

            

Net unrealized (depreciation) appreciation(B)

     (1,544     3,922       (13     1,066       2,152       5,583  

Reversal of prior period net appreciation on realization(B)

     —         (440     —         —         —         (440

New investments, repayments and settlements: (C)

            

Issuances/originations

     7,106       13,925       85       —         —         21,116  

Settlements/repayments

     (1,859     (22,363     —         —         —         (24,222
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2018

   $ 199,496     $ 175,089     $ 3,612     $ 7,241     $ 15,599     $ 401,037  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Secured     Secured                 Common        

Nine Months Ended June 30, 2018

   First Lien
Debt
    Second
Lien Debt
    Unsecured
Debt
    Preferred
Equity
    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 (loss) gain(A)

     (3     37       —         597       (31     600  

Net unrealized (depreciation) appreciation(B)

     (1,434     6,775       (5     2,138       3,132       10,606  

Reversal of prior period net appreciation on realization(B)

     —         (545     —         (725     —         (1,270

New investments, repayments and settlements: (C)

            

Issuances/originations

     56,427       41,084       293       125       1,521       99,450  

Settlements/repayments

     (19,230     (37,636     —         —         —         (56,866

Sales

     3       (38     —         (1,296     30       (1,301

Transfers

     (10,163     10,163       —         (159     —         (159
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2018

   $ 199,496     $ 175,089     $ 3,612     $ 7,241     $ 15,599     $ 401,037  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Secured     Secured                 Common        

Three Months Ended June 30, 2017

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

Fair Value as of March 31, 2017

   $ 174,033     $ 121,097     $ 3,185     $ 4,666     $ 7,968     $ 310,949  

Total gains (losses):

            

Net realized loss(A)

     (14     —         —         (8     (1     (23

Net unrealized appreciation (depreciation)(B)

     387       (1,280     (50     963       672       692  

New investments, repayments and settlements:(C)

            

Issuances/originations

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

Settlements/repayments

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

Sales

     14       —         —         8       1       23  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2017

   $ 171,369     $ 152,861     $ 3,249     $ 6,519     $ 8,640     $ 342,638  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Secured     Secured                 Common        

Nine Months Ended June 30, 2017

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

Fair Value as of September 30, 2016

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

Total gains (losses):

            

Net realized (loss) gain(A)

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

Net unrealized appreciation (depreciation)(B)

     1,253       (3,262     (43     2,016       (2,679     (2,715

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

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

New investments, repayments and settlements:(C)

            

Issuances/originations

     33,130       63,264       241       1,644       345       98,624  

Settlements/repayments

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

Sales

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

Transfers

     (3,940     720       —         —         3,220       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2017

   $ 171,369     $ 152,861     $ 3,249     $ 6,519     $ 8,640     $ 342,638  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the three and nine months ended June 30, 2018 and 2017.
(B)  Included in net unrealized appreciation (depreciation) on investments on our accompanying Consolidated Statements of Operations for the three and nine months ended June 30, 2018 and 2017.
(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.

 

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Table of Contents

Investment Activity

Proprietary Investments

As of June 30, 2018 and September 30, 2017, we held 38 and 35 proprietary investments with an aggregate fair value of $366.8 million and $318.6 million, or 90.6% and 90.4% of the total aggregate portfolio, respectively. The following significant proprietary investment transactions occurred during the nine months ended June 30, 2018:

 

    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 a combination of 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 March 2018, we invested an additional $3.6 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.

 

    In January 2018, we invested $8.1 million in XMedius Solutions Inc. through secured first lien debt.

 

    In February 2018, we invested an additional $4.0 million in an existing portfolio company, Lignetics, Inc., through secured first lien debt.

 

    In March 2018, an existing portfolio company, EL Academies, Inc., drew an additional $1.4 million on the unused portion of its secured first lien delayed draw term loan.

 

    In May 2018, our investment in TapRoot Partners, Inc. paid off, which resulted in prepayment fees of $0.5 million and success fee income of $0.4 million. In connection with the pay off, we received net cash proceeds of $22.9 million, including the repayment of our debt investment of $22.0 million at par.

 

    In May 2018, we invested an additional $10.0 million in an existing portfolio company, Merlin International, Inc., through secured second lien debt.

 

    In June 2018, we invested an additional $7.0 million in an existing portfolio company, IA Tech, LLC, through secured first lien debt.

Syndicated Investments

As of each of June 30, 2018 and September 30, 2017, we held 12 syndicated investments with an aggregate fair value of $38.1 million and $33.8 million, or 9.4% and 9.6% of the total portfolio at fair value, respectively. The following significant syndicated investment transactions occurred during the nine months ended June 30, 2018:

 

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

 

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

 

    In November 2017, we invested $5.0 million in DigiCert Holdings, Inc. through secured second lien debt. In March 2018, we sold $2.0 million of this investment for net cash proceeds of $2.0 million.

 

    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. In January 2018, we sold this investment for net cash proceeds of $1.0 million.

 

    In March 2018, we sold our $1.0 million investment in Neustar, Inc. for net cash proceeds of $1.0 million.

 

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Table of Contents
    In April 2018, we invested $3.0 million in CHA Holdings, Inc. through secured second lien debt.

Investment Concentrations

As of June 30, 2018, our investment portfolio consisted of investments in 50 portfolio companies located in 25 states in 18 different industries, with an aggregate fair value of $404.9 million. The five largest investments at fair value totaled $120.9 million, or 29.9% 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 June 30, 2018 and September 30, 2017, our average investment by obligor was $9.1 million and $8.8 million at cost, respectively.

The following table outlines our investments by security type at June 30, 2018 and September 30, 2017:

 

     June 30, 2018     September 30, 2017  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 223,942        49.4 %    $ 199,496        49.3 %    $ 198,942        48.4   $ 173,896        49.4

Secured second lien debt

     183,893        40.5       175,089        43.2       168,247        40.9       155,249        44.1  

Unsecured debt

     3,618        0.8       3,612        0.9       3,324        0.8       3,324        0.9  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt investments

     411,453        90.7       378,197        93.4       370,513        90.1       332,469        94.4  

Preferred equity

     18,052        4.0       7,241        1.8       18,794        4.5       6,561        1.9  

Common equity/equivalents

     24,153        5.3       19,450        4.8       22,128        5.4       13,343        3.7  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity investments

     42,205        9.3       26,691        6.6       40,922        9.9       19,904        5.6  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 453,658        100.0 %    $ 404,888        100.0 %    $ 411,435        100.0   $ 352,373        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Our investments at fair value consisted of the following industry classifications at June 30, 2018 and September 30, 2017:

 

     June 30, 2018     September 30, 2017  

Industry Classification

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

Diversified/Conglomerate Service

   $ 78,714        19.4 %    $ 80,723        22.9

Oil and gas

     62,451        15.4       34,712        9.9  

Healthcare, education and childcare

     53,823        13.3       46,288        13.1  

Telecommunications

     48,594        12.0       31,350        8.9  

Diversified/Conglomerate Manufacturing

     44,756        11.0       40,843        11.6  

Diversified natural resources, precious metals and minerals

     23,046        5.7       18,949        5.4  

Automobile

     18,524        4.6       20,082        5.7  

Cargo Transportation

     14,433        3.6       13,081        3.7  

Beverage, food and tobacco

     13,986        3.5       14,103        4.0  

Machinery

     11,694        2.9       5,114        1.4  

Home and Office Furnishings, Housewares and Durable Consumer Products

     10,200        2.5       10,100        2.9  

Textiles and leather

     6,415        1.6       4,879        1.4  

Hotels, Motels, Inns, and Gaming

     6,213        1.5       7,136        2.0  

Personal and non-durable consumer products

     5,107        1.3       7,035        2.0  

Printing and publishing

     2,309        0.6       3,628        1.0  

Leisure, Amusement, Motion Pictures, Entertainment

     —          —         9,225        2.6  

Other, < 2.0%

     4,623        1.1       5,125        1.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 404,888        100.0 %    $ 352,373        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Our investments at fair value were included in the following U.S. geographic regions and other countries at June 30, 2018 and September 30, 2017:

 

     June 30, 2018     September 30, 2017  

Location

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

South

   $ 183,797        45.4 %    $ 150,727        42.8

West

     111,103        27.5       116,302        33.0  

Midwest

     64,502        15.9       58,915        16.7  

Northeast

     37,772        9.3       26,429        7.5  

Canada

     7,714        1.9       —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 404,888        100.0 %    $ 352,373        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The geographic composition is determined by the location of the headquarters of our portfolio companies. A portfolio company may have a number of other business locations in other geographic locations.

 

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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 June 30, 2018:

 

          Amount  

For the remaining three months ending September 30:

  

2018

   $ 31,683  

For the fiscal years ending September 30:

  

2019

     49,042  
  

2020

     82,731  
  

2021

     55,769  
  

2022

     39,387  
  

Thereafter

     158,592  
     

 

 

 
  

Total contractual repayments

   $ 417,204  
  

Adjustments to cost basis of debt investments

     (5,751
  

Investments in equity securities

     42,205  
     

 

 

 
  

Investments held as of June 30, 2018 at Cost:

   $ 453,658  
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs incurred on behalf of such portfolio companies and are included in other assets on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write-off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of June 30, 2018 and September 30, 2017, we had gross receivables from portfolio companies of $0.1 million and $0.5 million, respectively. The allowance for uncollectible receivables was $21 and $44 at June 30, 2018 and September 30, 2017, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with the Adviser

We have been externally managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay the Adviser a base management fee and an incentive fee for its services. The Advisory Agreement originally included administrative services; however, it was amended and restated on October 1, 2006. Simultaneously, we entered into the Administration Agreement with the Administrator (discussed further below) to provide those services. With the unanimous approval of our Board of Directors, the Advisory Agreement was later amended in October 2015 to reduce the base management fee payable thereunder from 2.0% per annum to 1.75% per annum, effective July 1, 2015, with all other terms remaining unchanged. On July 10, 2018, 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, 2019.

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.

 

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

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2018     2017     2018     2017  

Average total assets subject to base management fee(A)

   $ 411,657     $ 338,286     $ 400,838     $ 321,295  

Multiplied by prorated annual base management fee of 1.75%

     0.4375     0.4375     1.3125     1.3125
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(B)

   $ 1,801     $ 1,480     $ 5,261     $ 4,217  

Portfolio company fee credit

     (170     (261     (1,001     (1,344

Syndicated loan fee credit

     (92     (100     (276     (122
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Base Management Fee

   $ 1,539     $ 1,119     $ 3,984     $ 2,751  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee(B)

     1,294       1,071       3,754       3,009  

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

     (1,294     (1,071     (3,754     (3,009
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee(B)

     1,499       1,116       4,082       3,479  

Incentive fee credit

     —         (914     (856     (2,028
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Incentive Fee

   $ 1,499     $ 202     $ 3,226     $ 1,451  
  

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio company fee credit

     (170     (261     (1,001     (1,344

Syndicated loan fee credit

     (92     (100     (276     (122

Incentive fee credit

     —         (914     (856     (2,028
  

 

 

   

 

 

   

 

 

   

 

 

 

Credits to Fees From Adviser - other(B)

   $ (262   $ (1,275   $ (2,133   $ (3,494
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 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 $18 and $42 for the three and nine months ended June 30, 2018, respectively, and $11 and $57 for the three and nine months ended June 30, 2017, 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 and nine months ended June 30, 2018 and 2017.

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

 

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  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 “net realized capital gains” (as defined herein) as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate “net realized capital gains” at the end of each applicable year by subtracting the sum of our cumulative aggregate realized capital losses and our entire portfolio’s aggregate unrealized capital depreciation from our cumulative aggregate realized capital gains. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less the entire portfolio’s aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since our inception through June 30, 2018, 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 from our inception through June 30, 2018.

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 six months ended March 31, 2018 and the nine months ended June 30, 2017. There was no incentive fee credit during the three months ended June 30, 2018.

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 10, 2018, 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, 2019.

 

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Other Transactions

Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional and irrevocable credits against the base management fee or incentive fee. Gladstone Securities received fees from portfolio companies totaling $0.2 million and $0.8 million during the three and nine months ended June 30, 2018, respectively, and $0.3 million and $0.7 million during the three and nine months ended June 30, 2017, respectively.

Related Party Fees Due

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

 

     June 30, 2018      September 30, 2017  

Base management fee due to Adviser

   $ 244      $ 45  

Loan servicing fee due to Adviser

     261        242  

Incentive fee due to Adviser

     1,499        1,005  
  

 

 

    

 

 

 

Total fees due to Adviser

     2,004        1,292  
  

 

 

    

 

 

 

Fee due to Administrator

     310        244  
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 2,314      $ 1,536  
  

 

 

    

 

 

 

In addition to the above fees, other operating expenses due to the Adviser as of June 30, 2018 and September 30, 2017, totaled $10 and $12, respectively. In addition, net expenses payable to Gladstone Investment Corporation (for reimbursement purposes), which includes certain co-investment expenses, totaled $15 and $55 as of June 30, 2018 and September 30, 2017, respectively. These amounts are generally settled in the quarter subsequent to being incurred and have been included in other liabilities on the accompanying Consolidated Statements of Assets and Liabilities as of June 30, 2018 and September 30, 2017.

NOTE 5. BORROWINGS

Revolving Credit Facility

On March 9, 2018, we, through Business Loan, entered into Amendment No. 4 to our Credit Facility with KeyBank, which increased the commitment amount from $170.0 million to $190.0 million, extended the revolving period end date by approximately two years to January 15, 2021, decreased the marginal interest rate added to 30-day LIBOR from 3.25% to 2.85% per annum, and changed the unused commitment fee from 0.50% of the total unused commitment amount to 0.50% when the average unused commitment amount for the reporting period is less than or equal to 50%, 0.75% when the average unused commitment amount for the reporting period is greater than 50% but less than or equal to 65%, and 1.00% when the average unused commitment amount for the reporting period is greater than 65%. If our Credit Facility is not renewed or extended by January 15, 2021, all principal and interest will be due and payable on or before April 15, 2022 (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 $265.0 million through additional commitments of new or existing lenders. We incurred fees of approximately $1.2 million in connection with this amendment, which are being amortized through our Credit Facility’s revolving period end date of January 15, 2021.

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

 

     June 30, 2018      September 30, 2017  

Commitment amount

   $ 190,000      $ 170,000  

Borrowings outstanding, at cost

     117,000        93,000  

Availability(A)

     67,239        58,576  

 

     For the Three Months
Ended June 30,
    For the Nine Months
Ended June 30,
 
     2018     2017     2018     2017  

Weighted average borrowings outstanding, at cost

   $ 121,664     $ 72,555     $ 115,962     $ 51,398  

Weighted average interest rate(B)

     5.1 %      5.0     5.0 %      5.3

Commitment (unused) fees incurred

   $ 86     $ 123     $ 237     $ 449  

 

(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.

 

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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. Amounts collected in the lockbox account with KeyBank are presented as Due from administrative agent on the accompanying Consolidated Statement of Assets and Liabilities as of June 30, 2018 and September 30, 2017.

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 $228.7 million as of June 30, 2018, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Sections 18 and 61 of the 1940 Act, and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of June 30, 2018, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $293.4 million, asset coverage on our “senior securities representing indebtedness” of 350.1%, 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 33 obligors in our Credit Facility’s borrowing base as of June 30, 2018. As of June 30, 2018, 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 similar securities as of the measurement date. As of June 30, 2018, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 2.85% 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 June 30, 2018 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.

 

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The following tables present our Credit Facility carried at fair value as of June 30, 2018 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 and nine months ended June 30, 2018 and 2017:

 

     Total Recurring Fair Value Measurement Reported in  
     Consolidated Statements  of Assets and Liabilities Using
Significant Unobservable  Inputs (Level 3)
 
     June 30, 2018      September 30, 2017  

Credit Facility

   $ 117,000      $ 93,115  
  

 

 

    

 

 

 

 

Fair Value Measurements Using Significant

Unobservable Data Inputs (Level 3)

Reported in Consolidated Statements of

Assets and Liabilities

 
     Three Months Ended June 30,  
     2018      2017  

Fair value as of March 31, 2018 and 2017, respectively

   $ 127,800      $ 53,989  

Borrowings

     22,200        37,700  

Repayments

     (33,000      (9,600

Net unrealized appreciation(A)

     —          182  
  

 

 

    

 

 

 

Fair Value as of June 30, 2018 and 2017, respectively

   $ 117,000      $ 82,271  
  

 

 

    

 

 

 
     Nine Months Ended June 30,  
     2018      2017  

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

   $ 93,115      $ 71,300  

Borrowings

     109,600        108,000  

Repayments

     (85,600      (97,100

Net unrealized (depreciation) appreciation(A)

     (115      71  
  

 

 

    

 

 

 

Fair Value as of June 30, 2018 and 2017, respectively

   $ 117,000      $ 82,271  
  

 

 

    

 

 

 

 

(A)  Included in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations for the three and nine months ended June 30, 2018 and 2017.

The fair value of the collateral under our Credit Facility totaled approximately $348.0 million and $317.4 million as of June 30, 2018 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 offering 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 month