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 MARCH 31, 2019

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
  (Zip Code)
(Address of principal executive office)  

(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, a 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      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 April 30, 2019 was 29,351,063.

 

 

 


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 March 31, 2019 and September 30, 2018      2  
   Consolidated Statements of Operations for the three and six months ended March 31, 2019 and 2018      3  
   Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2019 and 2018      5  
   Consolidated Statements of Cash Flows for the six months ended March 31, 2019 and 2018      6  
   Consolidated Schedules of Investments as of March 31, 2019 and September 30, 2018      7  
   Notes to Consolidated Financial Statements      19  

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      54  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      60  

Item 4.

   Controls and Procedures      60  

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      61  

Item 1A.

   Risk Factors      61  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      62  

Item 3.

   Defaults Upon Senior Securities      62  

Item 4.

   Mine Safety Disclosures      62  

Item 5.

   Other Information      62  

Item 6.

   Exhibits      63  

SIGNATURES

     64  

 

1


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     March 31,     September 30,  
     2019     2018  

ASSETS

    

Investments, at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $338,163 and $359,304, respectively)

   $ 328,859     $ 325,567  

Affiliate investments (Cost of $38,921 and $54,667, respectively)

     37,185       48,856  

Control investments (Cost of $29,877 and $13,496, respectively)

     21,676       15,623  

Cash and cash equivalents

     1,622       1,971  

Restricted cash and cash equivalents

     74       33  

Interest receivable, net

     2,606       2,601  

Due from administrative agent

     2,415       2,807  

Deferred financing costs, net

     1,102       1,363  

Other assets, net

     929       687  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 396,468     $ 399,508  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings, at fair value (Cost of $52,300 and $110,000, respectively)

   $ 52,300     $ 110,000  

Notes payable, net (Cost of $57,500 as of March 31, 2019)

     55,537       —    

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, net

     50,216       50,077  

Accounts payable and accrued expenses

     479       290  

Interest payable

     824       330  

Fees due to Adviser(A)

     1,497       1,084  

Fee due to Administrator(A)

     326       317  

Other liabilities

     366       318  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 161,545     $ 162,416  
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

    

Common stock, $0.001 par value per share, 44,560,000 and 44,560,000 shares authorized, respectively, and 28,965,403 and 28,501,980 shares issued and outstanding, respectively

   $ 29     $ 29  

Capital in excess of par value

     347,144       343,076  

Cumulative net unrealized depreciation of investments

     (19,241     (37,421

Under (Over) distributed net investment income

     175       (219

Accumulated net realized losses

     (93,184     (68,373
  

 

 

   

 

 

 

Total distributable loss

     (112,250     (106,013
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 234,923     $ 237,092  
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE

   $ 8.11     $ 8.32  
  

 

 

   

 

 

 
(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
March 31,
    Six Months Ended
March 31,
 
     2019     2018     2019     2018  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 9,061     $ 8,283     $ 18,633     $ 15,967  

Affiliate investments

     1,034       1,177       2,209       2,288  

Control investments

     679       376       1,191       1,063  

Cash and cash equivalents

     10       7       26       19  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income (excluding PIK interest income)

     10,784       9,843       22,059       19,337  

PIK interest income

        

Non-Control/Non-Affiliate investments

     267       1,088       604       2,194  

Affiliate investments

     —         69       49       139  

Control investments

     50       —         76       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total PIK interest income

     317       1,157       729       2,333  

Total interest income

     11,101       11,000       22,788       21,670  

Success fee income

        

Non-Control/Non-Affiliate investments

     621       —         671       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total success fee income

     621       —         671       —    

Dividend income

        

Non-Control/Non-Affiliate investments

     366       60       485       93  

Control investments

     172       —         172       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend income

     538       60       657       93  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income

     262       26       315       182  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     12,522       11,086       24,431       21,945  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     1,824       1,784       3,652       3,460  

Loan servicing fee(A)

     1,233       1,274       2,495       2,460  

Incentive fee(A)

     1,383       1,210       2,743       2,583  

Administration fee(A)

     326       312       671       584  

Interest expense on borrowings and notes payable

     2,085       1,569       3,983       2,800  

Dividend expense on mandatorily redeemable preferred stock

     776       776       1,552       1,552  

Amortization of deferred financing fees

     341       292       641       540  

Professional fees

     218       290       485       545  

Other general and administrative expenses

     272       270       595       562  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, before credits from Adviser

     8,458       7,777       16,817       15,086  

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

     (1,233     (1,274     (2,495     (2,460

Credits to fees from Adviser – other(A)

     (720     (1,030     (1,894     (1,871
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     6,505       5,473       12,428       10,755  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     6,017       5,613       12,003       11,190  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     2,306       224       (24,550     826  

Affiliate investments

     (4     104       (2     104  

Control investments

     —         (4     (9     (32

Other

     —         —         —         (133
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     2,302       324       (24,561     765  

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     4,726       2,603       24,433       3,511  

Affiliate investments

     (129     1,625       4,075       2,665  

Control investments

     (3,586     (1,194     (10,328     (1,782

Other

     —         333       —         115  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation

     1,011       3,367       18,180       4,509  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     3,313       3,691       (6,381     5,274  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 9,330     $ 9,304     $ 5,622     $ 16,464  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.21      $ 0.21      $ 0.42      $ 0.42  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 0.33      $ 0.35      $ 0.20      $ 0.62  
  

 

 

    

 

 

    

 

 

    

 

 

 
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and Diluted      28,634,013        26,709,476        28,568,653        26,615,106  

 

(A) 

Refer to Note 4 – Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

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

 

4


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     2019     2018  

NET ASSETS, SEPTEMBER 30

   $ 237,092     $ 219,650  

OPERATIONS

    

Net investment income

     5,986     $ 5,577  

Net realized (loss) gain on investments

     (26,863     574  

Realized loss on other

     —         (133

Net unrealized appreciation of investments

     17,169       1,360  

Net unrealized appreciation of other

     —         (218
  

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

     (3,708     7,160  
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income ($0.21 per share)

     (5,986     (5,577

CAPITAL TRANSACTIONS

    

Issuance of common stock

     28       4,567  

Discounts, commissions and offering costs for issuance of common stock

     —         (83
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     28       4,484  

NET (DECREASE) INCREASE IN NET ASSETS

     (9,666     6,067  
  

 

 

   

 

 

 

NET ASSETS, DECEMBER 31

   $ 227,426     $ 225,717  

OPERATIONS

    

Net investment income

     6,017     $ 5,613  

Net realized gain on investments

     2,302       324  

Net unrealized appreciation of investments

     1,011       3,034  

Net unrealized depreciation of other

     —         333  
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     9,330       9,304  

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income ($0.21 per share)

     (6,017     (5,613

CAPITAL TRANSACTIONS

    

Issuance of common stock

     4,258       2,361  

Discounts, commissions and offering costs for issuance of common stock

     (74     (44
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     4,184       2,317  

NET INCREASE IN NET ASSETS

     7,497       6,008  
  

 

 

   

 

 

 

NET ASSETS, MARCH 31

   $         234,923     $         231,725  
  

 

 

   

 

 

 

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)

 

     Six Months Ended March 31,  
     2019     2018  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 5,622     $ 16,464  

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

    

Purchase of investments

     (63,174     (76,377

Principal repayments on investments

     57,372       32,740  

Net proceeds from sale of investments

     3,012       1,301  

Increase in investments due to paid-in-kind interest

     (1,097     (2,338

Net change in premiums, discounts and amortization

     (168     (97

Net realized loss (gain) on investments

     24,561       (831

Net unrealized appreciation of investments

     (18,180     (4,394

Net unrealized appreciation of other

     —         (115

Changes in assets and liabilities:

    

Amortization of deferred financing fees

     641       540  

Increase in interest receivable, net

     (5     (508

Decrease (increase) in funds due from administrative agent

     392       (214

(Increase) decrease in other assets, net

     (252     1,932  

Increase (decrease) in accounts payable and accrued expenses

     189       (215

Increase in interest payable

     494       122  

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

     413       (285

Increase in fee due to Administrator(A)

     9       68  

Increase (decrease) in other liabilities

     48       (163
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     9,877       (32,370
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from line of credit

     65,000       87,400  

Repayments on line of credit

     (122,700     (52,600

Proceeds from issuance of long term debt

     57,500       —    

Deferred financing fees

     (2,204     (1,329

Proceeds from issuance of common stock

     4,286       6,928  

Discounts, commissions and offering costs for issuance of common stock

     (64     (104

Distributions paid to common stockholders

     (12,003     (11,190
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (10,185     29,105  
  

 

 

   

 

 

 

NET DECREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS

     (308     (3,265

CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF PERIOD

     2,004       5,270  
  

 

 

   

 

 

 

CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD

   $ 1,696     $ 2,005  
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $         3,489     $         2,678  
  

 

 

   

 

 

 

 

(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

MARCH 31, 2019

(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) – 140.0%

        

Secured First Lien Debt – 73.2%

        

Aerospace and Defense – 5.3%

        

Antenna Research Associates, Inc. – Line of Credit, $2,500 available (L + 8.3%, 10.7% Cash, Due 11/2021)(C)

   $ —        $ —        $ —    

Antenna Research Associates, Inc. – Term Debt (L + 10.0%, 12.5% Cash, 4.0% PIK, Due 11/2023)(C)

     12,545        12,545        12,561  
     

 

 

    

 

 

 
        12,545        12,561  

Automobile – 1.1%

        

Meridian Rack & Pinion, Inc.(S) – Term Debt (L + 11.5%, 14.0% Cash, Due 6/2019)(C)(H)

     4,140        4,140        2,484  

Beverage, Food, and Tobacco – 2.4%

        

Triple H Food Processors, LLC – Line of Credit, $750 available (L + 6.8%, 9.2% Cash, Due 8/2020)(C)

     —          —          —    

Triple H Food Processors, LLC – Term Debt (L + 8.3%, 10.7% Cash, Due 8/2020)(C)

     5,600        5,600        5,663  
     

 

 

    

 

 

 
        5,600        5,663  

Buildings and Real Estate – 0.9%

        

GFRC 360, LLC – Line of Credit, $50 available (L + 8.0%, 10.5% Cash, Due 9/2020)(C)

     1,150        1,150        1,139  

GFRC 360, LLC – Term Debt (L + 8.0%, 10.5% Cash, Due 9/2020)(C)

     1,000        1,000        990  
     

 

 

    

 

 

 
        2,150        2,129  

Diversified/Conglomerate Service – 32.4%

        

DKI Ventures, LLC – Line of Credit, $2,500 available (L + 7.8%, 10.2% Cash, Due 12/2021)(C)

     —          —          —    

DKI Ventures, LLC – Delayed Draw Term Loan, $5,000 available (L + 7.8%, 10.2% Cash, Due 12/2023)(C)

     —          —          —    

DKI Ventures, LLC – Term Debt (L + 7.8%, 10.2% Cash, Due 12/2023)(C)

     6,500        6,500        6,467  

IA Tech, LLC – Term Debt (L + 11.0%, 13.5% Cash, Due 6/2023)(C)

     30,000        30,000        30,450  

R2i Holdings, LLC – Line of Credit, $2,000 available (L + 8.0%, 10.5% Cash, Due 12/2021)(C)

     —          —          —    

R2i Holdings, LLC – Term Debt (L + 8.0%, 10.5% Cash, Due 12/2023)(C)

     19,875        19,875        19,751  

Travel Sentry, Inc. – Term Debt (L + 8.0%, 10.6% Cash, Due 12/2021)(C)(U)

     7,805        7,805        7,766  

Vision Government Solutions, Inc. – Line of Credit, $0 available (L + 8.8%, 11.2% Cash, Due 6/2021)(C)

     1,450        1,447        1,407  

Vision Government Solutions, Inc. – Delayed Draw Term Loan, $900 available (10.0% Cash, Due 6/2021)(C)(F)

     1,600        1,597        1,560  

Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 11.2% Cash, Due 6/2021)(C)

     9,000        8,982        8,730  
     

 

 

    

 

 

 
        76,206        76,131  

Healthcare, Education, and Childcare – 9.3%

        

EL Academies, Inc. – Line of Credit, $2,000 available (L + 9.5%, 12.0% Cash, Due 8/2020)(C)

     —          —          —    

EL Academies, Inc. – Delayed Draw Term Loan, $0 available (L + 9.5%, 12.0% Cash, Due 8/2022)(C)

     9,840        9,840        9,828  

EL Academies, Inc. – Term Debt (L + 9.5%, 12.0% Cash, Due 8/2022)(C)

     12,000        12,000        11,985  
     

 

 

    

 

 

 
        21,840        21,813  

Machinery – 2.3%

        

Arc Drilling Holdings LLC – Line of Credit, $875 available (L + 8.0%, 10.5% Cash, Due 11/2020)(C)

     125        125        101  

Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 12.0% Cash, 3.0% PIK, Due 11/2022)(C)

     5,900        5,900        4,779  

Precision International, LLC – Line of Credit, $500 available (10.0% Cash, Due 9/2021)(C)(F)

     —          —          —    

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

     436        436        435  
     

 

 

    

 

 

 
        6,461        5,315  

Printing and Publishing – 0.0%

        

Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 9.5% Cash, Due 2/2015)(E)(V)

     107        107        —    

Telecommunications – 19.5%

        

B+T Group Acquisition, Inc.(S) – Line of Credit, $75 available (L + 11.0%, 13.5% Cash, Due 12/2021)(C)(I)

     525        525        525  

B+T Group Acquisition, Inc.(S) – Term Debt (L + 11.0%, 13.5% Cash, Due 12/2021)(C)

     6,000        6,000        5,970  

NetFortris Corp. – Term Debt (L + 9.0%, 11.5% Cash, Due 2/2021)(C)

     23,302        23,258        22,836  

XMedius America, Inc. – Term Debt (L + 9.3%, 11.7% Cash, Due 10/2022)(C)

     9,549        9,549        9,453  

XMedius Solutions Inc. – Term Debt (L + 9.3%, 11.7% Cash, Due 10/2022)(C)

     7,088        7,088        7,088  
     

 

 

    

 

 

 
        46,420        45,872  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 175,469      $ 171,968  
     

 

 

    

 

 

 

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

 

7


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2019

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

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

Secured Second Lien Debt – 49.2%

        

Automobile – 2.1%

        

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

   $ 5,000      $ 4,983      $ 5,037  

Beverage, Food, and Tobacco – 4.5%

        

8th Avenue Food & Provisions, Inc. – Term Debt (L + 7.8%, 10.2% Cash, Due 10/2026)(D)

     3,683        3,708        3,692  

The Mochi Ice Cream Company – Term Debt (L + 10.5%, 13.0% Cash, Due 12/2023)(C)

     6,750        6,727        6,784  
     

 

 

    

 

 

 
        10,435        10,476  

Cargo Transportation – 5.5%

        

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

     13,000        13,000        12,984  

Chemicals, Plastics, and Rubber – 0.5%

        

Vertellus Holdings LLC – Term Debt (L + 12.0%, 14.5% Cash, Due 10/2021)(C)

     1,099        1,099        1,091  

Diversified/Conglomerate Manufacturing – 2.4%

        

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.5% Cash, Due 4/2021)(C)

     5,235        5,235        5,156  

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.5% Cash, Due 4/2021)(C)

     75        75        74  

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.5% Cash, Due 4/2021)(C)

     390        390        384  
     

 

 

    

 

 

 
        5,700        5,614  

Diversified/Conglomerate Service – 11.9%

        

CHA Holdings, Inc. – Term Debt (L + 8.8%, 11.3% Cash, Due 4/2026)(D)(U)

     3,000        2,945        3,030  

DigiCert Holdings, Inc. – Term Debt (L + 8.0%, 10.5% Cash, Due 10/2025)(D)

     2,400        2,378        2,352  

DiscoverOrg, LLC – Term Debt (L + 8.5%, 11.0% Cash, Due 2/2027)(D)(I)

     3,304        3,273        3,254  

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        11,017  

Keystone Acquisition Corp. – Term Debt (L + 9.3%, 11.8% Cash, Due 5/2025)(D)(U)

     4,000        3,933        3,880  

LDiscovery, LLC – Term Debt (L + 10.0%, 12.5% Cash, Due 12/2023)(D)

     5,000        4,847        4,300  
     

 

 

    

 

 

 
        28,476        27,833  

Grocery – 0.8%

        

GOBP Holdings, Inc. – Term Debt (L + 7.3%, 9.8% Cash, Due 10/2026)(D)(U)

     2,000        1,981        1,980  

Healthcare, Education, and Childcare – 1.3%

        

Medical Solutions Holdings, Inc. – Term Debt (L + 8.3%, 10.7% Cash, Due 6/2025)(D)

     3,000        2,962        2,940  

New Trident Holdcorp, Inc. – Term Debt (L + 10.0%, 12.5% Cash, Due 7/2020)(E)(H)(Q)

     4,409        4,409        —    
     

 

 

    

 

 

 
        7,371        2,940  

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        9,950  

Hotels, Motels, Inns, and Gaming – 2.8%

        

Vacation Rental Pros Property Management, LLC – Term Debt (L + 10.0%, 12.5% Cash, 3.0% PIK, Due 6/2023)(C)

     7,477        7,477        6,610  

Machinery – 0.4%

        

CPM Holdings, Inc. – Term Debt (L + 8.3%, 10.7% Cash, Due 11/2026)(D)

     1,000        1,000        975  

Oil and Gas – 12.8%

        

Imperative Holdings Corporation – Term Debt (L + 10.3%, 12.7% Cash, Due 9/2022)(C)(I)

     30,000        30,000        30,000  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 121,522      $ 115,490  
     

 

 

    

 

 

 

Unsecured Debt – 1.6%

        

Healthcare, education, and childcare – 1.6%

        

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

   $ 3,800      $ 3,800      $ 3,771  

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

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2019

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

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

Preferred Equity – 6.0%

     

Automobile – 0.0%

     

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

    1,449     $ 1,449     $ —    

Buildings and Real Estate – 0.4%

     

GFRC 360, LLC – Preferred Stock(E)(G)

    1,000       1,025       905  

Diversified/Conglomerate Manufacturing – 1.4%

     

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

    2,192       2,192       3,264  

Diversified/Conglomerate Service – 0.0%

     

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

    766       500       —    

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

    169       —         —    
   

 

 

   

 

 

 
      500       —    

Oil and Gas – 3.7%

     

FES Resources Holdings LLC – Preferred Equity Units(E)(G)

    6,350       6,350       6,350  

Imperative Holdings Corporation – Preferred Equity Units(E)(G)(Z)

    13,740       633       2,314  
   

 

 

   

 

 

 
      6,983       8,664  

Telecommunications – 0.5%

     

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

    5,503       1,799       —    

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

    5,656,380       565       1,250  
   

 

 

   

 

 

 
      2,364       1,250  
   

 

 

   

 

 

 

Total Preferred Equity

    $ 14,513     $ 14,083  
   

 

 

   

 

 

 

Common Equity – 10.0%

     

Aerospace and Defense – 2.0%

     

Antenna Research Associates, Inc. – Common Equity Units(E)(G)

    4,283     $ 4,283     $ 4,124  

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

    80       1,449       616  
   

 

 

   

 

 

 
      5,732       4,740  

Automobile – 0.6%

     

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

    588,039       588       1,304  

Beverage, Food, and Tobacco – 0.6%

     

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

    450       450       771  

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

    250,000       250       755  
   

 

 

   

 

 

 
      700       1,526  

Buildings and Real Estate – 0.0%

     

GFRC 360, LLC – Common Stock Warrants(E)(G)

    45.0     —         —    

Cargo Transportation – 1.2%

     

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

    18.0     1,000       1,769  

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

    12.0     244       990  
   

 

 

   

 

 

 
      1,244       2,759  

Chemicals, Plastics, and Rubber – 0.2%

     

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

    879,121       3,017       438  

Diversified/Conglomerate Manufacturing – 0.3%

     

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

    270       18       665  

Healthcare, Education, and Childcare – 1.7%

     

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

    21,429       2,636       —    

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

    767       767       767  

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

    3.5     2,152       3,330  
   

 

 

   

 

 

 
      5,555       4,097  

Machinery – 0.3%

     

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

    15,000       1,500       —    

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

    33.3     —         812  
   

 

 

   

 

 

 
      1,500       812  

Oil and Gas – 0.1%

     

FES Resources Holdings LLC – Common Equity Units(E)(G)

    6,233       —         —    

Total Safety Holdings, LLC – Common Equity(E)(G)

    435       499       174  
   

 

 

   

 

 

 
      499       174  

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

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2019

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

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

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

     

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

    27,188       131       402  

Telecommunications – 0.0%

     

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

    1       1       —    

Textiles and Leather – 2.8%

     

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

    3,076,414       3,874       6,630  
   

 

 

   

 

 

 

Total Common Equity

    $ 22,859     $ 23,547  
   

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

    $ 338,163     $ 328,859  
   

 

 

   

 

 

 

AFFILIATE INVESTMENTS(N) – 15.8%

     

Secured First Lien Debt – 3.4%

     

Diversified/Conglomerate Manufacturing – 3.4%

     

Edge Adhesives Holdings, Inc.(S) – Term Debt (L + 10.5%, 13.0% Cash, Due 2/2022)(C)

  $ 6,200     $ 6,200     $ 5,968  

Edge Adhesives Holdings, Inc.(S) – Term Debt (L + 11.8%, 14.2% Cash, Due 2/2022)(C)

    2,000       2,000       1,935  
   

 

 

   

 

 

 
      8,200       7,903  
   

 

 

   

 

 

 

Total Secured First Lien Debt

    $ 8,200     $ 7,903  
   

 

 

   

 

 

 

Secured Second Lien Debt – 10.7%

     

Diversified Natural Resources, Precious Metals and Minerals – 9.1%

     

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

  $ 6,000     $ 6,000     $ 6,015  

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

    8,000       8,000       8,020  

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

    3,300       3,300       3,308  

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

    4,000       4,000       4,010  
   

 

 

   

 

 

 
      21,300       21,353  

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

     

Canopy Safety Brands, LLC – Term Debt (L + 10.5%, 13.0% Cash, Due 7/2022)(C)

    3,750       3,750       3,783  
   

 

 

   

 

 

 

Total Secured Second Lien Debt

    $ 25,050     $ 25,136  
   

 

 

   

 

 

 

Preferred Equity – 0.6%

     

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       898  

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

     

Canopy Safety Brands, LLC – Preferred Stock(E)(G)

    500,000       500       610  
   

 

 

   

 

 

 

Total Preferred Equity

    $ 3,816     $ 1,508  
   

 

 

   

 

 

 

Common Equity – 1.1%

     

Diversified Natural Resources, Precious Metals and Minerals – 1.1%

     

Lignetics, Inc. – Common Stock(E)(G)

    152,603     $ 1,855     $ 2,585  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0%

     

Canopy Safety Brands, LLC – Common Stock(E)(G)

    500,000       —         53  
   

 

 

   

 

 

 

Total Common Equity

    $ 1,855     $ 2,638  
   

 

 

   

 

 

 

Total Affiliate Investments

    $ 38,921     $ 37,185  
   

 

 

   

 

 

 

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

 

10


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2019

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

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

CONTROL INVESTMENTS(O) – 9.2%

        

Secured First Lien Debt – 4.0%

        

Diversified/Conglomerate Manufacturing – 2.3%

        

LWO Acquisitions Company LLC – Term Debt (L + 7.5%, 10.0% Cash, Due 6/2021)(E)

   $ 6,000      $ 6,000      $ 5,310  

LWO Acquisitions Company LLC – Term Debt (Due 6/2021)(E)(P)

     9,657        9,657        —    
     

 

 

    

 

 

 
        15,657        5,310  

Machinery – 1.1%

        

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

     2,600        2,600        2,600  

Printing and Publishing – 0.6%

        

TNCP Intermediate HoldCo, LLC – Line of Credit, $500 available (8.0% Cash, Due 9/2021)(E)(F)

     1,500        1,458        1,500  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 19,715      $ 9,410  
     

 

 

    

 

 

 

Secured Second Lien Debt – 3.4%

        

Automobile– 3.4%

        

Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 12.0% Cash, Due 8/2023)(E)

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

Unsecured Debt – 0.0%

        

Diversified/Conglomerate Manufacturing – 0.0%

        

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

   $ 95      $ 95      $ —    

Common Equity – 1.8%

        

Automobile– 0.6%

        

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

     33,321      $ 580      $ 1,322  

Diversified/Conglomerate Manufacturing – 0.0%

        

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

     921,000        921        —    

Machinery – 1.0%

        

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

     750        1        2,375  

Printing and Publishing – 0.2%

        

TNCP Intermediate HoldCo, LLC – Common Equity Units(E)(G)

     790,000        500        504  
     

 

 

    

 

 

 

Total Common Equity

      $ 2,002      $ 4,201  
     

 

 

    

 

 

 
     

 

 

    

 

 

 

Total Control Investments

      $ 29,877      $ 21,676  
     

 

 

    

 

 

 
     

 

 

    

 

 

 

TOTAL INVESTMENTS – 165.0%

      $ 406,961      $ 387,720  
     

 

 

    

 

 

 

 

(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 $338.3 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 March 31, 2019, our investments in FedCap Partners, LLC, Leeds Novamark Capital I, L.P., Funko Acquisition Holdings, LLC (“Funko”), and XMedius Solutions Inc. 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 March 31, 2019.

(B) 

Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 2.49% as of March 31, 2019. 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 (formerly Standard and Poor’s Securities Evaluations, Inc.).

(D)

Fair value was based on the indicative bid price on or near March 31, 2019, 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 during the quarter ended March 31, 2019.

(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.

 

11


Table of Contents
(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)

In February 2019, New Trident Holdcorp, Inc. filed for Chapter 11 bankruptcy protection.

(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 2.60% as of March 31, 2019.

(V)

The cash interest rate on this investment was indexed to the U.S. Prime Rate, which was 5.50% as of March 31, 2019.

(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 March 31, 2019.

(Z)

Investment formerly known as Chemical and Injection Holdings Company, LLC.

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

 

12


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

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

NON-CONTROL/NON-AFFILIATE  INVESTMENTS(M) – 137.3%

        

Secured First Lien Debt – 75.3%

        

Automobile – 1.3%

        

Meridian Rack & Pinion, Inc.(S) – Term Debt (L + 11.5%, 13.8% Cash, Due 6/2019) (C)

   $ 4,140      $ 4,140      $ 3,105  

Beverage, Food, and Tobacco – 2.6%

        

Triple H Food Processors, LLC – Line of Credit, $750 available (L + 6.8%, 9.0% Cash, Due 8/2020)(C)

     —          —          —    

Triple H Food Processors, LLC – Term Debt (L + 8.3%, 10.5% Cash, Due 8/2020)(C)

     6,000        6,000        6,135  
     

 

 

    

 

 

 
        6,000        6,135  

Buildings and Real Estate – 0.9%

        

GFRC Holdings, LLC – Line of Credit, $0 available (L + 8.0%, 10.3% Cash, Due 9/2018)(E)

     1,150        1,150        1,150  

GFRC Holdings, LLC – Term Debt (L + 8.0%, 10.3% Cash, Due 9/2018)(E)

     1,000        1,000        1,000  
     

 

 

    

 

 

 
        2,150        2,150  

Diversified/Conglomerate Service – 21.3%

        

IA Tech, LLC – Term Debt (L + 11.0%, 13.3% Cash, Due 6/2023)(C)

     30,000        30,000        30,900  

Travel Sentry, Inc. – Term Debt (L + 8.0%, 10.4% Cash, Due 12/2021)(C)(U)

     8,415        8,415        8,646  

Vision Government Solutions, Inc. – Line of Credit, $0 available (L + 8.8%, 11.0% Cash, Due 6/2021)(C)

     1,450        1,446        1,305  

Vision Government Solutions, Inc. – Delayed Draw Term Loan, $900 available (10.0% Cash, Due 6/2021)(C)(F)

     1,600        1,596        1,448  

Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 11.0% Cash, Due 6/2021)(C)

     9,000        8,978        8,100  
     

 

 

    

 

 

 
        50,435        50,399  

Healthcare, Education, and Childcare – 9.7%

        

EL Academies, Inc. – Line of Credit, $2,000 available (L + 9.5%, 11.8% Cash, Due 8/2020)(C)

     —          —          —    

EL Academies, Inc. – Delayed Draw Term Loan, $1,010 available (L + 9.5%, 11.8% Cash, Due 8/2022)(C)

     8,990        8,990        9,069  

EL Academies, Inc. – Term Debt (L + 9.5%, 11.8% Cash, Due 8/2022)(C)

     12,000        12,000        12,105  

TWS Acquisition Corporation – Term Debt (L + 8.0%, 10.3% Cash, Due 7/2020)(Q)(AA)

     2,000        2,000        2,000  
     

 

 

    

 

 

 
        22,990        23,174  

Machinery – 2.7%

        

Arc Drilling Holdings LLC – Line of Credit, $1,000 available (L + 8.0%, 10.3% Cash, Due 11/2020)(C)

     —          —          —    

Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 11.8% Cash, 3.0% PIK, Due 11/2022)(C)

     5,960        5,960        5,454  

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

     836        836        836  
     

 

 

    

 

 

 
        6,796        6,290  

Oil and Gas – 17.0%

        

Impact! Chemical Technologies, Inc. – Line of Credit, $0 available (L + 8.8%, 11.0% Cash, Due 12/2020)(C)

     2,500        2,500        2,497  

Impact! Chemical Technologies, Inc. – Term Debt (L + 8.8%, 11.0% Cash, Due 12/2020)(C)

     20,000        20,000        19,975  

WadeCo Specialties, Inc. – Line of Credit, $1,100 available (L + 7.0%, 9.3% Cash, Due 3/2019)(C)

     900        900        909  

WadeCo Specialties, Inc. – Term Debt (L + 7.0%, 9.3% Cash, Due 3/2019)(C)

     9,691        9,691        9,788  

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

     7,000        7,000        7,035  
     

 

 

    

 

 

 
        40,091        40,204  

Printing and Publishing – 0.0%

        

Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 9.3% Cash, Due 2/2015)(E)(V)

     107        107        —    

Telecommunications – 19.8%

        

Applied Voice & Speech Technologies, Inc. – Term Debt (L + 9.3%, 11.5% Cash, Due 10/2022)(C)

     10,100        10,100        9,948  

B+T Group Acquisition, Inc.(S) – Term Debt (L + 11.0%, 13.3% Cash, Due 12/2019)(C)

     6,000        6,000        6,000  

NetFortris Corp. – Term Debt (L + 8.4%, 10.7% Cash, Due 2/2021)(C)

     23,700        23,700        23,522  

XMedius Solutions Inc. – Term Debt (L + 9.3%, 11.5% Cash, Due 10/2022)(C)

     7,493        7,493        7,521  
     

 

 

    

 

 

 
        47,293        46,991  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 180,002      $ 178,448  
     

 

 

    

 

 

 

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, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

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

Secured Second Lien Debt – 53.5%

        

Automobile – 2.1%

        

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

   $ 5,000      $ 4,980      $ 5,094  

Beverage, Food, and Tobacco – 2.9%

        

The Mochi Ice Cream Company – Term Debt (L + 10.5%, 12.8% Cash, Due 12/2023)(C)

     6,750        6,726        6,767  

Cargo Transportation – 5.5%

        

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

     13,000        13,000        13,097  

Chemicals, Plastics, and Rubber – 0.5%

        

Vertellus Holdings LLC – Term Debt (L + 12.0%, 14.3% Cash, Due 10/2021)(C)

     1,099        1,099        1,096  

Diversified/Conglomerate Manufacturing – 8.7%

        

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.3% Cash, Due 4/2021)(C)

     5,235        5,235        4,934  

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.3% Cash, Due 4/2021)(C)

     75        75        71  

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.3% Cash, Due 4/2021)(C)

     390        390        368  

United Flexible, Inc. – Term Debt (L + 9.3%, 11.5% Cash, Due 2/2022)(C)

     15,300        15,232        15,300  
     

 

 

    

 

 

 
        20,932        20,673  

Diversified/Conglomerate Service – 12.1%

        

CHA Holdings, Inc. – Term Debt (L + 8.8%, 11.1% Cash, Due 4/2026)(D)(U)

     3,000        2,942        3,030  

DigiCert Holdings, Inc. – Term Debt (L + 8.0%, 10.3% Cash, Due 10/2025)(D)

     3,000        2,977        2,989  

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        11,045  

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

     4,000        3,929        4,015  

LDiscovery, LLC – Term Debt (L + 10.0%, 12.3% Cash, Due 12/2023)(D)

     5,000        4,836        4,400  

Red Ventures, LLC – Term Debt (L + 8.0%, 10.3% Cash, Due 11/2025)(D)(AA)

     3,125        3,069        3,188  
     

 

 

    

 

 

 
        28,853        28,667  

Healthcare, Education, and Childcare – 10.0%

        

Medical Solutions Holdings, Inc. – Term Debt (L + 8.3%, 10.5% Cash, Due 6/2025)(D)

     3,000        2,960        3,000  

Merlin International, Inc. – Term Debt (L + 10.0%, 12.3% Cash, Due 10/2022)(C)

     20,000        20,000        20,600  

New Trident Holdcorp, Inc. – Term Debt (L + 10.0%, 5.5% Cash, 6.8% PIK, Due 7/2020)(E)

     4,382        4,382        —    
     

 

 

    

 

 

 
        27,342        23,600  

Home and Office Furnishings, Housewares and Durable Consumer Products – 4.3%

        

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

     10,000        10,000        10,125  

Hotels, Motels, Inns, and Gaming – 2.6%

        

Vacation Rental Pros Property Management, LLC – Term Debt (L + 10.0%, 12.3% Cash, 3.0% PIK, Due 6/2023)(C)

     7,366        7,366        6,337  

Oil and Gas – 3.2%

        

Francis Drilling Fluids, Ltd. – Term Debt (L + 10.4%, 12.6% Cash, Due 4/2020)(E)(H)(I)

     18,510        18,427        5,281  

Francis Drilling Fluids, Ltd. – Term Debt (L + 9.3%, 11.5% Cash, Due 4/2020)(E)(H)(I)

     8,473        8,434        2,417  
     

 

 

    

 

 

 
        26,861        7,698  

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

        

Canopy Safety Brands, LLC – Term Debt (L + 10.5%, 12.8% Cash, Due 7/2022)(C)

     3,750        3,750        3,802  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 150,909      $ 126,956  
     

 

 

    

 

 

 

Unsecured Debt – 1.5%

        

Healthcare, education, and childcare – 1.5%

        

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

   $ 3,613      $ 3,613      $ 3,603  

Preferred Equity – 1.9%

        

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        305  

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, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

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

Diversified/Conglomerate Manufacturing – 0.5%

       

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

     2,192       2,192        533  

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

     538       538        708  
    

 

 

    

 

 

 
       2,730        1,241  

Diversified/Conglomerate Service – 0.0%

       

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

     766       500        —    

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

     169       —          —    
    

 

 

    

 

 

 
       500        —    

Oil and Gas – 0.9%

       

Chemical & Injection Holdings Company, LLC – Preferred Equity Units(E)(G)

     13,830       618        2,137  

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

     1,656       1,215        —    
    

 

 

    

 

 

 
       1,833        2,137  

Telecommunications – 0.4%

       

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

     5,503       1,799        —    

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

     2,677,070       268        803  
    

 

 

    

 

 

 
       2,067        803  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 9,604      $ 4,486  
    

 

 

    

 

 

 

Common Equity – 5.1%

       

Aerospace and Defense – 0.3%

       

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

     80     $ 1,449      $ 616  

Automobile– 0.4%

       

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

     494,902       495        857  

Beverage, Food, and Tobacco – 0.3%

       

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

     450       450        230  

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

     250,000       250        595  
    

 

 

    

 

 

 
       700        825  

Buildings and Real Estate – 0.0%

       

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

     45.0     —          —    

Cargo Transportation – 0.9%

       

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

     18.0     1,000        1,375  

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

     12.0     244        692  
    

 

 

    

 

 

 
       1,244        2,067  

Chemicals, Plastics, and Rubber – 0.2%

       

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

     879,121       3,017        404  

Diversified/Conglomerate Manufacturing – 0.9%

       

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

     270       18        —    

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

     1,158       148        2,247  
    

 

 

    

 

 

 
       166        2,247  

Healthcare, Education, and Childcare – 1.4%

       

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

     21,429       2,636        —    

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

     649       649        844  

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

     3.5     2,152        2,695  
    

 

 

    

 

 

 
       5,437        3,539  

Machinery – 0.1%

       

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

     16.7     1,500        —    

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

     33.3     —          296  
    

 

 

    

 

 

 
       1,500        296  

Oil and Gas – 0.1%

       

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

     1,656       1        —    

W3, Co. – Common Equity(E)(G)

     435       499        133  
    

 

 

    

 

 

 
       500        133  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.5%

       

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

     1       500        418  

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

     39,483       167        672  
    

 

 

    

 

 

 
       667        1,090  

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, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

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

Telecommunications – 0.0%

        

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

     1        1        —    
     

 

 

    

 

 

 

Total Common Equity

      $ 15,176      $ 12,074  
     

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

      $ 359,304      $ 325,567  
     

 

 

    

 

 

 

AFFILIATE INVESTMENTS(N) – 20.6%

        

Secured First Lien Debt – 7.1%

        

Diversified/Conglomerate Manufacturing – 7.1%

        

Edge Adhesives Holdings, Inc.(S) – Term Debt (L + 10.5%, 12.8% Cash, Due 2/2019)(C)

   $ 6,200      $ 6,200      $ 6,061  

Edge Adhesives Holdings, Inc.(S) – Term Debt (L + 11.8%, 14.0% Cash, Due 2/2019)(C)

     1,600        1,600        1,572  

LWO Acquisitions Company LLC – Line of Credit, $0 available (L + 5.5%, 7.8% Cash, 2.0% PIK, Due 12/2019)(C)

     3,205        3,205        3,105  

LWO Acquisitions Company LLC – Term Debt (L + 8.5%, 10.8% Cash, 2.0% PIK, Due 12/2019)(C)

     11,166        11,166        6,089  
     

 

 

    

 

 

 
        22,171        16,827  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 22,171      $ 16,827  
     

 

 

    

 

 

 

Secured Second Lien Debt – 9.0%

        

Diversified Natural Resources, Precious Metals and Minerals – 9.0%

        

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

   $ 6,000      $ 6,000      $ 6,014  

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

     8,000        8,000        8,020  

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

     3,300        3,300        3,308  

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

     4,000        4,000        4,010  
     

 

 

    

 

 

 
        21,300        21,352  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 21,300      $ 21,352  
     

 

 

    

 

 

 

Unsecured Debt – 0.0%

        

Diversified/Conglomerate Manufacturing – 0.0%

        

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

   $ 95      $ 95      $ 52  

Preferred Equity – 1.4%

        

Diversified/Conglomerate Manufacturing – 1.0%

        

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

     2,516      $ 2,516      $ 2,381  

Diversified Natural Resources, Precious Metals and Minerals – 0.4%

        

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

     40,000        800        882  
     

 

 

    

 

 

 

Total Preferred Equity

      $ 3,316      $ 3,263  
     

 

 

    

 

 

 

Common Equity – 3.1%

        

Diversified/Conglomerate Manufacturing – 0.0%

        

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

     921,000      $ 921      $ —    

Diversified Natural Resources, Precious Metals and Minerals – 0.3%

        

Lignetics, Inc. – Common Stock(E)(G)

     152,603        1,855        806  

Textiles and Leather – 2.8%

        

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

     3,076,414        5,009        6,556  
     

 

 

    

 

 

 

Total Common Equity

      $ 7,785      $ 7,362  
     

 

 

    

 

 

 

Total Affiliate Investments

      $ 54,667      $ 48,856  
     

 

 

    

 

 

 

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

 

16


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

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

CONTROL INVESTMENTS(O) – 6.6%

        

Secured First Lien Debt – 1.8%

        

Machinery – 1.2%

        

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

   $ 2,850      $ 2,850      $ 2,850  

Printing and Publishing – 0.6%

        

TNCP Intermediate HoldCo, LLC – Line of Credit, $500 available (8.0% Cash, Due 9/2021)(E)(F)

   $ 1,500        1,500        1,500  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 4,350      $ 4,350  
     

 

 

    

 

 

 

Secured Second Lien Debt – 3.4%

        

Automobile– 3.4%

        

Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.8% Cash, Due 8/2023)(E)

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

Common Equity – 1.4%

        

Automobile– 0.5%

        

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

     33,321      $ 580      $ 1,088  

Machinery – 0.7%

        

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

     750        1        1,622  

Printing and Publishing – 0.2%

        

TNCP Intermediate HoldCo, LLC – Common Equity Units(E)(G)

     790,000        500        498  
     

 

 

    

 

 

 

Total Common Equity

      $ 1,081      $ 3,208  
     

 

 

    

 

 

 

Total Control Investments

      $ 13,496      $ 15,623  
     

 

 

    

 

 

 

TOTAL INVESTMENTS(Z) – 164.5%

      $ 427,467      $ 390,046  
     

 

 

    

 

 

 

 

(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 $332.3 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 September 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 September 30, 2018.

(B) 

Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 2.27% as of September 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 September 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)

On September 29, 2018, Francis Drilling Fluids, Ltd. filed for Chapter 11 bankruptcy protection.

(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.

 

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(U)

The cash interest rate on this investment was indexed to 90-day LIBOR, which was 2.40% as of September 30, 2018.

(V)

The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 5.25% as of September 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 September 30, 2018.

(Z)

Cumulative gross unrealized depreciation for federal income tax purposes is $62.7 million; cumulative gross unrealized appreciation for federal income tax purposes is $15.4 million. Cumulative net unrealized depreciation is $47.4 million, based on a tax cost of $437.4 million.

(AA)

Investment was exited subsequent to September 30, 2018.

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)

MARCH 31, 2019

(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 are 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 U.S. federal income 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 holding certain investments pledged as collateral to 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”), an affiliate of ours and an SEC registered investment adviser, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). Administrative services are provided by our affiliate, Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, 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, 10 and 12 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 significant 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 six months ended March 31, 2019 are not necessarily indicative of results that ultimately may be achieved for the fiscal year ending September 30, 2019 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, 2018, as filed with the SEC on November 14, 2018.

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 these Notes to Consolidated Financial Statements. 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 to Consolidated Financial Statements. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities, or total net assets, or Consolidated Statements 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 determining, in good faith, the fair value of our investments for which market quotations are not readily available 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 determine in good faith the fair value of such 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 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 & 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 before determining 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 each 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 before determining 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, the Valuation Team generally allocates the TEV to the portfolio company’s securities based on the facts and

 

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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 for which we do not have the ability to effectuate a sale of the applicable portfolio company using the yield analysis, which includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, including, 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 the securities we hold as of the reporting date. For restricted securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold 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 for which we cannot effectuate a sale of the fund, the Valuation Team generally determines the fair value of our invested capital at the Net Asset Value (“NAV”) provided by the fund. Any invested capital that is not yet reflected in the NAV provided by the fund is valued at par value. 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: 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.

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 March 31, 2019, loans to Meridian Rack & Pinion, Inc. and New Trident Holdcorp, Inc. were on non-accrual status with an aggregate debt cost basis of approximately $8.5 million, or 2.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $2.5 million, or 0.7% of the fair value of all debt investments in our portfolio. At September 30, 2018, loans to Francis Drilling Fluids, Inc. (“FDF”) were on non-accrual status with an aggregate debt cost basis of approximately $26.9 million, or 6.9% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $7.7 million, or 2.1% 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 March 31, 2019 and September 30, 2018, we had seven and six OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $11 thousand and $0.1 million for the three and six months ended March 31, 2019, respectively, and $11 thousand and $0.1 million during the three and six months ended March 31, 2018, respectively. The unamortized balance of OID investments as of each of March 31, 2019 and September 30, 2018 totaled $0.4 million. As of March 31, 2019 and September 30, 2018, we had four and five investments which had a PIK interest component, respectively. We recorded PIK interest income of $0.3 million and $0.7 million during the three and six months ended March 31, 2019, respectively, as compared to $1.2 million and $2.3 million during the three and six months ended March 31, 2018, respectively. We collected $0 in PIK interest in cash during the three and six months ended March 31, 2019, as compared to $0.8 million during the three and six months ended March 31, 2018.

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, and are non-recurring.

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.

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 notes payable are presented as discounts to the principal amount of the notes payable and are amortized using the straight-line method, which approximates the effective interest method, over the term of the notes. 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 term of the respective series of preferred stock. Refer to Note 5 — Borrowings and Note 6 — Mandatorily Redeemable Preferred Stock for further discussion.

Related Party Fees

We are party to the Advisory Agreement with the Adviser, which is owned and controlled by our chairman and chief executive officer. 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 are also party to the Administration Agreement with the Administrator, which is owned and controlled by our chairman and chief executive officer, whereby we pay separately for administrative services. Refer to Note 4 – Related Party Transactions for additional information regarding these related party fees and agreements.

Recent Accounting Pronouncements

In August 2018, the FASB issued Accounting Standards Update 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value” (“ASU 2018-13”), which modifies the disclosure requirements in ASC 820. We are currently assessing the impact of ASU 2018-13 and do not anticipate a material impact on our disclosures. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.

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. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years and we adopted ASU 2016-18 effective October 1, 2018. The adoption of ASU 2016-18 did not have a material impact on our financial position, results of operations or cash flows.

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 and we adopted ASU 2016-15 effective October 1, 2018. The adoption of ASU 2016-15 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. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years and we adopted ASU 2016-01 effective October 1, 2018. The adoption of ASU 2016-01 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 effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years and we adopted ASU 2014-09, as amended, effective October 1, 2018. The adoption of ASU 2014-09, as amended, did not result in a material change in the timing of revenue recognition or a material impact on our financial position, results of operations, or cash flows from adopting this standard.

NOTE 3. INVESTMENTS

Fair Value

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

 

   

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

 

   

Level 2 – inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for

 

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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 March 31, 2019 and September 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 Acquisition Holdings, LLC (“Funko”), which was valued using Level 2 inputs and our investments in FedCap Partners, LLC (“FedCap”) and Leeds Novamark Capital I, L.P. (“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 six months ended March 31, 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 as our units in Funko can be converted into common shares of Funko, Inc. upon meeting certain requirements. During the six months ended March 31, 2019, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.

As of March 31, 2019 and September 30, 2018, 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 March 31, 2019:

         

Secured first lien debt

   $ 189,281     $ —        $ —       $ 189,281  

Secured second lien debt

     148,691       —          —         148,691  

Unsecured debt

     3,771       —          —         3,771  

Preferred equity

     15,591       —          —         15,591  

Common equity/equivalents

     26,440 (A)      —          402 (B)      26,038  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Investments at March 31, 2019

   $ 383,774     $ —        $ 402     $ 383,372  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

           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, 2018:

         

Secured first lien debt

   $ 199,625     $ —        $ —       $ 199,625  

Secured second lien debt

     156,373       —          —         156,373  

Unsecured debt

     3,655       —          —         3,655  

Preferred equity

     7,749       —          —         7,749  

Common equity/equivalents

     19,333 (A)      —          672 (B)      18,661  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Investments at September 30, 2018

   $ 386,735     $ —        $ 672     $ 386,063  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(A)

Excludes our investments in FedCap and Leeds with fair values of $0.6 million and $3.3 million, respectively, as of March 31, 2019 and fair values of $0.6 million and $2.7 million, respectively, as of September 30, 2018. FedCap and Leeds were valued using net asset value as a practical expedient.

(B)

Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into common shares of Funko, Inc.) at the reporting date less a discount for lack of marketability as our investment was subject to certain restrictions.

 

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Table of Contents

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 March 31, 2019 and September 30, 2018, 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)
 
     March 31, 2019     September 30, 2018  

Non-Control/Non-Affiliate Investments

    

Secured first lien debt

   $ 171,968     $ 178,448  

Secured second lien debt

     115,490       126,956  

Unsecured debt

     3,771       3,603  

Preferred equity

     14,083       4,486  

Common equity/equivalents

     19,199 (A)      8,091 (B) 
  

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 324,511     $ 321,584  
  

 

 

   

 

 

 

Affiliate Investments

    

Secured first lien debt

   $ 7,903     $ 16,827  

Secured second lien debt

     25,136       21,352  

Unsecured debt

     —         52  

Preferred equity

     1,508       3,263  

Common equity/equivalents

     2,638       7,362  
  

 

 

   

 

 

 

Total Affiliate Investments

   $ 37,185     $ 48,856  
  

 

 

   

 

 

 

Control Investments

    

Secured first lien debt

   $ 9,410     $ 4,350  

Secured second lien debt

     8,065       8,065  

Common equity/equivalents

     4,201       3,208  
  

 

 

   

 

 

 

Total Control Investments

   $ 21,676     $ 15,623  
  

 

 

   

 

 

 

Total Investments at Fair Value Using Level 3 Inputs

   $ 383,372     $ 386,063  
  

 

 

   

 

 

 

 

(A)

Excludes our investments in FedCap, Leeds, and Funko with fair values of $0.6 million, $3.3 million, and $0.4 million, respectively, as of March 31, 2019. 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, Leeds, and Funko with fair values of $0.6 million, $2.7 million, and $0.7 million, respectively, as of September 30, 2018. FedCap and Leeds were valued using net asset value as a practical expedient, and Funko was valued using Level 2 inputs.

 

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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 March 31, 2019 and September 30, 2018. 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  
    Fair Value as of               Range / Weighted Average as of  
    March 31,
2019
    September 30,
2018
    Valuation
Techniques/
Methodologies
  Unobservable
Input
    March 31,
2019
    September 30,
2018
 

Secured first lien debt(A)

    $179,871       $193,125     Yield Analysis     Discount Rate       9.7% – 23.1% /13.6%       6.9% – 24.3% /12.7%  
    9,410       6,500     TEV     EBITDA multiple       3.4x – 5.9x /5.6x       3.3x – 3.3x /3.3x  
          EBITDA       $897 – $1,709 /$1,013       $1,507 – $1,507 /$1,507  
          Revenue multiple       0.3x – 0.3x / 0.3x       0.3x – 0.5x / 0.4x  
          Revenue       $7,428 – $7,428 /$7,428       $4,909 – $7,400 /$5,933  

Secured second lien debt

    114,223       119,988     Yield Analysis     Discount Rate       7.3% – 19.4% /12.6%       10.7% – 23.2% /12.6%  
    26,403       20,622     Market Quote     IBP       86.0% – 101.0% /96.4%     88.0% – 102.0% /97.6%  
    8,065       15,763     TEV     EBITDA multiple       5.6x – 6.7x /6.0x       5.5x – 6.6x /5.8x  
          EBITDA       $2,542 – $37,311 /$14,832       $2,500 – $55,375 /$13,341  

Unsecured debt

    3,771       3,655     Yield Analysis     Discount Rate       10.7% – 10.7% / 10.7%       10.2% – 20.3% / 10.4%  

Preferred and common equity / equivalents(B)

    41,629       26,410     TEV     EBITDA multiple       3.4x – 10.3x / 6.6x       3.3x – 11.9x / 6.6x  
          EBITDA       $715 – $44,331 /$12,638       $459 – $39,352 /$14,216  
          Revenue multiple       0.3x – 1.5x / 0.7x       0.3x – 1.5x / 0.7x  
          Revenue       $802 –$555,998 /$307,251       $473 –$543,360 /$313,688  
 

 

 

   

 

 

         

Total Level 3 Investments, at Fair Value

    $383,372       $386,063          
 

 

 

   

 

 

         

 

(A)

Fair value as of September 30, 2018 includes one proprietary debt investment totaling $2.0 million, which was valued using the expected payoff amount as the unobservable input.

(B)

Fair value as of March 31, 2019 excludes our investments in FedCap, Leeds and Funko with fair values of $0.6 million, $3.3 million, and $0.4 million, respectively, as of March 31, 2019. Fair value as of September 30, 2018 excludes our investments in FedCap, Leeds and Funko with fair values of $0.6 million, $2.7 million, and $0.7 million, respectively, as of September 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 both March 31, 2019 and September 30, 2018.

 

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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 six months ended March 31, 2019 and 2018 for all investments for which we determine fair value using unobservable (Level 3) inputs.

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  

Three months ended March 31, 2019

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

Fair Value as of December 31, 2018

   $ 232,651     $ 149,783     $ 3,649      $ 14,606     $ 26,601     $ 427,290  

Total gains (losses):

             

Net realized gain (loss)(A)

     —         —         —          (7     2,093       2,086  

Net unrealized appreciation (depreciation)(B)

     (3,212     868       27        1,276       3,169       2,128  

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

     742       (65     —          (188     (2,134     (1,645

New investments, repayments and settlements: (C)

 

Issuances/originations

     1,157       3,359       95        —         118       4,729  

Settlements/repayments

     (12,057     (35,254     —          —         (1,135     (48,446

Net proceeds from sales

     —         —         —          (532     (2,238     (2,770

Transfers

     (30,000     30,000       —          436       (436     —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2019

   $ 189,281     $ 148,691     $ 3,771      $ 15,591     $ 26,038     $ 383,372  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  

Six months ended March 31, 2019

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

Fair Value as of September 30, 2018

   $ 199,625     $ 156,373     $ 3,655     $ 7,749     $ 18,661     $ 386,063  

Total gains (losses):

            

Net realized gain (loss)(A)

     —         (25,634     —         (1,226     2,083       (24,777

Net unrealized appreciation (depreciation)(B)

     (7,946     (1,024     (71     1,471       6,733       (837

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

     742       18,980       —         1,027       (2,133     18,616  

New investments, repayments and settlements: (C)

 

Issuances/originations

     44,153       10,125       187       5,312       4,494       64,271  

Settlements/repayments

     (17,293     (38,779     —         —         (1,135     (57,207

Net proceeds from sales

     —         —         —         (528     (2,229     (2,757

Transfers

     (30,000     28,650       —         1,786       (436     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2019

   $ 189,281     $ 148,691     $ 3,771     $ 15,591     $ 26,038     $ 383,372  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  

Three months ended March 31, 2018

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

Fair Value as of December 31, 2017

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

Total gains (losses):

             

Net realized gain (loss)(A)

     (3     37       —          (5     (3     26  

Net unrealized appreciation (depreciation)(B)

     (1,005     2,408       11        514       992       2,920  

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

     —         (18     —          —         —         (18

New investments, repayments and settlements: (C)

             

Issuances/originations

     11,895       8,794       85        —         21       20,795  

Settlements/repayments

     (4,694     (9,426     —          —         —         (14,120

Net proceeds from sales

     3       (38     —          5       3       (27

Transfers

     (6,598     6,598       —          —         —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2018

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

Fair Value Measurements Using Significant  Unobservable Inputs (Level 3)

 

Six Months Ended March 31, 2018

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

Fair Value as of September 30, 2017

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

Total gains (losses):

             

Net realized gain (loss)(A)

     (3     37       —          597       (31     600  

Net unrealized appreciation (depreciation)(B)

     110       2,853       8        1,072       980       5,023  

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

     —         (105     —          (725     —         (830

New investments, repayments and settlements: (C)

 

Issuances/originations

     49,321       27,159       208        125       1,521       78,334  

Settlements/repayments

     (17,371     (15,273     —          —         —         (32,644

Net proceeds from sales

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

Transfers

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2018

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(A)

Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for corresponding period.

(B) 

Included in net unrealized appreciation (depreciation) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.

(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 March 31, 2019 and September 30, 2018, we held 37 and 39 proprietary investments with an aggregate fair value of $349.2 million and $357.6 million, or 90.1% and 91.7% of the total portfolio at fair value, respectively. The following significant proprietary investment transactions occurred during the six months ended March 31, 2019:

 

   

In October 2018, our investment in TWS Acquisition Corporation paid off at par for net proceeds of $2.0 million.

 

   

In November 2018, we invested $16.7 million in Antenna Research Associates, Inc. through a combination of secured first lien debt and equity.

 

   

In December 2018, we invested $20.0 million in R2i Holdings, LLC through secured first lien debt.

 

   

In December 2018, we invested $6.5 million in DKI Ventures, LLC through secured first lien debt.

 

   

In December 2018, our investment in FDF was restructured upon emergence from Chapter 11 bankruptcy protection. As part of the restructure, our existing $27.0 million debt investment in FDF was converted to $1.35 million of preferred equity and common equity units in a new entity, FES Resources Holdings, LLC (“FES Resources”). We also invested an additional $5.0 million in FES Resources through a combination of preferred equity and common equity units. In conjunction with the restructure, we recorded a net realized loss of $26.9 million associated with our investment in FDF.

 

   

In January 2019, our investment in Merlin International, Inc. paid off, which resulted in success fee income of $0.6 million and a prepayment fee of $0.3 million. In connection with the payoff, we received net cash proceeds of $20.9 million, including the repayment of our debt investment of $20.0 million at par.

 

   

In February 2019, our investment in United Flexible, Inc. paid off, which resulted in a realized gain of $2.1 million. In connection with the payoff, we received net cash proceeds of $18.1 million, including the repayment of our debt investment of $15.3 million at par.

 

   

In March 2019, two of our portfolio companies, Impact! Chemical Technologies, Inc. (“Impact”) and WadeCo Specialties, Inc. (“WadeCo”), merged to form Imperative Holdings Corporation (“Imperative”). In connection with the merger, we received a principal repayment of $10.9 million and our first lien loans to Impact and WadeCo were restructured into one $30.0 million second lien debt investment in Imperative.

Syndicated Investments

As of March 31, 2019 and September 30, 2018, we held 14 and 11 syndicated investments with an aggregate fair value of $38.5 million and $32.4 million, or 9.9% and 8.3% of the total portfolio at fair value, respectively. The following significant syndicated investment transactions occurred during the six months ended March 31, 2019:

 

   

In October, November and December 2018, we invested a total of $3.7 million in 8th Avenue Food & Provisions, Inc. through secured second lien debt.

 

   

In November 2018, we invested $2.0 million in GOBP Holdings, Inc. through secured second lien debt.

 

   

In November 2018, our investment in Red Ventures, LLC paid off at par for net proceeds of $3.1 million.

 

   

In December 2018, we invested $1.0 million in CPM Holdings, Inc. through secured second lien debt.

 

   

In February 2019, we invested $3.3 million in DiscoverOrg, LLC through secured second lien debt.

Investment Concentrations

As of March 31, 2019, our investment portfolio consisted of investments in 51 portfolio companies located in 24 states in 19 different industries, with an aggregate fair value of $387.7 million. The five largest investments at fair value totaled $134.3 million, or 34.6% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2018 totaling $122.8 million, or 31.5% of our total investment portfolio. As of March 31, 2019 and September 30, 2018, our average investment by obligor was $8.0 million and $8.5 million at cost, respectively.

 

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Table of Contents

The following table outlines our investments by security type as of March 31, 2019 and September 30, 2018:

 

     March 31, 2019     September 30, 2018  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 203,384        50.0   $ 189,281        48.8   $ 206,523        48.3   $ 199,625        51.2

Secured second lien debt

     154,637        38.0       148,691        38.3       180,274        42.2       156,373        40.1  

Unsecured debt

     3,895        0.9       3,771        1.0       3,708        0.9       3,655        0.9  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt investments

     361,916        88.9       341,743        88.1       390,505        91.4       359,653        92.2  

Preferred equity

     18,329        4.5       15,591        4.0       12,920        3.0       7,749        2.0  

Common equity/equivalents

     26,716        6.6       30,386        7.9       24,042        5.6       22,644        5.8  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity investments

     45,045        11.1       45,977        11.9       36,962        8.6       30,393        7.8  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 406,961        100.0   $ 387,720        100.0   $ 427,467        100.0   $ 390,046        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Our investments at fair value consisted of the following industry classifications as of March 31, 2019 and September 30, 2018:

 

     March 31, 2019     September 30, 2018  

Industry Classification

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

Diversified/Conglomerate Service

   $ 103,964        26.8   $ 79,066        20.3

Telecommunications

     47,122        12.1       47,794        12.3  

Oil and Gas

     38,838        10.0       50,172        12.9  

Healthcare, Education and Childcare

     32,621        8.4       53,916        13.8  

Diversified Natural Resources, Precious Metals and Minerals

     24,836        6.4       23,040        5.9  

Diversified/Conglomerate Manufacturing

     22,756        5.8       43,421        11.1  

Automobile

     18,212        4.7       18,209        4.7  

Beverage, Food and Tobacco

     17,665        4.6       13,727        3.5  

Aerospace and Defense

     17,301        4.5       616        0.1  

Cargo Transportation

     15,743        4.1       15,164        3.9  

Machinery

     12,077        3.1       11,058        2.8  

Home and Office Furnishings, Housewares and Durable Consumer Products

     9,950        2.6       10,125        2.6  

Textiles and Leather

     6,630        1.7       6,556        1.7  

Hotels, Motels, Inns, and Gaming

     6,610        1.7       6,337        1.6  

Personal and Non-Durable Consumer Products

     4,848        1.3       4,892        1.3  

Buildings and Real Estate

     3,034        0.8       2,455        0.6  

Other, < 2.0%

     5,513        1.4       3,498        0.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 387,720        100.0   $ 390,046        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Our investments at fair value were included in the following U.S. geographic regions and other countries as of March 31, 2019 and September 30, 2018:

 

     March 31, 2019     September 30, 2018  

Location

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

South

   $ 166,063        42.8   $ 168,917        43.3

West

     121,573        31.4       114,286        29.3  

Midwest

     55,606        14.3       61,733        15.8  

Northeast

     37,390        9.7       37,589        9.7  

Canada

     7,088        1.8       7,521        1.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 387,720        100.0   $ 390,046        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The geographic composition indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional locations in other geographic regions.

 

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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 March 31, 2019:

 

          Amount  

For the remaining six months ending September 30:

   2019    $ 8,865  

For the fiscal years ending September 30:

   2020      38,457  
   2021      67,196  
   2022      73,035  
   2023      98,263  
   Thereafter      76,610  
     

 

 

 
   Total contractual repayments                                  $ 362,426  
   Adjustments to cost basis of debt investments      (510
   Investments in equity securities      45,045  
     

 

 

 
   Investments held as of March 31, 2019 at Cost:    $ 406,961  
     

 

 

 

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 March 31, 2019 and September 30, 2018, we had gross receivables from portfolio companies of $0.5 million and $0.3 million, respectively. The allowance for uncollectible receivables was $20 thousand and $32 thousand as of March 31, 2019 and September 30, 2018, 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. We have entered into the Administration Agreement with the Administrator (discussed further below) to provide administrative services. 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.

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
March 31,
    Six Months Ended
March 31,
 
     2019     2018     2019     2018  

Average total assets subject to base management fee(A)

   $ 416,914     $ 407,771     $ 417,371     $ 395,428  

Multiplied by prorated annual base management fee of 1.75%

     0.4375     0.4375     0.875     0.875
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(B)

   $ 1,824     $ 1,784     $ 3,652     $ 3,460  

Portfolio company fee credit

     (141     (167     (685     (831

Syndicated loan fee credit

     (92     (92     (175     (184
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Base Management Fee

   $ 1,591     $ 1,525     $ 2,792     $ 2,445  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee(B)

     1,233       1,274       2,495       2,460  

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

     (1,233     (1,274     (2,495     (2,460
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2019     2018     2019     2018  

Incentive fee(B)

     1,383       1,210       2,743       2,583  

Incentive fee credit

     (487     (771     (1,034     (856
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Incentive Fee

   $ 896     $ 439     $ 1,709     $ 1,727  
  

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio company fee credit

     (141     (167     (685     (831

Syndicated loan fee credit

     (92     (92     (175     (184

Incentive fee credit

     (487     (771     (1,034     (856
  

 

 

   

 

 

   

 

 

   

 

 

 

Credits to Fees From Adviser – other(B)

   $ (720   $ (1,030   $ (1,894   $ (1,871
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)

Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.

(B)

Reflected, on a gross basis, as a line item on our accompanying Consolidated Statements of Operations.

Base Management Fee

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

Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include: (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 any fees for such services against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $11 thousand and $21 thousand for the three and six months ended March 31, 2019 and $10 thousand and $19 thousand for the three and six months ended March 31, 2018, 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 six months ended March 31, 2019 and 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.

Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based 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, which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted appropriately for any share issuances or repurchases during the period (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;

 

   

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; 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.

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 March 31, 2019, 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 March 31, 2019.

Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser to reduce the income-based incentive fee to the extent net investment income did not 100.0% cover distributions to common stockholders for the three and six months ended March 31, 2019 and 2018.

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: 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 allocable portion of the Administrator’s expenses is 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. 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 either party, approved the annual renewal of the Administration Agreement through August 31, 2019.

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 $0.1 million and $0.6 million during the three and six months ended March 31, 2019, respectively, and $0.2 million and $0.6 million during the three and six months ended March 31, 2018, respectively.

 

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Related Party Fees Due

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

 

     March 31, 2019      September 30, 2018  

Base management fee due to Adviser

   $ 358      $ 378  

Loan servicing fee due to Adviser

     243        281  

Incentive fee due to Adviser

     896        425  
  

 

 

    

 

 

 

Total fees due to Adviser

     1,497        1,084  
  

 

 

    

 

 

 

Fee due to Administrator

     326        317  
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 1,823      $ 1,401  
  

 

 

    

 

 

 

In addition to the above fees, other operating expenses due to the Adviser as of March 31, 2019 and September 30, 2018, totaled $28 thousand and $19 thousand, respectively. In addition, net expenses payable to Gladstone Investment Corporation (for reimbursement purposes), which includes certain co-investment expenses, totaled $12 thousand and $0 as of March 31, 2019 and September 30, 2018, respectively. These amounts are generally settled in the quarter subsequent to being incurred and are included in other liabilities on the accompanying Consolidated Statements of Assets and Liabilities as of March 31, 2019 and September 30, 2018.

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 April 15, 2022 (15 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):

 

     March 31, 2019      September 30, 2018  

Commitment amount

   $ 190,000      $ 190,000  

Borrowings outstanding, at cost

     52,300        110,000  

Availability(A)

     109,197        68,116  

 

     For the Three Months
Ended March 31,
    For the Six Months
Ended March 31,
 
     2019     2018     2019     2018  

Weighted average borrowings outstanding, at cost

   $ 73,493     $ 128,324     $ 81,287     $ 113,111  

Weighted average interest rate(B)

     6.6     4.9     6.3     5.0

Commitment (unused) fees incurred

   $ 233     $ 59     $ 415     $ 151  

 

(A) 

Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required.

(B)

Includes unused commitment fees and excludes the impact of deferred financing fees.

Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once a month. 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 March 31, 2019 and September 30, 2018.

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

 

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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 $263.7 million as of March 31, 2019, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Sections 18 and 61 of the 1940 Act, and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of March 31, 2019, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $339.6 million, asset coverage on our “senior securities representing indebtedness” of 355.0%, 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 March 31, 2019. As of March 31, 2019, we were in compliance with all of our Credit Facility covenants.

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 the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of March 31, 2019, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 2.85% per annum, plus a 1.00% unused commitment fee. As of September 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 commitment 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 March 31, 2019 and September 30, 2018, our Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations.

The following tables present our Credit Facility carried at fair value as of March 31, 2019 and September 30, 2018, 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 six months ended March 31, 2019 and 2018:

 

     Total Recurring Fair Value Measurement Reported in  
     Consolidated Statements  of Assets and Liabilities Using
Significant Unobservable  Inputs (Level 3)
 
     March 31, 2019      September 30, 2018  

Credit Facility

   $ 52,300      $ 110,000  
  

 

 

    

 

 

 

 

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

 
     Three Months Ended
March 31,
 
     2019      2018  

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

   $ 102,200      $ 130,833  

Borrowings

     6,000        26,300  

Repayments

     (55,900      (29,000

Net unrealized appreciation(A)

     —          (333
  

 

 

    

 

 

 

Fair Value as of March 31, 2019 and 2018, respectively

   $ 52,300      $ 127,800  
  

 

 

    

 

 

 

 

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

 
     Six Months Ended
March 31,
 
     2019      2018  

Fair value as of September 30, 2018 and 2017, respectively

   $ 110,000      $ 93,115  

Borrowings

     65,000        87,400  

Repayments

     (122,700      (52,600

Net unrealized appreciation(A)

     —          (115
  

 

 

    

 

 

 

Fair Value as of March 31, 2019 and 2018, respectively

   $ 52,300      $ 127,800  
  

 

 

    

 

 

 

 

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(A) 

Included in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations for the three and six months ended March 31, 2019 and 2018.

The fair value of the collateral under our Credit Facility totaled approximately $338.3 million and $332.3 million as of March 31, 2019 and September 30, 2018, respectively.

Notes Payable

In November 2018, we completed a public debt offering of $57.5 million aggregate principal amount of 6.125% Notes due 2023 (the “2023 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of $55.4 million after deducting underwriting discounts, commissions and offering expenses borne by us. We incurred approximately $2.1 million in total underwriting discounts and offering costs related to the issuance of the 2023 Notes, which have been recorded as discounts to the principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized from issuance through November 1, 2023, the maturity date. The offering proceeds were used to pay down borrowings under our Credit Facility.

The 2023 Notes are traded under the ticker symbol “GLADD” on the Nasdaq Global Select Market. The 2023 Notes will mature on November 1, 2023, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after November 1, 2020. The 2023 Notes bear interest at a rate of 6.125% per year payable quarterly on February 1, May 1, August 1, and November 1 of each year, commencing February 1, 2019 (which equates to approximately $3.5 million per year). The 2023 Notes are recorded at the principal amount, less discounts, on our accompanying Consolidated Statements of Assets and Liabilities as of March