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 DECEMBER 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
(Address of principal executive office)   (Zip Code)

(703) 287-5800

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading

Symbol(s)

 

Name of Each Exchange

on Which Registered

Common Stock, $0.001 par value per share   GLAD   The Nasdaq Global Stock Market LLC
6.125% Notes due 2023, $25.00 par value per note   GLADD   The Nasdaq Global Stock Market LLC
5.375% Notes due 2024, $25.00 par value per note   GLADL   The Nasdaq Global Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

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 February 4, 2020 was 31,151,579.

 

 

 

 


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 December  31, 2019 and September 30, 2019

     2  
 

Consolidated Statements of Operations for the three months ended December 31, 2019 and 2018

     3  
 

Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2019 and 2018

     4  
 

Consolidated Statements of Cash Flows for the three months ended December 31, 2019 and 2018

     5  
 

Consolidated Schedules of Investments as of December  31, 2019 and September 30, 2019

     6  
 

Notes to Consolidated Financial Statements

     18  

Item 2.

 

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

     39  
 

Overview

     39  
 

Results of Operations

     43  
 

Liquidity and Capital Resources

     47  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     53  

Item 4.

 

Controls and Procedures

     53  

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     54  

Item 1A.

 

Risk Factors

     54  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     55  

Item 3.

 

Defaults Upon Senior Securities

     55  

Item 4.

 

Mine Safety Disclosures

     55  

Item 5.

 

Other Information

     55  

Item 6.

 

Exhibits

     56  

SIGNATURES

     57  

 

1


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,
2019
    September 30,
2019
 

ASSETS

    

Investments, at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $386,462 and $361,272, respectively)

   $ 373,808     $ 345,876  

Affiliate investments (Cost of $39,721 and $38,921, respectively)

     36,081       35,421  

Control investments (Cost of $28,263 and $28,259, respectively)

     19,119       21,578  

Cash and cash equivalents

     1,766       15,707  

Restricted cash and cash equivalents

     35       41  

Interest receivable, net

     2,904       2,625  

Due from administrative agent

     3,173       2,826  

Deferred financing costs, net

     679       866  

Other assets, net

     1,224       1,129  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 438,789     $ 426,069  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings, at fair value (Cost of $90,800 and $66,900, respectively)

   $ 90,984     $ 67,067  

Notes payable, net (Cost of $96,313 and $57,500, respectively)

     93,362       55,750  

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 0 and 2,070,000 shares issued and outstanding, respectively, net

     —         50,354  

Accounts payable and accrued expenses

     660       576  

Interest payable

     1,237       842  

Fees due to Adviser(A)

     870       1,452  

Fee due to Administrator(A)

     470       366  

Other liabilities

     417       332  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 188,000     $ 176,739  
  

 

 

   

 

 

 

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 31,050,954 and 30,345,923 shares issued and outstanding, respectively

   $ 31     $ 30  

Capital in excess of par value

     363,884       358,113  

Cumulative net unrealized depreciation of investments

     (25,438     (25,577

Cumulative net unrealized appreciation of other

     (184     (167

Under distributed net investment income

     47       136  

Accumulated net realized losses

     (87,551     (83,205
  

 

 

   

 

 

 

Total distributable loss

     (113,126     (108,813
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 250,789     $ 249,330  
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE

   $ 8.08     $ 8.22  
  

 

 

   

 

 

 

 

(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 December 31,  
     2019     2018  

INVESTMENT INCOME

    

Interest income

    

Non-Control/Non-Affiliate investments

   $ 9,648     $ 9,572  

Affiliate investments

     1,046       1,175  

Control investments

     422       512  

Cash and cash equivalents

     8       16  
  

 

 

   

 

 

 

Total interest income (excluding PIK interest income)

     11,124       11,275  

PIK interest income

    

Non-Control/Non-Affiliate investments

     332       337  

Affiliate investments

     —         49  

Control investments

     —         26  
  

 

 

   

 

 

 

Total PIK interest income

     332       412  

Total interest income

     11,456       11,687  

Dividend income

    

Non-Control/Non-Affiliate investments

     164       119  

Control investments

     186       —    
  

 

 

   

 

 

 

Total dividend income

     350       119  

Other income

     353       103  
  

 

 

   

 

 

 

Total investment income

     12,159       11,909  
  

 

 

   

 

 

 

EXPENSES

    

Base management fee(A)

     1,852       1,828  

Loan servicing fee(A)

     1,403       1,262  

Incentive fee(A)

     1,394       1,360  

Administration fee(A)

     371       345  

Interest expense on borrowings and notes payable

     2,537       1,898  

Dividends on mandatorily redeemable preferred stock

     9       776  

Amortization of deferred financing costs and discounts

     361       300  

Professional fees

     185       267  

Other general and administrative expenses

     346       323  
  

 

 

   

 

 

 

Expenses before credits from Adviser

     8,458       8,359  

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

     (1,403     (1,262

Credit to fees from Adviser - other(A)

     (1,313     (1,174
  

 

 

   

 

 

 

Total expenses, net of credits

     5,742       5,923  
  

 

 

   

 

 

 

NET INVESTMENT INCOME

     6,417       5,986  
  

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

    

Net realized gain (loss):

    

Non-Control/Non-Affiliate investments

     (4,434     (26,856

Affiliate investments

     —         2  

Control investments

     —         (9

Other

     (1,407     —    
  

 

 

   

 

 

 

Total net realized gain (loss)

     (5,841     (26,863

Net unrealized appreciation (depreciation):

    

Non-Control/Non-Affiliate investments

     2,742       19,707  

Affiliate investments

     (140     4,204  

Control investments

     (2,463     (6,742

Other

     (17     —    
  

 

 

   

 

 

 

Total net unrealized appreciation

     122       17,169  
  

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     (5,719     (9,694
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 698     $ (3,708
  

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

    

Net investment income

   $ 0.21     $ 0.21  
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 0.02     $ (0.13
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and Diluted

     30,513,530       28,504,715  

 

(A) 

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

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

 

3


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     2019     2018  

NET ASSETS, SEPTEMBER 30

   $ 249,330     $ 237,092  

OPERATIONS

    

Net investment income

     6,417       5,986  

Net realized gain (loss) on investments

     (4,434     (26,863

Realized gain (loss) on other

     (1,407     —    

Net unrealized appreciation (depreciation) of investments

     139       17,169  

Net unrealized depreciation (appreciation) of other

     (17     —    
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     698       (3,708
  

 

 

   

 

 

 

DISTRIBUTIONS

    

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

     (6,417     (5,986

CAPITAL TRANSACTIONS

    

Issuance of common stock

     7,315       28  

Discounts, commissions and offering costs for issuance of common stock

     (137     —    
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital transactions

     7,178       28  

NET INCREASE (DECREASE) IN NET ASSETS

     1,459       (9,666
  

 

 

   

 

 

 

NET ASSETS, DECEMBER 31

   $ 250,789     $ 227,426  
  

 

 

   

 

 

 

 

(A)

Refer to Note 9 – Distributions to Common Stockholders 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 CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended December 31,  
     2019     2018  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase (decrease) in net assets resulting from operations

   $ 698     $ (3,708

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

    

Purchase of investments

     (42,535     (59,228

Principal repayments on investments

     12,656       8,868  

Net proceeds from sale of investments

     (25     (13

Increase in investments due to PIK interest

     (328     (314

Net change in premiums, discounts and amortization

     (196     (108

Net realized loss (gain) on investments

     4,434       26,863  

Net realized loss (gain) on other

     1,407       —    

Net unrealized depreciation (appreciation) of investments

     (139     (17,169

Net unrealized appreciation (depreciation) of other

     17       —    

Changes in assets and liabilities:

    

Amortization of deferred financing fees

     361       300  

Decrease (increase) in interest receivable, net

     (279     (279

Decrease (increase) in funds due from administrative agent

     (347     670  

Decrease (increase) in other assets, net

     (123     20  

Increase (decrease) in accounts payable and accrued expenses

     84       74  

Increase (decrease) in interest payable

     395       534  

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

     (582     (36

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

     104       28  

Increase (decrease) in other liabilities

     85       91  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (24,313     (43,407
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from line of credit

     84,300       59,000  

Repayments on line of credit

     (60,400     (66,800

Redemption of preferred stock

     (51,750     —    

Proceeds from issuance of long-term debt

     38,813       57,500  

Deferred financing fees

     (1,383     (1,941

Proceeds from issuance of common stock

     7,315       28  

Discounts, commissions and offering costs for issuance of common stock

     (112     —    

Distributions paid to common stockholders

     (6,417     (5,986
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     10,366       41,801  
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS

     (13,947     (1,606

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

     15,748       2,004  
  

 

 

   

 

 

 

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

   $ 1,801     $ 398  
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 2,142     $ 1,364  
  

 

 

   

 

 

 

 

(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.

 

5


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2019

(UNAUDITED)

(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) – 149.1%

        

Secured First Lien Debt – 79.7%

        

Aerospace and Defense – 4.8%

        

Antenna Research Associates, Inc. – Term Debt (L + 10.0%, 12.0% Cash, 4.0% PIK, Due 11/2023)(E)

   $ 12,093      $ 12,093      $ 12,093  

Automobile – 0.0%

        

Meridian Rack & Pinion, Inc. (S) – Term Debt (L + 11.5%, 13.5% Cash, Due 6/2020)(E)(H)(Z)

     4,140        4,140        —    

Beverage, Food, and Tobacco – 9.6%

        

Café Zupas – Line of Credit, $4,000 available (L + 7.9%, 9.6% Cash, Due 12/2024)(C)

     —          —          —    

Café Zupas – Delayed Draw Term Loan, $5,000 available (L + 7.9%, 9.6% Cash, Due 12/2024)(C)

     —          —          —    

Café Zupas – Term Debt (L + 7.9%, 9.6% Cash, Due 12/2024)(C)

     24,000        24,000        24,000  
     

 

 

    

 

 

 
        24,000        24,000  

Buildings and Real Estate – 0.9%

        

GFRC 360, LLC – Line of Credit, $50 available (L + 8.0%, 9.8% Cash, Due 9/2020)(C)

     1,150        1,150        1,147  

GFRC 360, LLC – Term Debt (L + 8.0%, 9.8% Cash, Due 9/2020)(C)

     1,000        1,000        998  
     

 

 

    

 

 

 
        2,150        2,145  

Diversified/Conglomerate Service – 32.9%

        

DKI Ventures, LLC – Line of Credit, $2,500 available (L + 8.3%, 10.0% Cash, Due 12/2021)(C)

     —          —          —    

DKI Ventures, LLC – Delayed Draw Term Loan, $5,000 available (L + 8.3%, 10.0% Cash, Due 12/2023)(C)

     —          —          —    

DKI Ventures, LLC – Term Debt (L + 8.3%, 10.0% Cash, Due 12/2023)(C)

     5,973        5,973        5,316  

ENET Holdings, LLC – Line of Credit, $1,000 available (L + 7.3%, 9.0% Cash, Due 4/2022)(C)

     —          —          —    

ENET Holdings, LLC – Term Debt (L + 7.3%, 9.0% Cash, Due 4/2025)(C)

     29,000        29,000        28,058  

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

     —          —          —    

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

     19,625        19,625        18,545  

Travel Sentry, Inc. – Term Debt (L + 8.0%, 9.9% Cash, Due 12/2021)(C)(U)

     6,097        6,097        6,113  

Universal Survey Center, Inc. – Line of Credit, $500 available (L + 7.3%, 9.3% Cash, Due 9/2022)(C)

     500        500        500  

Universal Survey Center, Inc. – Term Debt (L + 7.3%, 9.3% Cash, Due 9/2024)(C)

     13,500        13,500        13,500  

Vision Government Solutions, Inc. – Line of Credit, $2,500 available (L + 8.8%, 10.5% Cash, Due 12/2022)(C)

     —          —          —    

Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 10.5% Cash, Due 12/2022)(C)

     10,475        10,436        10,449  
     

 

 

    

 

 

 
        85,131        82,481  

Healthcare, Education, and Childcare – 11.1%

        

EL Academies, Inc. – Line of Credit, $2,000 available (L + 8.0%, 9.8% Cash, Due 8/2020)(C)

     —          —          —    

EL Academies, Inc. – Delayed Draw Term Loan, $0 available (L + 8.0%, 9.8% Cash, Due 8/2022)(C)

     16,000        15,981        15,960  

EL Academies, Inc. – Term Debt (L + 8.0%, 9.8% Cash, Due 8/2022)(C)

     12,000        11,977        11,970  
     

 

 

    

 

 

 
        27,958        27,930  

Machinery – 2.5%

        

Arc Drilling Holdings LLC – Line of Credit, $875 available (L + 8.0%, 9.8% Cash, Due 11/2020)(C)

     125        125        125  

Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 11.3% Cash, 3.0% PIK, Due 11/2022)(C)

     5,886        5,886        5,732  

Precision International, LLC – Line of Credit, $500 available (L + 7.5%, 9.3% Cash, Due 9/2021)(C)

     —          —          —    

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

     436        436        436  
     

 

 

    

 

 

 
        6,447        6,293  

Printing and Publishing – 0.0%

        

Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 8.8% Cash, Due 2/2015)(E)(V)

     107        107        —    

Telecommunications – 17.9%

        

B+T Group Acquisition, Inc.(S) – Line of Credit, $0 available (L + 11.0%, 13.0% Cash, Due 12/2021)(C)

     1,200        1,200        1,185  

B+T Group Acquisition, Inc.(S) – Term Debt (L + 11.0%, 13.0% Cash, Due 12/2021)(C)

     6,000        6,000        5,925  

NetFortris Corp. – Term Debt (L + 9.0%, 10.8% Cash, Due 2/2021)(C)

     23,302        23,275        22,847  

XMedius America, Inc. – Term Debt (L + 9.3%, 11.0% Cash, Due 10/2022)(C)

     8,415        8,415        8,426  

XMedius Solutions Inc. – Term Debt (L + 9.3%, 11.0% Cash, Due 10/2022)(C)

     6,480        6,480        6,496  
     

 

 

    

 

 

 
        45,370        44,879  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 207,396      $ 199,821  
     

 

 

    

 

 

 

 

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

 

6


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2019

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

Secured Second Lien Debt – 56.1%

        

Automobile – 3.9%

        

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

   $ 10,000      $ 10,000      $ 9,900  

Beverage, Food, and Tobacco – 4.1%

        

8th Avenue Food & Provisions, Inc. – Term Debt (L + 7.8%, 9.5% Cash, Due 10/2026)(D)

     3,683        3,707        3,609  

The Mochi Ice Cream Company – Term Debt (L + 10.5%, 12.3% Cash, Due 12/2023)(Q)(Z)

     6,750        6,730        6,750  
     

 

 

    

 

 

 
        10,437        10,359  

Cargo Transportation – 5.2%

        

AG Transportation Holdings, LLC – Term Debt (L + 10.0%, 13.3% Cash, Due 12/2020)(C)

     13,000        13,000        13,000  

Chemicals, Plastics, and Rubber – 4.3%

        

Phoenix Aromas & Essential Oils, LLC – Term Debt (L + 9.5%, 11.3% Cash, Due 5/2024)(C)

     10,000        10,000        9,888  

Vertellus Holdings LLC – Term Debt (L + 12.0%, 13.8% Cash, Due 10/2021)(C)

     1,099        1,099        1,081  
     

 

 

    

 

 

 
        11,099        10,969  

Diversified/Conglomerate Manufacturing – 1.9%

        

Tailwind Smith Cooper Intermediate Corporation – Term Debt (L + 9.0%, 10.8% Cash, Due 5/2027)(D)

     5,000        4,761        4,675  

Diversified/Conglomerate Service – 15.5%

        

CHA Holdings, Inc. – Term Debt (L + 8.8%, 10.7% Cash, Due 4/2026)(D)(U)

     3,000        2,949        3,030  

DiscoverOrg, LLC – Term Debt (L + 8.5%, 10.3% Cash, Due 2/2027)(D)

     3,303        3,275        3,303  

Drive Chassis Holdco, LLC – Term Debt (L + 8.3%, 10.0% Cash, Due 4/2026)(D)

     5,000        4,766        4,550  

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%, 11.2% Cash, Due 5/2025)(D)(U)

     4,000        3,938        3,880  

Prophet Brand Strategy – Delayed Draw Term Loan, $5,000 available (L + 9.0%, 11.0% Cash, Due 2/2025)(C)

     —          —          —    

Prophet Brand Strategy – Term Debt (L + 9.0%, 11.0% Cash, Due 2/2025)(C)

     13,000        13,000        12,968  
     

 

 

    

 

 

 
        39,028        38,748  

Healthcare, Education, and Childcare – 2.3%

        

Medical Solutions Holdings, Inc. – Term Debt (L + 8.4%, 10.1% Cash, Due 6/2025)(D)

     3,000        2,965        2,850  

Medical Solutions Holdings, Inc. – Term Debt (L + 8.8%, 10.5% Cash, Due 6/2025)(D)

     3,000        2,941        2,940  
     

 

 

    

 

 

 
        5,906        5,790  

Home and Office Furnishings, Housewares and Durable Consumer Products – 3.9%

        

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

     10,000        10,000        9,700  

Hotels, Motels, Inns, and Gaming – 3.0%

        

Vacation Rental Pros Property Management, LLC – Term Debt (L + 10.0%, 11.8% Cash, 3.0% PIK, Due 6/2023)(C)

     7,651        7,651        7,586  

Machinery – 0.4%

        

CPM Holdings, Inc. – Term Debt (L + 8.3%, 10.0% Cash, Due 11/2026)(D)

     1,000        1,000        975  

Oil and Gas – 11.6%

        

Imperative Holdings Corporation – Term Debt (L + 10.3%, 12.3% Cash, Due 9/2022)(C)

     29,500        29,500        28,984  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 142,382      $ 140,686  
     

 

 

    

 

 

 

 

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

 

7


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2019

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

Unsecured Debt – 1.6%

       

Healthcare, education, and childcare – 1.6%

       

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

   $ 4,095     $ 4,095      $ 4,049  

Preferred Equity – 3.1%

       

Automobile – 0.0%

       

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

     1,449     $ 1,449      $ —    

Beverage, Food, and Tobacco – 0.0%

       

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

     75       75        76  

Buildings and Real Estate – 0.5%

       

GFRC 360, LLC – Preferred Stock(E)(G)

     1,000       1,025        1,320  

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 – 1.9%

       

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

     6,350       6,350        2,601  

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

     13,740       632        2,133  
    

 

 

    

 

 

 
       6,982        4,734  

Telecommunications – 0.7%

       

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

     6,130       2,024        —    

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

     7,890,860       789        1,734  
    

 

 

    

 

 

 
       2,813        1,734  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 12,844      $ 7,864  
    

 

 

    

 

 

 

Common Equity – 8.6%

       

Aerospace and Defense – 1.2%

       

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

     4,283     $ 4,283      $ 3,032  

Automobile– 0.3%

       

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

     823,333       824        862  

Beverage, Food, and Tobacco – 1.3%

       

The Mochi Ice Cream Company – Common Stock(G)(Q)(Z)

     450       450        3,000  

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

     250,000       250        185  
    

 

 

    

 

 

 
       700        3,185  

Buildings and Real Estate – 0.0%

       

GFRC 360, 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        1,527  

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

     12.0     244        759  
    

 

 

    

 

 

 
       1,244        2,286  

Chemicals, Plastics, and Rubber – 0.2%

       

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

     879,121       3,018        398  

Healthcare, Education, and Childcare – 1.9%

       

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

     21,429       2,636        —    

GSM MidCo LLC – Common Stock(E)(G)

     767       767        632  

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

     3.5     2,152        4,176  
    

 

 

    

 

 

 
       5,555        4,808  

Machinery – 0.4%

       

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

     15,000       1,500        540  

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

     33.3     —          536  
    

 

 

    

 

 

 
       1,500        1,076  

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        166  
    

 

 

    

 

 

 
       499        166  

 

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

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2019

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

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

       

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

     12,180       59        142  

Telecommunications – 0.0%

       

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

     1.5     —          —    

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

     1       1        —    
    

 

 

    

 

 

 
       1        —    

Textiles and Leather – 2.2%

       

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

     3,076,414       2,062        5,433  
    

 

 

    

 

 

 

Total Common Equity

     $ 19,745      $ 21,388  
    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     $ 386,462      $ 373,808  
    

 

 

    

 

 

 

AFFILIATE INVESTMENTS(N) – 14.4%

       

Secured First Lien Debt – 3.5%

       

Diversified/Conglomerate Manufacturing – 3.5%

       

Edge Adhesives Holdings, Inc. (S) – Line of Credit, $400 available (L + 8.0%, 10.0% Cash, Due 3/2020)(C)

   $ 800     $ 800      $ 792  

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 10.5%, 12.5% Cash, Due 2/2022)(C)

     6,200       6,200        5,983  

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 11.8%, 13.8% Cash, Due 2/2022)(C)

     2,000       2,000        1,940  
    

 

 

    

 

 

 
       9,000        8,715  
    

 

 

    

 

 

 

Total Secured First Lien Debt

     $ 9,000      $ 8,715  
    

 

 

    

 

 

 

Secured Second Lien Debt – 9.9%

       

Diversified Natural Resources, Precious Metals and Minerals – 8.4%

       

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

   $ 6,000     $ 6,000      $ 5,963  

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

     8,000       8,000        7,950  

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

     3,300       3,300        3,279  

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

     4,000       4,000        3,975  
    

 

 

    

 

 

 
       21,300        21,167  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 1.5%

       

Canopy Safety Brands, LLC – Term Debt (L + 10.5%, 12.3% Cash, Due 7/2022) (C)

     3,750       3,750        3,726  
    

 

 

    

 

 

 

Total Secured Second Lien Debt

     $ 25,050      $ 24,893  
    

 

 

    

 

 

 

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        964  

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

       

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

     500,000       500        646  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 3,816      $ 1,610  
    

 

 

    

 

 

 

Common Equity – 0.4%

       

Diversified Natural Resources, Precious Metals and Minerals – 0.3%

       

Lignetics, Inc. – Common Stock(E)(G)

     152,603     $ 1,855      $ 717  

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

       

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

     500,000       —          146  
    

 

 

    

 

 

 

Total Common Equity

     $ 1,855      $ 863  
    

 

 

    

 

 

 

Total Affiliate Investments

     $ 39,721      $ 36,081  
    

 

 

    

 

 

 

 

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

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2019

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

CONTROL INVESTMENTS(O) – 7.6%

        

Secured First Lien Debt – 2.7%

        

Diversified/Conglomerate Manufacturing – 2.1%

        

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

   $ 6,000      $ 6,000      $ 5,304  

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

     10,632        10,632        —    
     

 

 

    

 

 

 
        16,632        5,304  

Printing and Publishing – 0.6%

        

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

     1,500        1,469        1,500  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 18,101      $ 6,804  
     

 

 

    

 

 

 

Secured Second Lien Debt – 3.2%

        

Automobile– 3.2%

        

Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.3% Cash, Due 5/2026)(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 – 1.7%

        

Automobile– 0.6%

        

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

     33,321      $ 580      $ 1,563  

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        2,535  

Printing and Publishing – 0.1%

        

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

     790,000        500        152  
     

 

 

    

 

 

 

Total Common Equity

      $ 2,002      $ 4,250  
     

 

 

    

 

 

 

Total Control Investments

      $ 28,263      $ 19,119  
     

 

 

    

 

 

 

TOTAL INVESTMENTS – 171.1%

      $ 454,446      $ 429,008  
     

 

 

    

 

 

 

 

(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 $385.3 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 December 31, 2019, our investments in 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 2.5% of total investments, at fair value, as of December 31, 2019.

(B) 

Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 1.76% as of December 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.

(D) 

Fair value was based on the indicative bid price on or near December 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)

Reserved.

(J)

Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

(K)

Reserved.

(L)

There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than May 9, 2024 or two years after all outstanding leverage has matured.

(M)

Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.

(N)

Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.

(O)

Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

 

10


Table of Contents
(P)

Debt security does not have a stated 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 Financial Accounting Standards Board (“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 Global Select Market under the trading symbol “FNKO.” Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(U)

The cash interest rate on this investment was indexed to 90-day LIBOR, which was 1.91% as of December 31, 2019.

(V)

The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 4.75% as of December 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 December 31, 2019.

(Z)

Investment was exited subsequent to December 31, 2019. Refer to Note 15—Subsequent Events in the accompanying Notes to Consolidated Financial Statements for additional information.

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

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2019

(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) – 138.7%

        

Secured First Lien Debt – 65.6%

        

Aerospace and Defense – 4.8%

        

Antenna Research Associates, Inc. – Term Debt (L + 10.0%, 12.0% Cash, 4.0% PIK, Due 11/2023)(C)

   $ 12,124      $ 12,124      $ 12,033  

Automobile – 0.0%

        

Meridian Rack & Pinion, Inc. (S) – Term Debt (L + 11.5%, 13.5% Cash, Due 12/2019)(E)(H)

     4,140        4,140        112  

Buildings and Real Estate – 0.9%

        

GFRC 360, LLC – Line of Credit, $50 available (L + 8.0%, 10.0% Cash, Due 9/2020)(C)

     1,150        1,150        1,143  

GFRC 360, LLC – Term Debt (L + 8.0%, 10.0% Cash, Due 9/2020)(C)

     1,000        1,000        994  
     

 

 

    

 

 

 
        2,150        2,137  

Diversified/Conglomerate Service – 28.4%

        

DKI Ventures, LLC – Line of Credit, $2,500 available (L + 8.3%, 10.3% Cash, Due 12/2021)(C)

     —          —          —    

DKI Ventures, LLC – Delayed Draw Term Loan, $5,000 available (L + 8.3%, 10.3% Cash, Due 12/2023)(C)

     —          —          —    

DKI Ventures, LLC – Term Debt (L + 8.3%, 10.3% Cash, Due 12/2023)(C)

     6,054        6,054        5,827  

ENET Holdings, LLC – Line of Credit, $1,000 available (L + 7.3%, 9.3% Cash, Due 4/2022)(C)

     —          —          —    

ENET Holdings, LLC – Term Debt (L + 7.3%, 9.3% Cash, Due 4/2025)(C)

     29,000        29,000        28,420  

R2i Holdings, LLC – Line of Credit, $2,000 available (L + 8.0%, 10.0% Cash, Due 12/2021)(C)

     —          —          —    

R2i Holdings, LLC – Term Debt (L + 8.0%, 10.0% Cash, Due 12/2023)(C)

     19,625        19,625        18,987  

Travel Sentry, Inc. – Term Debt (L + 8.0%, 10.1% Cash, Due 12/2021)(C)(U)

     6,939        6,939        6,930  

Vision Government Solutions, Inc. – Line of Credit, $2,500 available (L + 8.8%, 10.8% Cash, Due 12/2022)(C)

     —          —          —    

Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 10.8% Cash, Due 12/2022)(C)

     10,600        10,558        10,547  
     

 

 

    

 

 

 
        72,176        70,711  

Healthcare, Education, and Childcare – 11.2%

        

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

     —          —          —    

EL Academies, Inc. – Delayed Draw Term Loan, $0 available (L + 8.8%, 10.8% Cash, Due 8/2022)(C)

     16,000        15,980        15,940  

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

     12,000        11,975        11,955  
     

 

 

    

 

 

 
        27,955        27,895  

Machinery – 2.5%

        

Arc Drilling Holdings LLC – Line of Credit, $875 available (L + 8.0%, 10.0% Cash, Due 11/2020)(C)

     125        125        125  

Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 11.5% Cash, 3.0% PIK, Due 11/2022)(C)

     5,916        5,916        5,663  

Precision International, LLC – Line of Credit, $500 available (L + 7.5%, 9.5% Cash, Due 9/2021)(C)

     —          —          —    

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

     436        436        437  
     

 

 

    

 

 

 
        6,477        6,225  

Printing and Publishing – 0.0%

        

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

     107        107        —    

Telecommunications – 17.8%

        

B+T Group Acquisition, Inc.(S) – Line of Credit, $435 available (L + 11.0%, 13.0% Cash, Due
12/2021)(C)

     765        765        759  

B+T Group Acquisition, Inc.(S) – Term Debt (L + 11.0%, 13.0% Cash, Due 12/2021)(C)

     6,000        6,000        5,955  

NetFortris Corp. – Term Debt (L + 9.0%, 11.0% Cash, Due 2/2021)(C)

     23,302        23,269        22,137  

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

     8,690        8,690        8,777  

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

     6,683        6,683        6,749  
     

 

 

    

 

 

 
        45,407        44,377  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 170,536      $ 163,490  
     

 

 

    

 

 

 

 

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, 2019

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

Secured Second Lien Debt – 59.6%

        

Automobile – 4.0%

        

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

   $ 10,000      $ 9,986      $ 9,913  

Beverage, Food, and Tobacco – 4.2%

        

8th Avenue Food & Provisions, Inc. – Term Debt (L + 7.8%, 9.8% Cash, Due 10/2026)(D)

     3,683        3,707        3,628  

The Mochi Ice Cream Company – Term Debt (L + 10.5%, 12.5% Cash, Due 12/2023)(C)

     6,750        6,729        6,843  
     

 

 

    

 

 

 
        10,436        10,471  

Cargo Transportation – 5.2%

        

AG Transportation Holdings, LLC – Term Debt (L + 10.0%, 13.3% Cash, Due 12/2020)(C)

     13,000        13,000        12,967  

Chemicals, Plastics, and Rubber – 4.4%

        

Phoenix Aromas & Essential Oils, LLC – Term Debt (L + 9.5%, 11.5% Cash, Due 5/2024)(C)

     10,000        10,000        9,838  

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

     1,099        1,099        1,085  
     

 

 

    

 

 

 
        11,099        10,923  

Diversified/Conglomerate Manufacturing – 1.9%

        

Tailwind Smith Cooper Intermediate Corporation – Term Debt (L + 9.0%, 11.0% Cash, Due 5/2027)(D)

     5,000        4,756        4,700  

Diversified/Conglomerate Service – 18.5%

        

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

     3,000        2,947        3,030  

DigiCert Holdings, Inc. – Term Debt (L + 8.0%, 10.0% Cash, Due 10/2025)(D)(AA)

     2,400        2,379        2,388  

DiscoverOrg, LLC – Term Debt (L + 8.5%, 10.5% Cash, Due 2/2027)(D)

     3,303        3,275        3,287  

Drive Chassis Holdco, LLC – Term Debt (L + 8.3%, 10.3% Cash, Due 4/2026)(D)

     5,000        4,760        4,700  

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

     11,100        11,100        10,989  

Keystone Acquisition Corp. – Term Debt (L + 9.3%, 11.3% Cash, Due 5/2025)(D)(U)

     4,000        3,936        3,880  

LDiscovery, LLC – Term Debt (L + 10.0%, 12.0% Cash, Due 12/2023)(D)

     5,000        4,858        4,938  

Prophet Brand Strategy – Delayed Draw Term Loan, $5,000 available (L + 9.5%, 11.5% Cash, Due 2/2025)(C)

     —          —          —    

Prophet Brand Strategy – Term Debt (L + 9.5%, 11.5% Cash, Due 2/2025)(C)

     13,000        13,000        13,000  
     

 

 

    

 

 

 
        46,255        46,212  

Healthcare, Education, and Childcare – 1.1%

        

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

     3,000        2,964        2,850  

New Trident Holdcorp, Inc. – Term Debt (L + 10.0%, 12.1% Cash, Due 7/2020)(E)(H)(K)(U)

     4,409        4,409        —    
     

 

 

    

 

 

 
        7,373        2,850  

Home and Office Furnishings, Housewares and Durable Consumer Products – 3.9%

        

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

     10,000        10,000        9,800  

Hotels, Motels, Inns, and Gaming – 2.9%

        

Vacation Rental Pros Property Management, LLC – Term Debt (L + 10.0%, 12.0% Cash, 3.0% PIK, Due 6/2023)(C)

     7,593        7,593        7,209  

Machinery – 0.4%

        

CPM Holdings, Inc. – Term Debt (L + 8.3%, 10.3% Cash, Due 11/2026)(D)

     1,000        1,000        990  

Oil and Gas – 11.9%

        

Imperative Holdings Corporation – Term Debt (L + 10.3%, 12.3% Cash, Due 9/2022)(C)

     30,000        30,000        29,625  

Retail Stores – 1.2%

        

United PF Holdings, LLC – Term Debt (L + 8.5%, 10.5% Cash, Due 6/2027)(D)

     3,000        2,956        2,970  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 154,454      $ 148,630  
     

 

 

    

 

 

 

 

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

 

13


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2019

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

Unsecured Debt – 1.6%

       

Healthcare, education, and childcare – 1.6%

       

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

   $ 3,993     $ 3,993      $ 3,933  

Preferred Equity – 3.3%

       

Automobile – 0.0%

       

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

     1,449     $ 1,449      $ —    

Buildings and Real Estate – 0.5%

       

GFRC 360, LLC – Preferred Stock(E)(G)

     1,000       1,025        1,273  

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 – 2.1%

       

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

     6,350       6,350        3,236  

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

     13,740       632        2,030  
    

 

 

    

 

 

 
       6,982        5,266  

Telecommunications – 0.7%

       

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

     5,503       1,799        —    

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

     7,890,860       789        1,734  
    

 

 

    

 

 

 
       2,588        1,734  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 12,544      $ 8,273  
    

 

 

    

 

 

 

Common Equity – 8.6%

       

Aerospace and Defense – 1.3%

       

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

     4,283     $ 4,283      $ 3,131  

Automobile– 0.5%

       

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

     823,333       824        1,152  

Beverage, Food, and Tobacco – 0.8%

       

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

     450       450        1,365  

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

     250,000       250        650  
    

 

 

    

 

 

 
       700        2,015  

Buildings and Real Estate – 0.0%

       

GFRC 360, 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        1,511  

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

     12.0     244        747  
    

 

 

    

 

 

 
       1,244        2,258  

Chemicals, Plastics, and Rubber – 0.2%

       

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

     879,121       3,018        525  

Healthcare, Education, and Childcare – 1.8%

       

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

     21,429       2,636        —    

GSM MidCo LLC – Common Stock(E)(G)

     767       767        777  

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

     3.5     2,152        4,060  
    

 

 

    

 

 

 
       5,555        4,837  

Machinery – 0.5%

       

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

     15,000       1,500        415  

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

     33.3     —          783  
    

 

 

    

 

 

 
       1,500        1,198  

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        160  
    

 

 

    

 

 

 
       499        160  

 

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

 

14


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2019

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

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

       

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

     12,180       59        170  

Telecommunications – 0.0%

       

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

     1.5     —          —    

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

     1       1        —    
    

 

 

    

 

 

 
       1        —    

Textiles and Leather – 2.4%

       

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

     3,076,414       2,062        6,104  
    

 

 

    

 

 

 

Total Common Equity

     $ 19,745      $ 21,550  
    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     $ 361,272      $ 345,876  
    

 

 

    

 

 

 

AFFILIATE INVESTMENTS(N) – 14.2%

       

Secured First Lien Debt – 3.2%

       

Diversified/Conglomerate Manufacturing – 3.2%

       

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 10.5%, 12.5% Cash, Due 2/2022)(C)

   $ 6,200     $ 6,200      $ 6,045  

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 11.8%, 13.8% Cash, Due 2/2022)(C)

     2,000       2,000        1,960  
    

 

 

    

 

 

 
       8,200        8,005  
    

 

 

    

 

 

 

Total Secured First Lien Debt

     $ 8,200      $ 8,005  
    

 

 

    

 

 

 

Secured Second Lien Debt – 10.0%

       

Diversified Natural Resources, Precious Metals and Minerals – 8.5%

       

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

   $ 6,000     $ 6,000      $ 5,940  

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

     8,000       8,000        7,920  

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

     3,300       3,300        3,267  

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

     4,000       4,000        3,960  
    

 

 

    

 

 

 
       21,300        21,087  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 1.5%

       

Canopy Safety Brands, LLC – Term Debt (L + 10.5%, 12.5% Cash, Due 7/2022) (C)

     3,750       3,750        3,759  
    

 

 

    

 

 

 

Total Secured Second Lien Debt

     $ 25,050      $ 24,846  
    

 

 

    

 

 

 

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 – 0.3%

       

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

     40,000       800        947  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.3%

       

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

     500,000       500        634  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 3,816      $ 1,581  
    

 

 

    

 

 

 

Common Equity – 0.4%

       

Diversified Natural Resources, Precious Metals and Minerals – 0.3%

       

Lignetics, Inc. – Common Stock(E)(G)

     152,603     $ 1,855      $ 805  

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

       

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

     500,000       —          184  
    

 

 

    

 

 

 

Total Common Equity

     $ 1,855      $ 989  
    

 

 

    

 

 

 

Total Affiliate Investments

     $ 38,921      $ 35,421  
    

 

 

    

 

 

 

 

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

 

15


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2019

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

CONTROL INVESTMENTS(O) – 8.7%

        

Secured First Lien Debt – 2.8%

        

Diversified/Conglomerate Manufacturing – 2.2%

        

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

   $ 6,000      $ 6,000      $ 5,218  

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

     10,632        10,632        —    
     

 

 

    

 

 

 
        16,632        5,218  

Printing and Publishing – 0.6%

        

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

     1,500        1,465        1,500  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 18,097      $ 6,718  
     

 

 

    

 

 

 

Secured Second Lien Debt – 3.2%

        

Automobile– 3.2%

        

Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.5% 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 – 2.7%

        

Automobile– 1.7%

        

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

     33,321      $ 580      $ 4,287  

Diversified/Conglomerate Manufacturing – 0.0%

        

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

     921,000        921        —    

Machinery – 0.9%

        

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

     750        1        2,311  

Printing and Publishing – 0.1%

        

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

     790,000        500        197  
     

 

 

    

 

 

 

Total Common Equity

      $ 2,002      $ 6,795  
     

 

 

    

 

 

 

Total Control Investments

      $ 28,259      $ 21,578  
     

 

 

    

 

 

 

TOTAL INVESTMENTS(Z) – 161.6%

      $ 428,452      $ 402,875  
     

 

 

    

 

 

 

 

(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 $369.0 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 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, 2019, our investments in Leeds, Funko, and XMedius are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 2.7% of total investments, at fair value, as of September 30, 2019.

(B) 

Unless indicated otherwise, all cash interest rates are indexed to LIBOR, which was 2.02% as of September 30, 2019. If applicable, 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.

(D) 

Fair value was based on the indicative bid price on or near September 30, 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)

Reserved.

(J)

Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

(K)

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

(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.

 

16


Table of Contents
(T)

Our investment in Funko was valued using Level 2 inputs within the ASC 820 fair value hierarchy. Our common units in Funko are convertible to class A common stock in Funko, Inc. upon 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 Global Select 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 2.09% as of September 30, 2019.

(V)

The cash interest rate on this investment was indexed to PRIME, which was 5.00% as of September 30, 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 September 30, 2019.

(Z)

Cumulative gross unrealized depreciation for federal income tax purposes is $55.6 million; cumulative gross unrealized appreciation for federal income tax purposes is $19.8 million. Cumulative net unrealized depreciation is $35.8 million, based on a tax cost of $438.6 million.

(AA)

Investment was exited subsequent to September 30, 2019.

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

 

17


Table of Contents

GLADSTONE CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DECEMBER 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 (“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 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 months ended December 31, 2019 are not necessarily indicative of results that ultimately may be achieved for the fiscal year ending September 30, 2020 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, 2019, as filed with the SEC on November 13, 2019 and amended on December 16, 2019.

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.

 

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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, Consolidated Statements of Changes in Net Assets, or Consolidated Statements of Cash Flows classifications.

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 and Reference Data, LLC (“ICE”), 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,

 

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the Valuation Team generally allocates the TEV to the portfolio company’s securities based on the facts and circumstances of the securities, which typically results in the allocation of fair value to securities based on the order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.

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

 

   

Yield Analysis — The Valuation Team generally determines the fair value of our debt investments 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 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. As of December 31, 2019, loans to Meridian Rack & Pinion, Inc. (“Meridian”) were on non-accrual status with an aggregate debt cost basis of approximately $4.1 million, or 1.0% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0, or 0.0% of the fair value of all debt investments in our portfolio. As of September 30, 2019, loans to Meridian and New Trident Holdcorp, Inc. were on non-accrual status with an aggregate debt cost basis of approximately $8.5 million, or 2.2% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $0.1 million, or 0.0% 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 December 31, 2019 and September 30, 2019, we held six and ten OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $0.2 million and $0.1 million for the three months ended December 31, 2019 and 2018, respectively. The unamortized balance of OID investments as of December 31, 2019 and September 30, 2019 totaled $0.7 million and $0.8 million, respectively. As of each of December 31, 2019 and September 30, 2019, we had four investments which had a PIK interest component. We recorded PIK interest income of $0.3 million and $0.4 million during the three months ended December 31, 2019 and 2018 respectively. We collected $0 in PIK interest in cash during each of the three months ended December 31, 2019 and 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.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents are generally cash and cash equivalents held in escrow received as part of an investment exit. Restricted cash and cash equivalents are carried at cost, which approximates fair value.

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.

 

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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 lender (our “Credit Facility”). These fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter.

We 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.

 

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NOTE 3. INVESTMENTS

Fair Value

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

 

   

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

 

   

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

 

   

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

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

As of December 31, 2019, 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 investment in Leeds Novamark Capital I, L.P. (“Leeds”), which was valued using NAV as a practical expedient. As of September 30, 2019, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko, which was valued using Level 2 inputs, and our investment in Leeds, which was valued using NAV as a practical expedient.

We transfer investments in and out of Level 1, 2, and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three months ended December 31, 2019 and 2018, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.

As of December 31, 2019 and September 30, 2019, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:

 

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

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

As of December 31, 2019:

         

Secured first lien debt

   $ 215,340     $ —        $ —       $ 215,340  

Secured second lien debt

     173,644       —          —         173,644  

Unsecured debt

     4,049       —          —         4,049  

Preferred equity

     9,474       —          —         9,474  

Common equity/equivalents

     22,325  (A)      —          142  (B)      22,183  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Investments at December 31, 2019

   $ 424,832     $ —        $ 142     $ 424,690  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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     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, 2019:

         

Secured first lien debt

   $ 178,213     $ —        $ —       $ 178,213  

Secured second lien debt

     181,541       —          —         181,541  

Unsecured debt

     3,933       —          —         3,933  

Preferred equity

     9,854       —          —         9,854  

Common equity/equivalents

     25,274  (A)      —          170  (B)      25,104  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Investments at September 30, 2019

   $ 398,815     $ —        $ 170     $ 398,645  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(A)

Excludes our investment in Leeds with a fair value of $4.2 million and $4.1 million as of December 31, 2019 and September 30, 2019, respectively. Leeds was valued using NAV 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.

The following table presents our portfolio investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy and carried at fair value as of December 31, 2019 and September 30, 2019, by caption on our accompanying Consolidated Statements of Assets and Liabilities, and by security type:

 

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

Non-Control/Non-Affiliate Investments

    

Secured first lien debt

   $ 199,821     $ 163,490  

Secured second lien debt

     140,686       148,630  

Unsecured debt

     4,049       3,933  

Preferred equity

     7,864       8,273  

Common equity/equivalents

     17,070  (A)      17,320  (B) 
  

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 369,490     $ 341,646  
  

 

 

   

 

 

 

Affiliate Investments

    

Secured first lien debt

   $ 8,715     $ 8,005  

Secured second lien debt

     24,893       24,846  

Preferred equity

     1,610       1,581  

Common equity/equivalents

     863       989  
  

 

 

   

 

 

 

Total Affiliate Investments

   $ 36,081     $ 35,421  
  

 

 

   

 

 

 

Control Investments

    

Secured first lien debt

   $ 6,804     $ 6,718  

Secured second lien debt

     8,065       8,065  

Common equity/equivalents

     4,250       6,795  
  

 

 

   

 

 

 

Total Control Investments

   $ 19,119     $ 21,578  
  

 

 

   

 

 

 

Total Investments at Fair Value Using Level 3 Inputs

   $ 424,690     $ 398,645  
  

 

 

   

 

 

 

 

(A)

Excludes our investments in Leeds and Funko with fair values of $4.2 million and $0.1 million, respectively, as of December 31, 2019. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.

(B)

Excludes our investments in Leeds and Funko with fair values of $4.1 million and $0.2 million, respectively, as of September 30, 2019. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.

 

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In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of December 31, 2019 and September 30, 2019. 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

     December 31,
2019
     September 30,
2019
     Valuation
Techniques/
Methodologies
   Unobservable
Input
  

December 31,

2019

   September 30,
2019

Secured first lien debt(A)

   $ 196,443      $ 171,383      Yield Analysis    Discount Rate    9.0% - 15.5%/11.6%    9.8% - 18.0%/12.4%
     18,897        6,830      TEV    EBITDA multiple    5.1x - 5.1x/5.1x    6.5x - 6.5x/6.5x
            EBITDA    $5,723 - $5,723/$5,723    $830 - $830/$830
            Revenue multiple    0.3x - 0.3x/0.3x    0.3x - 0.3x/0.3x
            Revenue    $6,596 - $19,291/$18,241    $6,663 - $18,978/$17,959

Secured second lien debt

     129,017        136,115      Yield Analysis    Discount Rate    11.1% - 15.1%/12.5%    11.5% - 16.8%/12.6%
     29,812        37,361      Market Quote    IBP    91.0% - 101.0%/96.2%    94.0% - 101.0%/97.3%
     14,815        8,065      TEV    EBITDA multiple    5.3x - 10.3x/7.6x    5.4x - 6.5x/5.8x
            EBITDA    $3,200 - $17,981/$9,935    $3,571 - $37,311/$15,498

Unsecured debt

     4,049        3,933      Yield Analysis    Discount Rate    12.7% - 12.7%/12.7%    12.2% - 12.2%/12.2%

Preferred and common equity / equivalents(B)

     31,657        34,958      TEV    EBITDA multiple    3.2x - 10.3x/6.1x    3.3x - 8.9x/6.4x
            EBITDA    $483 - $52,523/$14,800    $715 - $48,973/$14,853
            Revenue multiple    0.3x - 1.5x/0.8x    0.3x - 1.4x/0.8x
            Revenue    $949 - $60,323/$25,525    $1,033 - $61,584/$25,814
                 
  

 

 

    

 

 

             

Total Level 3 Investments, at Fair Value

   $ 424,690      $ 398,645              
  

 

 

    

 

 

             

 

(A)

Fair value as of December 31, 2019 includes one proprietary debt investment totaling $6.8 million, which was valued using the expected payoff amount as the unobservable input. Fair value as of September 30, 2019 includes two proprietary debt investments totaling $15.5 million, which were valued using the expected payoff amount as the unobservable input.

(B)

Fair value as of December 31, 2019 excludes our investments in Leeds and Funko with fair values of $4.2 million and $0.1 million, respectively, as of December 31, 2019. Fair value as of September 30, 2019 excludes our investments in Leeds and Funko with fair values of $4.1 million and $0.2 million, respectively, as of September 30, 2019. Leeds was valued using NAV as a practical expedient and Funko was valued using Level 2 inputs as of both December 31, 2019 and September 30, 2019.

 

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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 months ended December 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 December 31, 2019

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

Fair Value as of September 30, 2019

   $ 178,213     $ 181,541     $ 3,933     $ 9,854     $ 25,104     $ 398,645  

Total gains (losses):

 

Net realized loss(A)

     —         (4,409     —         —         —         (4,409

Net unrealized appreciation (depreciation)(B)

     (537     (132     14       (680     (2,921     (4,256

Reversal of prior period net depreciation on realization(B)

     —         4,307       —         —         —         4,307  

New investments, repayments and settlements: (C)

 

Issuances/originations

     39,403       3,058       102       300       —         42,863  

Settlements/repayments

     (1,739     (10,721     —         —         —         (12,460
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of December 31, 2019

   $ 215,340     $ 173,644     $ 4,049     $ 9,474     $ 22,183     $ 424,690  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  

Three months ended December 31, 2018

   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 loss(A)

     —         (25,634     —         (1,219     (10     (26,863

Net unrealized appreciation (depreciation)(B)

     (4,734     (1,892     (98     195       3,564       (2,965

Reversal of prior period net depreciation on realization(B)

     —         19,045       —         1,215       1       20,261  

New investments, repayments and settlements: (C)

 

Issuances/originations

     42,996       6,766       92       5,312       4,376       59,542  

Settlements/repayments

     (5,236     (3,525     —         —         —         (8,761

Net proceeds from sales

     —         —         —         4       9       13  

Transfers

     —         (1,350     —         1,350       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of December 31, 2018

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)

Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the 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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Investment Activity

Proprietary Investments

As of December 31, 2019 and September 30, 2019, we held 39 and 37 proprietary investments with an aggregate fair value of $388.1 million and $353.7 million, or 90.5% and 87.8% of the total portfolio at fair value, respectively. The following significant proprietary investment transactions occurred during the three months ended December 31, 2019:

 

   

In October 2019, we invested $14.0 million in Universal Survey Center, Inc. through secured first lien debt.

 

   

In December 2019, we invested $24.0 million in Café Zupas through secured first lien debt.

Syndicated Investments

As of December 31, 2019 and September 30, 2019, we held 12 and 16 syndicated investments with an aggregate fair value of $40.9 million and $49.2 million, or 9.5% and 12.2% of the total portfolio at fair value, respectively. The following significant syndicated investment transactions occurred during the three months ended December 31, 2019:

 

   

In October 2019, we invested an additional $3.0 million in Medical Solutions Holdings, Inc., an existing portfolio company, through secured second lien debt.

 

   

In October 2019, our investment in DigiCert Holdings, Inc. paid off at par for net proceeds of $2.4 million.

 

   

In December 2019, our investment in LDiscovery, LLC paid off at par for net proceeds of $5.0 million.

 

   

In December 2019, our investment in United PF Holdings, LLC paid off at par for net proceeds of $3.1 million. In conjunction with the payoff, we received a prepayment fee of $0.1 million.

 

   

In December 2019, we recorded a net realized loss of $4.4 million related to our investment in New Trident Holdcorp, Inc. which filed for bankruptcy protection in February 2019.

Investment Concentrations

As of December 31, 2019, our investment portfolio consisted of investments in 51 portfolio companies located in 25 states in 18 different industries, with an aggregate fair value of $429.0 million. The five largest investments at fair value as of December 31, 2019 totaled $136.3 million, or 31.8% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2019 totaling $135.5 million, or 33.6% of our total investment portfolio. As of December 31, 2019 and September 30, 2019, our average investment by obligor was $8.9 million and $8.1 million at cost, respectively.

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

 

     December 31, 2019     September 30, 2019  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 234,497        51.6   $ 215,340        50.2   $ 196,833        45.9   $ 178,213        44.2

Secured second lien debt

     175,497        38.6       173,644        40.5       187,569        43.8       181,541        45.1  

Unsecured debt

     4,190        0.9       4,049        0.9       4,088        1.0       3,933        1.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt investments

     414,184        91.1       393,033        91.6       388,490        90.7       363,687        90.3  

Preferred equity

     16,660        3.7       9,474        2.2       16,360        3.8       9,854        2.4  

Common equity/equivalents

     23,602        5.2       26,501        6.2       23,602        5.5       29,334        7.3  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity investments

     40,262        8.9       35,975        8.4       39,962        9.3       39,188        9.7  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 454,446        100.0   $ 429,008        100.0   $ 428,452        100.0   $ 402,875        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

     December 31, 2019     September 30, 2019  

Industry Classification

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

Diversified/Conglomerate Service

   $ 121,229        28.3   $ 116,923        29.0

Telecommunications

     46,613        10.9       46,111        11.4  

Healthcare, Education, and Childcare

     42,577        9.9       39,515        9.8  

Beverage, Food, and Tobacco

     37,620        8.8       12,486        3.1  

Oil and Gas

     33,884        7.9       35,051        8.7  

Diversified Natural Resources, Precious Metals, and Minerals

     22,848        5.3       22,839        5.7  

Automobile

     20,390        4.7       23,529        5.8  

Diversified/Conglomerate Manufacturing

     18,694        4.3       17,923        4.4  

Cargo Transportation

     15,286        3.6       15,225        3.8  

Aerospace and Defense

     15,125        3.5       15,164        3.8  

Chemicals, Plastics, and Rubber

     11,367        2.6       11,448        2.8  

Machinery

     10,879        2.5       10,724        2.7  

Home and Office Furnishings, Housewares, and Durable Consumer Products

     9,700        2.3       9,800        2.4  

Hotels, Motels, Inns, and Gaming

     7,586        1.8       7,209        1.8  

Textiles and Leather

     5,433        1.3       6,104        1.5  

Personal and Non-Durable Consumer Products

     4,660        1.1       4,747        1.2  

Buildings and Real Estate

     3,465        0.8       3,410        0.9  

Other, < 2.0%

     1,652        0.4       4,667        1.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 429,008        100.0   $ 402,875        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     December 31, 2019     September 30, 2019  

Location

   Fair
Value
     Percentage of
Total

Investments
    Fair
Value
     Percentage of
Total

Investments
 

South

   $ 163,150        38.0   $ 171,985        42.7

West

     154,274        36.0       118,078        29.3  

Midwest

     56,036        13.1       56,149        13.9  

Northeast

     49,052        11.4       49,914        12.4  

Canada

     6,496        1.5       6,749        1.7  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 429,008        100.0   $ 402,875        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.

Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of December 31, 2019:

 

          Amount  

For the remaining nine months ending September 30:

   2020    $ 18,765  

For the fiscal years ending September 30:

   2021      66,036  
   2022      82,080  
  

2023

     77,317  
  

2024

     70,217  
   Thereafter      100,611  
     

 

 

 
  

Total contractual repayments

   $ 415,026  
   Adjustments to cost basis of debt investments      (842
   Investments in equity securities      40,262  
     

 

 

 
  

Investments held as of December 31, 2019 at cost:

   $ 454,446  
     

 

 

 

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,

 

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based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write-off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of December 31, 2019 and September 30, 2019, we had gross receivables from portfolio companies of $0.6 million and $0.7 million, respectively. The allowance for uncollectible receivables was $15 thousand and $16 thousand as of December 31, 2019 and September 30, 2019, 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. On July 9, 2019, 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 renewal of the Advisory Agreement through August 31, 2020.

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 (including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings) during any given fiscal year pursuant to the Advisory Agreement.

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

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

 

     Three Months Ended
December 31,
 
     2019     2018  

Average total assets subject to base management fee(A)

   $ 423,314     $ 417,829  

Multiplied by prorated annual base management fee of 1.75%

     0.4375     0.4375
  

 

 

   

 

 

 

Base management fee(B)

   $ 1,852     $ 1,828  

Portfolio company fee credit

     (352     (544

Senior syndicated loan fee credit

     (121     (83
  

 

 

   

 

 

 

Net Base Management Fee

   $ 1,379     $ 1,201  
  

 

 

   

 

 

 

Loan servicing fee(B)

     1,403       1,262  

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

     (1,403     (1,262
  

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —       $ —    
  

 

 

   

 

 

 

Incentive fee(B)

     1,394       1,360  

Incentive fee credit

     (840     (547
  

 

 

   

 

 

 

Net Incentive Fee

   $ 554     $ 813  
  

 

 

   

 

 

 

Portfolio company fee credit

     (352     (544

Senior syndicated loan fee credit

     (121     (83

Incentive fee credit

     (840     (547
  

 

 

   

 

 

 

Credits to Fees From Adviser - other(B)

   $ (1,313   $ (1,174
  

 

 

   

 

 

 

 

(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 two most recently completed quarters within the respective years and adjusted appropriately for any share issuances or repurchases during the period.

(B)

Reflected 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.

 

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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) taking a 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 $15 thousand and $19 thousand for the three months ended December 31, 2019 and 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 months ended December 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 the Credit Facility 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

 

   

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 is 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 December 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 appreciation and depreciation. 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

 

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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 December 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 months ended December 31, 2019 and 2018.

Transactions with the Administrator

We have entered into the Administration Agreement with the Administrator to provide administrative services. We reimburse 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 9, 2019, 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 renewal of the Administration Agreement through August 31, 2020.

Other Transactions

Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional and irrevocable credits against the base management fee or incentive fee. Gladstone Securities received fees from portfolio companies totaling $0.3 million and $0.5 million during the three months ended December 31, 2019 and 2018, respectively.

Related Party Fees Due

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

 

     December 31, 2019      September 30, 2019  

Base management fee due to (from) Adviser

   $ (22    $ 61  

Loan servicing fee due to Adviser

     338        305  

Incentive fee due to Adviser

     554        1,086  
  

 

 

    

 

 

 

Total fees due to Adviser

     870        1,452  
  

 

 

    

 

 

 

Fee due to Administrator

     470        366  
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 1,340      $ 1,818  
  

 

 

    

 

 

 

In addition to the above fees, other operating expenses due to the Adviser as of December 31, 2019 and September 30, 2019, totaled $60 thousand and $32 thousand, respectively. In addition, net expenses payable to Gladstone Investment Corporation (for reimbursement purposes), which includes certain co-investment expenses, totaled $66 thousand and $0 as of December 31, 2019 and September 30, 2019, 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 December 31, 2019 and September 30, 2019.

 

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NOTE 5. BORROWINGS

Revolving Credit Facility

On July 10, 2019, we, through Business Loan, entered into Amendment No. 5 to our Credit Facility with KeyBank, which (i) modified the covenants to reduce our minimum asset coverage with respect to senior securities representing indebtedness from 200% to 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), (ii) amended the excess concentration limits definition to decrease the limit for non-first lien loans from 60% to 50% under certain circumstances and (iii) amended the distributions covenant to allow a distribution to be applied towards the redemption of our 6.00% Series 2024 Term Preferred Stock, par value $0.001 per share (“Series 2024 Term Preferred Stock”).

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:

 

     December 31, 2019     September 30, 2019  

Commitment amount

   $ 190,000     $ 190,000  

Borrowings outstanding, at cost

     90,800       66,900  

Availability(A)

     77,825       101,725  
     For the Three Months Ended
December 31,
 
     2019     2018  

Weighted average borrowings outstanding, at cost

   $ 88,160     $ 88,911  

Weighted average interest rate(B)

     5.4     6.1

Commitment (unused) fees incurred

   $ 190     $ 182  

 

(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 each 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 December 31, 2019 and September 30, 2019.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.

Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $205.0 million plus 50.0% of all equity and subordinated debt raised after May 1, 2015 less 50% of any equity and subordinated debt retired or redeemed after May 1, 2015, which equates to $267.3 million as of December 31, 2019, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

 

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As of December 31, 2019, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $343.5 million, asset coverage on our “senior securities representing indebtedness” of 231.1%, calculated in accordance 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 34 obligors in our Credit Facility’s borrowing base as of December 31, 2019. As of December 31, 2019, we were in compliance with all of our Credit Facility covenants.

Fair Value

We elected to apply the fair value option of ASC 825, “Financial Instruments,” specifically for the Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and the assumptions that the Valuation Team believes market participants would use, including the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of December 31, 2019 and September 30, 2019, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 2.65% per annum, plus a 0.75% unused commitment fee. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding decrease or increase, respectively, in the fair value of our Credit Facility. As of December 31, 2019 and September 30, 2019, our Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations.

The following tables present our Credit Facility carried at fair value as of December 31, 2019 and September 30, 2019, on our accompanying Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three months ended December 31, 2019 and 2018:

 

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

Credit Facility

   $ 90,984      $ 67,067  
  

 

 

    

 

 

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

 

     Three Months Ended
December 31,
 
     2019      2018  

Fair value as of September 30, 2019 and 2018, respectively

   $ 67,067      $ 110,000  

Borrowings

     84,300        59,000  

Repayments

     (60,400      (66,800

Net unrealized appreciation(A)

     17         
  

 

 

    

 

 

 

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

   $ 90,984      $ 102,200  
  

 

 

    

 

 

 

 

(A) 

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

The fair value of the collateral under our Credit Facility totaled approximately $385.3 million and $369.0 million as of December 31, 2019 and September 30, 2019, respectively.

Notes Payable

In October 2019, we completed a public debt offering of $38.8 million aggregate principal amount of 5.375% Notes due 2024 (the “2024 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of approximately $37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us.

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.

The 2024 and 2023 Notes are traded under the ticker symbols “GLADL” and “GLADD,” respectively, on the Nasdaq Global Select Market (“Nasdaq”). The 2024 Notes and 2023 Notes will mature on November 1, 2024 and November 1, 2023, respectively, 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, 2021 and November 1, 2020, respectively. The 2024 Notes and 2023 Notes bear interest at a rate of 5.375% and 6.125% per year, respectively, payable quarterly on February 1, May 1, August 1, and November 1 of each year (which equates to approximately $5.6 million per year). The 2024 Notes and 2023 Notes are recorded at the principal amount, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities.

 

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The indenture relating to the 2024 Notes and 2023 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2024 Notes and 2023 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.

The fair value, based on the last quoted closing price, of the 2023 Notes as of December 31, 2019 and September 30, 2019 was $59.7 million and $60.1 million, respectively. The fair value, based on the last quoted closing price, of the 2024 Notes as of December 31, 2019 was $39.9 million. We consider the trading price of the 2024 Notes and 2023 Notes to be a Level 1 input within the ASC 820 hierarchy.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In September 2017, we completed a public offering of approximately 2.1 million shares of our Series 2024 Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $51.8 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were approximately $49.8 million. We incurred approximately $1.9 million in total underwriting discounts and offering costs related to the issuance of the Series 2024 Term Preferred Stock, which were recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and were previously amortized from issuance through September 30, 2024, the mandatory redemption date.

The shares of our Series 2024 Term Preferred Stock were traded under the ticker symbol “GLADN” on Nasdaq as of September 30, 2019. The asset coverage on our “senior securities that are stock” as of September 30, 2019 was 238.5%, calculated in accordance with Sections 18 and 61 of the 1940 Act.

On October 2, 2019, we voluntarily redeemed all 2,070,000 outstanding shares of our Series 2024 Term Preferred Stock at a redemption price of $25.00 per share which represents the liquidation preference per share, plus accrued and unpaid dividends through October 1, 2019 in the amount of $0.004166 per share, for a total payment per share of $25.004166 and an aggregate redemption price of approximately $51.8 million. In connection with the voluntary redemption of our Series 2024 Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.4 million, which has been reflected in Realized loss on other in our accompanying Consolidated Statement of Operations and which is primarily comprised of the unamortized deferred issuance costs at the time of redemption.

We paid the following monthly dividends on our Series 2024 Term Preferred Stock for the three months ended December 31, 2018:

 

Fiscal Year

   Declaration Date      Record Date      Payment Date      Dividend per Share
of Series 2024 Term
Preferred Stock
 

2019

     October 9, 2018        October 19, 2018        October 31, 2018      $ 0.125  
     October 9, 2018        November 20, 2018        November 30, 2018        0.125  
     October 9, 2018        December 20, 2018        December 31, 2018        0.125  
           

 

 

 
        Three Months Ended December 31, 2018:      $ 0.375  
        

 

 

 

The federal income tax characteristics of dividends paid to our preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year. Estimates of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of dividends for the full year. Estimates made on a quarterly basis are updated as of each interim reporting date. The tax characterization of dividends paid to our preferred stockholders during the calendar years ended December 31, 2019 and 2018 was 100% from ordinary income.

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet. Our mandatorily redeemable preferred stock was recorded at the liquidation preference, less discounts, on our accompanying Consolidated Statements of Assets and Liabilities as of September 30, 2019. The related dividend payments to our mandatorily redeemable preferred stockholders are treated as dividend expense on our Consolidated Statements of Operations as of the ex-dividend date.

The fair value, based on the last quoted closing price, for our Series 2024 Term Preferred Stock as of September 30, 2019 was $51.8 million. We consider the trading price of our mandatorily redeemable preferred stock to be a Level 1 input within the fair value hierarchy.

NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS

Our shelf registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock. As of December 31, 2019, we had the ability to issue up to an additional $236.7 million in securities under the registration statement.

 

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Common Stock Offerings

In February 2019, we entered into an equity distribution agreement with Jefferies LLC (the “Jefferies Sales Agreement”) under which we have the ability to issue and sell, from time to time, up to an aggregate offering price of $50.0 million shares of our common stock. During the three months ended December 31, 2019, we sold 705,031 shares of our common stock under the Jefferies Sales Agreement, at a weighted-average price of $10.37 per share and raised $7.3 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $7.2 million. As of December 31, 2019, we had a remaining capacity to sell up to an additional $25.5 million of our common stock under the Jefferies Sales Agreement.

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

The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per weighted average common share for the three months ended December 31, 2019 and 2018:

 

     Three Months Ended
December 31,
 
     2019      2018  

Numerator, basic and diluted net increase (decrease) in net assets resulting from operations

   $ 698      $ (3,708

Denominator, basic and diluted weighted average common shares

     30,513,530        28,504,715  
  

 

 

    

 

 

 

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

   $ 0.02      $ (0.13
  

 

 

    

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90% of our taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“Investment Company Taxable Income”). The amount to be paid out as distributions to our stockholders is determined by our Board of Directors quarterly and is based on management’s estimate of Investment Company Taxable Income. Based on that estimate, our Board of Directors declares three monthly distributions to common stockholders each quarter.

The federal income tax characteristics of all distributions will be reported to stockholders on the IRS Form 1099 after the end of each calendar year. For calendar year ended December 31, 2019, 97.4% of distributions to common stockholders were deemed to be paid from ordinary income and 2.6% of distributions to common stockholders were deemed to be a return of capital for 1099 stockholder reporting purposes. For the calendar year ended December 31, 2018, 100% of distributions to common stockholders were deemed to be paid from ordinary income for 1099 stockholder reporting purposes.

We paid the following monthly distributions to common stockholders for the three months ended December 31, 2019 and 2018:

 

Fiscal Year

   Declaration
Date
   Record Date    Payment Date    Distribution
per Common
Share
 

2020

   October 8, 2019    October 22, 2019    October 31, 2019    $ 0.07  
   October 8, 2019    November 19, 2019    November 29, 2019      0.07  
   October 8, 2019    December 19, 2019    December 31, 2019      0.07  
           

 

 

 
      Three Months Ended December 31, 2019:    $ 0.21  
        

 

 

 

2019

   October 9, 2018    October 19, 2018    October 31, 2018    $ 0.07  
   October 9, 2018    November 20, 2018    November 30, 2018      0.07  
   October 9, 2018    December 20, 2018    December 31, 2018      0.07  
           

 

 

 
      Three Months Ended December 31, 2018:    $ 0.21  
        

 

 

 

Aggregate distributions declared and paid to our common stockholders were approximately $6.4 million and $6.0 million for the three months ended December 31, 2019 and 2018, respectively, and were declared based on estimates of Investment Company Taxable Income for the respective fiscal years. For the fiscal year ended September 30, 2019, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately $0.7 million.

 

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For the three months ended December 31, 2019 and the fiscal year ended September 30, 2019, we recorded the following adjustments for book-tax differences to reflect tax character. Results of operations, total net assets, and cash flows were not affected by these adjustments.

 

     Three Months Ended
December 31, 2019
     Year Ended
September 30, 2019
 

Undistributed net investment income

   $ (89    $ 355  

Accumulated net realized losses

     1,496        1,553  

Capital in excess of par value

     (1,407      (1,908

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operations or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of December 31, 2019 and September 30, 2019, we had no established reserves for such loss contingencies.

Escrow Holdbacks

From time to time, we enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations, as stipulated in the sales agreements. We record escrow amounts in Restricted cash and cash equivalents, if received in cash but subject to potential obligations or other contractual restrictions, or as escrow receivables in Other assets, net, if not yet received in cash, on our accompanying Consolidated Statements of Assets and Liabilities. We establish reserves and holdbacks against escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not ultimately be released or received at the end of the escrow period. There were no aggregate reserves recorded against the escrow amounts as of December 31, 2019 and September 30, 2019.

Financial Commitments and Obligations

We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans and the uncalled capital commitment as of December 31, 2019 and September 30, 2019 to be immaterial.

The following table summarizes the amounts of our unused lines of credit, delayed draw term loans and uncalled capital commitment, at cost, as of December 31, 2019 and September 30, 2019, which are not reflected as liabilities in the accompanying Consolidated Statements of Assets and Liabilities:

 

     December 31,
2019
     September 30,
2019
 

Unused line of credit commitments

   $ 16,825      $ 12,360  

Delayed draw term loans

     15,000        10,000  

Uncalled capital commitment

     843        843  
  

 

 

    

 

 

 

Total

   $ 32,668      $ 23,203  
  

 

 

    

 

 

 

 

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NOTE 11. FINANCIAL HIGHLIGHTS

 

     Three Months Ended December 31,  
     2019     2018  

Per Common Share Data(A):

    

Net asset value at beginning of period(A)

   $ 8.22     $ 8.32  
  

 

 

   

 

 

 

Income from operations(B)

    

Net investment income(B)

     0.21       0.21  

Net realized and unrealized gain (loss) on investments

     (0.14     (0.34

Net realized and unrealized loss on other

     (0.05     —    
  

 

 

   

 

 

 

Total from operations

     0.02       (0.13
  

 

 

   

 

 

 

Distributions to common stockholders from(B)(C)

    

Net investment income

     (0.21     (0.21
  

 

 

   

 

 

 

Total distributions

     (0.21     (0.21
  

 

 

   

 

 

 

Capital share transactions(B)

    

Net anti-dilutive effect of equity offering(D)

     0.05       —    
  

 

 

   

 

 

 

Total capital share transactions

     0.05       —    
  

 

 

   

 

 

 

Net asset value at end of period(A)

   $ 8.08     $ 7.98  
  

 

 

   

 

 

 

Per common share market value at beginning of period

   $ 9.75     $ 9.50  

Per common share market value at end of period

     9.93       7.30  

Total return(E)

     3.96     (21.28 )% 

Common stock outstanding at end of period(A)

     31,050,954       28,504,745  

Statement of Assets and Liabilities Data:

    

Net assets at end of period

   $ 250,789     $ 227,426  

Average net assets(F)

     249,312       234,061  

Senior securities Data:

    

Borrowings under Credit Facility, at cost

   $ 90,800     $ 102,200  

Mandatorily redeemable preferred stock

     —         51,750  

Long term debt

     96,313       57,500  

Ratios/Supplemental Data:

    

Ratio of net expenses to average net assets(G)(H)

     9.21     10.12

Ratio of net investment income to average net assets(I)

     10.30     10.23

 

(A) 

Based on actual shares outstanding at the end of the corresponding period.

(B) 

Based on weighted average basic per share data.

(C) 

The tax character of distributions is determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.

(D) 

During the three months ended December 31, 2019, the anti-dilution was a result of issuing common shares during the period at a price above the then current NAV per share.

(E)

Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, taking into account distributions reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, refer to Note 9—Distributions to Common Stockholders.

(F)

Computed using the average of the balance of net assets at the end of each month of the reporting period.

(G) 

Ratio of net expenses to average net assets is computed using total expenses, net of credits from the Adviser, to the base management, loan servicing and incentive fees.

(H)

Had we not received any voluntary, unconditional and irrevocable credits of the incentive fee due to the Adviser, the ratio of net expenses to average net assets would have been 10.56% and 11.06% for the quarters ended December 31, 2019 and 2018, respectively.

(I)

Had we not received any voluntary, unconditional and irrevocable credits of the incentive fee due to the Adviser, the ratio of net investment income to average net assets would have been 8.97% and 9.30% for the quarters ended December 31, 2019 and 2018, respectively.

 

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NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES

In accordance with the SEC’s Regulation S-X, we do not consolidate portfolio company investments. Further, in accordance with 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.

We had two unconsolidated subsidiaries, Defiance Integrated Technologies, Inc. and PIC 360, LLC, that met at least one of the significance conditions under Rule 1-02(w) of the SEC’s Regulation S-X as of or during at least one of the three month periods ended December 31, 2019 and 2018. Accordingly, summarized, comparative financial information, in aggregate, is presented below for the three months ended December 31, 2019 and 2018 for our unconsolidated significant subsidiaries.

 

     Three Months Ended
December 31,
 

Income Statement

   2019      2018  

Net sales

   $ 7,191      $ 7,982  

Gross profit

     950        1,507  

Net loss

     (127      156  

NOTE 13. SUBSEQUENT EVENTS

Portfolio Activity

In January 2020, we invested an additional $5.5 million in Lignetics, Inc., an existing portfolio company, through a combination of secured second lien debt and preferred equity.

In January 2020, we invested an additional $3.0 million in Edge Adhesives Holdings, Inc., an existing portfolio company, in the form of preferred equity.

In January 2020, we sold our investment in The Mochi Ice Cream Company, which resulted in a realized gain of approximately $2.5 million. In connection with the sale, we received net cash proceeds of approximately $9.7 million, including the repayment of our debt investment of $6.8 million at par.

In January 2020, we exited our investment in Meridian, with a fair value of $0 as of December 31, 2019 and recorded a realized loss of $5.6 million.

Distributions and Dividends

In January 2020, our Board of Directors declared the following monthly distributions to common stockholders:

 

Record Date

   Payment Date    Distribution
per Common
Share
 

January 24, 2020

   January 31, 2020    $ 0.07  

February 19, 2020

   February 28, 2020      0.07  

March 20, 2020

   March 31, 2020      0.07  
     

 

 

 
   Total for the Quarter:    $ 0.21  
     

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation (the “Adviser”), our adviser, and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “project,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets, including stock price volatility; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or Robert L. Marcotte; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and as business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”); and (12) those factors described herein, including Item 1A. “Risk Factors,” and in the “Risk Factors” sections of our Annual Report on Form 10-K (our “Annual Report”) for the fiscal year ended September 30, 2019, filed with the U.S. Securities and Exchange Commission (“SEC”) on November 13, 2019 and amended on December 16, 2019. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC from time to time, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended.

The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated.

OVERVIEW

General

We were incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the U.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of December 31, 2019, our investment portfolio was made up of approximately 91.1% debt investments and 8.9% equity investments, at cost.

 

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We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million) in the U.S. that meet certain criteria, including the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace.

We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us an exemptive order (the “Co-Investment Order”) that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment Corporation, a BDC also managed by the Adviser, and any future business development company or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. Since 2012, we have opportunistically made several co-investments with Gladstone Investment Corporation pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

We are externally managed by the Adviser, an investment adviser registered with the SEC and an affiliate of ours, pursuant to an investment advisory and management agreement. The Adviser manages our investment activities. We have also entered into an administration agreement with Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services.

Additionally, 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.

Business

Portfolio and Investment Activity

In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on the 30-day London Interbank Offered Rate (“LIBOR”)) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company, typically from an exit or sale. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called paid-in-kind (“PIK”) interest.

Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.

During the three months ended December 31, 2019, we invested $38.0 million in two new portfolio companies and extended $4.5 million of investments to existing portfolio companies. In addition, during the three months ended December 31, 2019, we exited four portfolio companies through early payoffs or a restructure. We received a total of $12.6 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits as well as principal repayments by existing portfolio companies during the three months ended December 31, 2019. This activity resulted in a net decrease in our overall portfolio by two portfolio companies to 51 and a net increase of $26.0 million in our portfolio at cost since September 30, 2019. From our initial public offering in August 2001 through December 31, 2019, we have made 538 different loans to, or investments in, 242 companies for a total of approximately $1.9 billion, before giving effect to principal repayments on investments and divestitures.

During the three months ended December 31, 2019, the following significant transactions occurred:

Proprietary Investments

 

   

In October 2019, we invested $14.0 million in Universal Survey Center, Inc. through secured first lien debt.

 

   

In December 2019, we invested $24.0 million in Café Zupas through secured first lien debt.

 

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Syndicated Investments

 

   

In October 2019, we invested an additional $3.0 million in Medical Solutions Holdings, Inc., an existing portfolio company, through secured second lien debt.

 

   

In October 2019, our investment in DigiCert Holdings, Inc. paid off at par for net proceeds of $2.4 million.

 

   

In December 2019, our investment in LDiscovery, LLC paid off at par for net proceeds of $5.0 million.

 

   

In December 2019, our investment in United PF Holdings, LLC paid off at par for net proceeds of $3.1 million. In conjunction with the payoff, we received a prepayment fee of $0.1 million.

 

   

In December 2019, we recorded a net realized loss of $4.4 million related to our investment in New Trident Holdcorp, Inc. (“New Trident”) which filed for bankruptcy protection in February 2019.

Capital Raising

We have been able to meet our capital needs through extensions of and increases to our line of credit under the Fifth Amended and Restated Credit Agreement with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and lender (as amended, our “Credit Facility”) and by accessing the capital markets in the form of public equity offerings of common and preferred stock and public debt offerings. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to January 2021, and currently have a total commitment amount of $190.0 million. We sold 705,031 and 2,765 common shares under our at-the-market program during the three months ended December 31, 2019 and 2018, respectively. In October 2019, we completed a public debt offering of $38.8 million aggregate principal amount of our 5.375% Notes due 2024 (the “2024 Notes”), inclusive of the overallotment. Additionally, we completed a public debt offering of $57.5 million aggregate principal amount of our 6.125% Notes due 2023 (the “2023 Notes”), inclusive of the overallotment in November 2018. Refer to “Liquidity and Capital Resources — Revolving Credit Facility,” “Liquidity and Capital Resources — Equity — Common Stock,” and “Liquidity and Capital Resources — Notes Payable” for further discussion.

Although we were able to access the capital markets historically and in recent years, we believe uncertain market conditions could affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity. When our common stock trades below net asset value (“NAV”) per common share, as it has done from time to time, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering.

On December 31, 2019, the closing market price of our common stock was $9.93, a 22.9% premium to our December 31, 2019 NAV per share of $8.08.

Regulatory Compliance

Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on our “senior securities representing indebtedness” and our “senior securities that are stock.”

On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the Company’s asset coverage requirements for senior securities changed from 200% to 150%, effective April 10, 2019.

As of December 31, 2019, our asset coverage on our “senior securities representing indebtedness” and our “senior securities that are stock” was 231.1%.

Recent Developments

Distributions and Dividends

In January 2020, our Board of Directors declared the following monthly distributions to common stockholders:

 

Record Date

   Payment Date    Distribution
per Common
Share
 

January 24, 2020

   January 31, 2020    $ 0.07  

February 19, 2020

   February 28, 2020      0.07  

March 20, 2020

   March 31, 2020      0.07  
     

 

 

 
   Total for the Quarter:    $ 0.21  
     

 

 

 

 

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Portfolio and Investment Activity

In January 2020, we invested an additional $5.5 million in Lignetics, Inc., an existing portfolio company, through a combination of secured second lien debt and preferred equity.

In January 2020, we invested an additional $3.0 million in Edge Adhesives Holdings, Inc., an existing portfolio company, in the form of preferred equity.

In January 2020, we sold our investment in The Mochi Ice Cream Company, which resulted in a realized gain of approximately $2.5 million. In connection with the sale, we received net cash proceeds of approximately $9.7 million, including the repayment of our debt investment of $6.8 million at par.

In January 2020, we exited our investment in Meridian Rack & Pinion, Inc., with a fair value of $0 as of December 31, 2019 and recorded a realized loss of $5.6 million.

LIBOR Transition

In general, our investments in debt securities have a term of five years, accrue interest at variable rates (based on the one-month LIBOR) and, to a lesser extent, at fixed rates. LIBOR is currently anticipated to be phased out during late 2021. LIBOR is currently expected to transition to a new standard rate, the Secured Overnight Financing Rate (“SOFR”), which will incorporate certain overnight repo market data collected from multiple data sets. To attain an equivalent one-month rate, we currently intend to adjust the SOFR to minimize the difference between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition and cannot assure you whether SOFR will become a standard rate for variable rate debt. However, we expect we will need to renegotiate certain loan documents with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. Assuming that SOFR replaces LIBOR and is appropriately adjusted to equate to one-month LIBOR, we expect that there should be minimal impact on our operations.

 

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended December 31, 2019, to the Three Months Ended December 31, 2018

 

     Three Months Ended December 31,  
     2019      2018      $ Change      % Change  

INVESTMENT INCOME

           

Interest income

   $ 11,456      $ 11,687      $ (231      (2.0 )% 

Other income

     703        222        481        216.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment income

     12,159        11,909        250        2.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

EXPENSES

           

Base management fee

     1,852        1,828        24        1.3  

Loan servicing fee

     1,403        1,262        141        11.2  

Incentive fee

     1,394        1,360        34        2.5  

Administration fee

     371        345        26        7.5  

Interest expense on borrowings and notes payable

     2,537        1,898        639        33.7  

Dividend expense on mandatorily redeemable preferred stock

     9        776        (767      (98.8

Amortization of deferred financing fees

     361        300        61        20.3  

Other expenses

     531        590        (59      (10.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses, before credits from Adviser

     8,458        8,359        99        1.2  

Credit to base management fee – loan servicing fee

     (1,403      (1,262      (141      11.2  

Credits to fees from Adviser — other

     (1,313      (1,174      (139      11.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses, net of credits

     5,742        5,923        (181      (3.1
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INVESTMENT INCOME

     6,417        5,986        431        7.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

NET REALIZED AND UNREALIZED (LOSS) GAIN

           

Net realized gain (loss) on investments and other

     (5,841      (26,863      21,022        (78.3

Net unrealized appreciation (depreciation) of investments

     139        17,169        (17,030      (99.2

Net unrealized appreciation of other

     (17