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EX-32.1 - EXHIBIT 32.1 - OHA Investment Corpv239551_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - OHA Investment Corpv239551_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - OHA Investment Corpv239551_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - OHA Investment Corpv239551_ex32-2.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011
 
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: 814-00672
 


NGP Capital Resources Company
(Exact name of registrant as specified in its charter)
 

 
Maryland
20-1371499
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
1221 McKinney Street, Suite 2975
Houston, Texas
77010
(Address of principal executive offices)
(Zip Code)

(713) 752-0062
(Registrant’s telephone number, including area code)

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  þ   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ No ¨

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

Large accelerated filer   ¨
Accelerated filer     þ
Non-accelerated filer     ¨
Smaller reporting company   ¨
   
(Do not check if smaller reporting company)

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

As of November 11, 2011, there were 21,628,202 shares of the registrant’s common stock outstanding.
 
 
 

 
 
TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION
1
Item 1.
Financial Statements.
1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
27
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
34
Item 4.
Controls and Procedures.
34
PART II – OTHER INFORMATION
35
Item 1.
Legal Proceedings.
35
Item 1A.
Risk Factors.
35
Item 6.
Exhibits.
35

 
 
 
 
 

 

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
 
    
September 30, 2011
   
December 31, 2010
 
   
(Unaudited)
       
             
Assets
           
Investments in portfolio securities at fair value
           
 Control investments - majority owned
           
 (cost: $0 and $89,502,910, respectively)
  $ 150,000     $ 70,973,316  
 Affiliate investments
               
 (cost: $36,425,265 and $34,146,328, respectively)
    13,576,684       33,064,028  
 Non-affiliate investments
               
 (cost: $130,623,421 and $114,852,057, respectively)
    128,077,749       112,025,645  
Total investments
    141,804,433       216,062,989  
Cash and cash equivalents
    80,223,340       68,456,908  
Accounts receivable and other current assets
    1,768,858       3,095,882  
Interest receivable
    623,689       2,236,122  
Prepaid assets
    992,194       1,736,732  
Total current assets
    83,608,081       75,525,644  
Total assets
  $ 225,412,514     $ 291,588,633  
                 
Liabilities and net assets
               
Current liabilities
               
Accounts payable and accrued expenses
  $ 674,333     $ 525,111  
Management and incentive fees payable
    1,337,211       1,376,032  
Dividends payable
    3,893,076       3,893,076  
Income taxes payable
    35,065       50,350  
Current portion of long-term debt
    15,000,000       -  
Total current liabilities
    20,939,685       5,844,569  
Deferred tax liabilities
    15,438       18,136  
Long-term debt, less current portion
    -       50,000,000  
Total liabilities
    20,955,123       55,862,705  
                 
Commitments and contingencies  (Note 7)
               
                 
Net assets
               
Common stock, $.001 par value, 250,000,000 shares authorized;
               
21,628,202 shares issued and outstanding
    21,628       21,628  
Paid-in capital in excess of par
    295,684,737       295,684,737  
Undistributed net investment income (loss)
    (5,876,731 )     (7,845,925 )
Undistributed net realized capital gain (loss)
    (63,213,264 )     (32,778,782 )
Net unrealized appreciation (depreciation) of portfolio securities
    (22,158,979 )     (19,355,730 )
Total net assets
    204,457,391       235,725,928  
Total liabilities and net assets
  $ 225,412,514     $ 291,588,633  
                 
Net asset value per share
  $ 9.45     $ 10.90  
 
(See accompanying notes to consolidated financial statements)
 
 
1

 
 
 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

    
For The Three Months Ended
   
For The Nine Months Ended
 
   
September 30, 2011
   
September 30, 2010
   
September 30, 2011
   
September 30, 2010
 
Investment income
                       
Interest income:
                       
Control investments - majority owned
  $ 1,438,834     $ 1,188,139     $ 8,605,178     $ 3,384,042  
Affiliate investments
    341,930       959,298       972,974       2,692,192  
Non-affiliate investments
    4,715,863       3,011,209       11,233,500       9,568,456  
Royalty income (loss), net of amortization:
                               
Control investments - majority owned
    514,835       522,473       1,194,970       1,277,258  
Non-affiliate investments
    274,574       (75,337 )     801,262       (1,038,012 )
Other income
    33,750       640,000       126,387       1,586,079  
Total investment income
    7,319,786       6,245,782       22,934,271       17,470,015  
                                 
Operating expenses
                               
Management and incentive fees
    1,337,211       1,409,553       4,262,213       4,171,952  
Professional fees
    376,086       159,960       811,152       646,936  
Insurance expense
    182,182       185,658       547,028       556,974  
Interest expense and bank fees
    376,374       339,073       1,143,051       956,254  
Other general and administrative expenses
    760,985       973,024       2,487,689       2,763,012  
Total operating expenses
    3,032,838       3,067,268       9,251,133       9,095,128  
Income tax provision (benefit), net
    17,013       15,224       34,715       51,516  
Net investment income
    4,269,935       3,163,290       13,648,423       8,323,371  
                                 
Net realized capital gain (loss) on investments
                               
Net realized capital gain (loss) on portfolio securities:
                               
Control investments - majority owned
    (32,879,825 )     -       (32,798,550 )     -  
Non-affiliate investments
    1,985,858       -       2,364,068       -  
Total net realized capital gain (loss) on investments
    (30,893,967 )     -       (30,434,482 )     -  
                                 
Net unrealized gain (loss) on investments
                               
Net increase (decrease) in unrealized appreciation
                               
(depreciation) on portfolio securities
                               
Control investments - majority owned
    27,917,683       (2,838,653 )     18,679,595       (2,925,328 )
Affiliate investments
    (228,752 )     (1,542,752 )     (21,766,280 )     (1,732,043 )
Non-affiliate investments
    (1,001,129 )     1,261,745       280,738       5,308,870  
Benefit (provision) for taxes on unrealized gain (loss)
    (100 )     20,479       2,698       (29,658 )
Total net unrealized gain (loss) on investments
    26,687,702       (3,099,181 )     (2,803,249 )     621,841  
                                 
Net increase (decrease) in net assets resulting
                               
from operations
  $ 63,670     $ 64,109     $ (19,589,308 )   $ 8,945,212  
                                 
Net increase (decrease) in net assets resulting
                               
from operations per common share
  $ -     $ -     $ (0.91 )   $ 0.42  
 
(See accompanying notes to consolidated financial statements)

 
2

 
 
 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)

   
Common Stock
   
Paid-in
Capital
in Excess
   
Undistributed
Net Investment
Income
   
Undistributed
Net Realized
Capital
   
Net Unrealized
Appreciation
(Depreciation)
of Portfolio
   
Total
 
   
Shares
   
Amount
   
of Par
   
(Loss)
   
Gain (Loss)
   
Securities
   
Net Assets
 
Balance at December 31, 2010
    21,628,202     $ 21,628     $ 295,684,737     $ (7,845,925 )   $ (32,778,782 )   $ (19,355,730 )   $ 235,725,928  
Net increase (decrease)
                                                       
in net assets resulting
                                                       
from operations
    -       -       -       13,648,423       (30,434,482 )     (2,803,249 )     (19,589,308 )
Dividends declared
    -       -       -       (11,679,229 )     -       -       (11,679,229 )
                                                         
Balance at September 30, 2011
    21,628,202     $ 21,628     $ 295,684,737     $ (5,876,731 )   $ (63,213,264 )   $ (22,158,979 )   $ 204,457,391  

(See accompanying notes to consolidated financial statements)
 
 
3

 
 
 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

    
For The Nine Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
Cash flows from operating activities
           
Net increase (decrease) in net assets resulting from operations
  $ (19,589,308 )   $ 8,945,212  
Adjustments to reconcile net increase (decrease) in net assets resulting from
               
operations to net cash provided by operating activities:
               
Payment-in-kind interest
    (6,650,072 )     (4,547,397 )
Net amortization of premiums, discounts and fees
    (2,096,619 )     8,650,115  
Net realized capital loss on portfolio securities
    30,434,482       -  
Net unrealized (appreciation) depreciation on portfolio securities
    2,805,947       (651,499 )
Net deferred income tax liabilities
    (2,698 )     -  
Effects of changes in operating assets and liabilities:
               
Accounts receivable and other current assets
    1,327,024       177,880  
Interest receivable
    1,612,433       362,249  
Prepaid assets
    744,538       893,233  
Accounts payable and accrued expenses
    110,401       (93,928 )
Payables for investment securities purchased
    -       2,856,806  
Income taxes payable
    (15,285 )     (13,484 )
Purchase of investments in portfolio securities
    (88,390,690 )     (21,318,320 )
Proceeds from the redemption of investments in portfolio securities
    138,155,508       20,296,527  
Purchase of investments in U.S. Treasury Bills
    (30,601,000 )     -  
Proceeds from the redemption of investments in U.S. Treasury Bills
    30,601,000       -  
Net cash provided by operating activities
    58,445,661       15,557,394  
                 
Cash flows from financing activities
               
Borrowings under revolving credit facilities
    110,000,000       174,905,200  
Repayments on revolving credit facilities
    (145,000,000 )     (192,405,200 )
Dividends paid
    (11,679,229 )     (11,030,383 )
Net cash used in financing activities
    (46,679,229 )     (28,530,383 )
Net increase (decrease) in cash and cash equivalents
    11,766,432       (12,972,989 )
Cash and cash equivalents, beginning of period
    68,456,908       108,288,217  
Cash and cash equivalents, end of period
  $ 80,223,340     $ 95,315,228  

(See accompanying notes to consolidated financial statements)
 
 
4

 
 
 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2011
(Unaudited)
 
Portfolio Company
 
Energy Industry Segment
 
Investment (1)
   
Principal
   
Cost
   
Fair Value (2)
Control Investments - Majority Owned (50% or more owned)
BSR Holdings, LLC (11)
 
Oil & Natural Gas
 
100% of membership interests of
        $
-
  $
-
   
 Production and Development
 
BSR Holdings, LLC
                 
                           
DeanLake Operator,
 
Oil & Natural Gas
 
Class A membership interests -
         
-
   
150,000
    LLC (11)  
 Production and
  entitled to 100%                  
    Development  
of distribution of DeanLake
                 
        Operator, LLC                  
                           
Rubicon Energy Partners,
 
Oil & Natural Gas
 
4,000 LLC Units -
                 
    LLC (11)
 
 Production and
 
50% ownership of the assets of
                 
    Development  
Rubicon Energy Partners, LLC
         
-
   
-
                           
Subtotal Control Investments - Majority Owned (50% or more owned)
        $
-
  $
150,000
                           
Affiliate Investments - (5% to 25% owned)
BioEnergy Holding, LLC (6)
 
Alternative Fuels and
 
Senior Secured Notes
  $
16,662,326
  $
15,510,855
  $
-
   
Specialty Chemicals
 
(15%, due 3/06/2015) (4)
                 
       
BioEnergy Holding Units - 11.1% of outstanding
         
1,296,771
   
-
       
units of BioEnergy Holdings, LLC
                 
       
Myriant Corporation -
0.59% of
         
418,755
   
706,132
       
outstanding common shares of Myriant
 Corporation
                 
       
Myriant Corporation Warrants (8)
         
49,238
   
49,238
                           
Bionol Clearfield, LLC (6)
 
Alternative Fuels and
 
Senior Secured Tranche C
   
4,950,000
   
4,950,000
   
-
   
Specialty Chemicals
 
2nd Lien Term Loan
                 
       
(LIBOR + 7% cash, LIBOR + 9%
                 
       
default, due 9/06/2016) (4)
                 
                           
Resaca Exploitation Inc.
 
Oil & Natural Gas
 
Senior Unsecured Term Loan
   
10,926,010
   
10,714,392
   
10,714,392
   
 Production and
 
(9.5% cash or 12% PIK,
                 
    Development  
due on 12/31/2014)
                 
       
Common Stock (1,360,972 shares) - representing
         
3,235,254
   
1,856,922
       
6.56% of outstanding
common stock of
                 
       
Resaca Exploitation Inc. (3) (9)
                 
       
Warrants (13)
         
250,000
   
250,000
                           
Subtotal Affiliate Investments - (5% to 25% owned)
            $
36,425,265
  $
13,576,684
                           
Non-affiliate Investments - (Less than 5% owned)
Anadarko Petroleum
 
Oil & Natural Gas
 
Net Profits Interest
  $
5,654,145
  $
5,680,474
  $
5,980,474
    Corporation  
 Production and
 
(Due 4/23/2032)
                 
    2007-III Drilling Fund
  Development                      
                           
ATP Oil & Gas
 
Oil & Natural Gas
 
Limited Term Royalty Interest
         
20,714,799
   
20,714,799
    Corporation - III  
 Production and
 
(12.35% annual interest, 13% IRR
                 
    Development   to pay-out)                  
                           
Black Pool Energy
 
Oil & Natural Gas
 
Senior Secured Term Loan
   
15,854,631
   
15,840,696
   
12,100,000
    Partners, LLC
 
 Production and
 
(The greater of 15% or LIBOR +
                 
    Development  
11%, due 10/24/2011) (18)
                 
       
3% Overriding Royalty Interest
         
8,324
   
              100,000
       
Warrants (10)
         
10,000
   
-
 
(See accompanying notes to consolidated financial statements)
 
5

 
 
 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2011
(Unaudited)
(continued)
 
Portfolio Company
 
Energy Industry Segment
 
Investment (1)
   
Principal
   
Cost
   
Fair Value (2)
Non-affiliate Investments - (Less than 5% owned) - Continued
                   
Castex Energy Development
 
Oil & Natural Gas
 
Senior Secured Term Loan
  $
27,500,000
  $
26,961,669
  $
26,961,669
    Fund, LLC
 
 Production and
 
(The greater of 11.5% or LIBOR +
                 
    Development  
10.5%, due 12/31/2014)
                 
       
Castex Class B Units - 5% (16)
         
50
   
50
                           
Chroma Exploration &
 
Oil & Natural Gas
 
10,930 Shares Series A Participating
         
2,221,710
   
-
    Production, Inc.
 
 Production and
 
Convertible Preferred Stock (4)
                 
    Development  
9,981 Shares Series AA Participating
         
2,089,870
   
650,000
       
Convertible Preferred Stock (4)
                 
       
8.11 Shares Common Stock
         
-
   
-
       
Warrants (5)
         
-
   
-
                           
Crestwood Holdings, LLC
 
Natural Gas
 
Senior Secured Term Loan
   
8,465,000
   
8,308,599
   
8,308,599
   
Gathering and Processing
 
(The greater of 10.5% or LIBOR +
                 
       
8.5%, due 10/01/2016)
                 
                           
Globe BG, LLC
 
Coal Production
 
Contingent earn-out related to July
   
-
   
-
   
3,400,000
       
2011 sale of royalty interests in Alden Resources (15)
                 
                           
GMX Resources, Inc. (3)
 
Oil & Natural Gas
 
Senior Convertible Notes
   
12,661,000
   
11,055,228
   
10,255,410
   
 Production and
 
(5%, due 2/1/2013)
                 
    Development                      
                           
Nighthawk Transport I, LP
 
Energy Services
 
LP Units (12)
         
-
   
-
       
Warrants (12)
         
-
   
-
                           
Pallas Contour Mining, LLC
 
Coal Mining
 
Senior Secured Term Loan
   
12,411,290
   
12,455,201
   
12,455,201
       
(14%, due 10/14/2015)
                 
                           
Powder River Acquisitions,
 
Oil & Natural Gas
 
Senior Secured Promissory Note
   
3,000,000
   
3,000,000
   
3,000,000
    LLC  
 Production and
 
(8%, due 9/30/2011) (17)
                 
    Development                      
                           
Spirit Resouces, LLC
 
Oil & Natural Gas
 
Senior Secured Term Loan
   
9,500,000
   
9,254,415
   
9,254,415
   
 Production and
 
(The greater of 12% or LIBOR + 8%,
                 
    Development  
 due 4/27/2015)
                 
       
Warrants (14)
         
25,000
   
25,000
                           
Tammany Oil & Gas, LLC
 
Oil & Natural Gas
 
Senior Secured Term Loan
   
12,882,804
   
12,872,132
   
12,872,132
   
 Production and
 
(The greater of 13% or LIBOR + 8%,
                 
    Development  
 due 9/30/2012)
                 
       
3.33% Overriding Royalty Interest
         
120,254
   
1,000,000
       
Warrants (7)
         
5,000
   
1,000,000
                           
Subtotal Non-affiliate Investments - (Less than 5% owned)
        $
130,623,421
  $
128,077,749
                           
TOTAL INVESTMENTS
                $
167,048,686
  $
141,804,433
 
(See accompanying notes to consolidated financial statements)
 
 
6

 
 
 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2011
(Unaudited)
(continued)
 
NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
 
(1)
All of our targeted investments are collateral for obligations under our Investment Facility.  See Note 4 of Notes to Consolidated Financial Statements. All investments are in entities with primary operations in the United States of America.  Percentages represent interest rates in effect at the end of the period and due dates represent the contractual maturity dates.  Warrants, common stocks, units and earn-outs are non-income producing securities, unless otherwise stated.
(2)
Our Board of Directors determines, in good faith, the fair value of our investments.  Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated.
(3)
Fair value is determined using prices with observable market inputs (Level 2 hierarchy).  See note 8 of the Notes to Consolidated Financial Statements.
(4)
Non-accrual status.
(5)
Chroma warrants expire on April 5, 2012 and provide us the right to purchase 2,462 shares of common stock at a purchase price of $75.00 per share.
(6)
BioEnergy Holdings, LLC owns 100% of Bionol Clearfield, LLC.  In July 2011, both entities filed for protection under Chapter 7 of the U.S. Bankruptcy Code.
(7)
Tammany Oil & Gas, LLC warrants expire five years after repayment of principal and interest and provide us the right to purchase approximately 10% of membership shares at the exercise price of approximately $17.61 per share.
(8)
Myriant Corporation warrants expire on August 15, 2015 and provide us the right to purchase  32,680 shares of Myriant Corporation, at a purchase price of $10.00 per share.
(9)
Resaca Exploitation, Inc. stock trades in U.S. dollars on the Alternative Investment Market of the London Stock Exchange.
(10)
Black Pool warrants expire seven years after repayment of principal and interest and provide us the right to purchase approximately 25% of membership interest at the exercise price of $0.01 per share.
(11)
Assets of this portfolio company have been sold.  The legal entity, in which we retain an equity interest, is in the process of dissolution.
(12)
Due to insufficient recoveries in the liquidation under Nighthawk's voluntary petition under Chapter 7 of the U.S. Bankruptcy Code, we recognized a realized loss of our total remaining investment in Nighthawk notes in December 2009.  We retain ownership in warrants and units in Nighthawk and have assigned no value to those securities.
(13)
Resaca Exploitation, Inc. warrants expire 10 business days following termination of the credit agreement and entitle us to purchase up to 2,420,000 shares of Resaca common stock at a purchase price of $1.92 per share.
(14)
Spirit Resources, LLC penny warrants expire five years after repayment of principal and interest and entitle us to acquire 33% of the Units of Membership Interest.
(15)
Contingent payment of up to $6.8MM is dependent upon Alden Resources’ ability to achieve certain sales volume and operating efficiency levels during the three year period ending July 2014.
(16)
Lenders were granted 10% (5% net to NGPC Asset Holdings II) of the LP interest in Castex Energy Development Fund via Class B LP units that will become effective at the earlier of maturity or a liquidity event in which the Castex Energy Development Fund assets are sold.
(17)
We issued a written notice of default on September 30, 2011 and have filed a suit against Powder River Acquisitions, LLC and an individual guarantor for failure to pay principal and interest when due.
(18)
The Term Loan to Black Pool Energy Partners matured on October 24, 2011 without repayment. We are currently negotiating with Black Pool toward a potential amendment and extension of the Term Loan.
 
(See accompanying notes to consolidated financial statements)
 
 
7

 
 
 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
 
Portfolio Company
 
Energy Industry Segment
 
Investment (1) (2) (4)
 
Principal
   
Cost
   
Fair Value (3)
 
TARGETED INVESTMENTS
                     
Control Investments - Majority Owned (50% or more owned)
             
Alden Resources, LLC (17)
 
Coal Production
 
Senior Secured
 
$
16,497,033
   
$
15,106,754
   
$
15,006,754
 
       
Multiple-Advance Term Loan - Tranche A
                       
       
(The greater of 12.00% or LIBOR +
                       
       
9.00% cash, due 1/05/2013) (18)
                       
                                 
       
Senior Secured
   
24,330,226
     
19,519,841
     
19,519,841
 
       
Multiple-Advance Term Loan - Tranche B
                       
       
(The greater of 12.00% or LIBOR +
                       
       
9.00% cash, 15.00% or LIBOR +
                       
       
12.00% PIK, due 1/05/2013) (6)
                       
                                 
       
Senior Secured
   
3,000,000
     
3,000,000
     
3,000,000
 
       
Multiple-Advance Term Loan - Revolver
                       
       
(The greater of 12.00% or LIBOR +
                       
       
9.00% cash, 15.00% or LIBOR +
                       
       
12.00% PIK, due 1/05/2013) (18)
                       
                                 
       
5.8 million Class E Units - entitled  to
           
5,800,000
     
5,800,000
 
       
 100% of distributions of Alden Resources
                       
       
until payout, 80% after payout (5)
                       
                                 
       
Royalty Interest
           
2,486,020
     
10,300,000
 
                                 
BSR Holdings, LLC
 
Oil & Natural Gas
 
100% of membership interests of
           
-
     
-
 
(15) (17)  
 Production and
 
BSR Holdings, LLC.
                       
    Development                            
                                 
DeanLake Operator, LLC (17)
 
Oil & Natural Gas
Production and Development
 
Class A membership interests - entitled to 100% of distribution of DeanLake Operator, LLC
until payout, 80% after payout (5)
           
14,050,255
     
3,500,000
 
                                 
       
Overriding Royalty Interest
           
17,622
     
50,000
 
                                 
Gatliff Services, LLC (17)
 
Coal Processing
 
Senior Secured
   
11,696,721
     
11,696,721
     
11,696,721
 
       
Multiple-Advance Term Loan
                       
       
(8.00% during construction, 12.00%
                       
       
after completion, due 9/30/2020)
                       
                                 
       
One Membership Unit - representing 100%
           
1,100,000
     
1,100,000
 
       
ownership of Gatliff Services, LLC  (5)
                       
                                 
Rubicon Energy Partners,
 
Oil & Natural Gas
 
4,000 LLC Units representing
           
-
     
-
 
LLC (17)
 
 Production and
 
50% ownership of the assets of
                       
    Development  
Rubicon Energy Partners, LLC (5)
                       
                                 
TierraMar Energy, LP (17)
 
Oil & Natural Gas
 
212,637 Class A Preferred LP Units -
           
16,710,788
     
900,000
 
   
 Production and
 
entitled to 100% of distribution of
                       
    Development  
TierraMar Energy LP
until payout, 67% after payout (5)
                       
                                 
       
Overriding Royalty Interest
           
14,909
     
100,000
 
                                 
Subtotal Control Investments - Majority Owned (50% or more owned)
         
$
89,502,910
   
$
70,973,316
 
(See accompanying notes to consolidated financial statements)
 
 
8

 
 
 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(continued)
 
Portfolio Company
 
Energy Industry Segment
 
Investment (1) (2) (4)
 
Principal
   
Cost
   
Fair Value (3)
 
TARGETED INVESTMENTS  - Continued
                     
Affiliate Investments - (5% to 25% owned)
                     
BioEnergy Holding, LLC (17)
 
Alternative Fuels and
 
Senior Secured Notes
 
$
15,485,039
   
$
14,302,570
   
$
14,302,570
 
   
Specialty Chemicals
 
(15.00%, due 3/06/2015)
                       
       
BioEnergy Holding Units - 11.1% of outstanding
           
1,296,771
     
1,296,771
 
       
units of BioEnergy Holdings, LLC (5)
                       
       
Myriant Technologies Warrants (5) (10)
           
49,238
     
49,238
 
       
Myriant Technologies Units - 1.9% of
           
418,755
     
418,755
 
       
the outstanding units of Myriant Technologies, LLC (5)
                       
                                 
Bionol Clearfield, LLC (8)
 
Alternative Fuels and
 
Senior Secured Tranche C
   
4,950,000
     
4,950,000
     
4,950,000
 
(14) (17)  
Specialty Chemicals
 
2nd Lien Term Loan
                       
       
(LIBOR + 7.00% cash, LIBOR + 9.00%
                       
       
default, due 9/06/2016) (19)
                       
                                 
Resaca Exploitation Inc.
 
Oil & Natural Gas
 
Senior Secured
   
10,000,000
     
9,893,740
     
9,893,740
 
   
 Production and Development
 
Revolving Credit Facility
                       
       
(The greater of 8.0% or LIBOR + 5.50%,
                       
       
due 7/01/2012) (17)
                       
       
Common Stock (1,345,595 shares) - representing
           
3,235,254
     
2,152,954
 
       
6.84% of outstanding common stock of
                       
       
Resaca Exploitation Inc. (5) (11) (16)
                       
                                 
Subtotal Affiliate Investments - (5% to 25% owned)
             
$
34,146,328
   
$
33,064,028
 
                                 
Non-affiliate Investments - (Less than 5% owned)
                           
                                 
Anadarko Petroleum
 
Oil & Natural Gas
 
Multiple-Advance Net Profits Interest
 
$
9,532,723
   
$
9,586,637
   
$
9,886,635
 
Corporation  
 Production and Development
 
(Due 4/23/2032)
                       
2007-III Drilling Fund (17)
                               
                                 
ATP Oil & Gas Corporation
 
Oil & Natural Gas
 
Limited Term Royalty Interest
           
6,548,318
     
6,548,318
 
(17)  
 Production and Development
 
(Dollar Denominated - 16.00% Return)
                       
                                 
Black Pool Energy
 
Oil & Natural Gas
 
Senior Secured
   
17,895,000
     
17,754,507
     
17,754,507
 
Partners, LLC (17)
 
 Production and Development
 
Multiple-Advance Term Loan
                       
       
(The greater of 15.00% or LIBOR +
                       
       
11.00% cash, due 10/24/2011)
                       
       
Overriding Royalty Interest
           
9,750
     
100,000
 
       
Warrants (5) (12)
           
10,000
     
10,000
 
                                 
Chroma Exploration &
 
Oil & Natural Gas
 
10,930 Shares Series A Participating
           
2,221,710
     
100,000
 
Production, Inc. (17)
 
 Production and Development
 
Convertible Preferred Stock (6)
                       
       
9,981 Shares Series AA Participating
           
2,089,870
     
650,000
 
       
Convertible Preferred Stock (6)
                       
       
8.11 Shares Common Stock (5)
           
-
     
-
 
       
Warrants (5) (7)
           
-
     
-
 
                                 
Crestwood Holdings, LLC
 
Natural Gas
 
Senior Secured Term Loan
   
9,000,000
     
8,836,125
     
8,836,125
 
(17)  
Gathering and Processing
 
(The greater of 10.50% or LIBOR + 8.50%,
                       
       
due 10/01/2016)
                       
                                 
Greenleaf Investments,
 
Oil & Natural Gas
 
Senior Secured
   
8,587,076
     
8,543,239
     
8,543,239
 
LLC (17)  
 Production and Development
 
Multiple-Advance Term Loan
                       
       
(The greater of 10.50% or LIBOR + 6.50%,
                       
       
due 4/30/2011)
                       
       
Overriding Royalty Interest
           
20,785
     
400,000
 
 
(See accompanying notes to consolidated financial statements)
 
 
9

 

 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(continued)

Portfolio Company
 
Energy Industry Segment
 
Investment (1) (2) (4)
 
Principal
   
Cost
   
Fair Value (3)
 
TARGETED INVESTMENTS  - Continued
                     
Non-affiliate Investments - (Less than 5% owned) - Continued
                 
GMX Resources, Inc. (16)
 
Oil & Natural Gas
 
Senior Convertible Notes
 
$
7,925,000
   
$
6,532,576
   
$
6,676,813
 
   
 Production and Development
 
(5.00%, due 2/1/2013)
                       
                                 
Nighthawk Transport I,
 
Energy Services
 
LP Units (5) (20)
           
-
     
-
 
LP (17)      
Warrants (5) (20)
           
-
     
-
 
                                 
Pallas Contour Mining,
 
Coal Mining
 
Senior Secured
   
14,411,290
     
14,459,867
     
14,459,867
 
LLC (17)      
Multiple-Advance Term Loan
                       
       
(14.00%, due 10/14/2015)
                       
                                 
Pioneer Natural Resources
 
Oil & Natural Gas
 
Senior Notes, 7.2%, due 2028
   
10,000,000
     
11,489,439
     
10,450,100
 
Co. (16)  
 Production and Development
                           
                                 
Powder River Acquisitions,
 
Oil & Natural Gas
 
Senior Secured
   
3,000,000
     
3,000,000
     
3,000,000
 
LLC (17)  
 Production and Development
 
Promissory Note
                       
       
(8.00%, due 9/30/2011)
                       
                                 
Tammany Oil & Gas,
 
Oil & Natural Gas
 
Senior Secured
   
23,607,804
     
23,590,041
     
23,590,041
 
LLC (17)  
 Production and Development
 
Multiple-Advance Term Loan
                       
       
(The greater of 13.0% or LIBOR + 8.00%,
                       
       
 due 9/30/2012)
                       
                                 
       
Overriding Royalty Interest
           
139,193
     
1,000,000
 
       
After Pay-Out Overriding Royalty Interest (5) (13)
           
10,000
     
10,000
 
       
Warrants (5) (9) (13)
           
10,000
     
10,000
 
                                 
Subtotal Non-affiliate Investments - (Less than 5% owned)
       
$
114,852,057
   
$
112,025,645
 
                                 
TOTAL INVESTMENTS
                 
$
238,501,295
   
$
216,062,989
 

(See accompanying notes to consolidated financial statements)
 
10

 
 
 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(continued)

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
 
(1)
All of our investments are collateral for obligations under our credit facility.
(2)
Percentages represent interest rates in effect at the end of the period and due dates represent the contractual maturity dates.
(3)
Our Board of Directors determines, in good faith, the fair value of our investments.
(4)
All investments are in entities with primary operations in the United States of America.
(5)
Non-income producing securities.
(6)
Non-accrual status.
(7)
Chroma warrants expire on April 5, 2012 and provide us the right to purchase 2,462 shares of common stock at a purchase price of $75.00 per share.
(8)
BioEnergy Holdings, LLC owns 100% of Bionol.
(9)
Tammany Oil & Gas, LLC warrants expire five years after repayment of principal and interest and provide us the right to purchase approximately 20% of membership shares at the exercise price of approximately $17.61 per share.
(10)
Myriant Technologies, LLC warrants expire on August 15, 2015 and provide us the right to purchase 32,680 units, representing membership interests of Myriant Technologies, LLC, at the purchase price of $10.00 per unit.
(11)
Resaca stock trades on the Alternative Investment Market of the London Stock Exchange.  On April 1, 2010, it began trading in U.S. Dollars.
(12)
Black Pool warrants expire seven years after repayment of principal and interest and provide us the right to purchase approximately 25% of membership interest at the exercise price of $0.01 per unit.
(13)
Tammany Oil & Gas, LLC retains the right to repurchase the after pay-out ORRI and 10% warrants for $750,000 on or before March 31, 2011 or for $1,250,000 on or before September 30, 2011.
(14)
We issued a forbearance agreement to Bionol on June 16, 2010 due to a default event.
(15)
Oil and gas assets owned by BSR Holdings, LLC were sold on October 13, 2010.
(16)
Investments are level 2 securities hierarchy.
(17)
Investments are level 3 securities hierarchy.
(18)
Alden Resources, LLC did not pay December 31, 2010 interest on its Tranche A Term Note or Working Capital Revolver until February 10, 2011.
(19)
Bionol has not paid scheduled interest payments since March 10, 2010 due to a default event involving a Bionol customer, as per the terms of our credit agreement with Bionol.  Bionol and the customer are currently in arbitration and, as of December 31, 2010, we expected Bionol to prevail and pay all interest due.
(20)
Due to insufficient recoveries in the liquidation under Nighthawk's voluntary petition under Chapter 7 of the United States Bankruptcy Code, we recognized a realized loss of our total remaining investment in Nighthawk notes in December 2009.  We retain ownership in warrants and units in Nighthawk and have assigned no value to that interest.
 
(See accompanying notes to consolidated financial statements)
 
 
11

 
 
 NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED FINANCIAL HIGHLIGHTS
(Unaudited)

    
For The Nine Months Ended
 
Per Share Data  (1)
 
September 30, 2011
   
September 30, 2010
 
Net asset value, beginning of period
  $ 10.90     $ 11.10  
Net investment income
    0.63       0.38  
Net realized and unrealized gain (loss)
               
on portfolio securities (2)
    (1.54 )     0.04  
Net increase (decrease) in net assets
               
resulting from operations
    (0.91 )     0.42  
Dividends declared
    (0.54 )     (0.51 )
Net asset value, end of period
  $ 9.45     $ 11.01  
                 
Market value, beginning of period
  $ 9.20     $ 8.13  
Market value, end of period
  $ 6.54     $ 9.06  
Market value return  (3)
    (24.05 %)     18.32 %
Net asset value return (3)
    (7.37 %)     5.31 %
                 
Senior Securities Data
               
Total borrowings (in thousands)
  $ 15,000     $ 50,000  
Asset coverage ratio (4) (5)
    1503 %     602 %
Asset coverage per unit (5)
  $ 15,027     $ 6,019  
                 
Ratios and Supplemental Data
               
($ and shares in thousands)
               
Net assets, end of period
  $ 204,457     $ 238,090  
Average net assets
  $ 220,092     $ 239,133  
Common shares outstanding end of period
    21,628       21,628  
Net investment income/average net assets (6)
    8.29 %     4.65 %
Portfolio turnover rate
    76.60 %     8.49 %
Total operating expenses/average net assets (6)
    5.62 %     5.09 %
                 
Additional ratios
               
Total operating expenses less management and
               
  incentive fees and interest expense/average net assets (6)
    2.34 %     2.22 %
Total operating expenses less management
               
   and incentive fees/average net assets (6)
    3.03 %     2.75 %
Net increase (decrease) in net assets resulting from
               
   operations/average net assets (6)
    (11.90 %)     5.00 %
 
(1) 
Per Share Data is based on weighted average number of common shares outstanding for the period.
(2) 
Calculated as a balancing amount necessary to reconcile the change in net assets value per share with other per share information presented.  This amount may not agree with the aggregate gains and losses for the period because the difference in the net asset value at the beginning and end of the period may not equal the per share changes of the line items disclosed.
(3) 
Return calculations assume reinvestment of dividends and are not annualized.
(4) 
As a business development company, we are generally required to maintain a ratio of at least 200% of total assets, less all liabilities and indebtedness not represented by senior securities, to total borrowings and guaranty commitments.                                                                                                     
(5) 
Asset coverage ratio is the ratio of the carrying value of our total assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities represented indebtedness (including interest payable and guarantees).  Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness.                                                                                                     
(6) 
Annualized.                                                                                                     
 
(See accompanying notes to consolidated financial statements)
 
 
12

 

 NGP CAPITAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

Note 1:
Organization

These Consolidated Financial Statements present the financial position, results of operations and cash flows of NGP Capital Resources Company and its consolidated subsidiaries.  The terms “we,” “us,” “our” and “NGPC” refer to NGP Capital Resources Company and its consolidated subsidiaries. We are a financial services company organized in July 2004 as a Maryland corporation to invest primarily in small and mid-size private energy companies. Our investment objective is to generate both current income and capital appreciation primarily through debt investments with certain equity components. We are a closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, or the 1940 Act. In addition, for federal income tax purposes we operate so as to be treated as a regulated investment company, which we refer to as a RIC, under the Internal Revenue Code of 1986, as amended, or the Code. We have several direct and indirect subsidiaries that are single member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to us in accordance with specific rules prescribed for a company operating as a RIC.  We consolidate the financial results of our wholly-owned subsidiaries for financial reporting purposes, and we do not consolidate the financial results of our portfolio companies.

Our external manager, NGP Investment Advisor, LP, or our Manager, conducts our operations pursuant to an investment advisory agreement. NGP Energy Capital Management, LLC, or NGP, and NGP Administration, LLC, or our Administrator, own our Manager.

Note 2:
Basis of Presentation
 
These interim unaudited consolidated financial statements include the accounts of NGPC and its subsidiaries.  We eliminate all significant intercompany accounts and transactions.  In accordance with Article 6 of Regulation S-X of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, we do not consolidate the financial results of our portfolio companies, including those in which we have a controlling interest.

We prepare the interim consolidated financial statements, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC. We omit certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, pursuant to such rules and regulations.  We believe we include all adjustments, which are of a normal recurring nature, so that these financial statements fairly present our financial position, results of operations and cash flows.  Interim results are not necessarily indicative of results for a full year.  You should read these unaudited consolidated financial statements in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Preparing interim consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes to the consolidated financial statements.  Although we believe our estimates and assumptions are reasonable, actual results could differ from these estimates.
 
 
13

 

Dividends

We record dividends to stockholders on the ex-dividend date.  We currently intend that our distributions each year will be sufficient to maintain our status as a RIC for federal income tax purposes and to eliminate federal excise tax liability.  We currently intend to make distributions to stockholders on a quarterly basis of substantially all of our net taxable income.  We also intend to make distributions of net realized capital gains, if any, at least annually.  However, we may in the future decide to retain such capital gains for investment and designate such retained dividends as a deemed distribution.  Each quarter, our Manager estimates our annual taxable earnings.  The Board of Directors considers this estimate and determines the distribution amount, if any.  We generally declare our dividends each quarter and pay them shortly thereafter.

The following table summarizes our recent distribution history:

Declaration Date
 
Amount
 
Record Date
 
Payment Date
March 10, 2010
 
$
0.17
 
March 31, 2010
 
April 9, 2010
June 15, 2010
 
$
0.17
 
June 30, 2010
 
July 9, 2010
September 14, 2010
 
$
0.17
 
September 30, 2010
 
October 8, 2010
December 14, 2010
 
$
0.18
 
December 31, 2010
 
January 7, 2011
March 9, 2011
 
$
0.18
 
March 31, 2011
 
April 8, 2011
June 14, 2011
 
$
0.18
 
June 30, 2011
 
July 8, 2011
September 13, 2011
 
$
0.18
 
September 30, 2011
 
October 10, 2011
 
Note 3:
Revisions of Previously Issued Financial Statements
 
In the third quarter of 2011, we corrected our method of categorizing income tax provision (benefit) among the income categories on our consolidated statements of operations (namely, net investment income, realized gains (losses) on investments and unrealized gains (losses) on investments) to appropriately reflect the income tax consequences among the income categories.    The change in methods had no impact on the total income tax provision (benefit) or on net increase (decrease) in net assets from operations or net asset value for any period.  However, the appropriate categorization method does result in immaterial changes to previously reported amounts for net investment income, net realized gain (loss) on investments and net unrealized gain (loss) on investments, because the amounts of income tax provision (benefit) applicable to each category are different under the new method.  In addition, the changes also impact the ratios of net investment income/average net assets and certain after-tax per share amounts.

We assessed the materiality of these revisions on each of the periods affected and concluded that none of the revisions were material to any previously issued financial statements.  Given that the effect is not material, previously issued financial statements will be revised for these items the next time such financial statements are presented in SEC filings.

The following tables set forth the line items affected by the revisions on the statements of operations and financial highlights for each of the three-month periods ended September 30, 2010, June 30, 2011 and 2010, and March 31, 2011 and 2010, for the nine-month period ended September 30, 2010, for each of the six-month periods ended June 20, 2011 and 2010, and for each of the years ended December 31, 2010, 2009 and 2008.  The change had no impact on any periods prior to 2008.
 
      Six Months Ended June 30, 2011       Three Months Ended June 30, 2011       Three Months Ended March 31, 2011  
   
As Previously Reported
   
Revisions
   
As Revised
   
As Previously Reported
   
Revisions
   
As Revised
   
As Previously Reported
   
Revisions
   
As Revised
 
Net investment income before income taxes
  $ 9,396,190     $ -     $ 9,396,190     $ 5,695,556     $ -     $ 5,695,556     $ 3,700,634     $ -     $ 3,700,634  
Benefit (provision) for income taxes
    (1,998,250 )     1,980,548       (17,702 )     (1,295,534 )     1,287,617       (7,917 )     (702,716 )     692,931       (9,785 )
Net investment income
    7,397,940       1,980,548       9,378,488       4,400,022       1,287,617       5,687,639       2,997,918       692,931       3,690,849  
                                                                         
Net realized gain (loss) on portfolio securities
    459,485       -       459,485       984,571       -       984,571       (525,086 )     -       (525,086 )
Benefit (provision) for income taxes
    64       (64 )     -       (223 )     223       -       287       (287 )     -  
Total net realized gain (loss) on investments
    459,549       (64 )     459,485       984,348       223       984,571       (524,799 )     (287 )     (525,086 )
                                                                         
Net increase (decrease) in unrealized appreciation (depreciation) on portfolio securities
    (29,493,749 )     -       (29,493,749 )     (23,067,262 )     -       (23,067,262 )     (6,426,487 )     -       (6,426,487 )
Benefit (provision) for taxes on unrealized gain (loss)
    1,983,282       (1,980,484 )     2,798       1,289,139       (1,287,840 )     1,299       694,143       (692,644 )     1,499  
Total net unrealized gain (loss) on investments
    (27,510,467 )     (1,980,484 )     (29,490,951 )     (21,778,123 )     (1,287,840 )     (23,065,963 )     (5,732,344 )     (692,644 )     (6,424,988 )
                                                                         
Net increase (decrease) in net assets resulting from operations
  $ (19,652,978 )   $ -     $ (19,652,978 )   $ (16,393,753 )   $ -     $ (16,393,753 )   $ (3,259,225 )   $ -     $ (3,259,225 )
                                                                         
Per share data:
                                                                       
  Net investment income
  $ 0.34     $ 0.09     $ 0.43     $ 0.20     $ 0.06     $ 0.26     $ 0.14     $ 0.03     $ 0.17  
  Net realized gain (loss) on investments
    0.02       (0.00 )     0.02       0.05       0.00       0.05       (0.02 )     (0.00 )     (0.02 )
  Net unrealized gain (loss) on investments
    (1.27 )     (0.09 )     (1.36 )     (1.01 )     (0.06 )     (1.07 )     (0.27 )     (0.03 )     (0.30 )
  Net increase (decrease) in net assets resulting from operations
  $ (0.91 )   $ -     $ (0.91 )   $ (0.76 )   $ -     $ (0.76 )   $ (0.15 )   $ -     $ (0.15 )
                                                                         
Average net assets
    222,006,363               222,006,363                               232,149,778               232,149,778  
Net investment income / average net assets (annualized) (1)
    6.72 %             8.52 %                             5.24 %             6.45 %
 
 
(1)
Information is only required to be presented on a year to date basis.  Accordingly, three-month data is not presented.
 
 
14

 
 
       Nine Months Ended September 30, 2010       Six Months Ended June 30, 2010       Three Months Ended March 31, 2010  
   
As Previously Reported
   
Revisions
   
As Revised
   
As Previously Reported
   
Revisions
   
As Revised
   
As Previously Reported
   
Revisions
   
As Revised
 
Net investment income before income taxes
  $ 8,374,887     $ -     $ 8,374,887     $ 5,196,373     $ -     $ 5,196,373     $ 2,144,253     $ -     $ 2,144,253  
Benefit (provision) for income taxes
    (298,709 )     247,193       (51,516 )     509,570       (545,862 )     (36,292 )     287,074       (302,300 )     (15,226 )
Net investment income
    8,076,178       247,193       8,323,371       5,705,943       (545,862 )     5,160,081       2,431,327       (302,300 )     2,129,027  
                                                                         
Net realized gain on portfolio securities
    -       -       -       -       -       -       -       -       -  
Benefit (provision) for income taxes
    (110,492 )     110,492       -       (18,613 )     18,613       -       (9,151 )     9,151       -  
Total net realized gain (loss) on investments
    (110,492 )     110,492       -       (18,613 )     18,613       -       (9,151 )     9,151       -  
                                                                         
Net increase (decrease) in unrealized appreciation (depreciation) on portfolio securities
    651,499       -       651,499       3,771,159       -       3,771,159       2,879,209       -       2,879,209  
Benefit (provision) for taxes on unrealized gain (loss)
    328,027       (357,685 )     (29,658 )     (577,386 )     527,249       (50,137 )     (293,149 )     293,149       -  
Total net unrealized gain (loss) on investments
    979,526       (357,685 )     621,841       3,193,773       527,249       3,721,022       2,586,060       293,149       2,879,209  
                                                                         
Net increase in net assets resulting from operations
  $ 8,945,212     $ -     $ 8,945,212     $ 8,881,103     $ -     $ 8,881,103     $ 5,008,236     $ -     $ 5,008,236  
                                                                         
Per share data:
                                                                       
  Net investment income
  $ 0.37     $ 0.01     $ 0.38     $ 0.26     $ (0.02 )   $ 0.24     $ 0.11     $ (0.01 )   $ 0.10  
  Net realized gain (loss) on investments
    (0.01 )     0.01       -       (0.00 )     0.00       -       (0.00 )     0.00       -  
  Net unrealized gain (loss) on investments
    0.06       (0.02 )     0.04       0.16       0.02       0.18       0.13       0.01       0.14  
  Net increase in net assets resulting from operations
  $ 0.42     $ -     $ 0.42     $ 0.42     $ -     $ 0.42     $ 0.24     $ -     $ 0.24  
                                                                         
Average net assets
    239,132,963               239,132,963       240,939,305               240,939,305       240,841,269               240,841,269  
Net investment income / average net assets (annualized) (1)
    4.52 %             4.65 %     4.78 %             4.32 %     4.09 %             3.59 %
 
      Three Months Ended September 30, 2010       Three Months Ended June 30, 2010  
   
As Previously Reported
   
Revisions
   
As Revised
   
As Previously Reported
   
Revisions
   
As Revised
 
Net investment income before income taxes
  $ 3,178,514     $ -     $ 3,178,514     $ 3,052,120     $ -     $ 3,052,120  
Benefit (provision) for income taxes
    (808,279 )     793,055       (15,224 )     222,496       (243,562 )     (21,066 )
Net investment income
    2,370,235       793,055       3,163,290       3,274,616       (243,562 )     3,031,054  
                                                 
Net realized gain on portfolio securities
    -       -       -       -       -       -  
Benefit (provision) for income taxes
    (91,879 )     91,879       -       (9,462 )     9,462       -  
Total net realized gain (loss) on investments
    (91,879 )     91,879       -       (9,462 )     9,462       -  
                                                 
Net increase (decrease) in unrealized appreciation (depreciation) on portfolio securities
    (3,119,660 )     -       (3,119,660 )     891,950       -       891,950  
Benefit (provision) for taxes on unrealized gain (loss)
    905,413       (884,934 )     20,479       (284,237 )     234,100       (50,137 )
Total net unrealized gain (loss) on investments
    (2,214,247 )     (884,934 )     (3,099,181 )     607,713       234,100       841,813  
                                                 
Net increase in net assets resulting from operations
  $ 64,109     $ -     $ 64,109     $ 3,872,867     $ -     $ 3,872,867  
                                                 
Per share data:
                                               
  Net investment income
  $ 0.11     $ 0.04     $ 0.15     $ 0.15     $ (0.01 )   $ 0.14  
  Net realized gain (loss) on investments
    (0.00 )     0.00       -       (0.00 )     0.00       -  
  Net unrealized gain (loss) on investments
    (0.11 )     (0.04 )     (0.15 )     0.03       0.01       0.04  
  Net increase in net assets resulting from operations
  $ 0.00     $ (0.00 )   $ 0.00     $ 0.18     $ -     $ 0.18  
 
 
(1)
Information is only required to be presented on a year to date basis.  Accordingly, three-month data is not presented.
 
 
15

 
 
      Year Ended December 31, 2010       Year Ended December 31, 2009       Year Ended December 31, 2008  
   
As Previously Reported
   
Revisions
   
As Revised
   
As Previously Reported
   
Revisions
   
As Revised
   
As Previously Reported
   
Revisions
   
As Revised
 
Net investment income before income taxes
  $ 11,494,196     $ -     $ 11,494,196     $ 9,919,646     $ -     $ 9,919,646     $ 18,646,536     $ -     $ 18,646,536  
Benefit (provision) for income taxes
    (252,066 )     197,631       (54,435 )     (19,347 )     (171,910 )     (191,257 )     (390,195 )     390,195       -  
Net investment income
    11,242,130       197,631       11,439,761       9,900,299       (171,910 )     9,728,389       18,256,341       390,195       18,646,536  
                                                                         
Net realized gain (loss) on portfolio securities
    (33,275,372 )     -       (33,275,372 )     (14,328,947 )     -       (14,328,947 )     19,251,090       -       19,251,090  
Benefit (provision) for income taxes
    (107,736 )     107,736       -       110,493       (110,493 )     -       (4,517,443 )     1,481,775       (3,035,668 )
Total net realized gain (loss) on investments
    (33,383,108 )     107,736       (33,275,372 )     (14,218,454 )     (110,493 )     (14,328,947 )     14,733,647       1,481,775       16,215,422  
                                                                         
Net increase (decrease) in unrealized appreciation (depreciation) on portfolio securities
    31,176,641       -       31,176,641       (5,614,178 )     -       (5,614,178 )     (51,605,789 )     -       (51,605,789 )
Benefit (provision) for taxes on unrealized gain (loss)
    1,438,176       (305,367 )     1,132,809       1,113,329       282,403       1,395,732       5,196,929       (1,871,970 )     3,324,959  
Total net unrealized gain (loss) on investments
    32,614,817       (305,367 )     32,309,450       (4,500,849 )     282,403       (4,218,446 )     (46,408,860 )     (1,871,970 )     (48,280,830 )
                                                                         
Net increase (decrease) in net assets resulting from operations
  $ 10,473,839     $ -     $ 10,473,839     $ (8,819,004 )   $ -     $ (8,819,004 )   $ (13,418,872 )   $ -     $ (13,418,872 )
                                                                         
Per share data:
                                                                       
  Net investment income
  $ 0.52     $ 0.01     $ 0.53     $ 0.46     $ (0.01 )   $ 0.45     $ 0.84     $ 0.02     $ 0.86  
  Net realized gain (loss) on investments
    (1.54 )     0.00       (1.54 )     (0.66 )     0.00       (0.66 )     0.68       0.07       0.75  
  Net unrealized gain (loss) on investments
    1.51       (0.01 )     1.50       (0.21 )     0.01       (0.20 )     (2.12 )     (0.09 )     (2.21 )
  Net increase (decrease) in net assets resulting from operations
  $ 0.49     $ -     $ 0.49     $ (0.41 )   $ -     $ (0.41 )   $ (0.60 )   $ -     $ (0.60 )
                                                                         
Average net assets
    237,950,738               237,950,738       251,506,075               251,506,075       255,126,272               255,126,272  
Net investment income / average net assets (1)
    4.72 %             4.81 %     3.94 %             3.87 %     7.16 %             7.31 %
 
 
(1)
Information is only required to be presented on a year to date basis.  Accordingly, three-month data is not presented.
 
Note 4:
Credit Facilities and Borrowings

We have a $67.5 million Revolving Credit Agreement, or the Investment Facility.  The total amount outstanding under the Investment Facility was $15.0 million and $50.0 million as of September 30, 2011 and December 31, 2010, respectively.  Substantially all of our assets except our investments in U.S. Treasury Bills are collateral for the obligations under the Investment Facility.  The Investment Facility matures on August 31, 2012, and bears interest, at our option, at either (i) LIBOR plus 425 to 575 basis points, or (ii) the base rate plus 325 to 475 basis points, both based on our amounts outstanding.  As of September 30, 2011, the interest rate on our outstanding balance of $15.0 million was 7.0% (Prime plus 375 basis points).  We repaid the entire $15.0 million balance in October 2011.  As of September 30, 2011, we had a letter of credit outstanding of $2.9 million, and the amount available to us for borrowing under the Investment Facility was $49.6 million.

On March 31, 2011, we entered into a $30.0 million Treasury Secured Revolving Credit Agreement, or the Treasury Facility.  Our investments in U.S. Treasury Bills secure our borrowings under the Treasury Facility.  Proceeds from the Treasury Facility facilitate the growth of our investment portfolio and provide flexibility in the sizing of our portfolio investments.  The Treasury Facility has a 364-day term and bears interest, at our option, at either (i) LIBOR plus 50 basis points or (ii) the base rate.  We have the right at any time to prepay the loans, in whole or in part, without premium or penalty.  As of September 30, 2011, we had no outstanding indebtedness under the Treasury Facility and the entire $30.0 million was available.

The Investment Facility and Treasury Facility contain affirmative and reporting covenants and certain financial ratio and restrictive covenants that apply to our subsidiaries and us.  We complied with these covenants as of September 30, 2011 and had no events of default under either facility.  The most restrictive covenants are:

 
·
maintaining a ratio of net asset value to consolidated total indebtedness (excluding net hedging liabilities) of not less than 2.25:1.0,
 
·
maintaining a ratio of net asset value to consolidated total indebtedness (including net hedging liabilities) of not less than 2.0:1.0,
 
·
maintaining a ratio of EBITDA (excluding revenue from cash collateral) to interest expense (excluding interest on loans under the Treasury Facility) of not less than 3.0:1.0, and
 
·
maintaining a ratio of collateral to the aggregate principal amount of loans under the Treasury Facility of not less than 1.02:1.0.
 
 
16

 
 
Note 5:
Investment Management

Investment Advisory Agreement

We have an investment advisory agreement with our Manager under which our Manager administers our day-to-day operations and provides investment advisory services to us.  Our Manager is subject to the overall supervision of our Board of Directors.  For providing these services, we pay our Manager a fee, consisting of two components — a base management fee and an incentive fee.  Management and incentive fees payable at September 30, 2011 and December 31, 2010 consisted of the following, representing amounts payable for the quarters then ended:

   
September 30, 2011
   
December 31, 2010
 
Base management fee
  $ 1,306,908     $ 1,376,032  
Investment income incentive fee
    30,303       -  
    $ 1,337,211     $ 1,376,032  

Base Management Fee:   According to the investment advisory agreement, we calculate the base management fee as 0.45% of the average of our total assets as of the end of the two previous quarters.  We record and pay this base management fee quarterly in arrears. 

Incentive Fee:   The incentive fee under the investment advisory agreement consists of two parts.

We calculate the first part of the incentive fee, the Investment Income Incentive Fee, as 20% of the excess, if any, of our net investment income for the quarter that exceeds a quarterly hurdle rate equal to 2% (8% annualized) of our net assets.  We calculate and pay this Investment Income Incentive Fee quarterly in arrears.  For the purpose of this fee calculation, net investment income means interest income, dividend income, royalty income and any other income (including any other fees, such as commitment, origination, syndication, structuring, diligence, managerial assistance, monitoring, and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement, and interest expense, but excluding the incentive fee).   Accordingly, we may pay an incentive fee based partly on accrued interest, the collection of which is uncertain or deferred.  Net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash.  Net investment income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation.  For the three and nine months ended September 30, 2011, we accrued $30,303 and $311,323, respectively, of Investment Income Incentive Fees, compared to no such fees for the same periods of 2010.

We calculate the second part of the incentive fee, the Capital Gains Fee, as (1) 20% of (a) our net realized capital gains (realized capital gains less realized capital losses) on a cumulative basis from the closing date of our initial public offering to the end of such fiscal year, less (b) any unrealized capital depreciation at the end of such fiscal year, less (2) the aggregate amount of all Capital Gains Fees paid to our Manager in prior fiscal years.  We determine and pay the Capital Gains Fee in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement, as of the termination date).  For accounting purposes only, in order to reflect the theoretical capital gains incentive fee that would be payable for a given period as if all unrealized capital gains were realized, we will accrue a capital gains incentive fee as described above (in accordance with the terms of the Investment Advisory Agreement), plus 20% of unrealized capital gains on investments held at the end of such period. It should be noted that the portion of the accruals for the capital gains incentive fees attributable to unrealized capital gains will not necessarily be payable under the Investment Advisory Agreement, and may never be paid based on the computation of capital gains incentive fees in subsequent periods.  As of September 30, 2011, we had cumulative net capital losses of $55.6 million and unrealized capital depreciation of $24.4 million.  We have not accrued or paid any Capital Gains Fees in 2011 or 2010, and we do not anticipate paying any Capital Gains Fees in the foreseeable future.

Our Board of Directors originally approved the investment advisory agreement on November 9, 2004.  The investment advisory agreement provides that unless terminated earlier as described below, the agreement shall remain in effect from year-to-year after November 9, 2006.  The Board of Directors or the affirmative vote of the holders of a majority of our outstanding voting securities must approve the continuation of the agreement at least annually.  Additionally, in either case, the approval must be by a majority of our independent directors.  On October 31, 2011, our Board of Directors, including all of the independent directors, approved an extension of the investment advisory agreement through November 9, 2012.

 
17

 
 
The agreement may be terminated at any time, without the payment of any penalty, by a vote of our Board of Directors or the holders of a majority of our shares on 60 days’ written notice to our Manager, and would automatically terminate in the event of its “assignment” (as defined in the 1940 Act).  Either party may terminate the agreement without penalty upon not more than 60 days’ written notice to the other.

Pursuant to the investment advisory agreement, our Manager pays the compensation and routine overhead expenses of the investment professionals of our management team and their respective staffs, when and to the extent engaged in providing management and investment advisory services to us.  We bear all other costs and expenses of our operations and transactions.  Our Manager is a registered investment adviser under the Investment Advisers Act of 1940.

Administration Agreement

We have entered into an administration agreement with our Administrator, under which our Administrator furnishes us with office facilities, equipment and clerical, bookkeeping and recordkeeping services at such facilities.  Under the administration agreement, our Administrator also performs, or oversees the performance by third parties of, our required administrative services.  These administrative services include being responsible for the financial records that we are required to maintain, preparing reports to our stockholders and preparing reports filed with the SEC.  In addition, our Administrator assists in determining and publishing our net asset value.  Our Administrator oversees the preparation and filing of our tax returns, the printing and dissemination of reports to our stockholders and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others.  To the extent permitted under the 1940 Act, our Administrator may also provide on our behalf, significant managerial assistance to our portfolio companies.  We base payments under the agreement upon the allocable portion of our Administrator’s costs and expenses incurred in connection with administering our business.  Our Administrator bills us for charges under the administration agreement monthly in arrears.  Either party may terminate the agreement without penalty upon 60 days’ written notice to the other party and will automatically terminate in the event of its “assignment” (as defined in the 1940 Act).

We owed $238,002 and $238,618 to our Administrator as of September 30, 2011 and December 31, 2010, respectively, for expenses incurred on our behalf.  We include these amounts in accounts payable and accrued expenses. 

Our Board of Directors originally approved the administration agreement on November 9, 2004.  The administration agreement provides that unless terminated earlier, the agreement will continue in effect until November 9, 2006, and from year-to-year thereafter provided that (i) our Board of Directors and (ii) a majority of our independent directors approve such continuance at least annually.  On October 31, 2011, our Board of Directors, including all of the independent directors, approved the continuation of the administration agreement through November 9, 2012.
 
 
18

 
 
Note 6:
Income Taxes

We intend to continue to qualify for tax purposes as a RIC under Subchapter M of the Code.  As a RIC, the IRS generally will not tax the portion of our investment company taxable income and net capital gain (i.e., realized net long term capital gains in excess of realized net short term capital losses) distributed to stockholders.  To qualify as a RIC, we are required, among other things, to distribute to our stockholders at least 90% of investment company taxable income, as defined by the Code, and to meet certain asset diversification requirements.

When a “C” corporation qualifies to be taxed as a RIC, it is subject to corporate-level tax on appreciation inherent in its assets on the date it becomes a RIC (i.e., built-in gain) that it recognizes within the first 10 years of its RIC status. A RIC generally may use loss carryforwards arising in taxable years while it was a “C” corporation to reduce its net recognized built-in gain, although a RIC is not otherwise allowed to utilize such loss carryforwards. Because we intend to qualify as a RIC under Subchapter M of the Code for 2011 and later years, it is uncertain whether we will fully utilize the tax benefit of our loss carryforward.  Thus, a valuation allowance fully offsets the RIC loss carryforwards.
 
Certain of our wholly-owned subsidiaries, or Taxable Subsidiaries, have elected to be taxed as corporations for federal income tax purposes.  The Taxable Subsidiaries hold certain of our portfolio investments, and are consolidated for financial reporting purposes but not for income tax reporting purposes.  These Taxable Subsidiaries permit us to hold equity investments in portfolio companies that are “pass through” entities for tax purposes, in order to comply with the “source income” requirements contained in the RIC tax regulations.  The Taxable Subsidiaries may generate net income tax expense or benefit, which is reflected on our consolidated statements of operations.
 
Note 7:
Commitments and Contingencies

As of September 30, 2011, we had investments in or commitments to fund investments in eighteen portfolio companies totaling $177.7 million.  Of this total, $169.6 million was outstanding and $8.1 million remained committed and available to fund. Generally, these commitments have fixed expiration dates, currently through the year 2032, and we do not expect to fund the entire $8.1 million of commitments before they expire.  We do not report the unused portions of these commitments on our Consolidated Balance Sheets. 

In February 2010, we arranged for a letter of credit issued under the Investment Facility with respect to our investment in one of our portfolio companies. As of September 30, 2011, the letter of credit balance was $2.9 million. 

We have continuing obligations under the investment advisory agreement with our Manager and under the administration agreement with our Administrator.  The agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its duties and obligations, our Manager, our Administrator and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with them will be entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of our Manager’s or Administrator’s services under the agreements or otherwise as our investment adviser or administrator. The agreements also provide that our Manager, our Administrator and their affiliates will not be liable to us or any stockholder for any error of judgment, mistake of law, any loss or damage with respect to any of our investments or any action taken or omitted to be taken by our Manager or our Administrator in connection with the performance of any of their duties or obligations under the agreements or otherwise as investment adviser or administrator to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services. In the normal course of business, we enter into a variety of undertakings containing a variety of representations that may expose us to some risk of loss.  We do not expect significant losses, if any, from such undertakings.
 
 
19

 
 
Note 8:
Investments and Fair Value

Investments consisted of the following as of September 30, 2011 and December 31, 2010:
 
    
September 30, 2011
 
                         
         
% of
         
% of
 
   
Cost
   
total
   
Fair Value
   
total
 
Senior secured debt
  $ 109,153,567       65.4 %   $ 84,952,016       59.9 %
Senior unsecured debt
    10,714,392       6.4 %     10,714,392       7.6 %
Senior convertible notes
    11,055,228       6.6 %     10,255,410       7.2 %
Limited term royalties
    20,714,799       12.4 %     20,714,799       14.6 %
Net profits interests
    5,680,474       3.4 %     5,980,474       4.2 %
Contingent earn-out
    -       0.0 %     3,400,000       2.4 %
Royalty interests
    128,578       0.1 %     1,100,000       0.8 %
Equity securities
                               
Membership and partnership units
    1,715,576       1.0 %     856,182       0.6 %
Participating preferred stock
    4,311,580       2.6 %     650,000       0.5 %
Common stock
    3,235,254       1.9 %     1,856,922       1.3 %
Warrants
    339,238       0.2 %     1,324,238       0.9 %
Total equity securities
    9,601,648       5.7 %     4,687,342       3.3 %
Total investments
  $ 167,048,686       100.0 %   $ 141,804,433       100.0 %

    
December 31, 2010
 
                         
         
% of
         
% of
 
   
Cost
   
total
   
Fair Value
   
total
 
Senior secured debt
  $ 154,653,405       64.9 %   $ 154,553,405       71.6 %
Senior convertible notes
    6,532,576       2.7 %     6,676,813       3.1 %
Senior corporate notes
    11,489,439       4.8 %     10,450,100       4.9 %
Limited term royalties
    6,548,318       2.8 %     6,548,318       3.0 %
Net profits interests
    9,586,637       4.0 %     9,886,635       4.6 %
Royalty interests
    2,698,279       1.1 %     11,960,000       5.5 %
Equity securities
                               
Membership and partnership units
    39,376,569       16.5 %     13,015,526       6.0 %
Participating preferred stock
    4,311,580       1.8 %     750,000       0.3 %
Common stock
    3,235,254       1.4 %     2,152,954       1.0 %
Warrants
    69,238       0.0 %     69,238       0.0 %
Total equity securities
    46,992,641       19.7 %     15,987,718       7.3 %
Total investments
  $ 238,501,295       100.0 %   $ 216,062,989       100.0 %
 
 
20

 
 
We account for all of the assets in our portfolio at fair value, following the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Fair Value Measurements and Disclosures, or ASC 820.  ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
 
On a quarterly basis, the investment team of our Manager prepares fair value estimates for all of the assets in our portfolio utilizing the income approach and market approach in accordance with ASC 820 and presents them to our Valuation Committee. The Valuation Committee recommends its fair value estimates to our Board of Directors, which in good faith determines the final estimates of fair value for each investment. We record investments in securities for which market quotations are readily available at such market quotations in our financial statements as of the valuation date. For investments in securities for which market quotations are unavailable, or which have various degrees of trading restrictions, the investment team of our Manager prepares valuation analyses and fair value estimates as generally described below.

 
Investment Team Valuation.   The investment professionals of our Manager prepare fair value estimates for each investment.

 
Investment Team Valuation Documentation.   The investment team documents and discusses its preliminary fair value estimates with senior management of our Manager.

 
Presentation to Valuation Committee.   Senior management presents the valuation analyses and fair value estimates to the Valuation Committee of our Board of Directors.

 
Third Party Valuation Activity.   The Valuation Committee and our Board of Directors, in their discretion, may retain an independent valuation firm to review any or all of the valuation analyses and fair value estimates provided by the investment team of our Manager.  The Valuation Committee has not retained an independent valuation firm in connection with the September 30, 2011 or the December 31, 2010 fair value estimates.

 
Board of Directors and Valuation Committee.   The Board of Directors and Valuation Committee review and discuss the valuation analyses and fair value estimates provided by the investment team of our Manager and the analysis of the independent valuation firm, if applicable.

 
Final Valuation Determination.   Our Board of Directors discusses the fair value estimates recommended by the Valuation Committee and determines the fair value of each investment in our portfolio, in good faith, based on the input of the investment team of our Manager, our Valuation Committee and the independent valuation firm, if any.
 
ASC 820 defines fair value as the price that a seller would receive for an asset or pay to transfer a liability in an orderly transaction between independent, knowledgeable and willing market participants at the measurement date. The fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes the use of observable market inputs over unobservable entity-specific inputs.  In accordance with ASC 820, we categorize our investments based on the inputs to our valuation methodologies as follows:
 
 
Level 1  — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.

 
Level 2  — Quoted prices for similar instruments in active markets; quoted prices for identicalor similar instruments in markets that are not active; and model-derived valuations in which all  significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in 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.

 
Level 3  — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect assumptions that market participants would use to price the asset or liability based on the best available information.
 
Fair value accounting classifies financial assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the estimates of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
 
Debt Securities: We record our investments in debt securities at fair value.  We utilize both the market approach and the income approach, as appropriate, in determining the fair value of our investments in debt securities, incorporating a variety of factors.  In estimating the fair value of our debt investments, we first assess the overall financial health of the portfolio company through an evaluation of a number of factors, including, as relevant, historical and projected financial results, the portfolio company's enterprise value, and the nature and realizable value of any collateral.  Each of these factors may consider the markets in which the portfolio company operates; comparison to a peer group of publicly traded securities; the size and scope of the portfolio company and its specific strengths and weaknesses; recent purchases or sales of securities by the portfolio company; recent offers to purchase the portfolio company; the estimated value of comparable securities; and other relevant factors.  Based upon this assessment, we consider the probability of collecting contractual cash flows and the appropriate yield to discount those cash flows.  The collection of contractual cash flows may come from one or a combination of cash flows generated from continuing operations of the portfolio company, liquidation of collateral or sale of the portfolio company.  The appropriateness of the yield on our investments is directly relative to our judgment of the associated risks, using observable yield or price data for similar or comparable debt investments when available.  We invest primarily in illiquid debt investments in small private energy companies, many of which are in the early stages of development, or are start-up companies in need of growth development capital.  There is limited activity, transparency and variable data in the markets in which we invest.  We have observed that there is limited correlation in yield and price data in our principle market when compared to overall market trends based upon debt investments we have made throughout our history.  In circumstances where there is limited  observable  price or yield data of similar or comparable securities, we base our considerations on our assessments of the credit trends and underlying performance of our portfolio companies and of the markets in which we invest, relying on the collective judgment of the investment team of our Manager, our Valuation Committee members and our Board of Directors, which is based on their extensive experience and expertise investing in public and non-public securities in energy markets.
 
Equity Securities:  We record our investments in preferred and common equity securities (including warrants or options to acquire equity securities) at fair value based on our pro rata share of the residual equity value available after deducting all outstanding debt from the estimated enterprise value. We may also utilize an option pricing method, or OPM, in addition to our other valuation methods, to value the various preferred stock, common stock, and warrants we have in companies with complex capital structures. The OPM treats preferred stock, common stock and warrants as call options on the enterprise value, with exercise prices based on liquidation preference of the preferred stock. The option-pricing method commonly uses the Black-Scholes model to price the call option. The OPM considers the various terms of the stockholder agreements upon liquidation of the enterprise. In addition, the OPM implicitly considers the effect of the liquidation preference as of a future liquidation date, not as of the valuation date.
 
Property-Based Equity Participation Rights:   We record our investments in overriding royalty and net profits interests at fair value based on a multiple of cash flows generated by such investments, multiples from transactions involving the sale of comparable assets and/or the discounted value of expected future net cash flows from such investments. We derive appropriate cash flow multiples from the review of comparable transactions involving similar assets. We derive the discounted value of future net cash flows, when appropriate, from third party valuations of a portfolio company’s assets, such as engineering reserve reports of oil and natural gas properties.
 
Our Board of Directors has the final responsibility for reviewing and approving, in good faith, the fair value estimates for our investments.  Due to the inherent uncertainty in the valuation process, the fair value estimates for our investments may differ materially from the values that would have been used had a ready market for the securities existed.  In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on our investments to be materially different that the valuations currently assigned.  We determine the fair value of each individual investment on a quarterly basis and record changes in fair value as unrealized appreciation or depreciation.
 
We may have investments in our portfolio that contain payment-in-kind, or PIK, provisions. We compute PIK interest income or dividend income at the contractual rate specified in each investment agreement, and add that amount to the principal balance of the investment. For those investments with PIK interest or dividends, as with our cash pay investments, we record our income accruals to the extent the amounts are expected to be collected.  One component in the determination of collectibility of PIK interest income or PIK dividend income is sufficiency of the valuation of the portfolio company’s assets that collateralize or otherwise support our investment.  To maintain our RIC status, we must pay out this non-cash income to stockholders in the form of dividends, even though we have not yet collected the cash.
 
 
21

 
 
The following tables set forth by level within the fair value hierarchy our financial assets that we accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010. Fair value accounting classifies financial assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.   We did not have any liabilities measured at fair value on a recurring basis at September 30, 2011 or December 31, 2010.

    
Fair Value Measurements as of September 30, 2011
 
       
Assets at Fair Value
 
Total
   
Quoted Prices
in Active
Markets
(Level 1)
   
Prices with
Observable
Market
Inputs
(Level 2)
   
Unobservable
Inputs
(Level 3)
 
Control investments
                       
Equity securities
  $ 150,000     $ -     $ -     $ 150,000  
Total control investments
    150,000       -       -       150,000  
Affiliate investments
                               
Senior unsecured debt
    10,714,392       -       -       10,714,392  
Equity securities
    2,862,292       -       1,856,922       1,005,370  
Total affiliate investments
    13,576,684       -       1,856,922       11,719,762  
Non-affiliate investments
                               
Senior secured debt
    84,952,016       -       -       84,952,016  
Senior convertible notes
    10,255,410       -       10,255,410       -  
Limited term royalties
    20,714,799       -       -       20,714,799  
Net profits interests
    5,980,474       -       -       5,980,474  
Contingent earn-out
    3,400,000       -       -       3,400,000  
Royalty interests
    1,100,000       -       -       1,100,000  
Equity securities
    1,675,050       -       -       1,675,050  
Total non-affiliate investments
    128,077,749       -       10,255,410       117,822,339  
Total assets at fair value
  $ 141,804,433     $ -     $ 12,112,332     $ 129,692,101  
 
 
22

 
 
    
Fair Value Measurements as of December 31, 2010
 
                         
         
Quoted
   
Prices with
       
         
Prices
   
Observable
       
         
in Active
   
Market
   
Unobservable
 
         
Markets
   
Inputs
   
Inputs
 
Assets at Fair Value
 
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Control investments
                       
Senior secured debt
  $ 49,223,316     $ -     $ -     $ 49,223,316  
Royalty interests
    10,450,000       -       -       10,450,000  
Equity securities
    11,300,000       -       -       11,300,000  
Total control investments
    70,973,316       -       -       70,973,316  
Affiliate investments
                               
Senior secured debt
    29,146,310       -       -       29,146,310  
Equity securities
    3,917,718       -       2,152,954       1,764,764  
Total affiliate investments
    33,064,028       -       2,152,954       30,911,074  
Non-affiliate investments
                               
Senior secured debt
    76,183,779       -       -       76,183,779  
Senior convertible notes
    6,676,813       -       6,676,813       -  
Senior corporate notes
    10,450,100       -       10,450,100       -  
Limited term royalties
    6,548,318       -       -       6,548,318  
Net profits interests
    9,886,635       -       -       9,886,635  
Royalty interests
    1,510,000       -       -       1,510,000  
Equity securities
    770,000       -       -       770,000  
Total non-affiliate investments
    112,025,645       -       17,126,913       94,898,732  
Total assets at fair value
  $ 216,062,989     $ -     $ 19,279,867     $ 196,783,122  
 
 
23

 
 
The following tables present a roll-forward of the changes in the fair value during the three and nine-month periods ended September 30, 2011 and 2010 for all investments for which we determine fair value using unobservable (Level 3) inputs.  During the nine-month periods ended September 30, 2011 and 2010, none of the investments in portfolio companies changed between the categories of Control Investments – Majority Owned, Affiliate Investments and Non-Affiliate Investments. There were no transfers between Levels 3, 2 or 1 during the nine-month period ended September 30, 2011.  During the three and nine-month periods ended September 30, 2010, we transferred the senior corporate notes of Pioneer Natural Resources Company and the common stock of Resaca Exploitation Inc. from Level 3 to Level 2 due to changes in the observability of significant inputs.

Rollforward of Assets at Fair Value Using Unobservable Inputs (Level 3) for the Three Months Ended September 30, 2011
 
    
Control
   
Affiliate
   
Non-affiliate
   
Total
 
   
Investments
   
Investments
   
Investments
   
Investments
 
Fair value June 30, 2011
                       
Senior secured debt
  $ 64,279,391     $ -     $ 69,345,154     $ 133,624,545  
Senior unsecured debt
    -       10,372,461       -       10,372,461  
Limited term royalties
    -       -       27,500,000       27,500,000  
Net profits interests
    -       -       8,973,650       8,973,650  
Royalty interests
    8,200,000       -       1,110,000       9,310,000  
Equity securities
    1,742,522       1,005,370       685,000       3,432,892  
Total fair value June 30, 2011
    74,221,913       11,377,831       107,613,804       193,213,548  
Net amortization of premiums, discounts and fees
                               
Senior secured debt
    1,088,091       -       75,539       1,163,630  
Senior unsecured debt
    -       13,602       -       13,602  
Limited term royalties
    -       -       (875 )     (875 )
Net profits interests
    -       -       (9,377 )     (9,377 )
Royalty interests
    (46 )     -       (7,248 )     (7,294 )
Total net amortization of premiums,
                               
discounts and fees
    1,088,045       13,602       58,039       1,159,686  
Net realized gains (losses)
                               
Royalty interests
    2,384,245       -       990,858       3,375,103  
Equity securities
    (35,264,070 )     -       995,000       (34,269,070 )
Total realized gains (losses)
    (32,879,825 )     -       1,985,858       (30,893,967 )
Net unrealized gains (losses)
                               
Senior secured debt
    (1,088,091 )     -       (3,740,698 )     (4,828,789 )
Limited term royalties
    -       -       (472,234 )     (472,234 )
Contingent earn-out
    -       -       3,400,000       3,400,000  
Royalty interests
    (5,712,748 )     -       7,248       (5,705,500 )
Equity securities
    34,718,521       -       995,000       35,713,521  
Total net unrealized gains (losses)
    27,917,682       -       189,316       28,106,998  
Purchases
                               
Senior secured debt
    1,272,219       -       28,752,390       30,024,609  
Limited term royalties
    -       -       25,946       25,946  
Equity securities
    -       -       50       50  
Total purchases
    1,272,219       -       28,778,386       30,050,605  
Payment-in-kind
                               
Senior unsecured debt
    -       328,329       -       328,329  
Total payment-in-kind
    -       328,329       -       328,329  
Sales and repayments
                               
Senior secured debt
    (65,551,610 )     -       (9,480,369 )     (75,031,979 )
Limited term royalties
    -       -       (6,338,038 )     (6,338,038 )
Net profits interests
    -       -       (2,983,799 )     (2,983,799 )
Royalty interests
    (4,871,451 )     -       (1,000,858 )     (5,872,309 )
Equity securities
    (1,046,973 )     -       (1,000,000 )     (2,046,973 )
Total sales and repayments
    (71,470,034 )     -       (20,803,064 )     (92,273,098 )
Fair value September 30, 2011
                               
Senior secured debt
    -       -       84,952,016       84,952,016  
Senior unsecured debt
    -       10,714,392       -       10,714,392  
Limited term royalties
    -       -       20,714,799       20,714,799  
Net profits interests
    -       -       5,980,474       5,980,474  
Contingent earn-out
    -       -       3,400,000       3,400,000  
Royalty interests
    -       -       1,100,000       1,100,000  
Equity securities
    150,000       1,005,370       1,675,050       2,830,420  
Total fair value September 30, 2011
  $ 150,000     $ 11,719,762     $ 117,822,339     $ 129,692,101  
 
 
24

 
 
Rollforward of Assets at Fair Value Using Unobservable Inputs (Level 3) for the Nine Months Ended September 30, 2011
 
    
Control
   
Affiliate
   
Non-affiliate
   
Total
 
   
Investments
   
Investments
   
Investments
   
Investments
 
Fair value December 31, 2010
                       
Senior secured debt
  $ 49,223,316     $ 29,146,310     $ 76,183,779     $ 154,553,405  
Limited term royalties
    -       -       6,548,318       6,548,318  
Net profits interests
    -       -       9,886,635       9,886,635  
Royalty interests
    10,450,000       -       1,510,000       11,960,000  
Equity securities
    11,300,000       1,764,764       770,000       13,834,764  
Total fair value December 31, 2010
    70,973,316       30,911,074       94,898,732       196,783,122  
Net amortization of premiums, discounts and fees
                               
Senior secured debt
    1,390,279       137,258       212,926       1,740,463  
Senior unsecured debt
    -       38,382       -       38,382  
Limited term royalties
    -       -       (876 )     (876 )
Net profits interests
    -       -       (27,583 )     (27,583 )
Royalty interests
    (16,621 )     -       (25,723 )     (42,344 )
Total net amortization of premiums,
                               
discounts and fees
    1,373,658       175,640       158,744       1,708,042  
Net realized gains (losses)
                               
Royalty interests
    2,465,520       -       1,975,429       4,440,949  
Equity securities
    (35,264,070 )     -       995,000       (34,269,070 )
Total realized gains (losses)
    (32,798,550 )     -       2,970,429       (29,828,121 )
Net unrealized gains (losses)
                               
Senior secured debt
    100,000       (20,460,855 )     (3,740,698 )     (24,101,553 )
Contingent earn-out
    -       -       3,400,000       3,400,000  
Royalty interests
    (7,931,448 )     -       (358,848 )     (8,290,296 )
Equity securities
    26,511,043       (1,009,394 )     885,000       26,386,649  
Total net unrealized gains (losses)
    18,679,595       (21,470,249 )     185,454       (2,605,200 )
Purchases
                               
Senior secured debt
    10,291,240       -       36,183,454       46,474,694  
Senior unsecured debt
    -       9,750,000       -       9,750,000  
Limited term royalties
    -       -       25,025,946       25,025,946  
Equity securities
    -       250,000       25,050       275,050  
Total purchases
    10,291,240       10,000,000       61,234,450       81,525,690  
Payment-in-kind
                               
Senior secured debt
    4,546,775       1,177,287       -       5,724,062  
Senior unsecured debt
    -       926,010       -       926,010  
Total payment-in-kind
    4,546,775       2,103,297       -       6,650,072  
Sales and repayments
                               
Senior secured debt
    (65,551,610 )     (10,000,000 )     (23,887,445 )     (99,439,055 )
Limited term royalties
    -       -       (10,858,589 )     (10,858,589 )
Net profits interests
    -       -       (3,878,578 )     (3,878,578 )
Royalty interests
    (4,967,451 )     -       (2,000,858 )     (6,968,309 )
Equity securities
    (2,396,973 )     -       (1,000,000 )     (3,396,973 )
Total sales and repayments
    (72,916,034 )     (10,000,000 )     (41,625,470 )     (124,541,504 )
Fair value September 30, 2011
                               
Senior secured debt
    -       -       84,952,016       84,952,016  
Senior unsecured debt
    -       10,714,392       -       10,714,392  
Limited term royalties
    -       -       20,714,799       20,714,799  
Net profits interests
    -       -       5,980,474       5,980,474  
Contingent earn-out
    -       -       3,400,000       3,400,000  
Royalty interests
    -       -       1,100,000       1,100,000  
Equity securities
    150,000       1,005,370       1,675,050       2,830,420  
Total fair value September 30, 2011
  $ 150,000     $ 11,719,762     $ 117,822,339     $ 129,692,101  

 
25

 
 
Rollforward of Assets at Fair Value Using Unobservable Inputs (Level 3) for the Three Months Ended September 30, 2010

    
Control
   
Affiliate
   
Non-affiliate
   
Total
 
   
Investments
   
Investments
   
Investments
   
Investments
 
Fair value June 30, 2010
                       
Senior secured debt
  $ 49,065,176     $ 27,947,444     $ 51,834,556     $ 128,847,176  
Limited term royalties
    -       -       12,548,457       12,548,457  
Net profits interests
    -       -       10,298,287       10,298,287  
Royalty interests
    5,830,000       -       1,500,000       7,330,000  
Equity securities
    22,100,000       5,697,073       760,000       28,557,073  
Total fair value June 30, 2010
    76,995,176       33,644,517       76,941,300       187,580,993  
Transfers in (out) of Level 3
                               
Equity securities
    -       (3,897,543 )     -       (3,897,543 )
Total transfers in (out) of Level 3
    -       (3,897,543 )     -       (3,897,543 )
Net amortization of premiums, discounts and fees
                               
Senior secured debt
    139,159       61,918       69,045       270,122  
Limited term royalties
    -       -       (2,018,812 )     (2,018,812 )
Net profits interests
    -       -       (8,053 )     (8,053 )
Royalty interests
    (11,347 )     -       (15,024 )     (26,371 )
Total net amortization of premiums,
                               
discounts and fees
    127,812       61,918       (1,972,844 )     (1,783,114 )
Net unrealized gains (losses)
                               
Senior secured debt
    (300,000 )     -       -       (300,000 )
Limited term royalties
    -       -       381,856       381,856  
Royalty interests
    (38,653 )     -       15,024       (23,629 )
Equity securities
    (2,500,000 )     -       -       (2,500,000 )
Total net unrealized gains (losses)
    (2,838,653 )     -       396,880       (2,441,773 )
Purchases
                               
Senior secured debt
    380,611       34,766       -       415,377  
Net profits interests
    -       -       906       906  
Equity securities
    12,100,000       -       -       12,100,000  
Total purchases
    12,480,611       34,766       906       12,516,283  
Payment-in-kind
                               
Senior secured debt
    896,864       1,064,869       -       1,961,733  
Total payment-in-kind
    896,864       1,064,869       -       1,961,733  
Sales and repayments
                               
Senior secured debt
    (9,500,000 )     (12,500 )     (1,087,386 )     (10,599,886 )
Limited term royalties
    -       -       (2,030,152 )     (2,030,152 )
Net profits interests
    -       -       (229,875 )     (229,875 )
Equity securities
    (1,000,000 )     (34,766 )     -       (1,034,766 )
Total sales and repayments
    (10,500,000 )     (47,266 )     (3,347,413 )     (13,894,679 )
Fair value September 30, 2010
                               
Senior secured debt
    40,681,810       29,096,497       50,816,215       120,594,522  
Limited term royalties
    -       -       8,881,349       8,881,349  
Net profits interests
    -       -       10,061,265       10,061,265  
Royalty interests
    5,780,000       -       1,500,000       7,280,000  
Equity securities
    30,700,000       1,764,764       760,000       33,224,764  
Total fair value September 30, 2010
  $ 77,161,810     $ 30,861,261     $ 72,018,829     $ 180,041,900  

 
26

 
 
Rollforward of Assets at Fair Value Using Unobservable Inputs (Level 3) for the Nine Months Ended September 30, 2010
 
                      
Commodity
       
   
Control
   
Affiliate
   
Non-affiliate
   
Derivative
   
Total
 
   
Investments
   
Investments
   
Investments
   
Instruments
   
Investments
 
Fair value December 31, 2009
                             
Senior secured debt
  $ 48,019,620     $ 25,692,581     $ 53,364,835     $ -     $ 127,077,036  
Senior corporate notes
    -       -       9,062,200       -       9,062,200  
Limited term royalties
    -       -       20,577,744       -       20,577,744  
Net profits interests
    -       -       11,012,799       -       11,012,799  
Royalty interests
    5,830,000       -       1,500,000       -       7,330,000  
Equity securities
    18,600,000       5,886,364       510,000       -       24,996,364  
Commodity derivative instruments
    -       -       -       49,000       49,000  
Total fair value December 31, 2009
    72,449,620       31,578,945       96,027,578       49,000       200,105,143  
Transfers in (out) of Level 3
                                       
Senior corporate notes
    -       -       (9,062,200 )     -       (9,062,200 )
Equity securities
    -       (4,086,834 )     -       -       (4,086,834 )
Total transfers in (out) of Level 3
    -       (4,086,834 )     (9,062,200 )     -       (13,149,034 )
Net amortization of premiums, discounts and fees
                                       
Senior secured debt
    397,381       176,842       245,576       -       819,799  
Limited term royalties
    -       -       (9,335,754 )     -       (9,335,754 )
Net profits interests
    -       -       (23,185 )     -       (23,185 )
Royalty interests
    (24,672 )     -       (52,613 )     -       (77,285 )
Total net amortization of premiums,
                                       
discounts and fees
    372,709       176,842       (9,165,976 )     -       (8,616,425 )
Net unrealized gains (losses)
                                       
Senior secured debt
    (300,000 )     -       -       -       (300,000 )
Limited term royalties
    -       -       3,693,640       -       3,693,640  
Net profits interests
    -       -       (49,999 )     -       (49,999 )
Royalty interests
    (25,328 )     -       52,613       -       27,285  
Equity securities
    (2,600,000 )     -       250,000       -       (2,350,000 )
Commodity derivative instruments
    -       -       -       (18,900 )     (18,900 )
Total net unrealized gains (losses)
    (2,925,328 )     -       3,946,254       (18,900 )     1,002,026  
Purchases
                                       
Senior secured debt
    3,000,000       1,281,986       -       -       4,281,986  
Net profits interests
    -       -       2,100       -       2,100  
Equity securities
    15,700,000       -       -       -       15,700,000  
Total purchases
    18,700,000       1,281,986       2,100       -       19,984,086  
Payment-in-kind
                                       
Senior secured debt
    2,564,809       1,982,588       -       -       4,547,397  
Total payment-in-kind
    2,564,809       1,982,588       -       -       4,547,397  
Sales and repayments
                                       
Senior secured debt
    (13,000,000 )     (37,500 )     (2,794,196 )     -       (15,831,696 )
Limited term royalties
    -       -       (6,054,281 )     -       (6,054,281 )
Net profits interests
    -       -       (880,450 )     -       (880,450 )
Equity securities
    (1,000,000 )     (34,766 )     -       -       (1,034,766 )
Commodity derivative instruments
    -       -       -       (30,100 )     (30,100 )
Total sales and repayments
    (14,000,000 )     (72,266 )     (9,728,927 )     (30,100 )     (23,831,293 )
Fair value September 30, 2010
                                       
Senior secured debt
    40,681,810       29,096,497       50,816,215       -       120,594,522  
Limited term royalties
    -       -       8,881,349       -       8,881,349  
Net profits interests
    -       -       10,061,265       -       10,061,265  
Royalty interests
    5,780,000       -       1,500,000       -       7,280,000  
Equity securities
    30,700,000       1,764,764       760,000       -       33,224,764  
Total fair value September 30, 2010
  $ 77,161,810     $ 30,861,261     $ 72,018,829     $ -     $ 180,041,900  
 
 
27

 

Note 9:  Common Stock Repurchase Plan

On October 31, 2011, our Board of Directors approved a stock repurchase plan, pursuant to which we may, from time to time, repurchase up to $10.0 million of our common stock in the open market at prices not to exceed net asset value during our open trading periods.  Our Board of Directors authorized this plan, because it believes that general market trading activity may cause our common stock to be undervalued from time to time.  The repurchase program does not obligate us to purchase any shares and may be discontinued at any time.

Note 10:  Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” or ASU 2011-04.  This guidance requires additional disclosure regarding fair value measurement and sensitivity, and improves consistency between GAAP and international financial reporting standards, or IFRS.  This guidance must be applied prospectively and becomes effective for interim and annual periods beginning after December 15, 2011.  We will adopt this guidance in our Form 10-Q for the period ended March 31, 2012, and we do not believe the new guidance will have a significant impact on our consolidated financial statements, other than the additional required disclosures.
 
 
28

 
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following analysis of our financial condition and results of operations in conjunction with management’s discussion and analysis contained in our 2010 Annual Report on Form 10-K, as well as our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q that relate to estimates or expectations of our future performance or financial condition may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are subject to various risks and uncertainties.  Certain factors could cause actual results and conditions to differ materially from those projected, including, but not limited to,

 
·
uncertainties associated with the timing of transaction closings;
 
·
changes in the prospects of our portfolio companies;
 
·
changes in interest rates;
 
·
changes in regional, national or international economic conditions and their impact on the industries in which we invest;
 
·
continued disruption of credit and capital markets;
 
·
the future operating results of our portfolio companies and their ability to achieve their objectives;
 
·
changes in the conditions of the industries in which we invest;
 
·
the adequacy of our cash resources and working capital;
 
·
the timing of cash flows, if any, from the operations of our portfolio companies;
 
·
the ability of our Manager to locate suitable investments for us and to monitor and administer the investments; and
 
·
other factors enumerated in our filings with the Securities and Exchange Commission, or SEC.

We may use words such as “anticipates,” “believes,” “intends,” “plans,” “expects,” “projects,” “estimates,” “will,” “should,” “may” and similar expressions to identify forward-looking statements.  We base our forward-looking statements on assumptions that we believe to be reasonable, but that may not prove to be accurate.  You should not place undue reliance on such forward-looking statements, which speak only as of the date they are made.  We undertake no obligation to update any forward-looking statements made herein, unless required by law.
 
Revisions of Previously Issued Financial Statements
 
As discussed in Note 3, during the third quarter of 2011, we corrected our method of categorizing income tax provision (benefit) among the income categories on our consolidated statement of operations (namely, net investment income, realized gains (losses) on investments and unrealized gains (losses) on investments) to appropriately reflect the income tax consequences among the income categories for each of the three-month periods ended September 30, 2010, June 30, 2011 and 2010, and March 31, 2011 and 2010, for the nine-month period ended September 30, 2010, for each of the six-month periods ended June 20, 2011 and 2010, and for each of the years ended December 31, 2010, 2009 and 2008. The change in methods had no impact on any periods prior to 2008 and no impact on the total income tax provision (benefit) or on net increase (decrease) in net assets from operations or net asset value for any period.
 
Overview

We are a financial services company created to invest primarily in debt securities of small and mid-size private energy companies.  We have elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940 and, as such, we are required to comply with certain regulatory requirements.  For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” which include securities of private U.S. companies, U.S. companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.  In addition, for federal income tax purposes we operate so as to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended.  Pursuant to these elections, we generally do not have to pay corporate-level taxes on any income and capital gains we distribute to our stockholders.  We have several direct and indirect subsidiaries that are single member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to us in accordance with specific rules prescribed for a company operating as a RIC.  We consolidate the financial results of our subsidiaries for financial reporting purposes, and do not consolidate the financial results of our portfolio companies.

Our investment objective is to generate both current income and capital appreciation primarily through debt investments with certain equity components.  A key focus area for our targeted investments in the energy industry is domestic upstream businesses that produce, develop, acquire and explore for oil and natural gas.  We also evaluate investment opportunities in such businesses as coal, power and energy services.  Our investments generally range in size from $10 million to $50 million; however, we may invest more or less depending on market conditions and our Manager’s view of a particular investment opportunity. Our targeted investments primarily consist of debt instruments, including senior and subordinated loans combined in one facility, sometimes with an equity component, and subordinated loans, sometimes with equity components.  We may also invest in preferred stock and other equity securities or royalty interests on a stand-alone basis.

 
29

 
 
We generate revenue in the form of interest income on the debt securities, limited-term royalty interests and net profits interests that we own, dividend income on any common or preferred stock that we own, royalty income on any royalty interests that we own and capital gains or losses on any debt or equity securities that we acquire in portfolio companies and subsequently sell. Our investments, if in the form of debt securities, typically have a term of three to seven years and bear interest at a fixed or floating rate. To the extent achievable, we seek to collateralize our investments by obtaining security interests in our portfolio companies' assets.  We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or paid-in-kind, or PIK, dividends on a recurring or otherwise negotiated basis.  In addition, we may generate revenue in other forms including commitment, origination, structuring, administration or due diligence fees; fees for providing managerial assistance; and possibly consultation fees.  We recognize any such fees generated in connection with our investments as earned.

Our level of investment activity can and does vary substantially from period to period depending on many factors.  Some of these factors are the amount of debt and equity capital available to energy companies, the level of acquisition and divestiture activity for such companies, the level and volatility of energy commodity prices, the general economic environment and the competitive environment for the types of investments we make, and our own ability to raise capital to fund our investments, both through issuance of debt and equity securities.  While we currently have capital available to invest, we do not have unlimited capital.  We remain committed to our underwriting and investment disciplines in selectively investing in appropriate risk-reward opportunities within the energy sector.

Investment Activity
 
For the nine months ended September 30, 2011, portfolio investments decreased by a net amount of $76.9 million.  We funded $53.3 million to existing portfolio companies and $37.0 million to two new portfolio companies.  We recorded redemptions of $167.2 million from existing investments, including four repayments in full.  Following these transactions, we had eighteen portfolio companies in our investment portfolio.  The fair values of these investments totaled $141.8 million as of September 30, 2011.  Our portfolio, at fair value, was comprised of the following types of investments by percentage:

·
60% in senior secured debt,
·
8% in senior unsecured debt,
·
7% in senior convertible notes,
·
14% in limited-term royalty interests,
·
4% in net profits interests,
·
2% in a contingent earn-out,
·
1% in net royalty interests, and
·
4% in equity securities.

In September 2011, ATP Oil & Gas Corporation, or ATP, fully repaid the remaining outstanding balance on our second limited-term royalty interest agreement with ATP, including a $0.7 million “make-whole” payment to satisfy the guaranteed 16% return in the agreement.

Also in September 2011, DeanLake Operator, LLC, or DeanLake, sold its oil and gas assets, and we sold our royalty interest in DeanLake, to a third party for combined proceeds of $0.5 million.  In addition, the wind-down of TierraMar Energy, LP, or TierraMar, was completed in September and TierraMar was dissolved.  These transactions resulted in net realized losses totaling $29.2 million in the third quarter of 2011, substantially offset by the reversal of previously recorded net unrealized losses totaling $28.8 million.

In August 2011, we funded $27.5 million toward a $55.0 million Senior Secured First Lien Term Loan, or Term Loan, to Castex Energy Development Fund, LP, or Castex, a private company operating onshore in the Gulf Coast area and in the shallow waters of the Gulf of Mexico.  An unrelated private investment firm funded the remaining $27.5 million of the Term Loan.  The Term Loan earns interest payable monthly at an annual rate of 11.5% or LIBOR + 10.5%, whichever is greater.  Proceeds of the Term Loan were used by Castex to acquire certain oil and gas properties in various stages of production and development.  The Term Loan is secured by all of Castex’s assets and matures on December 31, 2014.  As partial consideration for providing the Term Loan, the other lender and we each received 5% of the limited partnership interest in Castex which becomes effective at maturity or when the underlying Castex assets are sold.

In August 2011, we purchased an additional $8.0 million face amount of GMX Resources, Inc., or GMX, 5% Senior Convertible Notes due February 1, 2013, for an aggregate cost of $6.9 million.  Estimated yield-to-maturity on the newly purchased GMX Notes is approximately 16.3%.  Our total position in GMX Notes at September 30, 2011 was a face amount of $12.7 million with an aggregate unamortized cost of $10.6 million.

Also in August 2011, Tammany Oil & Gas, LLC, or Tammany, repaid $6.0 million of its Senior Secured Term Loan, and repurchased its 5% after-payout overriding royalty interest and 50% of our warrant position for $2.0 million.  We retained our 3% overriding royalty interest and warrants to purchase 10% of Tammany’s equity.  As a result of this transaction, we realized a capital gain of approximately $2.0 million in the third quarter of 2011.

 
30

 
 
On July 28, 2011, we sold all of our interests in Alden Resources, LLC, or Alden, and Gatliff Services, LLC, or Gatliff, for $73.2 million in cash, subject to working capital adjustment, and a contingent earn-out payment of up to $6.8 million.  This transaction resulted in the recognition of $4.5 million of previously unrecognized PIK interest income on Tranche B of Alden’s Term Loan in the second quarter of 2011, and the recognition of previously unamortized original issue discount, or OID, of $1.1 million in the third quarter of 2011.  The contingent earn-out payment, to be paid by Globe BG, LLC, is dependent upon Alden’s sales volume and operating efficiency levels during the three-year period ending July 2014, and is valued at $3.4 million as of September 30, 2011.  The combined investments in Alden and Gatliff, since inception, generated an all in, cash-on-cash return in excess of 16% per annum.

In June 2011, we acquired a limited-term overriding royalty interest in certain oil and gas producing properties operated by ATP for $25.0 million.  ATP is a Houston, Texas-based oil and gas operator with whom we have made two similar investments in the past.

We reduced the carrying value of our investments in BioEnergy Holding LLC, or BioEnergy, and its affiliate, Bionol Clearfield LLC, or Bionol, by approximately 50% in the first quarter of 2011, and to zero during the second quarter of 2011, for a total write-down of $21.8 million, or $1.01 per share.  The ethanol and bio-fuels markets in which these portfolio companies participate deteriorated further during 2011.  On July 20, 2011, BioEnergy and Bionol filed a voluntary petition for protection under Chapter 7 of the U.S. Bankruptcy Code with the intention of selling Bionol’s ethanol plant.  Bionol is involved in litigation in connection with a contractual dispute with the former primary purchaser of its ethanol; however, it is uncertain whether the ultimate outcome of this litigation, the bankruptcy proceedings and cash flows from these businesses will provide any significant realization on our investment.

In April 2011, we entered into a $13.5 million Senior Secured Credit Facility with Spirit Resources, LLC, or Spirit, a private oil and gas company based in Fort Worth, Texas.  Initial availability under the Spirit facility is $12.3 million, of which we have funded $9.5 million as of September 30, 2011.  The Spirit facility is secured with first liens on substantially all of Spirit’s assets, pays interest at an annual rate of 12.0%, and matures on April 27, 2015.  Spirit is using proceeds from the Spirit facility to acquire and develop oil and gas properties in Texas and Oklahoma.  As partial consideration for providing the Spirit facility, we received warrants to acquire a 33% equity interest in Spirit.

In April 2011, Greenleaf Investments, LLC, or Greenleaf, repaid its entire $8.1 million Senior Secured Term Loan.  Concurrently, we sold our overriding royalty interest in Greenleaf for $1.0 million, resulting in a realized gain of $1.0 million, and the reversal of previously recorded unrealized gains of $0.4 million.

In March 2011, we sold 41.2% of our investment in GMX 5% Senior Convertible Notes for $3.3 million, and we sold our entire position in Pioneer Natural Resources Co., or PXD, for $10.5 million, including accrued interest.  Also in March 2011, TierraMar sold substantially all of its assets for cash consideration of $1.0 million.

In January 2011, we closed a $10.0 million participation in a $20.0 million Term Loan issued by Resaca Exploitation, Inc., or Resaca.  The Resaca Term Loan earns cash interest of 9.5% (12% if paid-in-kind), is unsecured and entitles us to purchase up to 2.42 million additional shares of Resaca common stock at a strike price of $1.92 per share.  Resaca used the proceeds of this Term Loan and a new revolving credit facility to repay amounts outstanding under its revolving credit facility and to provide capital for additional development of its oil and gas properties.

Results of Operations

Investment Income

Investment income for the quarter ended September 30, 2011 was $7.3 million, increasing $1.1 million, or 17%, compared to the corresponding quarter in 2010, and was comprised of $6.5 million in interest income from targeted investments and $0.8 million from net royalty income and other income.  The $1.1 million increase in investment income for the third quarter of 2011 compared to the third quarter of 2010 is primarily attributable to the recognition of $0.7 million of interest income from the guaranteed return make-whole provision of our second limited-term royalty agreement with ATP, and recognition of $1.1 million of previously unamortized OID related to our investment in Alden, partially offset by no interest recognized on BioEnergy and Bionol, which were placed on non-accrual status in March 2011, and fee income of $0.6 million in the third quarter of 2010 related to a specific transaction.

For the nine months ended September 30, 2011, investment income increased by $5.5 million, or 31%, to $22.9 million compared to the same period in 2010.  For the nine months ended September 30, 2011, we recorded $20.8 million of interest income from targeted investments and $2.1 million attributable to royalties and other income, compared to $15.6 million of interest income and $1.8 million of royalties and other income for the nine months ended September 30, 2010.  The increase in 2011 is largely attributable to the recognition of $4.5 million of previously unrecognized PIK interest on Tranche B of Alden’s Term Loan.

 
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Our total targeted investment portfolio balance decreased on a cost basis by $83.6 million from $250.6 million at September 30, 2010 to $167.0 million at September 30, 2011, primarily as a result of the July 2011 sale of our Alden and Gatliff investments.  On a cost basis, the balance of non-accruing and non-income producing investments decreased from $117.0 million at September 30, 2010 to $30.1 million at September 30, 2011, primarily as a result of the sale of our interests in Formidable, LLC in October 2010 and the sale of Alden (Tranche B and Class E Units), DeanLake, Gatliff and TierraMar during the first nine months of 2011, partially offset by the addition of our investments in BioEnergy and Bionol to non-accrual status in the first quarter of 2011.  On a fair value basis, the balance of non-accruing and non-income producing investments decreased from $60.4 million at September 30, 2010 to $8.1 million at September 30, 2011.  The table below summarizes our non-accruing and non-income producing investments (in thousands):
 
    
September 30, 2011
   
September 30, 2010
 
($ in thousands)
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Non-accruing investments
                       
Alden Resources, LLC Tranche B (sold in July 2011)
  $ -     $ -     $ 19,520     $ 19,520  
Formidable, LLC (sold in October 2010)
    -       -       38,780       5,300  
BioEnergy Holdings, LLC (non-accrual at March 1, 2011)
    15,511       -       -       -  
Bionol Clearfield, LLC (non-accrual at March 1, 2011)
    4,950       -       -       -  
Chroma Exploration & Production, Inc.
    4,311       650       4,311       750  
Total non-accruing investments
    24,772       650       62,611       25,570  
                                 
Non-income producing investments
                               
Alden Resources, LLC Class E Units (sold in July 2011)
    -       -       5,800       5,800  
BSR Holdings, LLC (sold in October 2010)
    -       -       300       300  
DeanLake Operator, LLC preferred units (sold in September 2011)
    -       150       14,000       7,500  
Formidable, LLC warrants and units (sold in October 2010)
    -       -       510       -  
Gatliff Services, LLC units (sold in July 2011)
    -       -       12,100       12,100  
TierraMar Energy, LP preferred units (sold in March 2011)
    -       -       16,711       5,000  
BioEnergy Holdings, LLC units and warrants
    1,297       -       1,297       1,297  
Myriant Technologies, LLC warrants and units
    468       755       468       468  
Resaca Exploitation, Inc. common stock and warrants
    3,485       2,107       3,235       2,355  
Black Pool Energy Partners, LLC warrants
    10       -       10       10  
Castex Energy Development Fund, LLC units
    -       -       -       -  
Globe BG, LLC (contingent Alden earn-out)
    -       3,400       -       -  
Spirit Resources, LLC warrants
    25       25       -       -  
Tammany Oil & Gas, LLC warrants
    5       1,000       -       -  
Total non-income producing investments
    5,290       7,437       54,431       34,830  
Total non-accruing and non-income
                               
 producing investments
  $ 30,062     $ 8,087     $ 117,042     $ 60,400  
 
Although LIBOR rates remained low during the first three quarters of 2011, they had a minimal effect on our targeted investment income because of LIBOR floors established for new portfolio companies and certain other existing portfolio companies beginning in 2008.  Additionally, the continued downward pressure on U.S. Treasury Bill interest rates during 2011 and 2010 reduced interest from cash and cash equivalents.

At September 30, 2011, the weighted average yield on targeted portfolio investments, exclusive of capital gains, was 11.3%, compared to 8.2% at September 30, 2010.  The weighted average yield of all investments was 11.3% at September 30, 2011, compared to 6.1% at September 30, 2010, including interest earned on U.S. Treasury Bills.  This improvement in yield is primarily attributable to the reduction in non-accruing investments from a cost of $62.6 million at September 30, 2010 to $24.8 million at September 30, 2011, and a generally more favorable mix of investments in our portfolio.  We compute yields on investments using interest rates as of the balance sheet date and include amortization of loan discount points, OID, and market premium or discount, royalty interest income, net profits income and other similar investment income, weighted by their respective costs when averaged. These yields do not include income from any investments on non-accrual status.  Such weighted average yields are not necessarily indicative of expected total returns on a portfolio.
 
 
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Operating Expenses

For the quarter ended September 30, 2011, operating expenses were $3.0 million, decreasing less than $0.1 million, or 1%, compared to the quarter ended September 30, 2010.  Investment management and incentive fees were $1.3 million for the quarter ended September 30, 2011 compared to $1.4 million for the quarter ended September 30, 2010, decreasing as a result of lower base management fees in the third quarter of 2011.  Professional fees, insurance expense and other general and administrative expenses were relatively unchanged at $1.3 million for both periods.  Interest expense and fees on our credit facilities were $0.4 million for the quarter ended September 30, 2011 compared to $0.3 million for the quarter ended September 30, 2010, as a result of increased average borrowing levels while interest rates remained consistent.

For the nine months ended September 30, 2011, operating expenses were $9.3 million, increasing $0.2 million, or 2%, compared to $9.1 million for the nine months ended September 30, 2010.  Investment management and incentive fees were $0.1 million higher in 2011 at $4.3 million, compared to $4.2 million for the first nine months of 2010, primarily as a result of investment income incentive fees earned in the second and third quarters of 2011, slightly offset by lower base management fees.  Professional fees, insurance expense and other general and administrative expenses decreased slightly to $3.8 million for the year-to-date period ended September 30, 2011, compared to $4.0 million for the corresponding period in 2010.  Interest expense and fees on our credit facilities increased slightly to $1.1 million for the nine months ended September 30, 2011 compared to $1.0 million for the nine months ended September 30, 2010, due to increased average borrowing levels.

Operating expenses for the three and nine-month periods include our allocable portion of the total organizational and operating expenses incurred by us, our Manager and our Administrator, as determined by our Board of Directors and representatives of our Manager and our Administrator.  According to the terms of the investment advisory agreement, we calculate the base management fee quarterly as 0.45% of the average of our total assets as of the end of the two previous quarters.  Other general and administrative expenses include our allocated share of employee, facilities, stockholder services and marketing costs.

Net Investment Income

For the quarter ended September 30, 2011, net investment income was $4.3 million compared to $3.2 million for the quarter ended September 30, 2010.  The 35% increase was primarily attributable to the $1.1 million increase in investment income.

For the nine months ended September 30, 2011, net investment income was $13.6 million compared to $8.3 million for the nine months ended September 30, 2010.  The 64% increase was primarily attributable to the $5.4 million increase in investment income.

Net Realized Losses

For the quarter ended September 30, 2011, we recognized net realized capital losses of $30.9 million resulting primarily from realized losses on the sale of our investments in Alden and Gatliff, $3.7 million; DeanLake, $13.9 million; and TierraMar, $15.3 million, partially offset by realized gains from the sales of the after pay-out overriding royalty interest and 50% of our warrants of Tammany of $2.0 million. We did not have any net realized capital gains or losses for the quarter ended September 30, 2010.

For the nine months ended September 30, 2011, we recognized net realized capital losses of $30.4 million, resulting primarily from realized losses on the sale of our investments in Alden and Gatliff, $3.7 million; DeanLake, $13.9 million; TierraMar, $15.2 million; and PXD, $1.1 million; partially offset by realized gains from the sales of the overriding royalty interest associated with Green Leaf, $1.0 million; and the after pay-out overriding royalty interest and 50% of our warrants of Tammany of $2.0 million.  We did not have any net realized capital gains or losses for the nine months ended September 30, 2010.

Unrealized Appreciation or Depreciation on Investments

For the quarter ended September 30, 2011, the decrease in net unrealized depreciation was $26.7 million.  The decrease in unrealized depreciation primarily resulted from the reversal, due to realizations, of prior period net write-downs of investments in Alden and Gatliff, $2.6 million; DeanLake, $13.5 million and TierraMar, $15.3 million; offset by the reversal, due to realizations, of prior period write-ups of our investment in limited-term royalties of ATP, $0.5 million.  Additional increases in unrealized depreciation were due to the reduction in the fair value of the assets underlying our investments in Black Pool Energy Partners, LLC, or Black Pool, $3.7 million, and GMX, $1.2 million, partially offset by the increase in the fair market value of our warrants associated with our investment in Tammany of $1.0 million.
 
 
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For the quarter ended September 30, 2010, the increase in net unrealized depreciation was $3.1 million, primarily as a result of decreases in the fair value of our investments in the membership interests and overriding royalty of DeanLake of $2.8 million and value of our investment in Resaca of $1.5 million, offset by the increase in the value of our investments in PXD of $0.9 million and in Anadarko Petroleum Corporation 2007-III Drilling Fund, or APC, of $0.4 million.

For the nine months ended September 30, 2011, the increase in net unrealized depreciation was $2.8 million, primarily due to decreases in the fair value of our investments in BioEnergy and Bionol of $21.5 million, Black Pool of $3.7 million and the reversal, due to realizations, of prior period unrealized appreciation associated with our investments in Alden of $4.3 million, partially offset by the reversal of prior period unrealized depreciation associated with our investments in DeanLake of $10.7 million and TierraMar of $15.7 million.

By comparison, for the nine months ended September 30, 2010, the decrease in net unrealized depreciation was $0.6 million, primarily resulting from the reversal, due to realizations, of prior period unrealized depreciation associated with our investment in ATP of $3.7 million, partially offset by the decrease in the fair value of our membership interests of DeanLake of $2.6 million.

While, in general, current capital and commodity markets are more stable in 2011 than during recent years, conditions are such that it remains difficult to predict capital gains or losses or fluctuations in our portfolio values.

Net Increase or Decrease in Net Assets Resulting from Operations

For the quarters ended September 30, 2011 and 2010, we had net increases in net assets resulting from operations of less than $0.1 million.  For the nine months ended September 30, 2011, we had a net decrease in net assets resulting from operations of $19.6 million, or $0.91 per share, compared to a net increase of $8.9 million, or $0.42 per share, for the corresponding period in 2010.  The $28.5 million, or $1.33 per share, net change between the two periods was primarily attributable to the $33.9 million increase in net realized and unrealized losses on our investments in 2011, partially offset by a $5.4 million increase in investment income in 2011.

Financial Condition, Liquidity and Capital Resources

During the nine months ended September 30, 2011, we generated cash from operations of $8.7 million excluding net purchases of investments; we received cash repayments and realizations of $138.2 million; and we reinvested $88.4 million in new investments.  At September 30, 2011, we had cash and cash equivalents of $80.2 million.  The amount outstanding under our Investment Facility at September 30, 2011 was $15.0 million and an additional $49.6 million was available for borrowing.  We repaid the $15.0 million balance outstanding on our Investment Facility in October 2011.  In September 2011, we redeemed our $30.6 million in U.S. Treasury Bills and used the proceeds to repay the outstanding borrowings under our Treasury Facility.  As of September 30, 2011, we had no outstanding indebtedness under the Treasury Facility and the entire $30.0 million was available.

Our net cash provided by operating activities for the nine months ended September 30, 2011 was $58.4 million, $42.8 million more than the $15.6 million net cash provided by operating activities for the nine months ended September 30, 2010.  This increase was primarily due to higher redemptions of investments in portfolio securities.  Purchases of portfolio securities were $88.4 million during the first three quarters of 2011, an increase of $67.1 million compared to the $21.3 million in purchases for the first three quarters of 2010.  The increased purchases in 2011 included Resaca, $10.0 million; Alden, $7.3 million; Gatliff, $2.9 million; ATP, $25.0 million; Spirit, $9.3 million; GMX, $6.9 million and Castex, $26.9 million.  By comparison, purchases for this nine-month period in 2010 included Alden, $3.0 million; Gatliff, $12.1 million; GMX, $4.9 million and BioEnergy, $1.2 million.  Proceeds from the redemption of investments increased $117.9 million in the nine months ended September 30, 2011 to $138.2 million, compared to $20.3 million in the first nine months of 2010.  The increased redemptions in 2011 included Resaca, $10.0 million; PXD, $10.4 million; GMX, $3.3 million; Greenleaf, $9.6 million; ATP, $10.8 million; Tammany, $12.7 million; TierraMar, $1.5 million; Black Pool, $2.0 million; Pallas Contour Mining, LLC, $2.0 million; Alden, $55.6 million; Gatliff, $15.6 million and APC, $3.9 million.  By comparison, redemptions in 2010 included Alden, $9.5 million; Greenleaf, $1.8 million; ATP, $6.1 million and TierraMar, $1.0 million.

During the nine months ended September 30, 2011, we paid cash dividends totaling $11.7 million, or $0.54 per share, to our common shareholders compared to $11.0 million, or $0.51 per share, for the corresponding period of 2010.  We currently intend to continue to distribute, in the form of quarterly dividends, a minimum of 90% of our annual investment company taxable income to our stockholders.

On October 31, 2011, our Board of Directors approved a stock repurchase plan, pursuant to which we may, from time to time, repurchase up to $10.0 million of our common stock in the open market at prices not to exceed net asset value during our open trading periods.  Our Board of Directors authorized this plan, because it believes that general market trading activity may cause our common stock to be undervalued from time to time.  The repurchase program does not obligate us to purchase any shares and may be discontinued at any time.

As of September 30, 2011, we had investments in or commitments to fund loan facilities to eighteen portfolio companies totaling $177.7 million, of which $169.6 million was drawn.  We expect to fund our investments in 2011 and 2012 from available cash, repayments or realizations of existing investments and from borrowings under our credit facilities.  In the future, we may also fund a portion of our investments with issuances of equity or senior debt securities.  We expect our primary use of funds to be investments in portfolio companies, cash distributions to holders of our common stock and payment of fees and other operating expenses.
 
 
34

 
 
  Commodity Derivative Instruments

We may periodically use commodity derivative instruments to manage our exposure to commodity price fluctuations.  We do not designate these instruments as hedging instruments for financial accounting purposes, and, as a result, we recognize the change in the instruments’ fair value currently on the Consolidated Statements of Operations as net increase (decrease) in unrealized appreciation (depreciation) on portfolio securities and commodity derivative instruments.  In June 2008, we acquired a limited term volume-denominated royalty interest from ATP, and the royalty payments associated with this investment were subject to fluctuations in natural gas and oil prices.  To manage this risk, we purchased oil and natural gas put options on approximately 93% of our royalty interest.  All of our commodity derivative instruments expired as of January 31, 2010 and we received payment for the final volumes associated with the limited term royalty interest in September 2010.

Contractual Obligations and Off-Balance Sheet Arrangements

Below is a summary of our contractual payment obligations at September 30, 2011:

         
Less than
               
More than
 
Contractual Obligations
 
Total
   
1 Year
   
1-3 Years
   
3-5 Years
   
5 Years
 
                               
September 30, 2011:
                             
Revolving credit facilities (1)
 
$
15,000,000
   
$
15,000,000
   
$
-
   
$
-
   
$
-
 
Total
 
$
15,000,000
   
$
15,000,000
   
$
-
   
$
-
   
$
-
 

(1)  Excludes accrued interest amounts.  We repaid the $15.0 million balance on our Investment Facility in October 2011.
 
We have certain unused commitments to extend credit to our portfolio companies. Generally, these commitments have fixed expiration dates, through the year 2032, and we do not expect to fund the entire amounts before they expire.  Therefore, these commitment amounts do not necessarily represent future cash requirements.  In February 2010, we arranged for a letter of credit issued under the Investment Facility with respect to our investment in one of our portfolio companies.  As of September 30, 2011, the letter of credit balance was $2.9 million.  We do not report the unused portions of these commitments on the balance sheets included in our consolidated financial statements. The following table shows our unused credit commitments and letter of credit as of September 30, 2011 and December 31, 2010:

   
September 30, 2011
   
December 31, 2010
 
Unused credit commitments
 
$
8,128,874
   
$
8,682,153
 
Letter of credit
   
2,851,500
     
2,676,200
 

Dividends

We have elected to operate our business to be taxed as a RIC for federal income tax purposes.  As a RIC, we generally may not pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends.  To maintain our RIC status, we must meet specific source-of-income and asset diversification requirements and distribute annually an amount equal to at least 90% of our “investment company taxable income” (which generally consists of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses) and net tax-exempt interest.  In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gain net income (i.e., realized capital gains in excess of realized capital losses) for the one-year period ended on October 31 of that calendar year, and (3) 100% of any ordinary income or capital gain net income not distributed in prior years. The Regulated Investment Company Modernization Act of 2010 increased a RIC’s required capital gain distribution to avoid excise tax from 98% to 98.2% beginning in 2011.  We currently intend to make sufficient distributions to satisfy the annual distribution requirement and to avoid the excise taxes.

We may not achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings when applicable to us as a BDC under the 1940 Act and due to provisions in our credit facility. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at any specific level.

 
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Portfolio Credit Quality

Virtually all of our portfolio investments are in negotiated, and often illiquid, securities of energy-related businesses. We maintain a system to evaluate the credit quality of these investments. While incorporating quantitative analysis, this system is a qualitative assessment. This system is intended to reflect the overall, long-term performance of a portfolio company’s business, the collateral coverage of an investment, and other relevant factors.  Of the nineteen rated investments in sixteen portfolio companies as of September 30, 2011, two improved in rating, five declined in rating, eight retained the same rating and we added four new investments during the first nine months of 2011.  As of September 30, 2011, on a fair value basis, approximately 60% of our portfolio investments were in the form of senior secured debt securities.  At September 30, 2011, we had three investments on non-accrual status with an aggregate cost and fair value of $24.8 million and $0.7 million, respectively.  Our portfolio investments at fair value were approximately 85% of the related cost basis as of September 30, 2011.

For the nine months ended September 30, 2011, the increase in net unrealized depreciation was $2.8 million primarily due to decreases in targeted portfolio fair value of our investments in BioEnergy of $21.5 million, Black Pool of $3.7 million and the reversal, due to realizations, of prior period unrealized appreciation associated with our investments in Alden of $4.3 million, offset by the reversal of prior period unrealized depreciation associated with our investments in DeanLake of $10.7 million and TierraMar of $15.7 million. By comparison, for the nine months ended September 30, 2010, the decrease in net unrealized depreciation was $0.6 million, primarily resulting from the reversal, due to realizations, of prior period unrealized depreciation associated with our initial investment in ATP of $3.7 million offset by the decrease in the fair value of our membership units of DeanLake of $2.6 million.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” or ASU 2011-04.  This guidance requires additional disclosure regarding fair value measurement and sensitivity, and improves consistency between GAAP and IFRS.  This guidance must be applied prospectively and becomes effective for interim and annual periods beginning after December 15, 2011.  We will adopt this guidance in our Form 10-Q for the period ended March 31, 2012, and we do not believe the new guidance will have a significant impact on our consolidated financial statements, other than the additional required disclosures.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes from the information provided in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 4.   Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act), designed to ensure that information required to be disclosed in our reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.

In connection with the preparation of this Quarterly Report on Form 10-Q, as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q, we performed an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) of the Exchange Act.  Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2011, our disclosure controls and procedures were effective in providing reasonable assurance (i) that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) that such information is accumulated and communicated to management in a manner that allows timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II – OTHER INFORMATION

Item 1. 
Legal Proceedings.

There have been no material changes to the legal proceedings disclosed under Part I, Item 3, “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Item 1A.
Risk Factors.

There have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Item 6.
Exhibits.

See “Index to Exhibits” following the signature page for a description of the exhibits furnished as part of this Quarterly Report on Form 10-Q.
 
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
NGP CAPITAL RESOURCES COMPANY
       
Date:  November 14, 2011
 
By:
/s/ Stephen K. Gardner
     
Stephen K. Gardner
     
President and Chief Executive Officer
       
Date:  November 14, 2011
 
By:
/s/ L. Scott Biar
     
L. Scott Biar
     
Chief Financial Officer, Treasurer and Secretary
 
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Index to Exhibits

Exhibits No.
 
Exhibit
 3.1
 
Articles of Incorporation (filed as Exhibit (a)(1) to our Registration Statement on Form N-2 filed on August 16, 2004 (Registration No. 333-118279) and incorporated herein by reference)
 3.2
 
Articles of Amendment and Restatement (filed as Exhibit 3.2 our Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference)
 3.3
 
Bylaws (filed as Exhibit (b) to our Registration Statement on Form N-2 filed on August 16, 2004 (Registration No. 333-118279) and incorporated herein by reference)
 4.1
 
Form of Stock Certificate (filed as Exhibit (d) to our Pre-Effective Amendment No. 2 to Registration Statement on Form N-2 filed on October 7, 2004 (Registration No. 333-118279) and incorporated herein by reference)
 4.2
 
Dividend Reinvestment Plan (filed as Exhibit (e) to our Registration Statement on Form N-2 filed on August 16, 2004 (Registration No. 333-118279) and incorporated herein by reference)
31.1*
 
Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Executive Officer
31.2*
 
Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Financial Officer
32.1**
 
Section 1350 Certification by the Chief Executive Officer
32.2**
 
Section 1350 Certification by the Chief Financial Officer
 


*Filed herewith.
**Furnished herewith.
 
 
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