Sierra Income Corp - FORM 10-Q

Sierra Income Corp - FORM 10-Q - November 7, 2013

Attached files

Attached files

Sierra Income Corp Reports

file	filename
EX-31.1 - EX-31.1 - Sierra Income Corp	d620890dex311.htm
EX-32.1 - EX-32.1 - Sierra Income Corp	d620890dex321.htm
EX-31.2 - EX-31.2 - Sierra Income Corp	d620890dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2013

¨	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 814-00924

Sierra Income Corporation

(Exact name of registrant as specified in its charter)

Maryland

45-2544432

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

375 Park Avenue, 33^rd Floor

New York, NY 10152

(Address of principal executive offices)

(212) 759-0777

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

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

As of November 1, 2013, the Registrant had 12,421,164 shares of common stock, $0.001 par value, outstanding.

TABLE OF CONTENTS


		Page
Part I. Financial Information

Item 1. Financial Statements			F-1

	Consolidated Statements of Assets and Liabilities as of September 30, 2013 (unaudited) and December 31, 2012		F-1

	Consolidated Statements of Operations for the three and nine months ended September 30, 2013 (unaudited) and September 30, 2012 (unaudited)		F-2

	Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2013 (unaudited) and September 30, 2012 (unaudited)		F-3

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 (unaudited) and September 30, 2012 (unaudited)		F-4

	Consolidated Schedules of Investments as of September 30, 2013 (unaudited) and December 31, 2012		F-5

	Notes to Financial Statements (unaudited)		F-12

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1

Item 3. Quantitative and Qualitative Disclosures About Market Risk			16

Item 4. Controls and Procedures			16

Part II. Other Information

Item 1. Legal Proceedings			17

Item 1A. Risk Factors			17

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			18

Item 3. Defaults Upon Senior Securities			18

Item 4. Mine Safety Disclosures			19

Item 5. Other Information			19

Item 6. Exhibits			19

SIGNATURES			20

Sierra Income Corporation

Consolidated Statements of Assets and Liabilities


	As of
	September 30, 2013			December 31, 2012
	(unaudited)
ASSETS
Non-Controlled/Non-Affiliated investments, at fair value (amortized cost of $104,157,445 and $30,599,349, respectively)	$	104,787,528		$	30,580,211
Cash and cash equivalents		616,832			6,651,767
Cash collateral on total return swap (Note 5)		2,209,000			—
Due from affiliate (Note 7)		1,965,938			814,814
Interest receivable		1,911,357			784,637
Prepaid expenses and other assets		48,614			8,949

Total assets	$	111,539,269		$	38,840,378

LIABILITIES
Due to prime broker	$	17,196,550		$	17,345,794
Unsettled trades payable		2,730,400			—
Accounts payable and accrued expenses		678,307			464,361
Management fee		487,843			171,317
Administrator fees		143,509			128,459
Directors fees		62,994			40,081
Repurchase of common shares payable		33,253			—
Unrealized depreciation on total return swap (Note 5)		32,400			—
Due to affiliate		15,702			55,927
Interest payable		11,784			10,829
Provisional incentive fee		—			628

Total liabilities	$	21,392,742		$	18,217,396

NET ASSETS
Common shares, par value $.001 per share, 250,000,000 common shares authorized, 9,862,017 and 2,300,573 common shares issued and outstanding, respectively	$	9,862		$	2,301
Capital in excess of par value		89,926,943			20,436,709
Accumulated net realized gain/(loss) from investments		(716,092	)		—
Accumulated undistributed net investment income		328,131			203,132
Net unrealized appreciation/(depreciation) on investments and total return swap		597,683			(19,160	)

Total net assets		90,146,527			20,622,982

Total liabilities and net assets	$	111,539,269		$	38,840,378

NET ASSET VALUE PER SHARE	$	9.14		$	8.96

See accompanying notes to the consolidated financial statements.

F-1

Sierra Income Corporation

Consolidated Statements of Operations


	Three Months Ended September 30						Nine months ended September 30
	2013			2012			2013			2012
INVESTMENT INCOME
Interest from Non-Controlled/Non-Affiliated investments	$	2,008,108		$	393,867		$	4,462,568		$	560,584
Other fee income		21,523			—			150,983			—
Interest from cash and cash equivalents		—			49			441			248

Total investment income		2,029,631			393,916			4,613,992			560,832

EXPENSES
Base management fee		487,843			111,770			1,091,731			148,212
Organizational and offering costs reimbursed to an affiliate (Note 7)		441,989			41,143			900,509			167,143
Professional fees		337,806			170,142			826,031			416,564
Administrator expenses		143,509			141,456			440,423			247,217
General and administrative expenses		169,506			15,094			392,222			161,466
Directors fees		41,646			40,112			127,286			111,242
Interest and financing expenses		41,960			16,407			107,455			20,390
Insurance expense		36,720			35,396			95,051			71,141
Provisional incentive fee		(34,108	)		13,125			—			14,485

Total gross expenses		1,666,871			584,645			3,980,708			1,357,860
Expense support reimbursement (Note 7)		(1,262,848	)		(437,303	)		(2,680,676	)		(893,537	)

Net expenses		404,023			147,342			1,300,032			464,323

NET INVESTMENT INCOME		1,625,608			246,574			3,313,960			96,509

Net realized gain/(loss) from investments		(714,665	)		—			(605,457	)		25,065
Net change in unrealized appreciation/(depreciation) on investments		565,613			65,623			649,243			47,357
Net change in unrealized appreciation/(depreciation) on total return swap (Note 5)		(32,400	)		—			(32,400	)		—

Net gain/(loss) on investments and total return swap		(181,452	)		65,623			11,386			72,422

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	1,444,156		$	312,197		$	3,325,346		$	168,931

WEIGHTED AVERAGE — BASIC AND DILUTED EARNINGS PER COMMON SHARE	$	0.18		$	0.25		$	0.61		$	0.23

WEIGHTED AVERAGE — BASIC AND DILUTED NET INVESTMENT INCOME PER COMMON SHARE	$	0.21		$	0.20		$	0.61		$	0.13

WEIGHTED AVERAGE COMMON STOCK OUTSTANDING — BASIC AND DILUTED		7,896,446			1,231,625			5,441,473			721,389

DIVIDENDS DECLARED PER COMMON SHARE	$	0.20		$	0.20		$	0.60		$	0.20

See accompanying notes to the consolidated financial statements.

F-2

Sierra Income Corporation

Consolidated Statements of Changes in Net Assets


	For the nine months ended September 30,
	2013			2012
	(unaudited)			(unaudited)
INCREASE FROM OPERATIONS
Net investment income	$	3,313,960		$	96,509
Net realized gain/(loss) on investments		(605,457	)		25,065
Net change in unrealized appreciation/(depreciation) on investments and total return swap (Note 5)		616,843			47,357

Net increase in net assets resulting from operations		3,325,346			168,931

SHAREHOLDER DISTRIBUTIONS
Distributions from realized gains		(110,635	)		—
Distributions from net investment income		(3,188,961	)		(168,931	)
Distributions from return of capital		—			(77,643	)

Net decrease in net assets from shareholder distributions		(3,299,596	)		(246,574	)

CAPITAL SHARE TRANSACTIONS
Issuance of common shares, net of underwriting costs		68,523,071			13,063,446
Issuance of common shares pursuant to distribution reinvestment plan		1,007,977			3,262
Repurchase of common shares		(33,253	)		—

Net increase in net assets resulting from capital share transactions		69,497,795			13,066,708

Total increase in net assets		69,523,545			12,989,065
Net assets at beginning of period		20,622,982			1,000

Net assets at end of period (including accumulated undistributed net investment income/(loss) of $328,130 and $(125,000), respectively)	$	90,146,527		$	12,990,065

Net asset value per common share	$	9.14		$	8.97
Common shares outstanding, beginning of period		2,300,573			—
Issuance of common shares		7,455,291			1,447,518
Issuance of common shares pursuant to distribution reinvestment plan		109,795			343
Repurchase of common shares		(3,642	)		—

Common shares outstanding, end of period		9,862,017			1,447,861

See accompanying notes to the consolidated financial statements.

F-3

Sierra Income Corporation

Consolidated Statements of Cash Flows


	For the nine months ended September 30,
	2013			2012
	(unaudited)			(unaudited)
Cash flows from operating activities
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	3,325,346		$	168,931
ADJUSTMENT TO RECONCILE NET INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS TO NET CASH USED IN OPERATING ACTIVITIES
Paid-in-kind interest income		(580	)		(2,213	)
Net amortization of premium on investments		22,741			17,210
Net realized (gain)/loss on investments		605,457			(25,065	)
Net change in unrealized appreciation/(depreciation) on investments		(649,243	)		(47,352	)
Net change in unrealized appreciation/(depreciation) on total return swap (Note 5)		32,400			—
Purchases of investments		(95,326,340	)		(21,070,859	)
Proceeds from sale of investments		21,140,648			2,985,348
(Increase)/decrease in operating assets:
Interest receivable		(1,126,720	)		(574,723	)
Prepaid expenses and other assets		(39,665	)		(13,952	)
Due from affiliate		(1,151,124	)		(539,764	)
Cash collateral on total return swap (Note 5)		(2,209,000	)		—
Increase/(decrease) in operating liabilities:
Unsettled trades payable		2,730,400			1,585,394
Management fee		316,526			111,770
Interest payable		955			5,192
Accounts payable and accrued expenses		213,946			359,541
Administrator fees		15,050			141,456
Due to affiliate		(40,225	)		—
Provisional incentive fee		(628	)		14,485
Directors fee		22,913			11,246

NET CASH USED IN OPERATING ACTIVITIES		(72,117,143	)		(16,873,355	)

Cash flows from financing activities
Borrowings under prime broker margin account		(149,244	)		10,028,782
Proceeds from issuance of common stock, net of underwriting costs		68,489,819			1,448
Payment of cash dividends		(2,291,620	)		(150,622	)
Repurchase of common shares		33,253			—
Proceeds from additional paid in capital		—			13,061,998

NET CASH PROVIDED BY FINANCING ACTIVITIES		66,082,208			22,941,606

TOTAL INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		(6,034,935	)		6,068,251
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		6,651,767			1,000

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	616,832		$	6,069,251

Supplemental Information
Cash paid during the period for interest	$	106,500		$	20,390
Supplemental non-cash information
Paid-in-kind interest income	$	580		$	2,213
Net amortization of premium on investments	$	(22,741	)	$	(17,210	)
Issuance of common shares in connection with distribution reinvestment plan	$	1,007,977		$	3,262

See accompanying notes to the consolidated financial statements.

F-4

Sierra Income Corporation

Consolidated Schedule of Investments

As of September 30, 2013

(unaudited)


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Non-controlled/non-affiliated investments — 116.2%
Aderant North America, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor⁽⁴⁾		6/20/2019	$	450,000	$	450,000	$	450,000		0.5	%

						450,000		450,000		450,000
Alcatel — Lucent USA, Inc.	Telecommunications	Senior Secured First Lien Term Loans LIBOR + 6.000%, 1.250% Floor		1/30/2019		992,500		987,983		996,222		1.1	%

						992,500		987,983		996,222
ALG USA Holdings, Inc.	Leisure, Amusement, Motion Pictures, Entertainment	Senior Secured Second Lien Term Loans LIBOR + 9.000%, 1.250% Floor		2/28/2020		2,000,000		1,962,062		1,987,340		2.2	%

						2,000,000		1,962,062		1,987,340
American Apparel, Inc.	Retail Stores	Senior Secured First Lien Notes 13.000%^(3)(4)(5)		4/15/2020		2,500,000		2,459,399		2,550,000		2.8	%

						2,500,000		2,459,399		2,550,000
Associated Asphalt Partners LLC	Chemicals, Plastics, and Rubber	Senior Secured First Lien Notes 8.500%⁽³⁾⁽⁵⁾		2/15/2018		5,000,000		5,038,460		4,959,550		5.5	%

						5,000,000		5,038,460		4,959,550
Atkore International, Inc.	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured First Lien Notes 9.875%⁽⁵⁾		1/1/2018		750,000		735,014		812,813		0.9	%

						750,000		735,014		812,813
Bon-Ton Stores, Inc.	Retail Stores	Senior Secured Second Lien Notes 10.625%⁽⁵⁾		7/15/2017		1,698,000		1,618,859		1,684,093		1.9	%

						1,698,000		1,618,859		1,684,093
Caesars Entertainment Operating Co., Inc.	Hotels, Motels, Inns, and Gaming	Senior Secured First Lien Notes 11.250%⁽⁵⁾⁽⁶⁾		6/1/2017		3,000,000		3,162,790		3,045,000		3.4	%

						3,000,000		3,162,790		3,045,000
Camp Systems International, Inc.	Aerospace and Defense	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor		11/30/2019		500,000		491,461		510,000		0.6	%

						500,000		491,461		510,000
Checkers Drive-In Restaurants, Inc.	Beverage, Food, and Tobacco	Senior Secured First Lien Notes 11.000%⁽³⁾⁽⁵⁾		12/1/2017		1,500,000		1,504,299		1,575,000		1.8	%

						1,500,000		1,504,299		1,575,000
Clondalkin Acquisitions B.V.	Containers, Plastics, and Glass	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor⁽⁶⁾		11/30/2020		2,000,000		1,961,265		1,970,000		2.2	%

						2,000,000		1,961,265		1,970,000
Cornerstone Chemical Company	Chemicals, Plastics, and Rubber	Senior Secured First Lien Notes 9.375%⁽⁵⁾		3/15/2018		2,000,000		2,000,000		2,110,360		2.3	%
		Senior Secured First Lien Notes 9.375%^{(3) (5)}		3/15/2018		2,500,000		2,617,107		2,637,950		2.9	%

						4,500,000		4,617,107		4,748,310

F-5


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Deltek, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor		10/10/2019		3,000,000		2,977,138		3,007,500		3.3	%

						3,000,000		2,977,138		3,007,500
Dispensing Dynamics International, Inc.	Personal and Nondurable Consumer Products (Manufacturing Only)	Senior Secured First Lien Notes 12.500%^(3)(4)(5)		1/1/2018		2,200,000		2,178,104		2,211,836		2.5	%

						2,200,000		2,178,104		2,211,836
EarthLink, Inc.	Telecommunications	Senior Secured First Lien Notes 7.375%^(3)(5)(6)		6/1/2020		2,450,000		2,437,116		2,391,812		2.7	%

						2,450,000		2,437,116		2,391,812
Erickson Air-Crane, Inc.	Aerospace and Defense	Senior Secured Second Lien Notes 8.250%⁽³⁾⁽⁵⁾		5/1/2020		1,953,000		1,967,540		1,911,499		2.1	%

						1,953,000		1,967,540		1,911,499
Fifth and Pacific Companies, Inc.	Retail Stores	Senior Secured First Lien Notes 10.500%^(3)(5)(6)		4/15/2019		500,000		548,583		545,000		0.6	%

						500,000		548,583		545,000
Gastar Exploration USA, Inc.	Oil and Gas	Senior Secured First Lien Notes 8.625%⁽³⁾⁽⁵⁾		5/15/2018		3,000,000		3,000,000		2,907,000		3.2	%

						3,000,000		3,000,000		2,907,000
Gibson Brands, Inc.	Personal and Nondurable Consumer Products (Manufacturing Only)	Senior Secured First Lien Notes 8.875%⁽³⁾⁽⁵⁾		8/1/2018		3,000,000		3,058,705		3,063,750		3.4	%

						3,000,000		3,058,705		3,063,750
Great Atlantic & Pacific Tea Company	Grocery	Senior Secured First Lien Term Loans LIBOR + 9.000%, 2.000% Floor⁽⁴⁾		3/13/2017		935,147		952,804		946,294		1.1	%

						935,147		952,804		946,294
Green Field Energy Services, Inc.	Oil and Gas	Senior Secured First Lien Notes 13.000%^(3)(4)(5)		11/15/2016		724,000		713,208		579,200		0.6	%

						724,000		713,208		579,200
Green Field Energy Services, Inc., Warrants, expires 11/15/21	Oil and Gas	Warrants/Equity⁽⁴⁾⁽⁷⁾				709		29,000		22,241		0.0	%

						709		29,000		22,241
Healogics, Inc.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 8.000%, 1.250% Floor		2/5/2020		1,500,000		1,486,045		1,526,250		1.7	%

						1,500,000		1,486,045		1,526,250
Holland Acquisition Corp.	Oil and Gas	Senior Secured First Lien Term Loans LIBOR + 9.000%, 1.000% Floor		5/29/2018		5,000,000		4,900,243		4,900,243		5.4	%

						5,000,000		4,900,243		4,900,243
IDQ Holdings, Inc.	Automobile	Senior Secured First Lien Notes 11.500%⁽³⁾⁽⁵⁾		4/1/2017		1,000,000		1,038,207		1,077,280		1.2	%

						1,000,000		1,038,207		1,077,280
Ineos US Finance PLC	Chemicals, Plastics, and Rubber	Senior Secured First Lien Notes 7.500%⁽³⁾⁽⁵⁾		5/1/2020		1,250,000		1,282,374		1,337,500		1.5	%

						1,250,000		1,282,374		1,337,500
Integra Telecom, Inc.	Telecommunications	Senior Secured Second Lien Term Loans LIBOR + 8.500%, 1.250% Floor⁽⁴⁾		2/22/2020		1,618,000		1,607,614		1,644,292		1.8	%

						1,618,000		1,607,614		1,644,292

F-6


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Interface Security Systems, Inc.	Electronics	Senior Secured First Lien Notes 9.250%^(3)(4)(5)		1/15/2018		3,417,000		3,479,190		3,513,394		3.9	%

						3,417,000		3,479,190		3,513,394
IronGate Energy Services LLC	Oil and Gas	Senior Secured First Lien Notes 11.000%⁽³⁾⁽⁵⁾		7/1/2018		3,000,000		2,945,091		2,970,000		3.3	%

						3,000,000		2,945,091		2,970,000
KCG Holdings, Inc.	Finance	Senior Secured Second Lien Notes 8.250%^(3)(5)(6)		6/15/2018		3,000,000		3,000,000		2,940,000		3.3	%

						3,000,000		3,000,000		2,940,000
Keystone Automotive Operations, Inc.	Automobile	Senior Secured Second Lien Term Loans LIBOR + 9.500%, 1.250% Floor		8/15/2020		5,000,000		5,000,000		5,000,000		5.6	%

						5,000,000		5,000,000		5,000,000
Linc Energy Finance (USA), Inc.	Oil and Gas	Senior Secured First Lien Notes 12.500%^(3)(4)(5)		10/31/2017		500,000		498,374		546,250		0.6	%
		Senior Secured First Lien Notes 12.500%⁽⁴⁾⁽⁵⁾		10/31/2017		500,000		484,586		546,250		0.6	%

						1,000,000		982,960		1,092,500
Liquidnet Holdings, Inc.	Finance	Senior Secured First Lien Term Loans LIBOR + 8.000%, 1.250% Floor		5/7/2017		2,925,000		2,898,020		2,895,750		3.2	%

						2,925,000		2,898,020		2,895,750
Livingston International, Inc.⁽⁸⁾	Cargo Transport	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.250% Floor⁽⁶⁾		4/18/2020		2,720,000		2,713,808		2,740,400		3.0	%

						2,720,000		2,713,808		2,740,400
Maxim Crane Works Holdings, Inc.	Oil and Gas	Senior Secured Second Lien Notes 12.250%⁽³⁾⁽⁵⁾		4/15/2015		1,500,000		1,523,112		1,546,875		1.7	%

						1,500,000		1,523,112		1,546,875
Mohegan Tribal Gaming Authority	Hotels, Motels, Inns, and Gaming	Senior Secured Second Lien Notes 11.500%⁽³⁾⁽⁵⁾		11/1/2017		1,000,000		1,038,600		1,126,250		1.3	%

						1,000,000		1,038,600		1,126,250
Murray Energy Corp.	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured Second Lien Notes 8.625%⁽³⁾⁽⁵⁾		6/15/2021		2,100,000		2,122,115		2,100,000		2.3	%

						2,100,000		2,122,115		2,100,000
Prince Minerals Holding Corp.	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured First Lien Notes 11.500%^(3)(4)(5)		12/15/2019		1,200,000		1,186,557		1,278,000		1.4	%

						1,200,000		1,186,557		1,278,000
Reddy Ice Group, Inc.	Beverage, Food, and Tobacco	Senior Secured Second Lien Term Loans LIBOR + 9.500%, 1.250% Floor⁽⁴⁾		10/1/2019		2,000,000		2,000,000		1,983,886		2.2	%

						2,000,000		2,000,000		1,983,886
Satmex Mexicanos, S.A. de C.V.	Telecommunications	Senior Secured First Lien Notes 9.500%^(3)(5)(6)		5/15/2017		1,000,000		1,030,252		1,081,250		1.2	%

						1,000,000		1,030,252		1,081,250
School Specialty, Inc.	Healthcare, Education, and Childcare	Senior Secured First Lien Term Loans LIBOR + 8.500%, 1.000% Floor		6/11/2019		2,992,500		2,941,702		2,947,612		3.3	%

						2,992,500		2,941,702		2,947,612

F-7


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value			% of Net Assets⁽²⁾
Securus Technologies, Inc.	Telecommunications	Senior Secured Second Lien Term Loans LIBOR + 9.000%, 1.750% Floor		4/30/2021		2,000,000		1,980,796		1,965,000			2.2	%

						2,000,000		1,980,796		1,965,000
Sesac Holdco II, Inc.	Broadcasting and Entertainment	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor⁽⁴⁾		7/12/2019		2,250,000		2,295,345		2,289,555			2.5	%

						2,250,000		2,295,345		2,289,555
Shale-Inland Holdings, Inc.	Oil and Gas	Senior Secured First Lien Notes 8.750%⁽³⁾⁽⁵⁾		11/15/2019		1,000,000		994,037		1,012,970			1.1	%

						1,000,000		994,037		1,012,970
Sizzling Platter, LLC	Beverage, Food, and Tobacco	Senior Secured First Lien Notes 12.250%^(3)(4)(5)		4/15/2016		2,063,000		2,131,310		2,183,252			2.4	%

						2,063,000		2,131,310		2,183,252
Sorenson Communications	Telecommunications	Senior Secured First Lien Term Loans LIBOR + 8.250%, 1.250% Floor		10/31/2014		2,987,500		2,987,500		2,994,969			3.3	%

						2,987,500		2,987,500		2,994,969
Tempel Steel Company	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured First Lien Notes 12.000%^(3)(4)(5)		8/15/2016		1,115,000		1,105,076		1,079,320			1.2	%

						1,115,000		1,105,076		1,079,320
True Religion Apparel, Inc.	Personal and Nondurable Consumer Products (Manufacturing Only)	Senior Secured Second Lien Term Loans LIBOR + 10.000%, 1.000% Floor		1/30/2020		4,000,000		3,830,887		3,830,887			4.3	%

						4,000,000		3,830,887		3,830,887
U.S. Well Services, LLC	Oil and Gas	Senior Secured First Lien Notes 14.500%^(3)(4)(5)		2/15/2017		2,816,605		2,805,534		2,817,309			3.1	%

						2,816,605		2,805,534		2,817,309
U.S. Well Services, LLC, Warrants, expires 2/15/19	Oil and Gas	Warrants/Equity⁽⁴⁾⁽⁷⁾				1,731		173		38,324			0.0	%

						1,731		173		38,324
Total non-controlled/non-affiliated investments							$	104,157,445	$	104,787,528			116.2	%


							Notional Amount		Unrealized Gain (Loss)
Derivative Instrument — Long Exposure
Total return swap (Note 5)		Total return swap					$	7,030,000	$	(32,400	)

							$	7,030,000	$	(32,400	)

(1)	All of our investments are domiciled in the United States except for Satmex Mexicanos, S.A. de C.V., Livingston International, Inc., and Clondalkin Acquisitions B.V., which are domiciled in Mexico, Canada and the Netherlands, respectively.

(2)	Percentage is based on net assets of $90,146,527 as of September 30, 2013.

(3)	Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent $51,942,247 and 57.6% of net assets as of September 30, 2013 and are considered restricted.

(4)	An affiliated fund that is managed by an affiliate of SIC Advisors LLC also holds an investment in this security.

(5)	Positions are held as collateral for margin borrowings from our prime broker. The fair value for collateral held at September 30, 2013 is $60,140,763.

(6)	The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.

(7)	Security is non-income producing.

(8)	Livingston International, Inc. is also held in the underlying portfolio of the total return swap with Citibank, N.A. (see Note 5). Sierra’s total committment to Livingston International, Inc. is $4,755,400 or 5.3% of Net Assets as of September 30, 2013.

F-8

Sierra Income Corporation

Schedule of Investments

December 31, 2012⁽⁶⁾


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Non-Controlled/non-affiliated investments —148.3%
Aderant North America, Inc.	Electronics	Senior Secured Loans — Second Lien LIBOR + 8.75%, 1.25% Floor⁽³⁾		6/20/2019	$	450,000	$	450,000	$	450,000		2.2	%

						450,000		450,000		450,000
Atkore International, Inc.	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured Notes 9.875%^(3)(4)(5)		1/1/2018		750,000		733,129		801,600		3.9	%

						750,000		733,129		801,600
Bon-Ton Stores, Inc.	Retail Stores	Senior Secured Notes 10.625%⁽⁴⁾⁽⁵⁾		7/15/2017		1,000,000		914,795		951,200		4.6	%

						1,000,000		914,795		951,200
Camp Systems International, Inc.	Aerospace & Defense	Senior Secured Loans — Second Lien LIBOR + 8.75%, 1.25% Floor		11/30/2019		500,000		490,523		505,000		2.4	%

						500,000		490,523		505,000
Cengage Learning, Inc.	Healthcare, Education, and Childcare	Senior Secured Notes 11.500%⁽⁴⁾⁽⁵⁾		4/15/2020		1,250,000		1,348,108		1,062,500		5.2	%

						1,250,000		1,348,108		1,062,500
Checkers Drive-In Restaurants, Inc.	Restaurant & Franchise	Senior Secured Notes 11.000%⁽⁴⁾⁽⁵⁾		12/1/2017		1,500,000		1,504,956		1,504,956		7.3	%

						1,500,000		1,504,956		1,504,956
Deltek, Inc.	Software	Senior Secured Loans — Second Lien LIBOR + 8.75%, 1.25% Floor⁽³⁾		10/31/2019		1,000,000		985,343		985,343		4.8	%

						1,000,000		985,343		985,343
Dispensing Dynamics International, Inc.	Personal and Nondurable Consumer Products (Manufacturing Only)	Senior Secured Notes 12.500%^(3)(4)(5)		1/1/2018		1,200,000		1,176,009		1,176,009		5.7	%

						1,200,000		1,176,009		1,176,009
EarthLink, Inc.	Telecommunications	Senior Secured Notes 10.500%⁽⁴⁾⁽⁵⁾		4/1/2016		900,000		950,574		957,420		4.6	%

						900,000		950,574		957,420
Exide Technologies	Machinery (Nonagriculture, Nonconstruction, Nonelectric)	Senior Secured Notes 8.625%^(3)(4)(5)		2/1/2018		1,600,000		1,336,979		1,364,001		6.6	%

						1,600,000		1,336,979		1,364,001
Fifth and Pacific Companies, Inc.	Retail Stores	Senior Secured Notes 10.500%⁽⁴⁾⁽⁵⁾		4/15/2019		500,000		557,130		557,130		2.7	%

						500,000		557,130		557,130
Great Atlantic & Pacific Tea Company	Grocery	Senior Secured Loans — First Lien LIBOR + 9%, 2% Floor⁽³⁾		3/13/2017		942,875		964,535		964,535		4.7	%

						942,875		964,535		964,535
Green Field Energy Services, Inc.	Oil and Gas	Senior Secured Notes 13.000%⁽⁴⁾⁽⁵⁾		11/15/2016		512,000		494,791		494,791		2.4	%
		Warrants/Equity				20,000		20,000		15,115		0.1	%

						532,000		514,791		509,906

F-9


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
IDQ Holdings, Inc.	Automobile	Senior Secured Notes 11.500^%(4)(5)		4/1/2017		1,000,000		1,044,468		1,078,200		5.2	%

						1,000,000		1,044,468		1,078,200
Ineos Finance PLC	Chemicals	Senior Secured Notes 7.500^%(4)(5)		5/1/2020		1,250,000		1,285,207		1,285,207		6.2	%

						1,250,000		1,285,207		1,285,207
Innovation Ventures, Inc.	Retail	Senior Secured Notes 9.500^%(4)(5)		8/1/2019		1,250,000		1,224,724		1,179,375		5.7	%

						1,250,000		1,224,724		1,179,375
Integra Telecom, Inc.	Telecommunications	Senior Secured Notes 10.750^%(3)(4)(5)		4/15/2016		750,000		722,600		757,500		3.7	%

						750,000		722,600		757,500
Linc Energy Finance (USA), Inc.	Oil and Gas	Senior Secured Notes 12.500^%(3)(4)(5)		10/31/2017		1,000,000		980,715		980,715		4.8	%

						1,000,000		980,715		980,715
Maxim Crane Works Holdings, Inc.	Industrial	Senior Secured Notes 12.250^%(4)(5)		4/15/2015		1,000,000		1,010,037		1,029,400		5.0	%

						1,000,000		1,010,037		1,029,400
Mohegan Tribal Gaming Authority	Gaming	Senior Secured Notes 11.500^%(4)(5)		11/1/2017		1,000,000		1,045,312		1,045,312		5.1	%

						1,000,000		1,045,312		1,045,312
Pittsburgh Glass Works, LLC	Automobile	Senior Secured Notes 8.500^%(4)(5)		4/15/2016		1,425,000		1,325,728		1,311,000		6.4	%

						1,425,000		1,325,728		1,311,000
Prince Minerals Holding Corp.	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured Notes 11.500^%(3)(4)(5)		12/15/2019		1,200,000		1,186,001		1,248,000		6.1	%

						1,200,000		1,186,001		1,248,000
Satmex Mexicanos, S.A. de C.V.	Telecommunications	Senior Secured Notes 9.500^%(4)(5)		5/15/2017		1,000,000		1,035,564		1,035,564		5.0	%

						1,000,000		1,035,564		1,035,564
Securus Technologies, Inc.	Telecommunications	Senior Secured Loans — Second Lien LIBOR + 9.00%, 1.75% Floor		5/31/2018		500,000		490,854		490,854		2.4	%

						500,000		490,854		490,854
Shale-Inland Holdings, Inc.	Energy	Senior Secured Notes 8.750^%(4)(5)		11/15/2019		1,000,000		993,624		1,010,000		4.9	%

						1,000,000		993,624		1,010,000
Sizzling Platter, LLC	Restaurant & Franchise	Senior Secured Notes 12.250^%(3)(4)(5)		4/15/2016		1,652,000		1,715,987		1,715,987		8.3	%

						1,652,000		1,715,987		1,715,987
Tempel Steel Company	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured Notes 12.000^%(3)(4)(5)		8/15/2016		1,115,000		1,102,986		1,090,024		5.3	%

						1,115,000		1,102,986		1,090,024
Tower International, Inc.	Automobile	Senior Secured Notes 10.625%^(3)(4)(5)		9/1/2017		500,000		518,324		534,500		2.6	%

						500,000		518,324		534,500
Travelport LLC	Business Services	Senior Secured Loans — Second Lien LIBOR + 9.5%, 1.5% Floor		11/22/2015		500,000		487,178		497,050		2.4	%

						500,000		487,178		497,050
US Well Services, Inc.	Oil and Gas	Senior Secured Notes 14.500^%(3)(4)(5)		2/15/2017		1,518,405		1,504,921		1,503,828		7.3	%
		Warrants/Equity⁽³⁾				1,518		152		—		0.0	%

						1,519,923		1,505,073		1,503,828

F-10


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
WeLocalize, Inc.	Business Services	Senior Secured Loans — First Lien LIBOR + 8%, 2% Floor⁽³⁾		11/19/2015		459,478		459,478		459,478		2.2	%
		Senior Secured Loans — First Lien LIBOR + 9%, 2% Floor, 1.25% PIK⁽³⁾		11/19/2015		538,617		538,617		538,617		2.6	%

						998,095		998,095		998,095
Total non-controlled/ non-affiliated investments								30,599,349		30,580,211		148.3	%

US Government Treasuries — 29.1%
US Treasury Bill		Government Securities 1.375%		1/15/2013		6,000,000.00		6,003,022		6,003,000		29.1	%

Total Investments and US Government Treasuries — 177.4%							$	36,602,371	$	36,583,211		177.4	%

⁽¹⁾	All of our investments are domiciled in the United States except for Satmex Mexicanos S.A. de C.V., which is domiciled in Mexico.

⁽²⁾	Percentage is based on net assets of $20,622,982 as of December 31, 2012.

⁽³⁾	An affiliated fund that is managed by an affiliate of SIC Advisors LLC also holds an investment in this security.

⁽⁴⁾	Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent $25,674,219 and 124.6% of net assets as of December 31, 2012 and are considered restricted.

⁽⁵⁾	Positions are held as collateral for margin borrowings from our prime broker. The fair value for collateral held at December 31, 2012 is $25,674,219.

⁽⁶⁾	The December 31, 2012 presentation has been revised to conform to the current period presentation.

F-11

SIERRA INCOME CORPORATION

Notes to Consolidated Financial Statements

September 30, 2013

(unaudited)

Note 1. Organization

Sierra Income Corporation (the “Company”) was incorporated under the general corporation laws of the State of Maryland on June 13, 2011 and formally commenced operations on April 17, 2012. The Company is an externally managed, non-diversified closed-end management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is externally managed by SIC Advisors LLC (“SIC Advisors”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Company has elected and intends to qualify to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2012, and intends to so qualify annually thereafter. The Company’s fiscal year-end is December 31^st.

On August 15, 2013, the Company formed Arbor Funding LLC, a wholly-owned financing subsidiary.

On April 17, 2012, the Company successfully reached its minimum escrow requirement and officially commenced operations by issuing 1,108,033 shares of common stock to SIC Advisors for gross proceeds of $10,000,000. The Company’s offering period is currently scheduled to terminate two years after the initial offering date, or April 16, 2014, unless extended. Since commencing its operations, the Company has sold a total of 9,865,659 shares of common stock, which includes shares issued as part of the distribution reinvestment plan in Note 12, for total proceeds of $92,217,756, which includes the shares sold to SIC Advisors. The proceeds from the issuance of common stock are presented in the Company’s consolidated statements of changes in net assets and consolidated statements of cash flows and are presented net of selling commissions and dealer manager fees.

The Company’s investment objective is to generate net investment income, and to a lesser extent, long-term capital appreciation. The Company intends to meet its investment objective by investing primarily in the debt of privately owned U.S. companies with a focus on senior secured debt, second lien debt and, to a lesser extent, subordinated debt. The Company will originate transactions sourced through SIC Advisors’ direct origination network, and also expects to acquire debt securities through the secondary market. The Company may make equity investments in companies that it believes will generate appropriate risk adjusted returns, although it does not expect this to be a substantial portion of the portfolio.

Note 2. Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”). Additionally, the accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending 2013. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

F-12

Cash and Cash Equivalents

The Company considers cash equivalents to be highly liquid investments or investments with original maturities of three months or less. Cash and cash equivalents include deposits in a money market account. The Company deposits its cash in a financial institution which, at times, may be in excess of the Federal Deposit Insurance Corporation insurance limits.

Offering Costs

Offering costs incurred directly by the Company will be recorded in the period incurred. See Note 7 regarding offering costs paid for by SIC Advisors.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Indemnification

In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

Revenue Recognition

Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. We record amortized or accreted discounts or premiums as interest income using the effective interest method. Dividend income, if any, is recognized on an accrual basis to the extent that the Company expects to collect such amount.

Origination/closing, amendment and transaction break-up fees associated with investments in portfolio companies are recognized as income when we become entitled to such fees. Other fees are capitalized as deferred revenue and recorded into income over the respective period. Other fee income for the three and nine months ended September 30, 2013 was $21,523 and $150,983, respectively.

Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. For the three and nine months ended September 30, 2013 the Company earned $0 and $580 in PIK interest, respectively.

Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. The Company reports changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

F-13

Management reviews all loans that become 90 days or more past due on principal and interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although the Company may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.

Investment Classification

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, it would be deemed to “control” a portfolio company if it owned more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. The Company refers to such investments in portfolio companies that it “controls” as “Control Investments.” Under the 1940 Act, the Company would be deemed to be an “Affiliated Person” of a portfolio company if it owns between 5% and 25% of the portfolio company’s outstanding voting securities or if it is under common control with such portfolio company. The Company refers to such investments in Affiliated Persons as “Affiliated Investments.” As of September 30, 2013, the Company has no Controlled Investments or Affiliated Investments.

Valuation of Investments

The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. We weight the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Investments for which market quotations are not readily available are valued at fair value as determined by the Company’s board of directors based upon input from management and third party valuation firms. Because these investments are illiquid and because there may not be any directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and consistently applied across all loans and through time.

F-14

spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, the Company uses a waterfall analysis which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower’s capital structure into consideration. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities using an expected recovery model. We may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.

The Company undertakes a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

•

the Company’s quarterly valuation process begins with each portfolio investment being initially valued by the investment professionals responsible for monitoring the portfolio investment;

•

conclusions are then documented and discussed with senior management; and

•

an independent valuation firm engaged by the Company’s board of directors prepares an independent valuation report for approximately one third of the portfolio investments each quarter on a rotating quarterly basis on non fiscal year-end quarters, such that each of these investments will be valued by an independent valuation firm at least twice per annum when combined with the fiscal year-end review of all the investments by independent valuation firms.

In addition, all of the Company’s investments are subject to the following valuation process:

•

management reviews preliminary valuations and their own independent assessment;

•

the audit committee of the Company’s board of directors reviews the preliminary valuations of senior management and independent valuation firms; and

•

the Company’s board of directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of SIC Advisors, the respective independent valuation firms and the audit committee.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to their short-term nature.

Federal Income Taxes

The Company has elected to be treated as a RIC under subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of its investment company taxable income (“ICTI”)

F-15

including PIK, as defined by the Code, and net tax exempt interest income (which is the excess of the Company’s gross tax exempt interest income over certain disallowed deductions) for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.

The Company will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.

ICTI generally differs from net investment income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. The Company may be required to recognize ICTI in certain circumstances in which it does not receive cash. For example, if the Company holds debt obligations that are treated under applicable tax rules as having original issue discount, the Company must include in ICTI each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by the Company in the same taxable year. The Company may also have to include in ICTI other amounts that it has not yet received in cash, such as 1) PIK interest income and 2) interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. Because any original issue discount or other amounts accrued will be included in the Company’s ICTI for the year of accrual, the Company may be required to make a distribution to its stockholders in order to satisfy the minimum distribution requirements, even though the Company will not have received and may not ever receive any corresponding cash amount. ICTI also excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.

The Company accounts for income taxes in conformity with ASC Topic 740 — Income Taxes (“ASC 740”). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. There were no material uncertain income tax positions at September 30, 2013. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The Company’s inception-to-date federal tax years for the Company remain subject to examination by the Internal Revenue Service.

F-16

The following table reflects, for tax purposes, the sources of the cash distributions that the Company has paid on its common stock during the nine months ended September 30, 2013, and the year ended December 31, 2012:


	Nine months ended September 30, 2013					Year Ended December 31, 2012
Source of Distribution	Distribution Amount⁽¹⁾		Percentage			Distribution Amount		Percentage
Return of capital from offering proceeds	$	—		—	%	$	—		—	%
Return of capital from borrowings	$	—		—	%	$	—		—	%
Net investment income	$	3,299,596		100.0	%	$	637,330		100.0	%
Return of capital (other)	$	—		—	%	$	—		—	%

Distributions on a tax basis:	$	3,299,596		100.0	%	$	637,330		100.0	%

⁽¹⁾	The Distribution Amount and Percentage reflected for September 30, 2013 are estimated figures. The actual source of distributions for the fiscal year ending 2013 will be calculated in connection with the Company’s year-end procedures.

Segments

The Company invests in various industries. The Company separately evaluates the performance of each of its investment relationships. However, because each of these investment relationships has similar business and economic characteristics, they have been aggregated into a single investment segment. All applicable segment disclosures are included in or can be derived from the Company’s financial statements. See Note 3 for further information.

Company Investment Risk, Concentration of Credit Risk, and Liquidity Risk

SIC Advisors has broad discretion in making investments for the Company. Investments generally consist of debt instruments that may be affected by business, financial market or legal uncertainties. Prices of investments may be volatile, and a variety of factors that are inherently difficult to predict, such as domestic or international economic and political developments, may significantly affect the results of the Company’s activities and the value of its investments. In addition, the value of the Company’s portfolio may fluctuate as the general level of interest rates fluctuates.

The value of the Company’s investments in loans and bonds may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient collateral and/or there are extensive legal and other costs incurred in collecting on a defaulted loan, observable secondary or primary market yields for similar instruments issued by comparable companies increase materially or risk premiums required in the market between smaller companies, such as the Company’s borrowers, and those for which market yields are observable increase materially. SIC Advisors may attempt to minimize this risk by maintaining low loan-to-liquidation values with each loan and the collateral underlying the loan.

The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.

F-17

Note 3. Investments

The following table shows the composition of the Company’s portfolio in debt and equity investments by industry classification at fair value at September 30, 2013:


	Fair Value		Percentage
Oil and Gas	$	17,886,662		17.1	%
Telecommunications		11,073,545		10.6	%
Chemicals, Plastics, and Rubber		11,045,360		10.5	%
Personal and Nondurable Consumer Products (Manufacturing Only)		9,106,473		8.7	%
Electronics		6,970,894		6.6	%
Automobile		6,077,280		5.8	%
Finance		5,835,750		5.6	%
Beverage, Food and Tobacco		5,742,138		5.5	%
Mining, Steel, Iron, and Nonprecious Metals		5,270,133		5.0	%
Retail Stores		4,779,093		4.5	%
Healthcare, Education, and Childcare		4,473,862		4.3	%
Hotels, Motels, Inns, and Gaming		4,171,250		4.0	%
Cargo Transport		2,740,400		2.6	%
Aerospace and Defense		2,421,499		2.3	%
Broadcasting and Entertainment		2,289,555		2.2	%
Leisure, Amusement, Motion Pictures, Entertainment		1,987,340		1.9	%
Containers, Plastics, and Glass		1,970,000		1.9	%
Grocery		946,294		0.9	%

Total	$	104,787,528		100.0	%

The following table shows the composition of the Company’s portfolio in debt and equity investments by industry classification at fair value at December 31, 2012:


	Fair Value		Percentage
Telecommunications		3,241,338		10.5	%
Restaurant & Franchise		3,220,943		10.4	%
Mining, Steel, Iron, and Nonprecious Metals		3,139,624		10.3	%
Oil and Gas		2,994,449		9.8	%
Automobile		2,923,700		9.6	%
Retail Stores		1,508,330		4.9	%
Business Services		1,495,145		4.9	%
Machinery (Nonagriculture, Nonconstruction, Nonelectric)		1,364,001		4.5	%
Chemicals		1,285,207		4.2	%
Retail		1,179,375		3.9	%
Personal and Nondurable Consumer Products (Manufacturing Only)		1,176,009		3.8	%
Healthcare, Education, and Childcare		1,062,500		3.5	%
Gaming		1,045,312		3.4	%
Industrial		1,029,400		3.4	%
Energy		1,010,000		3.3	%
Software		985,343		3.2	%
Grocery		964,535		3.2	%
Aerospace & Defense		505,000		1.7	%
Electronics		450,000		1.5	%

Total	$	30,580,211		100.0	%

F-18

The following table summarizes the amortized cost and the fair value of the Company’s portfolio in debt and equity investments as of September 30, 2013:


	Amortized Cost		Percentage			Value		Percentage
Senior secured first lien notes	$	48,433,373		46.6	%	$	48,832,046		46.6	%
Senior secured second lien term loans		28,756,421		27.6			28,905,110		27.6
Senior secured first lien term loans		15,668,252		15.0			15,681,090		15.0
Senior secured second lien notes		11,270,226		10.8			11,308,717		10.8
Warrants/Equity		29,173		0.0	%		60,565		0.0

Total	$	104,157,445		100.0	%	$	104,787,528		100.0	%

The following table summarizes the amortized cost and the fair value of the Company’s portfolio in debt and equity investments as of December 31, 2012:


		Amortized Cost	Percentage			Fair Value	Percentage
Senior secured notes	$	25,712,669	84.0	%	$	25,674,219	84.0	%
Senior secured second lien term loans		2,903,898	9.5			2,928,247	9.6
Senior secured first lien term loans		1,962,630	6.4			1,962,630	6.4
Warrants/Equity		20,152	0.1			15,115	0.0

Total	$	30,599,349	100.0	%	$	30,580,211	100.0	%

The following table shows the composition by of the Company’s portfolio in debt and equity investments geography classification at fair value at September 30, 2013:


Geography	Fair Value		Percentage
United States	$	98,995,878		94.5	%
Canada		2,740,400		2.6
Netherlands		1,970,000		1.9
Mexico		1,081,250		1.0

Total	$	104,787,528		100.0	%

The following table shows the portfolio composition by geography classification at fair value at December 31, 2012:


Geography	Fair Value		Percentage
United States	$	29,544,647		96.6	%
Mexico		1,035,564		3.4

Total	$	30,580,211		100.0	%

Opportunities for co-investments may arise when SIC Advisors or an affiliated adviser becomes aware of investment opportunities that may be appropriate for the Company and other clients, or affiliated funds. As a BDC, the Company is substantially limited in its ability to co-invest in privately negotiated transactions with affiliated funds unless it obtains an exemptive order from the SEC. The Company has applied for such an exemptive order, although there is no assurance that it will obtain the requested relief. Before receiving relief, the Company will only participate in co-investments that are allowed under existing regulatory guidance, such as syndicated loan transactions where price is the only negotiated term, which could limit the types of investments that the Company may make. Please refer to footnote 4 to the Schedule of Investments as of September 30, 2013 for disclosures regarding securities also held by affiliated funds.

F-19

Note 4. Fair Value Measurements

The Company follows ASC 820 for measuring the fair value of portfolio investments. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The Company’s fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in the financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows:

•

Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date.

•

Level 2 — Valuations based on inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities.

•

Level 3 — Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date. The inputs for the determination of fair value may require significant management judgment or estimation and is based upon management’s assessment of the assumptions that market participants would use in pricing the assets or liabilities. These investments include debt and equity investments in private companies or assets valued using the market or income approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta and EBITDA multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.

In addition to using the above inputs in investment valuations, the Company employs the valuation policy approved by the board of directors that is consistent with ASC 820 (see Note 2). Consistent with the Company’s valuation policy, the Company evaluates the source of inputs, including any markets in which the Company’s investments are trading, in determining fair value.

The following table presents the fair value measurements of the Company’s investments, by major class according to the fair value hierarchy, as of September 30, 2013:


Type of Investment	Level 1		Level 2		Level 3		Total
Senior secured first lien notes	$	—	$	4,402,813	$	44,429,233	$	48,832,046
Senior secured second lien term loans		—		—		28,905,110		28,905,110
Senior secured first lien term loans		—		—		15,681,090		15,681,090
Senior secured second lien notes		—		—		11,308,717		11,308,717
Warrants/Equity		—		—		60,565		60,565

Total	$	—	$	4,402,813	$	100,384,715	$	104,787,528

F-20


Derivative Instrument	Level 1		Level 2		Level 3			Total
Liability
Total return swap	$	—	$	—	$	(32,400	)	$	(32,400	)

The following table presents the fair value measurements of the Company’s investments, by major class according to the fair value hierarchy, as of December 31, 2012:


	Level 1		Level 2		Level 3		Total
Senior secured notes	$	—	$	3,123,021	$	22,551,198	$	25,674,219
US Government Treasuries		—		6,003,000		—		6,003,000
Senior secured second lien term loans		—		—		2,928,247		2,928,247
Senior secured first lien term loans		—		—		1,962,630		1,962,630
Warrants/Equity		—		—		15,115		15,115

Total	$	—	$	9,126,021	$	27,457,190	$	36,583,211

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended September 30, 2013 based off of fair value hierarchy at September 30, 2013:


	Senior Secured First Lien Notes			Senior Secured Second Lien Notes			Senior Secured First Lien Term Loans			Senior Secured Second Lien Term Loans			Warrants/ Equity		Total Return Swap			Total
Balance, December 31, 2012	$	18,214,286		$	4,336,912		$	1,962,630		$	2,928,247		$	15,115	$	—		$	27,457,190
Purchases		31,515,291			8,413,823			15,305,409			27,693,371			9,021		—			82,936,915
Sales		(5,445,370	)		(1,770,313	)		(1,607,653	)		(1,850,000	)		—		—			(10,673,336	)
Transfers in		—			1,659,221			—			—			—		—			1,659,221
Transfers out		—			(1,508,330	)		—			—			—		—			(1,508,330	)
Amortization of discount/ (premium)		(57,877	)		9,785			(2,238	)		(2,980	)		—		—			(53,310	)
Paid-in-kind interest income		—			—			580			—			—		—			580
Net realized gains		(421,615	)		133,764			9,524			12,132			—		—			(266,195	)
Net change in unrealized appreciation/ (depreciation)		624,518			33,855			12,838			124,340			36,429		(32,400	)		799,580

Balance, September 30, 2013	$	44,429,233		$	11,308,717		$	15,681,090		$	28,905,110		$	60,565	$	(32,400	)	$	100,352,315

Change in net unrealized appreciation (depreciation) in investments still held as of September 30, 2013⁽¹⁾	$	780,355		$	(29,398	)	$	(4,554	)	$	49,759		$	36,429	$	—		$	832,591

⁽¹⁾	Amount is included in the related amount on investments and derivative instruments in the condensed consolidated statements of operations.

During the nine months ended September 30, 2013, there were no transfers from Level 3 to Level 2 and $1,659,221 in transfers from level 2 to level 3 due to a decrease in observable market data.

F-21

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended September 30, 2012 based off of fair value hierarchy at September 30, 2012:


	Senior Secured Notes			First Lien Term Loans			Second Lien Term Loans			Warrants/ Equity		Total
Balance, December 31, 2011	$	—		$	—		$	—		$	—	$	—
Purchases		11,995,516			3,940,874			1,465,000			20,086		17,421,476
Sales		(1,007,500	)		(1,977,848	)		—			—		(2,985,348	)
Amortization of discount/ (premium)		(14,936	)		(842	)		2,012			—		(13,766	)
Paid-in-kind interest income		—			2,213			—			—		2,213
Net realized gains		22,500			2,565			—			—		25,065
Net change in unrealized appreciation/ (depreciation)		1,914			(22,908	)		(6,417	)		—		(27,411	)

Balance, September 30, 2012	$	10,997,494		$	1,944,054		$	1,460,595		$	20,086	$	14,422,229

During the nine months ended September 30, 2012, there were no transfers from Level 3 to Level 2 or from Level 2 to Level 3.

The following table presents the quantitative information about level 3 fair value measurements of our investments, as of September 30, 2013:

Fair Value

Valuation techniques

Unobservable input

Range (weighted average)

Senior secured first lien term loans

15,681,090

Market approach

Market yield

7.16% – 10.57% (9.69%)

Senior secured second lien term loans

28,905,110

Market approach

Market yield

8.84% – 11.99% (10.33%)

Senior secured first lien notes

48,429,233

Market approach

Market yield

6.17% – 22.58% (9.79%)

Senior secured second lien notes

11,308,717

Market approach

Market yield

7.78% – 10.90% (9.12%)

Warrants/Equity

60,565

Enterprise valuation analysis

EBITDA multiple

2.90x – 3.75x (3.34%)

Total return swap

(32,400

)

Market approach

Market yield

8.84% – 9.02% (8.95%)

The following table presents the quantitative information about level 3 fair value measurements of our investments, as of December 31, 2012:

Fair Value

Valuation techniques

Unobservable input

Range (weighted average)

Senior secured first lien term loan

1,962,630

Market approach

Market yield

8.8% –13.2% (10.8%)

Senior secured second lien term loan

2,928,247

Market approach

Market yield

8.9% –13.9% (10.5%)

Senior secured notes

22,551,198

Market approach

Market yield

4.2% –15.8% (12.0%)

Warrants/Equity

15,115

Enterprise valuation analysis

EBITDA multiple

The significant unobservable inputs used in the fair value measurement of the Company’s debt investments are market yields. Significant increases in market yields would result in significantly lower fair value measurements.

The significant unobservable inputs used in the fair value measurement of the Company’s warrants/equity investments are comparable company EBITDA multiples. Significant decreases in EBITDA multiples in isolation would result in significantly lower fair value measurements.

F-22

Note 5. Total Return Swap

On August 27, 2013, the Company, through its wholly-owned financing subsidiary Arbor Funding LLC (“Arbor”), entered into a total return swap (“TRS”) with Citibank, N.A. (“Citibank”).

The TRS with Citibank enables Arbor to obtain the economic benefit of the loans underlying the TRS, despite the fact that such loans will not be directly held or otherwise owned by Arbor, in return for an interest-type payment to Citibank. Accordingly, the TRS is analogous to Arbor utilizing leverage to acquire loans and incurring an interest expense to a lender.

SIC Advisors acts as the investment manager of Arbor and has discretion over the composition of the basket of loans underlying the TRS. The terms of the TRS are governed by an ISDA 2002 Master Agreement, the Schedule thereto and Credit Support Annex to such Schedule, and the Confirmation exchanged thereunder, between Arbor and Citibank, which collectively establish the TRS, and are collectively referred to herein as the “TRS Agreement”.

Pursuant to the terms of the TRS Agreement, and subject to conditions customary for transactions of this nature, Arbor may select a portfolio of loans with a maximum market value (determined at the time each such loan becomes subject to the TRS) of $100,000,000, which is also referred to as the maximum notional amount of the TRS. Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the TRS Agreement. Arbor receives from Citibank a periodic payment on set dates that is based upon any coupons, both earned and accrued, generated by the loans underlying the TRS as well as an amount equal to any appreciation in the value of the basket of loans, subject to limitations described in the TRS Agreement as well as any fees associated with the loans included in the portfolio. Arbor pays to Citibank interest at a rate equal to one-month LIBOR + 1.3% per annum as well as an amount equal to any depreciation in value of the basket of loans. In addition, upon the termination or repayment of any loan subject to the TRS, Arbor either receives from Citibank the appreciation in the value of such loan, or pays to Citibank any depreciation in the value of such loan.

Citibank may terminate the TRS on or after the second anniversary of the effectiveness of the TRS. SIC Advisors may terminate the TRS on behalf of Arbor at any time upon providing 10 days prior notice to Citibank. Any termination by SIC Advisors on behalf of Arbor prior to the second anniversary of the effectiveness of the TRS will result in payment of an early termination fee to Citibank. The early termination fee shall equal the present value of the following two cash flows: (a) interest payments at a rate equal 1.30% based on 70% of the maximum notional amount of $100,000,000, payable from the later of the first anniversary of the effectiveness of the TRS or the termination date until the second anniversary of the effectiveness of the TRS and (b) interest payments at a rate equal to 0.15% based on the maximum notional amount of $100,000,000, payable from the later of the first anniversary of the effectiveness of the TRS or the termination date until the second anniversary of the effectiveness of the TRS.

Arbor is required to pay a minimum usage fee in connection with the TRS of 1.3% on the amount equal to 85% of the average daily unused portion of the maximum amount permitted under the TRS. Such minimum usage fee will not apply during the first 365 days and last 60 days of the term of the TRS. Arbor will also pay Citibank customary fees in connection with the establishment and maintenance of the TRS.

Arbor is required to initially cash collateralize a specified percentage of each loan (generally 25% of the market value of such loan) included under the TRS in accordance with margin requirements described in the TRS Agreement. Arbor may be required to post additional collateral from time to time as a result of a decline in the mark-to-market value of the portfolio of loans subject to the TRS. The obligations of Arbor under the TRS Agreement are non-recourse to the Company and the Company’s exposure under the TRS Agreement is limited to the value of the Company’s investment in Arbor, which generally equals the value of cash collateral provided by Arbor under the TRS Agreement.

F-23

In connection with the TRS, Arbor has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default and termination events included in the form ISDA 2002 Master Agreement, the TRS Agreement contains the following termination events: (a) a failure to satisfy the portfolio criteria for at least 30 days; (b) a failure to post initial cash collateral or additional collateral as required by the TRS Agreement; (c) a default by Arbor or the Company with respect to indebtedness in an amount equal to or greater than the lesser of $10,000,000 and 2% of the Company’s net asset value at such time; (d) a merger of Arbor or the Company meeting certain criteria; (e) the Company or Arbor amending their respective constituent documents to alter their investment strategy in a manner that has or could reasonably be expected to have a material adverse effect; and (f) SIC Advisors ceasing to be the investment manager of Arbor or to have authority to enter into transactions under the TRS Agreement on behalf of Arbor, and not being replaced by an entity reasonably acceptable to Citibank.

The Company’s maximum derivative risk exposure as of September 30, 2013 is $2,209,000, which is recorded on the consolidated statement of assets and liabilities as cash collateral on total return swap.

The Company’s derivative liability due to Citibank, net of amounts available for offset under a master netting agreement as of September 30, 2013 was $32,400, which is recorded on the consolidated statement of assets and liabilities as unrealized depreciation on total return swap. The Company does not offset collateral posted in relation to the TRS with any unrealized appreciation or depreciation outstanding in the consolidated statement of assets and liabilities as of September 30, 2013.

Transactions in total return swap contracts during the nine months ended September 30, 2013 were $0 in realized gains/(losses) and $32,400 in unrealized losses, which is recorded on the consolidated statement of operations as net change in unrealized appreciation/(depreciation) on total return swap.

For the nine months ended September 30, 2013, the average notional par amount of total return swap contracts was $781,111.

The following is a summary of the TRS reference assets as of September 30, 2013 (unaudited):


Company⁽³⁾	Industry	Type of Investment		Maturity		Par Amount		Initial Notional Amount		Current Notional Amount		Unrealized Appreciation (Depreciation)
AMF Bowling Worldwide, Inc.	Leisure, Amusement, Motion Pictures, Entertainment	Senior Secured First Lien Term Loans	LIBOR + 7.500%, 1.250% Floor⁽²⁾		6/29/2018		3,000,000	$	2,985,000	$	2,970,000	$	(15,000	)

							3,000,000		2,985,000		2,970,000		(15,000	)
Livingston International, Inc.	Cargo Transport	Senior Secured Second Lien Term Loans	LIBOR + 7.750%, 1.250% Floor⁽¹⁾⁽²⁾		4/18/2020		2,000,000		2,015,000		2,015,000		—

							2,000,000		2,015,000		2,015,000		—
McGraw-Hill Companies, Inc.	Printing and Publishing	Senior Secured First Lien Term Loans	LIBOR + 7.750%, 1.250% Floor⁽²⁾		3/22/2019		2,000,000		2,030,000		2,012,600		(17,400	)

							2,000,000		2,030,000		2,012,600		(17,400	)
Total								$	7,030,000	$	6,997,600	$	(32,400	)

⁽¹⁾	The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.

⁽²⁾	The referenced asset or portion thereof is unsettled as of September 30, 2013.

⁽³⁾	All investments are domiciled in the United States except for Livingston International, Inc., which is domiciled in the Netherlands.

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Note 6. Borrowings

As a BDC, the Company is only allowed to employ leverage to the extent that its asset coverage, as defined in the 1940 Act, equals at least 200% after giving effect to such leverage. The amount of leverage that the Company employs at any time depends on its assessment of the market and other factors at the time of any proposed borrowing.

The fair value of the Company’s debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s margin borrowings are estimated based upon market interest rates for its own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. The Company’s debt obligation is recorded at its carrying value, which approximates fair value.

Prime Brokerage Agreement

The Company maintains a prime brokerage account and margin borrowing facility (the “Margin Facility”) with Barclays Capital Inc. (“Barclays”) for investment purposes that is based on the fair value of investments held at Barclays as determined by Barclays. As of September 30, 2013, the Company’s borrowings under the Margin Facility totaled $17,196,550 and were recorded as due to prime broker on the Company’s consolidated statements of assets and liabilities. The Company’s average outstanding borrowings for the nine months ended September 30, 2013 was $14,695,275. The interest rate charged is variable and ranges from one month LIBOR plus 0.25% to one month LIBOR plus 2.00%. The Company’s weighted average interest rate on borrowings for the nine months ended September 30, 2013 was 0.96%.

Note 7. Agreements

Investment Advisory Agreement

On April 16, 2012, the Company entered into an investment advisory agreement (“IAA”) with SIC Advisors to manage the Company’s investment activities. Pursuant to the IAA, SIC Advisors implements the Company’s business strategy on a day-to-day basis and performs certain services for the Company, subject to oversight by the Company’s board of directors. SIC Advisors is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the IAA, the Company has agreed to pay SIC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.75% of the Company’s gross assets payable quarterly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. For the first quarter of the Company’s operations, the base management fee was calculated based on the initial value of the Company’s gross assets. Subsequently, the base management fee is calculated based on the gross assets at the end of each completed calendar quarter. Base management fees for any partial quarter are appropriately prorated. For the three and nine months ended September 30, 2013, the Company recorded an expense for base management fees of $487,843 and $1,091,731, of which $487,843 and $171,317 were payable at September 30, 2013 and December 31, 2012, respectively.

The incentive fee consists of the following two parts:

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when pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter in any quarter. For any quarter in which the Company’s pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter, the subordinated incentive fee on income shall equal 20% of the amount of pre-incentive fee net investment income, because the preferred return and catch up will have been achieved.

A capital gains incentive fee will be earned on realized investments and shall be payable in arrears as of the end of each calendar year during which the IAA is in effect. If the IAA is terminated, the fee will also become payable as of the effective date of such termination. The fee equals 20% of the realized capital gains, less the aggregate amount of any previously paid capital gains incentive fees. Incentive fee on capital gains is equal to realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis.

Under GAAP, the Company calculates capital gains incentive fees as if the Company had realized all assets at their fair values and liabilities at their settlement amounts as of the reporting date. GAAP requires that the capital gains incentive fee accrual assume the cumulative aggregate unrealized capital appreciation is realized, even though such unrealized capital appreciation is not payable under the IAA. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. There can be no assurance that such unrealized capital appreciation will be realized in the future and that the provisional capital gains incentive fee will become payable.

For the three and nine months ended September 30, 2013, the Company recorded a provisional capital gains incentive fee of $(34,108), and $0, respectively. The $(34,108) represents a reversal of a portion of provisional capital gains incentive fee accrued in prior periods. As of September 30, 2013, there was no provisional incentive fee recorded on the consolidated statements of assets and liabilities. For the three and nine months ended September 30, 2012, the Company recorded a provisional capital gains incentive fee of $13,125 and $14,485, respectively.

Under the terms of the IAA, SIC Advisors bears all organization and offering expenses on behalf of the Company. Upon such time that the Company has either raised $300,000,000 in gross proceeds in connection with the sale of shares of its common stock or the offering period has expired, SIC Advisors shall no longer be obligated to bear, pay or otherwise be responsible for any ongoing organization and offering expenses on behalf of the Company, and the Company will be responsible for paying or otherwise incurring all such organization and offering expenses.

Pursuant to the terms of the IAA, the Company has agreed to reimburse SIC Advisors for any such organizational and offering expenses incurred by SIC Advisors not to exceed 1.25% of the gross subscriptions raised by the Company over the course of the offering period, which is currently scheduled to terminate two years from the initial offering date, unless extended.

In the event that other organizational and offering expenses exceed 5.25% of the gross proceeds from the sale of shares of the Company’s common stock pursuant to its public offering or one or more private offerings at the time of the completion of the offering or other organizational and offering expenses, together with selling commissions, dealer manager fees and any discounts paid to members of the Financial Industry Regulatory Authority, exceed 15% of the gross proceeds from the sale of shares of the Company’s common stock pursuant to its public offering or one or more private offerings at the time of the completion of the offering, then SIC Advisors shall be required to pay without reimbursement from the Company, or, if already paid by the Company, reimburse the Company, for amounts exceeding such 5.25% and 15% limit, as appropriate.

For the nine months ended September 30, 2013 and for the period from June 13, 2011 (inception) through December 31, 2012, SIC Advisors incurred organizational and offering costs of $835,452 and $2,984,676, respectively. Of the total $3,820,128 organizational and offering costs incurred from inception through September 30, 2013, $272,205 was reimbursed to SIC Advisors during the year ended December 31, 2012. For

F-26

the nine months ended September 30, 2013, $956,436 was reimbursed to SIC Advisors, of which $55,927 relates to expense reimbursements incurred and payable as of December 31, 2012 and, of which $15,702 has been accrued and is reflected in the consolidated statements of assets and liabilities as due to affiliate. The remaining unreimbursed amount will be eligible for reimbursement to the extent the Company receives subscriptions until April 16, 2014, which is the currently scheduled date that the offering period ends, unless it is extended. Organizational and offering expenses paid for by SIC Advisors and reimbursed by the Company will be expensed on the Company’s consolidated statements of operations.

Administration Agreement

On April 5, 2012, the Company entered into an administration agreement with Medley Capital LLC, pursuant to which Medley Capital LLC furnishes the Company with administrative services necessary to conduct its day-to-day operations. Medley Capital LLC is reimbursed for administrative expenses it incurs on the Company’s behalf in performing its obligations. Such costs are reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. The Company does not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC. Medley Capital LLC is an affiliate of SIC Advisors. For the three and nine months ended September 30, 2013, the Company recorded an expense of $143,509 and $440,423, respectively, relating to administrator expenses. For the three and nine months ended September 30, 2012, the Company recorded an expense of $141,456 and $247,217, respectively, relating to administrator expense.

Expense Support and Reimbursement Agreement

On June 29, 2012, the Company entered into an Expense Support and Reimbursement Agreement (the “Expense Support Agreement”) with SIC Advisors. Pursuant to the Expense Support Agreement, SIC Advisors has agreed to reimburse the Company for operating expenses in an amount equal to the difference between distributions paid to the Company’s stockholders in each month, less the sum of the Company’s net investment income, the Company’s net realized capital gains and dividends paid to the Company from its portfolio companies during such period (“Expense Support Payment”). To the extent that no dividends or other distributions are paid to the Company’s stockholders in any given month, then the Expense Support Payment for such month shall be equal to such amount necessary in order for Available Operating Funds for the month to equal zero. The terms of the Expense Support Agreement commenced as of the date that the Company’s registration statement was declared effective by the SEC and continued monthly thereafter until December 31, 2012. Subsequently, the Company’s board of directors approved amendments to the Expense Support Agreement that extended the term from December 31, 2012 to June 30, 2014.

Pursuant to the Expense Support Agreement, the Company has a conditional obligation to reimburse SIC Advisors for any amounts funded by SIC Advisors under the Expense Support Agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which SIC Advisors incurred a liability for such amount, the sum of the Company’s net investment income, the Company’s net capital gains and the amount of any dividends and other distributions paid to the Company from its portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders. The purpose of the Expense Support Agreement is to avoid such distributions being characterized as returns of capital for GAAP purposes and to reduce operating expenses until the Company has raised sufficient capital to be able to absorb such expenses.

Pursuant to the Expense Support Agreement, the Company will reimburse SIC Advisors for expense support payments it previously made following any calendar quarter in which the Company received net investment income, net capital gains and dividends from its portfolio companies in excess of the distributions paid to the Company’s stockholders during such calendar quarter (the “Excess Operating Funds”). Any such reimbursement will be made within three years of the date that the expense support payment obligation was incurred by SIC

F-27

Advisors, subject to the conditions described below. The amount of the reimbursement during any calendar quarter will equal the lesser of (i) the Excess Operating Funds received during the quarter and (ii) the aggregate amount of all expense payments made by SIC Advisors that have not yet been reimbursed. In addition, the Company will only make reimbursement payments if its “operating expense ratio” (as described in footnote 1 to the table below) is equal to or less than its operating expense ratio at the time the corresponding expense payment was incurred and if the annualized rate of its regular cash distributions to the Company’s stockholders is equal to or greater than the annualized rate of the Company’s regular cash distributions to stockholders at the time the corresponding expense payment was incurred.

As of September 30, 2013, the Company recorded $1,965,938 in its consolidated statements of assets and liabilities as due from affiliate relating to the Expense Support and Reimbursement Agreement. For the three and nine months ended September 30, 2013, the Company recorded expense support reimbursements of $1,262,848 and $2,680,676, respectively, on the consolidated statements of operations, included in which was $125,000 that SIC Advisors elected to reimburse on June 27, 2013 related to expenses from prior periods. Reimbursements of Expense Support Payments to SIC Advisors will be accrued as they become probable and estimable. For the three and nine months ended September 30, 2012, the Company recorded expense reimbursements of $437,303 and $893,537, respectively, on the consolidated statements of operations. For the three and nine months ended September 30, 2012 and 2013, the Company did not record any reimbursement of Expense Support Payments to SIC Advisors.

The following table provides information regarding Expenses Support Payments incurred by SIC Advisors pursuant to the Expense Support Agreement as well as other information relating to the Company’s ability to reimburse SIC advisors for such payments:


Quarter Ended	Amount of Expense Payment Obligation		Operating Expense Ratio⁽¹⁾			Annualized Distribution Rate⁽²⁾			Eligible for Reimbursement Through
June 30, 2012	$	454,874		6.13	%		8.00	%	June 30, 2015
September 30, 2012		437,303		4.05	%		8.00	%	September 30, 2015
December 31, 2012		573,733		3.91	%		8.00	%	December 31, 2015
March 31, 2013		685,404		1.71	%		8.00	%	March 31, 2016
June 30, 2013		732,425		1.00	%		7.84	%	June 30, 2016
September 30, 2013		1,277,853		0.83	%		7.84	%	September 30, 2016

⁽¹⁾	“Operating Expense Ratio” is as of the date the expense support payment obligation was incurred by our Advisor and includes all expenses borne by the Company, except for organizational and offering expenses, base management and incentive fees owed to SIC Advisors, and interest expense.

⁽²⁾

“Annualized Distribution Rate” equals the annualized rate of distributions paid to stockholders based on the amount of the regular cash distribution paid immediately prior to the date the expense support payment obligation was incurred by SIC Advisors. “Annualized Distribution Rate” does not include special cash or stock distributions paid to stockholders.

Note 8. Related Party Transactions

On October 19, 2011, SIC Advisors entered into a subscription agreement to purchase 110.80 shares of common stock for cash consideration of $1,000. The consideration represents $9.025 per share.

On March 31, 2012, SIC Advisors entered into a subscription agreement to purchase 1,108,033.24 shares of common stock for cash consideration of $10,000,000. The purchase was made on April 17, 2012. The consideration represents $9.025 per share.

Due from affiliate relates to Expense Support Payments as discussed in Note 7.

Due to affiliate relates to reimbursements of organizational and offering expenses paid to the Advisor as discussed in Note 7.

An affiliate of the Company’s dealer manager has an ownership interest in SIC Advisors.

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Note 9. Directors Fees

The Company’s independent directors receive an annual retainer fee of $30,000 and further receive a fee of $2,500 ($1,000 for telephonic attendance) for each regularly scheduled board meeting and a fee of $1,000 for each special board meeting and all committee meetings as well as reimbursement of reasonable and documented out-of-pocket expenses incurred in connection with attending each board or committee meeting. In addition, the chairman of the audit committee receives an annual retainer of $10,000, while the chairman of any other committee receives an annual retainer of $2,500. For the three and nine months ended September 30, 2013, the Company recorded directors’ fees expenses of $41,646 and $127,286, respectively, of which $62,994 was payable at September 30, 2013. For the three and nine months ended September 30, 2013, the Company recorded directors’ fees expenses of $40,112 and $111,242, respectively.

Note 10. Earnings Per Share

In accordance with the provisions of ASC Topic 260 — Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three and nine months ended September 30:


	For the three months ended September 30,				For the nine months ended September 30,
Basic and diluted	2013		2012		2013		2012
Net increase/(decrease) in net assets from operations	$	1,444,156	$	312,197	$	3,325,346	$	168,931
Weighted average common shares outstanding		7,896,446		1,231,625		5,441,473		721,389
Earnings per common share-basic and diluted	$	0.18	$	0.25	$	0.61	$	0.23

Note 11. Commitments and Contingencies

As of September 30, 2013, the Company had no unfunded commitments under loan and financing agreements.

Note 12. Distributions and Share Repurchase Plan

Distributions

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the Company’s board of directors.

The Company has adopted an “opt in” distribution reinvestment plan (“DRIP”) pursuant to which the Company’s common stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of the Company’s common stock. As a result, if the Company declares a cash dividend or other distribution, each stockholder that has “opted in” to the Company’s reinvestment plan will have their distributions automatically reinvested in additional shares of the Company’s common stock rather than receiving cash distributions. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions. For the nine months ended September 30, 2013, the Company distributed a total of $3,299,596, of which, $2,291,620 was in cash and $1,007,976 was in the form of common shares associated with the DRIP. For the nine months ended September 30, 2012, the Company distributed a total of $153,884, of which, $150,622 was in cash and $3,262 was in the form of common shares associated with the DRIP.

F-29

The following table reflects the cash distributions per share that the Company declared or paid to its stockholders since it commenced operations in April 2012. Stockholders of record as of each respective record date were entitled to receive the distribution.


Record Date	Payment Date		Amount per share
July 13 and 31, 2012		August 1, 2012	$	0.03333
August 15 and 31, 2012		September 4, 2012		0.03333
September 14 and 28, 2012		October 1, 2012		0.03333
October 15 and 30, 2012		October 31, 2012		0.03333
November 15 and 29, 2012		November 30, 2012		0.03333
December 14 and 28, 2012		December 31, 2012		0.03333
January 15 and 31, 2013		January 31, 2013		0.03333
February 15 and 28, 2013		February 28, 2013		0.03333
March 15 and 29, 2013		March 29, 2013		0.03333
April 15 and 30, 2013		April 30, 2013		0.03333
May 15 and 31, 2013		May 31, 2013		0.03333
June 14 and 28, 2013		June 28, 2013		0.03333
July 15 and 31, 2013		July 31, 2013		0.03333
August 15 and 30, 2013		August 30, 2013		0.03333
September 13 and 30, 2013		September 30, 2013		0.03333
October 15 and 31, 2013		October 31, 2013		0.03333
November 15 and 29, 2013		November 29, 2013		0.03333
December 13 and 31, 2013		December 31, 2013		0.03333

The Company’s distributions may be funded from offering proceeds or borrowings, which may constitute a return of capital and reduce the amount of capital available to the Company for investment. Any capital returned to stockholders through distributions will be distributed after payment of fees and expenses.

The Company’s previous distributions to stockholders were funded from temporary Expense Support Payments that are subject to repayment to SIC Advisors. These distributions were not based on our investment performance and may not continue in the future. If SIC Advisors had not agreed to make Expense Support Payments, these distributions would have come from paid in capital. The reimbursement of these payments owed to SIC Advisors will reduce the future distributions to which stockholders would otherwise be entitled.

The determination of the tax attributes (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) of distributions is made annually as of the end of the Company’s fiscal year based upon its taxable income for the full year and distributions paid for the full year.

Share Repurchase Program

In June 2013, the Company commenced a share repurchase program pursuant to which it intends to conduct quarterly share repurchases, of approximately 2.5% of the weighted average number of outstanding shares in any 3-month period or 10% of the weighted average number of outstanding shares in any 12-month period. The purpose of the share repurchase program is to allow stockholders to sell their shares back to the Company at a price equal to the most recently disclosed net asset value per share of the Company’s common stock immediately prior to the date of repurchase. Shares will be purchased from stockholder participating in the program on a pro rata basis. Unless the Company’s board of directors determines otherwise, the number of shares to be repurchased during any calendar year will be limited to the proceeds received in association with the sale of shares of common stock under the distribution reinvestment plan.

On June 4, 2013, the Company offered to repurchase up to 16,652 shares at a price per share of $9.18, which represented the Company’s net asset value per share as of March 31, 2013. No stockholders elected to participate in this quarterly repurchase, therefore the Company did not purchase any shares.

F-30

On August 8, 2013, the Company offered to repurchase up to 32,627 shares at a price per share of $9.13, which represented the Company’s net asset value per share as of June 30, 2013. On September 27, 2013, the Company repurchased 3,642 shares. As of September 30, 2013, the Company recorded a liability of $33,253 on the consolidated statement of assets and liabilities related to the repurchase plan.

Note 13. Financial Highlights

The following is a schedule of financial highlights of the Company for the nine months ended September 30:


	2013			2012
Per Share Data:⁽¹⁾
Net asset value at beginning of period	$	8.96		$	9.03
Net investment income/(loss)		0.61			0.07
Net realized gains/(losses) on investments		(0.11	)		0.03
Net unrealized appreciation/(depreciation) on investments and total return swap		0.11			0.03

Net increase/(decrease) in net assets		0.61			0.13
Distributions declared from net investment income⁽²⁾		(0.58	)		(0.13	)
Distributions from net realized capital gains		(0.02	)		—
Distributions from return of capital		—			(0.07	)

Total distributions to stockholders		(0.60	)		(0.20	)
Issuance of common stock above net asset value⁽⁶⁾		0.17			0.01

Net asset value at end of period		9.14			8.97
Total return based on net asset value⁽³⁾⁽⁴⁾		8.86	%		1.17	%
Portfolio turnover rate		33.94	%		25.30	%
Shares outstanding at end of period		9,862,017			1,447,861
Net assets at end of period		90,146,527			12,990,065

Ratio/Supplemental Data (annualized):
Ratio of net investment income/(loss) to average net assets⁽⁴⁾		8.82	%		2.26	%
Ratio of net expenses to average net assets⁽⁴⁾		3.46	%		10.88	%

Supplemental data (annualized):
Ratio of operating expenses to average net assets⁽⁵⁾		5.29	%		10.06	%
Ratio of incentive fees to average net assets		0.00	%		0.19	%
Ratio of interest and financing expenses to average net assets		0.29	%		0.48	%

⁽¹⁾	The per share data was derived by using the shares outstanding at September 30, 2012, which was 721,389 and weighted average shares outstanding for the nine months ended September 30, 2013, which was 5,441,473.

⁽²⁾	The per share data for distributions is the actual amount of paid distributions per share during the period.

⁽³⁾	Total annual return is historical and assumes reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales charge.

⁽⁴⁾

Total return, ratio of net investment income/(loss), and ratio of net expenses to average net assets for the nine months ended September 30, 2012 and 2013 prior to the effect of the Expense Support and Reimbursement Agreement were as follows: total return (5.79%) and 5.49%, ratio of net investment income/(loss): (19.85%) and 1.70% and ratio of net expenses to average net assets: 33.81% and 10.97%, respectively.

⁽⁵⁾	“Operating Expenses” include professional fees, administrator expenses, general and administrative expenses, directors fees, interest and financing expenses, and insurance expense paid to the effect of the expense support reimbursement.

⁽⁶⁾	Shares issued under the DRIP (see Note 12) as well as the continuous issuance of shares of common stock may cause an incremental increase/decrease in net asset value per share due to the effect of issuing shares at amounts that differ from the prevailing net asset value at each issuance date.

F-31

Note 14. Subsequent Events

Management has evaluated subsequent events through the date of issuance of the financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the financial statements as of and for the period ended September 30, 2013, except as disclosed below.

The Company issued common shares and received gross proceeds of approximately $25.5 million subsequent to September 30, 2013.

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

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including, but not limited to, statements as to:

•

our future operating results;

•

our business prospects and the prospects of our portfolio companies;

•

changes in the economy;

•

risk associated with possible disruptions in our operations or the economy generally;

•

the effect of investments that we expect to make;

•

our contractual arrangements and relationships with third parties;

•

actual and potential conflicts of interest with SIC Advisors and its affiliates;

•

the dependence of our future success on the general economy and its effect on the industries in which we invest;

•

the ability of our portfolio companies to achieve their objectives;

•

the use of borrowed money to finance a portion of our investments;

•

the adequacy of our financing sources and working capital;

•

the timing of cash flows, if any, from the operations of our portfolio companies;

•

the ability of SIC Advisors to locate suitable investments for us and to monitor and administer our investments;

•

the ability of SIC Advisors and its affiliates to attract and retain highly talented professionals;

•

our ability to maintain our qualification as a RIC and as a BDC; and

•

the effect of changes in laws or regulations affecting our operations or to tax legislation and our tax position.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. The forward looking statements contained in this annual report involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” in this annual report on Form 10-K.

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K.

Overview

We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. We are externally managed by SIC Advisors which is a registered investment adviser under the Advisers Act. SIC Advisors is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments and monitoring our portfolio on an ongoing basis. In addition, we have elected and intend to qualify to be treated, for U.S. federal income tax purposes, as a RIC under subchapter M of the Code.

On April 17, 2012 we successfully reached the minimum escrow requirement and officially commenced operations by receiving gross proceeds of $10 million in exchange for 1,108,033.24 shares of our common stock sold to SIC Advisors.

Our investment objective is generate current income and, to a lesser extent, long-term capital appreciation. We intend to meet our investment objective by investing primarily in the debt of privately owned U.S. companies with a focus on senior secured debt, second lien debt and, to a lesser extent, subordinated debt. We will originate transactions sourced through SIC Advisors’ network, and expect to acquire debt securities through the secondary market. Our debt investments may take the form of corporate loans or bonds, may be secured or unsecured and may, in some cases, be accompanied by warrants, options or other forms of equity participation. We may separately purchase common or preferred equity interests in transactions.

The level of our investment activity depends on many factors, including the amount of debt and equity capital available to prospective portfolio companies, the level of merger, acquisition and refinancing activity for such companies, the availability of credit to finance transactions, the general economic environment and the competitive environment for the types of investments we make. Based on prevailing market conditions, we anticipate that we will invest the proceeds from each subscription closing generally within 30-90 days. The precise timing will depend on the availability of investment opportunities that are consistent with our investment objective and strategies. Any distributions we make during such period may be substantially lower than the distributions that we expect to pay when our portfolio is fully invested.

As a BDC, 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,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing, with certain limited exceptions. To obtain and maintain our RIC status, we must meet specified source-of-income and asset diversification requirements. To be eligible for tax treatment under Subchapter M for U.S. federal income tax purposes, we must distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.

Revenues

We generate revenue in the form of interest on the debt securities that we hold and distributions and capital gains on other interests that we acquire in our portfolio companies. We expect that the senior debt we invest in will generally have stated terms of three to ten years and that the subordinated debt we invest in will generally have stated terms of five to ten years. Our senior and subordinated debt investments bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semiannually. In addition, some of our investments provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally will become due at the maturity date. In addition, we may generate revenue in the form of commitment and other fees in connection with transactions. Original issue discounts and market discounts or premiums will be capitalized, and we will accrete or amortize such amounts as interest income. We will record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.

Expenses

Our primary annual operating expenses consist of the payment of advisory fees and the reimbursement of expenses under our Investment Advisory Agreement with SIC Advisors and our Administration Agreement with Medley Capital LLC. We bear other expenses, which include, among other things:

•

corporate, organizational and offering expenses relating to offerings of our common stock, subject to limitations included in our Investment Advisory Agreement;

•

the cost of calculating our net asset value, including the related fees and cost of any third-party valuation services;

•

the cost of effecting sales and repurchases of shares of our common stock and other securities;

•

fees payable to third parties relating to, or associated with, monitoring our financial and legal affairs, making investments, and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;

•

interest payable on debt, if any, incurred to finance our investments;

•

transfer agent and custodial fees;

•

fees and expenses associated with marketing efforts;

•

federal and state registration fees and any stock exchange listing fees;

•

federal, state and local taxes;

•

independent directors’ fees and expenses, including travel expenses;

•

costs of director and stockholder meetings, proxy statements, stockholders’ reports and notices;

•

costs of fidelity bonds, directors and officers/errors and omissions liability insurance and other types of insurance;

•

direct costs, including those relating to printing of stockholder reports and advertising or sales materials, mailing, long distance telephone and staff;

•

fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act of 2002, the 1940 Act and applicable federal and state securities laws;

•

brokerage commissions for our investments;

•

all other expenses incurred by us or the Advisor in connection with administering our investment portfolio, including expenses incurred by our Advisor in performing certain of its obligations under the Investment Advisory Agreement; and

•

the reimbursement of the compensation of our chief financial officer and chief compliance officer, whose salary is paid by Medley, to the extent that each such reimbursement amount is annually approved by our independent director committee and subject to the limitations included in our Administration Agreement.

Reimbursement of Medley Capital LLC for Administrative Services

We reimburse Medley Capital LLC for the administrative expenses necessary for its performance of services to us. However, such reimbursement is made at an amount equal to the lower of Medley Capital LLC’s actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location. Also, such costs will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We will not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC.

Portfolio and Investment Activity

As of September 30, 2013, our portfolio consisted of investments in 48 portfolio companies with a fair value of $104.8 million, and was comprised of 15.0% Senior Secured first lien term loans, 27.5% Senior Secured second lien term loans, 46.6% Senior Secured first lien notes, 10.8% Senior Secured second lien notes and 0.1% warrants.

As of December 31, 2012, our portfolio consisted of investments in 31 portfolio companies with a fair value of $30.6 million, and was comprised of 6.4% Senior Secured first lien term loans, 9.6% Senior Secured second lien term loans, and 84.0% senior secured notes.

As of September 30, 2013, our income-bearing investment portfolio, which represented 99.9% of our total portfolio, had a weighted average yield based upon the cost of our portfolio investments of approximately 10.1%, and 57.4% of our income-bearing portfolio bore interest based on fixed rates, and 42.6% of our income-bearing portfolio bore interest on floating rates, such as LIBOR.

As of December 31, 2012, our income-bearing investment portfolio, which represented 100.0% of our total portfolio, had a weighted average yield based upon the cost of our portfolio investments of approximately 11.0%, and 84.0% of our income-bearing portfolio bore interest based on fixed rates, and 16.0% of our income-bearing portfolio bore interest on floating rates, such as LIBOR.

The following table summarizes the amortized cost and the fair value of investments as of September 30, 2013:


	Amortized Cost		Percentage of Total			Fair Value		Percentage of Total
Senior Secured First Lien Notes	$	48,433,373		46.5	%	$	48,832,046		46.6	%
Senior Secured Second Lien Term Loans		28,756,421		27.6			28,905,110		27.5
Senior Secured First Lien Term Loans		15,668,252		15.0			15,681,090		15.0
Senior Secured Second Lien Notes		11,270,226		10.9			11,308,717		10.8
Equity/Warrants		29,173		0.0			60,565		0.1

Total	$	104,157,445		100.0	%	$	104,787,528		100.0	%

The following table summarizes the amortized cost and the fair value of investments, not including cash and cash equivalents as of December 31, 2012:


	Amortized Cost		Percentage of Total			Fair Value		Percentage of Total
Senior Secured Notes⁽¹⁾	$	25,712,669		84.0	%	$	25,674,219		84.0	%
Senior Secured Second Lien Term Loans		2,903,898		9.5			2,928,247		9.6
Senior Secured First Lien Term Loans		1,692,630		6.4			1,962,630		6.4
Equity/Warrants		20,152		0.1			15,115		0.0

Total	$	30,599,349		100.0	%	$	30,580,211		100.0	%

¹	As of December 31, 2012, all of our Senior secured notes are either first or second lien positions.

Our portfolio composition, based on fair value, including the value of the TRS underlying loans, at September 30, 2013 was as follows:


	Percentage of Total Portfolio⁽¹⁾			Weighted Average Current Yield for Total Portfolio⁽¹⁾			Percentage of TRS Underlying Loans			Weighted Average Current Yield for TRS Underlying Loans			Percentage of Total Portfolio Including TRS Underlying Loans			Weighted Average Current Yield for Total Portfolio Including TRS Underlying Loans
Senior Secured First Lien Term Loans		15.0	%		9.7	%		71.3	%		9.0	%		18.5	%		9.5	%
Senior Secured Second Lien Term Loans		27.5			10.3			28.7			9.0			27.7			10.2
Senior Secured First Lien Notes		46.6			9.8			—			—			43.7			9.8
Senior Secured Second Lien Notes		10.8			9.1			—			—			10.1			9.1
Equity/Warrants		0.1			—			—			—			0.0			—

Total		100.0	%		9.9	%		100.0	%		9.0	%		100.0	%		9.8	%

⁽¹⁾	Does not include TRS underlying loans

The following table shows the portfolio composition by industry grouping, including the TRS underlying loans, based on fair value at September 30, 2013:


	Investments at Fair Value⁽¹⁾		Percentage of Total Portfolio⁽¹⁾			Value of TRS Underlying Loans		Percentage of TRS Underlying Loans			Total Investments at Fair Value including the value of TRS Underlying Loans		Percentage of Total Portfolio Including the value of TRS Underlying Loans
Oil and Gas	$	17,866,662		17.1	%	$	—		—	%	$	17,886,662		16.1	%
Telecommunications		11,073,545		10.6			—		—			11,073,545		9.9
Chemicals, Plastics, and Rubber		11,045,360		10.5			—		—			11,045,360		9.9
Personal and Nondurable Consumer Products (Manufacturing Only)		9,106,473		8.7			—		—			9,106,473		8.2
Electronics		6,970,894		6.6			—		—			6,970,894		6.2
Automobile		6,077,280		5.8			—		—			6,077,280		5.4
Finance		5,835,750		5.6			—		—			5,835,750		5.2
Beverage, Food, and Tobacco		5,742,138		5.5			—		—			5,742,138		5.1
Minging, Steel, Iron, and Nonprecious Metals		5,270,133		5.0			—		—			5,270,133		4.7
Leisure, Amusement, Motion Pictures, Entertainment		1,987,340		1.9			2,970,000		42.4			4,957,340		4.4
Retail Stores		4,779,093		4.5			—		—			4,779,093		4.3
Cargo Transport		2,740,400		2.6			2,015,000		28.8			4,755,400		4.3
Healthcare, Education, and Childcare		4,473,862		4.3			—		—			4,473,862		4.0
Hotels, Motels, Inns, and Gaming		4,171,250		4.0			—		—			4,171,250		3.7
Aerospace and Defense		2,421,499		2.3			—		—			2,421,499		2.2
Broadcasting and Entertainment		2,289,555		2.2			—		—			2,289,555		2.0
Printing and Publishing		—		—			2,012,600		28.8			2,012,600		1.8
Containers, Plastics, and Glass		1,970,000		1.9			—		—			1,970,000		1.8
Grocery		946,294		0.9			—		—			946,294		0.8

Total	$	104,787,528		100.0	%	$	6,997,600		100	%	$	111,785,128		100.0	%

⁽¹⁾	Does not include TRS underlying loans

SIC Advisors regularly assesses the risk profile of each of our investments and rates each of them based on the following categories, which we refer to as SIC Advisors’ investment credit rating:


Credit Rating		Definition
1		Investments that are performing above expectations.

2		Investments that are performing within expectations, with risks that are neutral or favorable compared to risks at the time of origination or purchase.

		All new loans are rated ‘2’.

3		Investments that are performing below expectations and that require closer monitoring, but where no loss of interest, dividend or principal is expected.

		Companies rated ‘3’ may be out of compliance with financial covenants, however, loan payments are generally not past due.

4		Investments that are performing below expectations and for which risk has increased materially since origination or purchase.

		Some loss of interest or dividend is expected, but no loss of principal.

		In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 180 days past due).

5		Investments that are performing substantially below expectations and whose risks have increased substantially since origination or purchase.

		Most or all of the debt covenants are out of compliance and payments are substantially delinquent.

		Some loss of principal is expected.

The following table shows the distribution of our investments, not including cash and cash equivalents, on the 1 to 5 investment performance rating scale at fair value as of September 30, 2013:


	September 30, 2013					December 31, 2012
Investment Performance Rating	Investments at Fair Value		Percentage			Investments at Fair Value		Percentage
1	$	4,472,807		4.3	%	$	—		—	%
2		99,713,280		95.1			29,517,711		96.5
3		601,441		0.6			1,062,500		3.5
4		—		—			—		—
5		—		—			—		—

Total	$	104,787,528		100.0	%	$	30,580,211		100.0	%

Results of Operations

Operating results for the three and nine months ended September 30, 2013 and 2012 are as follows:


	For the three months ended September 30					For the nine months ended September 30
	2013			2012		2013			2012
Total investment income	$	2,029,631		$	393,916	$	4,613,992		$	560,832
Total expenses, net		404,023			147,342		1,300,032			464,323
Net investment income/(loss)		1,625,608			246,574		3,313,960			96,509
Net realized gain/(loss) from investments		(714,665	)		—		(605,457	)		25,065
Net unrealized gain/(loss) on investments and total return swap		533,213			65,623		616,843			47,357

Net increase/(decrease) in net assets resulting from operations	$	1,444,156		$	312,197	$	3,325,346		$	168,931

Investment Income

For the three months ended September 30, 2013, investment income totaled $2,029,631, of which $2,008,108 was attributable to portfolio interest and $21,523 was attributable to other fee income. For the three months ended September 30, 2012, investment income totaled $393,916, of which $393,867 was attributable to portfolio interest and $49 was attributable to interest earned on cash and cash equivalents.

For the nine months ended September 30, 2013, investment income totaled $4,613,992, of which $4,462,568 was attributable to portfolio interest, $150,983 was attributable to other fee income, and $441 was attributable to interest earned on cash and cash equivalents. For the nine months ended September 30, 2012, investment income totaled $560,832, of which $560,584 was attributable to portfolio interest and $248 was attributable to interest earned on cash and cash equivalents.

Operating Expenses

Operating expenses for the three and nine months ended September, 2013 and 2012 were as follows:


	For the three months ended September 30					For the nine months ended September 30
	2013			2012		2013		2012
Base management fees	$	487,843		$	111,770	$	1,091,731	$	148,212
Provisional incentive fees		(34,108	)		13,125		—		14,485
Administrator expenses		143,509			141,456		440,423		247,217
Professional fees		337,806			170,142		826,031		416,564
Interest and financing expenses		41,960			16,407		107,455		20,390
Insurance expense		36,720			35,396		95,051		71,141
Directors fees		41,646			40,112		127,286		111,242
Organizational and offering costs reimbursed to an affiliate		441,989			41,143		900,509		167,143
General and administrative expenses		169,506			15,094		392,222		161,466

Expenses before expense reimbursement	$	1,666,871		$	584,645	$	3,980,708	$	1,357,860

For the three and nine months ended September 30, 2013, total expense reimbursement from SIC Advisors pursuant to the Expense Support and Reimbursement Agreement was $1,262,848 and $2,680,676, respectively. For the three and nine months ended September 30, 2012, total expense reimbursement from SIC Advisors pursuant to the Expense Support and Reimbursement Agreement was $437,303 and $893,537, respectively.

Expense Support and Reimbursement Agreement

On June 29, 2012, we entered into an Expense Support and Reimbursement Agreement (the “Expense Support Agreement”) with SIC Advisors. Pursuant to the Expense Support Agreement, SIC Advisors has agreed to reimburse us for operating expenses in an amount equal to the difference between our distributions paid to stockholders in each month, less the sum of our net investment income, our net realized capital gains and dividends paid to us from our portfolio companies during such period. The terms of the Expense Support Agreement commenced as of the date that our registration statement was declared effective by the SEC and continued monthly thereafter until December 31, 2012. Subsequently, the board of directors approved amendments to the Expense Support Agreement that extended the term from December 31, 2012 to June 30, 2014.

Pursuant to the Expense Support Agreement, we have a conditional obligation to reimburse SIC Advisors for any amounts funded by SIC Advisors under the Expense Support Agreement if (and only to the extent that),

during any fiscal quarter occurring within three years of the date on which SIC Advisors incurred a liability for such amount, the sum of our net investment income, net capital gains and the amount of any dividends and other distributions paid to us from our portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to stockholders. The purpose of the Expense Support Agreement is to cover distributions to stockholders so as to ensure that the distributions do not constitute a return of capital for GAAP purposes and to reduce operating expenses until we have raised sufficient capital to be able to absorb such expenses.

Pursuant to the Expense Support Agreement, we will reimburse SIC Advisors for expense support payments it previously made following any calendar quarter in which we received net investment income, net capital gains and dividends from our portfolio companies in excess of the distributions paid to stockholders during such calendar quarter (the “Excess Operating Funds”). Any such reimbursement will be made within three years of the date that the expense support payment obligation was incurred by SIC Advisors, subject to the conditions described below. The amount of the reimbursement during any calendar quarter will equal the lesser of (i) the Excess Operating Funds received during the quarter and (ii) the aggregate amount of all expense payments made by SIC Advisors that have not yet been reimbursed. In addition, we will only make reimbursement payments if our “operating expense ratio” is equal to or less than our operating expense ratio at the time the corresponding expense payment was incurred and if the annualized rate of our regular cash distributions to stockholders is equal to or greater than the annualized rate of our regular cash distributions to stockholders at the time the corresponding expense payment was incurred.

As of September 30, 2013, we recorded $1,965,938 in our statement of assets and liabilities as due from affiliate relating to the Expense Support Agreement. For the three and nine months ended September 30, 2013, we recorded an expense reimbursement of $1,262,848 and $2,680,676, respectively, on the statement of operations. Expense reimbursements to SIC Advisors will be accrued as they become probable and estimable. For the three and nine months ended September 30, 2013, we did not record any expense reimbursements to SIC Advisors. As of December 31, 2012, we recorded $814,814 in our statement of assets and liabilities as due from affiliate relating to the Expense Support Agreement. For the three and nine months ended September 30, 2012, we recorded an expense reimbursement of $437,303 and $893,537, respectively on the statement of operations. For the three and nine months ended September 30, 2013 and September 30, 2012, we did not record any expense reimbursements to SIC Advisors.

For the three and nine months ended September 30, 2013, net expenses after taking into account the expense reimbursement from SIC Advisors were $404,023 and $1,300,032, respectively. For the three and nine months ended September 30, 2012, net expenses after taking into account the expense reimbursement from SIC Advisors were $147,342 and $464,323, respectively.

Net Realized Gains/Losses from Investments

We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of an investment, without regard to unrealized gains or losses previously recognized.

During the three and nine months ended September 30, 2013, we recognized net realized losses of $714,665 and $605,457, respectively, on our portfolio investments.

During the three and nine months ended September 30, 2012, we recognized net realized gains of $0 and $25,065, respectively, on our portfolio investments.

Net Unrealized Appreciation/Depreciation on Investments

Net change in unrealized appreciation on investments reflects the net change in the fair value of our investment portfolio. For the three and nine months ended September 30, 2013, we had net unrealized

appreciation of $533,213 and $616,843, respectively, on our portfolio investments. For the three and nine months ended September 30, 2012, we had net unrealized appreciation of $65,623 and $47,357, respectively, on our portfolio investments.

Changes in Net Assets from Operations

For the three and nine months ended September 30, 2013, we recorded a net increase in net assets resulting from operations of $1,444,156 and $3,325,346, respectively. Based on 7,896,446 weighted average common shares outstanding for the three months ended September 30, 2013, our per share basic and diluted earnings was $0.18. Based on 5,441,473 weighted average common shares outstanding for the nine months ended September 30, 2013, our per share basic and diluted earnings was $0.61.

For the three and nine months ended September 30, 2012, we recorded a net increase in net assets resulting from operations of $312,197 and $168,931, respectively. Based on 1,231,625 weighted average common shares outstanding for the three months ended September 30, 2012, our per share basic and diluted earnings was $0.25. Based on 721,389 weighted average common shares outstanding for the nine months ended September 30, 2012, our per share basic and diluted earnings was $0.23.

Financial Condition, Liquidity and Capital Resources

As a BDC, we distribute substantially all of our net income to our stockholders and have an ongoing need to raise additional capital for investment purposes. To fund growth, we have a number of alternatives available to increase capital; including raising equity, increasing debt, and funding from operational cash flow.

Our liquidity and capital resources have been generated primarily from the net proceeds of our public offering of common stock and borrowings pursuant to the prime brokerage account we have with Barclays Capital, Inc.

As of September 30, 2013, we had $616,832 in cash and cash equivalents. In the future, we may generate cash from future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes.

In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow.

On April 24, 2012, we entered into a prime brokerage services agreement (“PBSA”) with Barclays Capital Inc. (“Barclays”) whereby Barclays provides financing for a portion of our investment portfolio. Under the terms of the PBSA, we are required to post a specified amount of collateral, in accordance with the margin requirements described in the agreement, generally between 20% and 50% of the market value of each Senior secured note as determined by Barclays. To secure the performance of our obligations under the PBSA, Barclays has been granted a first priority security interest and lien on all of the assets covered by the PBSA. Neither the cash collateral posted as margin nor our other assets covered by the PBSA are available to pay our debts. As of September 30, 2013, our borrowings under the Margin Facility totaled $17,196,550 and were recorded as due to broker on our consolidated statements of assets and liabilities. Our average outstanding borrowings for the three and nine months ended September 30, 2013 were $16,843,505 and $14,695,275, respectively. The rate is variable and ranges from LIBOR plus 0.25% to LIBOR plus 2.00%. We may use leverage that increases the effect of any investment fair value changes on capital.

Contractual Obligations and Off-Balance Sheet Arrangements

We have entered into certain contracts under which we have material future commitments. On April 5, 2012, we entered into the Investment Advisory Agreement with SIC Advisors in accordance with the 1940 Act. The Investment Advisory Agreement became effective as of April 17, 2012, the date that we met the minimum offering requirement. SIC Advisors serves as our investment advisor in accordance with the terms of the Investment Advisory Agreement. Payments under our Investment Advisory Agreement in each reporting period consist of (i) a management fee equal to a percentage of the value of our gross assets and (ii) an incentive fee based on our performance.

On April 5, 2012, we entered into the administration agreement with Medley Capital LLC pursuant to which Medley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC.

If any of our contractual obligations discussed above are terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services we expect to receive under the investment advisory agreement and administration agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.

Off-Balance Sheet Arrangements

On August 27, 2013, Arbor Funding LLC (“Arbor”), a newly-formed, wholly-owned financing subsidiary of the Company, entered into a total return swap (“TRS”) with Citibank, N.A. (“Citibank”).

Our derivative liability due to Citibank, net of amounts available for offset under a master netting agreement and net of collateral received by us, as of September 30, 2013 was $32,400.

Transactions in total return swap contracts during the nine months ended September 30, 2013 resulted in no realized gains/(losses) and $32,400 in unrealized losses.

For the nine months ended September 30, 2013, the average notional par amount of total return swap contracts was $781,111.

Distributions

We have elected and intend to qualify to be treated, for U.S. federal income tax purposes, as a RIC under subchapter M of the Code. To obtain and maintain RIC tax treatment, we must, among others things, distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders. 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: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period generally ending on October 31 of the calendar year (unless an election is made by us to use our taxable year) and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax.

While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.

We currently intend to distribute net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually out of the assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens, you will be treated for U.S. federal income tax purposes as if you had received an actual distribution of the capital gains that we retain and reinvested the net after tax proceeds in us. In this situation, you would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. We can offer no assurance that we will continue to achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

Subject to our board of directors’ discretion and applicable legal restrictions, we expect to authorize and pay monthly distributions to our stockholders. Any distributions to our stockholders will be declared out of assets legally available for distribution. We expect to continue making monthly distributions unless our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from doing so. From time to time, but not less than quarterly, we will review our accounts to determine whether distributions to our stockholders are appropriate. We have not established limits on the amount of funds we may use from available sources to make distributions. We expect that for a significant time after the commencement of this offering, substantially all of our distributions will result from expense support payments made by SIC Advisors that may be subject to repayment by us within three years. The purpose of this arrangement is to avoid such distributions being characterized as returns of capital for GAAP purposes. We may still have distributions which could be characterized as a return of capital for tax purposes. Such distributions are not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods and/or SIC Advisors continues to make Expense Support Payments under the Expense Support Agreement. Any future reimbursements to SIC Advisors will reduce the distributions that may otherwise be available for distribution to stockholders. There can be no assurance that we will achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at all. SIC Advisors has no obligation to make Expense Support Payments pursuant to the Expense Support Agreement after December 31, 2013, unless the Expense Support Agreement is extended. For the three and nine months ended September 30, 2013, if Expense Support Payments of $1,262,848 and $2,680,676, respectively were not made by SIC Advisors, 100% percent of the distributions would have been a return of capital.

Our distributions may exceed our earnings, which we refer to as a return of capital, especially during the period before we have invested substantially all of the proceeds of this offering. As a result, a portion of the distributions we make may represent a return of capital for tax purposes. Our use of the term “return of capital” merely means distributions in excess of our earnings and as such may constitute a return on your individual investments and does not mean a return on capital. Therefore stockholders are advised that they should be aware of the differences with our use of the term “return of capital” and “return on capital.”

The following table reflects the cash distributions per share that we have declared or paid to our stockholders since we commenced operations in April 2012. Stockholders of record as of each respective record date were entitled to receive the distribution.


Record Date	Payment Date	Amount per share
July 13 and 31, 2012	August 1, 2012	$	0.03333
August 15 and 31, 2012	September 4, 2012		0.03333
September 14 and 28, 2012	October 1, 2012		0.03333
October 15 and 30, 2012	October 31, 2012		0.03333
November 15 and 29, 2012	November 30, 2012		0.03333
December 14 and 28, 2012	December 31, 2012		0.03333
January 15 and 31, 2013	January 31, 2013		0.03333
February 15 and 28, 2013	February 28, 2013		0.03333
March 15 and 29, 2013	March 29, 2013		0.03333
April 15 and 30, 2013	April 30, 2013		0.03333
May 15 and 31, 2013	May 31, 2013		0.03333
June 14 and 28, 2013	June 28, 2013		0.03333
July 15 and 31, 2013	July 31, 2013		0.03333
August 15 and 30, 2013	August 30, 2013		0.03333
September 13 and 30, 2013	September 30, 2013		0.03333
October 15 and 31, 2013	October 31, 2013		0.03333
November 15 and 29, 2013	November 30, 2013		0.03333
December 13 and 31, 2013	December 31, 2013		0.03333

We have adopted an “opt in” distribution reinvestment plan pursuant to which our common stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of our common stock. As a result, if we declare a cash distribution, stockholders that have “opted in” to our distribution reinvestment plan will have their distribution automatically reinvested in additional shares of our common stock rather than receiving cash dividends. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions.

Each year a statement on Internal Revenue Service Form 1099-DIV (or such successor form) identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, or a return of capital) will be mailed to our stockholders. The tax basis of shares must be reduced by the amount of any return of capital distributions, which will result in an increase in the amount of any taxable gain (or a reduction in any deductible loss) on the sale of shares.

Related Party Transactions

On October 19, 2011, SIC Advisors entered into a subscription agreement to purchase 110.80 shares of common stock for cash consideration of $1,000. The consideration represents $9.025 per share.

On April 17, 2012, SIC Advisors purchased 1,108,033.24 shares of our common stock for aggregate gross proceeds of $10,000,000. The consideration represents $9.025 per share.

We have entered into an Investment Advisory Agreement and Expense Support and Reimbursement Agreement with SIC Advisors in which our senior management holds an equity interest. Members of our senior management also serve as principals of other investment managers affiliated with SIC Advisors that do, and may in the future, manage investment funds, accounts or other investment vehicles with investment objectives similar to ours.

We have entered into a dealer manager agreement with SC Distributors, LLC and pay them a dealer manager fee of up to 2.75% of gross proceeds raised in the offering. An affiliated entity of SC Distributors, LLC

owns an equity interest in SIC Advisors, which provides the right to receive a fixed percentage of the management fees received by SIC Advisors.

We have entered into a license agreement with SIC Advisors under which SIC Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name “Sierra” for specified purposes in our business. Under this agreement, we will have a right to use the “Sierra” name, subject to certain conditions, for so long as SIC Advisors or one of its affiliates remains our investment advisor. Other than with respect to this limited license, we will have no legal right to the “Sierra” name.

Management Fee

We pay SIC Advisors a fee for its services under the Investment Advisory Agreement. The fee consists of two components: a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.75% of our gross assets and is payable quarterly in arrears. The incentive fee consists of:

•

An incentive fee on net investment income (“subordinated incentive fee on income”) is calculated and payable quarterly in arrears and is based upon pre-incentive fee net investment income for the immediately preceding quarter. No subordinated incentive fee on income is payable in any calendar quarter in which pre-incentive fee net investment income does not exceed a quarterly return to stockholders of 1.75% per quarter on the Company’s net assets at the end of the immediately preceding fiscal quarter, or the preferred quarterly return. All pre-incentive fee net investment income, if any, that exceeds the quarterly preferred return, but is less than or equal to 2.1875% of net assets at the end of the immediately preceding fiscal quarter in any quarter, will be payable to SIC Advisors. The Company refers to this portion of its subordinated incentive fee on income as the catch up. It is intended to provide an incentive fee of 20% on pre-incentive fee net investment income when pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter in any quarter. For any quarter in which the Company’s pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter, the subordinated incentive fee on income shall equal 20% of the amount of pre-incentive fee net investment income, because the preferred return and catch up will have been achieved.

•

A capital gains incentive fee will be earned on realized investments and shall be payable in arrears as of the end of each calendar year during which the IAA is in effect. If the IAA is terminated, the fee will become payable as of the effective date of such termination. The capital gains incentive fee is based on our realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, which we refer to as “net realized capital gains.” The capital gains incentive fee equals’ 20% of net realized capital gains, less the aggregate amount of any previously paid capital gains incentive fee.

Under the terms of the Investment Advisory Agreement, SIC Advisors bears all organization and offering expenses on our behalf. Upon such time that we have raised $300 million in gross proceeds in connection with the sale of shares of our common stock, SIC Advisors shall no longer be obligated to bear, pay or otherwise be responsible for any ongoing organization and offering expenses on our behalf, and we will be responsible for paying or otherwise incurring all such organization and offering expenses. Pursuant to the terms of the Investment Advisory Agreement, we have agreed to reimburse SIC Advisors for any such organizational and offering expenses incurred by SIC Advisors not to exceed 1.25% of the gross subscriptions raised by us over the course of the offering period, which is currently scheduled to terminate two years from the initial offering date, unless extended. Notwithstanding the foregoing, in the event that organizational and offering expenses, together with sales commissions, the dealer manager fee and any discounts paid to members of the Financial Industry Regulatory Authority, exceed 15% of the gross proceeds from the sale of shares of our common stock pursuant to our registration statement or otherwise at the time of the completion of our offering, then SIC Advisors shall be required to pay or, if already paid by us, reimburse us for amounts exceeding such 15% limit.

Critical Accounting Policies

This discussion of our expected operating plans is based upon our expected financial statements, which will be prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements will require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we will describe our critical accounting policies in the notes to our future financial statements.

Valuation of Investments

The Company uses third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party valuation firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. Based on market data obtained from the third-party valuation firms, the Company uses a combined market yield analysis and an enterprise model of valuation. In applying the market yield analysis, the value of the Company’s loans is determined based upon inputs such as the coupon rate, current market yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, the Company uses a waterfall analysis which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower’s capital structure into consideration. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities

using an expected recovery model. We may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.

The Company undertakes a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

•

the Company’s quarterly valuation process begins with each portfolio investment being initially valued by the investment professionals responsible for monitoring the portfolio investment;

•

conclusions are then documented and discussed with senior management; and

•

In addition, all of the Company’s investments are subject to the following valuation process:

•

management reviews preliminary valuations and their own independent assessment;

•

the audit committee of the Company’s board of directors reviews the preliminary valuations of senior management and independent valuation firms; and

•

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities or accounting purposes if we have reason to doubt our ability to collect such interest. Original issue discounts, market discounts or premiums are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Payment-in-Kind Interest

We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that

such PIK interest is collectible. In order to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash.

Organization and Offering Expenses

Organization and offering expenses are expensed by SIC Advisors, and we may be required to reimburse SIC Advisors for such expenses subject to the terms of the Investment Advisory Agreement. Until such time that we raise $300 million in gross proceeds in connection with the sale of shares of our common stock, continuous offering expenses will be expensed by SIC Advisors. After such time, continuous offering expenses, excluding sales load, will be capitalized on our balance sheet as deferred offering expenses and expensed to our statement of operations in the period incurred.

Federal Income Taxes

We have elected and intend to qualify to be treated, for U.S. federal tax purposes, as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders from our tax earnings and profits. To obtain and maintain our RIC tax treatment, we must, among other things, meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.

Recent Developments

We do not believe that any recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on our condensed financial statements.

Item 3: Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. Pursuant to the Prime Brokerage Services Agreement, we post a specified amount of collateral, in accordance with the margin requirements described in the agreement, generally between 20% and 50% of the market value of each secured bond investment as determined by Barclays, in exchange for Barclays agreeing to provide financing for some portion of our senior secured note investments. As a result, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds would increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

In addition, any investments we make that are denominated in a foreign currency will be subject to risks associated with changes in currency exchange rates. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved.

Item 4: Controls and Procedures.

Disclosure Controls

In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that the disclosure controls and procedures are effective.

Change In Internal Control Over Financial Reporting

No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information

Item 1:

Legal Proceedings.

We are not currently subject to any legal proceedings, nor, to our knowledge, are any legal proceedings threatened against us or our subsidiaries.

Item 1A:

Risk Factors.

In addition to other information set forth in this report, you should carefully consider the “Risk Factors” discussed in our annual report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 15, 2013, which could materially affect our business, financial condition and/or operating results. Except as set forth below, there have been no material changes during the nine months ended September 30, 2013 to the risk factors discussed in “Item 1A. Risk Factors” of our annual report on Form 10-K. Additional risks or uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

Risks Related to Our Business

It is unclear how increased regulatory oversight and changes in the method for determining LIBOR may affect the value of the financial obligations to be held or issued by us that are linked to LIBOR, or how such changes could affect our results of operations or financial condition.

As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association, or BBA, member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR, and there are ongoing investigations by regulators and governmental authorities in various jurisdictions. Following a review of LIBOR conducted at the request of the U.K. government, on September 28, 2012, recommendations for reforming the setting and governing of LIBOR were released, which are referred to as the Wheatley Review. The Wheatley Review made a number of recommendations for changes with respect to LIBOR, including the introduction of S-5 statutory regulation of LIBOR, the transfer of responsibility for LIBOR from the BBA to an independent administrator, changes to the method of the compilation of lending rates and new regulatory oversight and enforcement mechanisms for ratesetting and a reduction in the number of currencies and tenors for which LIBOR is published. Based on the Wheatley Review and on a subsequent public and governmental consultation process, on March 25, 2013, the U.K. Financial Services Authority published final rules for the U.K. Financial Conduct Authority’s regulation and supervision of LIBOR, which are referred to as the FCA Rules. In particular, the FCA Rules include requirements that (1) an independent LIBOR administrator monitor and survey LIBOR submissions to identify breaches of practice standards and/or potentially manipulative behavior, and (2) firms submitting data to LIBOR establish and maintain a clear conflicts of interest policy and appropriate systems and controls. The FCA Rules took effect on April 2, 2013. It is uncertain what additional regulatory changes or what changes, if any, in the method of determining LIBOR may be required or made by the U.K. government or other governmental or regulatory authorities. Accordingly, uncertainty as to the nature of such changes may adversely affect the market for or value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for or value of any LIBOR-

linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.

We have entered into a total return swap agreement which exposes us to certain risks, including market risk, liquidity risk and other risks similar to those associated with the use of leverage.

On August 27, 2013, we, through our wholly-owned subsidiary, Arbor, entered into a TRS with Citi. A total return swap is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the total return swap, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. The TRS effectively adds leverage to our portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. The TRS enables us, through our ownership of Arbor, to obtain the economic benefit of owning the loans subject to the terms of the TRS Agreement, without actually owning them, in return for an interest-type payment to Citi. The TRS is subject to market risk and liquidity risk.

The obligations under the TRS Agreement are non-recourse to us and our exposure is limited to the amount that we contribute to Arbor in connection with the TRS. Generally, that amount will be the amount that Arbor is required to post as cash collateral for each loan (generally 25% of the market value of a loan at the time that such loan is purchased). Arbor may select a portfolio of loans with a maximum aggregate market value (determined at the time such loans become subject to the TRS) of $100 million. The current price of any loan, from day to day, will be calculated by the calculation agent, Citi, as net cash proceeds that would be received from the sale on such date of determination, less the related costs of assigning that obligation.

Arbor will pay interest to Citi for each loan at a rate equal to one-month LIBOR plus 1.30% per annum. Upon the termination or repayment of any loan subject to the TRS, Arbor will either receive from Citi the appreciation in the value of such loan, or pay to Citi any depreciation in the value of such loan.

In addition to customary events of default and termination events included in the form ISDA 2002 Master Agreement, the TRS Agreement contains the following and other customary termination events: (a) a failure to satisfy the portfolio criteria for at least 30 days; (b) a failure to post initial cash collateral or additional collateral as required by the TRS Agreement; (c) a default by Arbor or the Company with respect to indebtedness in an amount equal to or greater than the lesser of $10,000,000 and 2% of the Company’s net asset value at such time; (d) a merger of Arbor or the Company meeting certain criteria; (e) the Company or Arbor amending their respective constituent documents to alter their investment strategy in a manner that has or could reasonably be expected to have a material adverse effect; and (f) SIC Advisors ceasing to be the investment manager of Arbor or to have authority to enter into transactions under the TRS Agreement on behalf of Arbor, and not being replaced by an entity reasonably acceptable to Citi.

Citi may terminate TRS on or after the second anniversary of the effective date of the TRS. If at any time, any particular loan fails to meet certain criteria set forth in the TRS Agreement, and such failure continues for 30 days, Citi will have the right to terminate that loan or the entire agreement with at least 10 days’ notice and Arbor would be required to pay certain breakage costs to Citi. SIC Advisors may terminate the TRS Agreement at any time upon providing 10 days prior notice to Citi, but would be required to pay certain termination fees.

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3:

Defaults Upon Senior Securities.

None.

Item 4:

Mine Safety Disclosures.

None.

Item 5:

Other Information.

None.

Item 6:

Exhibits.

EXHIBIT INDEX


Number		Description

31.1		Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.


Dated: November 7, 2013	Sierra Income Corporation.

	By	/s/ Seth Taube
		Seth Taube Chief Executive Officer (Principal Executive Officer)

Dated: November 7, 2013	By	/s/ Richard T. Allorto, Jr.
		Richard T. Allorto, Jr. Chief Financial Officer (Principal Accounting and Financial Officer)

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