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EX-31.1 - EX-31.1 - GLADSTONE INVESTMENT CORPORATION\DEd812521dex311.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2014

OR

 

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

For the transition period from                      to                     

Commission file number: 814-00704

 

 

GLADSTONE INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   83-0423116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1521 WESTBRANCH DRIVE, SUITE 100  
MCLEAN, VIRGINIA   22102
(Address of principal executive office)   (Zip Code)

(703) 287-5800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed from 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12 b-2 of the Exchange Act. (Check one):

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of October 27, 2014, was 26,475,958.

 

 

 


GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

 

PART I.   FINANCIAL INFORMATION:       
Item 1.   Financial Statements (Unaudited)   
 

Condensed Consolidated Statements of Assets and Liabilities as of September 30 and March 31, 2014

     2   
 

Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2014 and 2013

     3   
 

Condensed Consolidated Statements of Changes in Net Assets for the six months ended September 30, 2014 and 2013

     4   
 

Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2014 and 2013

     5   
 

Condensed Consolidated Schedules of Investments as of September 30 and March 31, 2014

     6   
 

Notes to Condensed Consolidated Financial Statements

     13   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   
 

Overview

     30   
 

Results of Operations

     34   
 

Liquidity and Capital Resources

     42   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      50   
Item 4.   Controls and Procedures      50   
PART II.   OTHER INFORMATION:   
Item 1.   Legal Proceedings      51   
Item 1A.   Risk Factors      51   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      51   
Item 3.   Defaults Upon Senior Securities      51   
Item 4.   Mine Safety Disclosures      51   
Item 5.   Other Information      51   
Item 6.   Exhibits      51   
SIGNATURES      52   


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     September 30,     March 31,  
     2014     2014  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $181,693 and $233,895, respectively)

   $ 172,970      $ 205,440   

Affiliate investments (Cost of $201,605 and $120,010, respectively)

     156,661        87,849   

Control investments (Cost of $28,782 and $29,632 respectively)

     17,270        21,104   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $412,080 and $383,537, respectively)

     346,901        314,393   

Cash

     3,052        4,553   

Restricted cash

     3,450        5,314   

Interest receivable

     1,713        1,289   

Due from custodian

     1,177        1,704   

Deferred financing costs

     3,569        2,355   

Other assets

     1,312        1,086   
  

 

 

   

 

 

 

Total assets

   $ 361,174      $ 330,694   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Line of credit at fair value (Cost of $87,750 and $61,250, respectively)

   $ 87,750      $ 61,701   

Secured borrowing

     5,096        5,000   
  

 

 

   

 

 

 

Total borrowings

     92,846        66,701   

Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 1,610,000 shares authorized, 1,600,000 shares issued and outstanding

     40,000        40,000   

Accounts payable and accrued expenses

     1,055        665   

Fees due to Adviser(A)

     1,307        1,225   

Fee due to Administrator(A)

     209        224   

Other liabilities

     984        1,042   
  

 

 

   

 

 

 

Total liabilities

     136,401        109,857   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

    

Common stock, $0.001 par value per share, 100,000,000 shares authorized, 26,475,958 shares issued and outstanding

   $ 26      $ 26   

Capital in excess of par value

     286,866        287,062   

Cumulative net unrealized depreciation of investments

     (65,179     (69,144

Cumulative net unrealized depreciation of other

     (74     (525

Net investment income in excess of distributions

     3,344        3,616   

Accumulated net realized loss

     (210     (198
  

 

 

   

 

 

 

Total net assets

     224,773        220,837   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 361,174      $ 330,694   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 8.49      $ 8.34   
  

 

 

   

 

 

 

 

(A)  Refer to Note 4—Related Party Transactions for additional information.
(B)  Refer to Note 10—Commitments and Contingencies for additional information.

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

 

2


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended September 30,     Six Months Ended September 30,  
     2014     2013     2014     2013  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 4,494      $ 5,216      $ 9,751      $ 9,893   

Affiliate investments

     3,540        473        6,156        931   

Control investments

     535        2,017        1,065        4,063   

Cash and cash equivalents

     1        —          2        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     8,570        7,706        16,974        14,888   

Other income

        

Non-Control/Non-Affiliate investments

     501        25        1,900        241   

Affiliate investments

     —          333        34        333   

Control investments

     —          3,295        —          3,295   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     501        3,653        1,934        3,869   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,071        11,359        18,908        18,757   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     1,744        1,561        3,410        3,110   

Loan servicing fee(A)

     1,158        1,116        2,293        2,141   

Incentive fee(A)

     1,051        1,557        2,266        1,722   

Administration fee(A)

     209        156        444        399   

Interest expense on borrowings

     720        597        1,458        1,074   

Dividends on mandatorily redeemable preferred stock

     712        712        1,425        1,425   

Amortization of deferred financing fees

     282        256        536        499   

Professional fees

     305        159        547        280   

Other general and administrative expenses

     450        467        747        832   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     6,631        6,581        13,126        11,482   
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit of loan servicing fee(A)

     (1,158     (1,116     (2,293     (2,141

Other credits to Adviser fees(A)

     (606     (334     (988     (845
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits to fees

     4,867        5,131        9,845        8,496   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,204        6,228        9,063        10,261   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED (LOSS) GAIN

        

Net realized (loss) gain:

        

Control investments

     (12     24,804        (12     24,804   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized (loss) gain

     (12     24,804        (12     24,804   

Net unrealized (depreciation) appreciation:

        

Non-Control/Non-Affiliate investments

     9,454        1,258        9,899        (8,378

Affiliate investments

     (4,283     411        (2,941     (3,022

Control investments

     (6,666     (17,353     (2,993     (15,690

Other

     —          (409     451        445   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized (depreciation) appreciation

     (1,495     (16,093     4,416        (26,645
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain

     (1,507     8,711        4,404        (1,841
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 2,697      $ 14,939      $ 13,467      $ 8,420   
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.16      $ 0.24      $ 0.34      $ 0.39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.10      $ 0.57      $ 0.51      $ 0.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions

   $ 0.18      $ 0.15      $ 0.36      $ 0.30   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

        

Basic and diluted

     26,475,958        26,475,958        26,475,958        26,475,958   

 

(A)  Refer to Note 4—Related Party Transactions for additional information.

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

 

3


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended September 30,  
     2014     2013  

OPERATIONS:

    

Net investment income

   $ 9,063      $ 10,261   

Net realized (loss) gain of investments

     (12     24,804   

Net unrealized appreciation (depreciation) of investments

     3,965        (27,090

Net unrealized appreciation of other

     451        445   
  

 

 

   

 

 

 

Net increase in net assets from operations

     13,467        8,420   

DISTRIBUTIONS TO COMMON STOCKHOLDERS:

     (9,531     (7,943
  

 

 

   

 

 

 

Total increase in net assets

     3,936        477   

Net assets at beginning of period

     220,837        240,963   
  

 

 

   

 

 

 

Net assets at end of period

   $ 224,773      $ 241,440   
  

 

 

   

 

 

 

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

 

4


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended September 30,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 13,467      $ 8,420   

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

    

Purchase of investments

     (29,287     (55,990

Principal repayments of investments

     802        22,200   

Increase in investment balance due to paid in kind interest

     (58     (30

Net proceeds from the sale of investments

     (12     30,804   

Net realized loss (gain) on investments

     12        (24,804

Net unrealized (appreciation) depreciation of investments

     (3,965     27,090   

Net unrealized appreciation of other

     (451     (445

Amortization of deferred financing costs

     536        499   

Decrease (increase) in restricted cash

     1,864        (4,851

Increase in interest receivable

     (424     (170

Decrease in due from custodian

     527        633   

Increase in other assets

     (226     (293

Increase (decrease) in accounts payable and accrued expenses

     357        (24

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

     82        (120

Decrease in administration fee due to Administrator(A)

     (15     (65

(Decrease) increase in other liabilities

     (58     592   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (16,849     3,446   

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from short-term loans

     —          48,014   

Repayments on short-term loans

     —          (84,025

Proceeds from line of credit

     36,800        71,500   

Repayments on line of credit

     (10,300     (68,500

Proceeds from secured borrowing

     96        —     

Purchase of derivative

     —          (75

Payment of deferred financing costs

     (1,717     (1,088

Distributions paid to common stockholders

     (9,531     (7,943
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     15,348        (42,117
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (1,501     (38,671

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     4,553        85,904   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 3,052      $ 47,233   
  

 

 

   

 

 

 

 

(A)  Refer to Note 4—Related Party Transactions for additional information.

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

 

5


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS(L):

  

Auto Safety House, LLC

 

Automobile

 

Line of Credit , $1,000 available (7.0%, Due 10/2018)

  $ 5,000      $ 5,000      $ 4,900   
       

 

 

   

 

 

 
          5,000        4,900   

B-Dry, LLC

 

Personal, Food and Miscellaneous Services

 

Line of Credit, $0 available (6.5%, Due 5/2015)

    750        750        544   
   

Senior Term Debt (13.5%, Due 5/2015)

    6,433        6,443        4,703   
   

Senior Term Debt (13.5%, Due 5/2015)

    2,840        2,840        2,066   
   

Common Stock Warrants (85 shares)(C)(F)

      300        —     
       

 

 

   

 

 

 
          10,333        7,313   

Cavert II Holding Corp.

 

Containers, Packaging, and Glass

 

Preferred Stock (18,446 shares)(C)(F)

      1,845        3,140   
       

 

 

   

 

 

 
          1,845        3,140   

Country Club Enterprises, LLC

 

Automobile

 

Senior Subordinated Term Debt (18.6%, Due 5/2017)

    4,000        4,000        4,000   
   

Preferred Stock (7,079,792 shares)(C)(F)

      7,725        2,888   
   

Guaranty ($2,000)(D)

     
   

Guaranty ($716)(D)

     
       

 

 

   

 

 

 
          11,725        6,888   

Drew Foam Company, Inc.

 

Chemicals, Plastics, and Rubber

 

Senior Term Debt (13.5%, Due 8/2017)

    10,913        10,913        10,913   
   

Preferred Stock (34,045 shares)(C)(F)

      3,375        1,769   
   

Common Stock (5,372 shares)(C)(F)

      63        —     
       

 

 

   

 

 

 
          14,351        12,682   

Frontier Packaging, Inc.

 

Containers, Packaging, and Glass

 

Senior Term Debt (12.0%, Due 12/2017)

    12,500        12,500        12,500   
   

Preferred Stock (1,373 shares)(C)(F)

      1,373        1,591   
   

Common Stock (152 shares)(C)(F)

      152        1,102   
       

 

 

   

 

 

 
          14,025        15,193   

Funko, LLC(K)

 

Personal and Non-Durable Consumer Products (Manufacturing Only)

 

Senior Subordinated Term Debt (12.0% and 1.5% PIK, Due 5/2019)

    7,646        7,646        7,817   
   

Preferred Stock (1,305 shares)(C)(F)

      1,305        5,691   
       

 

 

   

 

 

 
          8,951        13,508   

Ginsey Home Solutions, Inc.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

 

Senior Subordinate Term Debt (13.5%, Due 1/2018)(H)

    13,300        13,300        13,300   
   

Preferred Stock (18,898 shares)(C)(F)

      9,583        1,660   
   

Common Stock (63,747 shares)(C)(F)

      8        —     
       

 

 

   

 

 

 
          22,891        14,960   

Jackrabbit, Inc.

 

Farming and Agriculture

 

Senior Term Debt (13.5%, Due 4/2018)

    11,000        11,000        11,000   
   

Preferred Stock (3,556 shares)(C)(F)

      3,556        3,986   
   

Common Stock (548 shares)(C)(F)

      94        4,341   
       

 

 

   

 

 

 
          14,650        19,327   

Mathey Investments, Inc.

 

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

 

Senior Term Debt (10.0%, Due 3/2016)

    1,375        1,375        1,375   
   

Senior Term Debt (12.0%, Due 3/2016)

    3,727        3,727        3,727   
   

Senior Term Debt (12.5%, Due
3/2016)(E)(I)

    3,500        3,500        3,500   
   

Common Stock (29,102 shares)(C)(F)

      777        7,204   
       

 

 

   

 

 

 
          9,379        15,806   

Mitchell Rubber Products, Inc.

 

Chemicals, Plastics, and Rubber

 

Subordinated Term Debt (13.0%, Due 10/2016)(I)

    13,560        13,560        12,543   
   

Subordinated Term Debt (13.0%, Due 12/2015)(I)

    1,500        1,500        1,388   
    Preferred Stock (27,900 shares)(C)(F)       2,790        —     
    Common Stock (27,900 shares)(C)(F)       28        —     
       

 

 

   

 

 

 
          17,878        13,931   
         
Precision Southeast, Inc.  

Diversified/Conglomerate Manufacturing

 

Senior Term Debt (14.0%, Due 12/2015)

    5,617        5,617        5,617   
   

Preferred Stock (19,091 shares)(C)(F)

      1,909        108   
   

Common Stock (90,909 shares)(C)(F)

      91        —     
       

 

 

   

 

 

 
          7,617        5,725   

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

 

6


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

September 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

Quench Holdings Corp.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

 

Common Stock (4,770,392 shares)(C)(F)

    $ 3,397      $ 4,753   
       

 

 

   

 

 

 
          3,397        4,753   

SBS, Industries, LLC

 

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

 

Senior Term Debt (14.0%, Due 8/2016)

    11,355        11,355        11,355   
   

Preferred Stock (19,935 shares)(C)(F)

      1,994        2,527   
   

Common Stock (221,500 shares)(C)(F)

      221        381   
       

 

 

   

 

 

 
          13,570        14,263   

Schylling Investments, LLC

 

Leisure, Amusement, Motion Pictures, Entertainment

 

Senior Term Debt (13.0%, Due 8/2017)

    13,081        13,081        13,081   
   

Preferred Stock (4,000 shares)(C)(F)

      4,000        —     
       

 

 

   

 

 

 
          17,081        13,081   

Star Seed, Inc.

 

Farming and Agriculture

 

Senior Term Debt (12.5%, Due 4/2018)

    7,500        7,500        7,500   
   

Preferred Stock (1,499 shares)(C)(F)

      1,499        —     
   

Common Stock (600 shares)(C)(F)

      1        —     
       

 

 

   

 

 

 
          9,000        7,500   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 49.9% of total investments at fair value)

  

  $ 181,693      $ 172,970   
       

 

 

   

 

 

 

AFFILIATE INVESTMENTS(M):

       

Acme Cryogenics, Inc.

 

Chemicals, Plastics, and Rubber

 

Senior Subordinated Term Debt (11.5%, Due 3/2015)(I)

  $ 14,500      $ 14,500      $ 14,500   
   

Preferred Stock (965,982 shares)(C)(F)

      7,956        12,639   
   

Common Stock (549,908 shares)(C)(F)

      1,197        —     
   

Common Stock Warrants (465,639 shares)(C)(F)

      25        —     
       

 

 

   

 

 

 
          23,678        27,139   

Alloy Die Casting Corp.(K)

 

Diversified/Conglomerate Manufacturing

 

Senior Term Debt (13.5%, Due 10/2018)

    12,215        12,215        12,200   
   

Preferred Stock (4,064 shares)(C)(F)

      4,064        2,619   
   

Common Stock (630 shares)(C)(F)

      41        —     
       

 

 

   

 

 

 
          16,320        14,819   

Behrens Manufacturing, LLC(K)

 

Diversified/Conglomerate Manufacturing

 

Senior Term Debt (13.0%, Due 12/2018)

    9,975        9,975        9,975   
    Preferred Stock (2,923 shares)(C)(F)       2,922        2,684   
       

 

 

   

 

 

 
          12,897        12,659   

Cambridge Sound Management, LLC

 

Home and office Furnishings, Housewares and Durable Consumer Products

 

Line of Credit, $325 available (13.0%, Due 9/2015)(J)

    675        675        675   
   

Senior Term Debt (13.0%, Due 9/2019)(J)

    15,000        15,000        15,000   
   

Preferred Stock (4,500 shares)(C)(F)(J)

      4,500        4,500   
       

 

 

   

 

 

 
          20,175        20,175   

Channel Technologies Group, LLC

 

Diversified/Conglomerate Manufacturing

 

Preferred Stock (2,279 shares)(C)(F)

      2,864        2,110   
   

Common Stock (2,279,020 shares)(C)(F)

      —          —     
       

 

 

   

 

 

 
          2,864        2,110   

Danco Acquisition Corp.

 

Diversified/Conglomerate Manufacturing

 

Line of Credit, $550 available (4.0%, Due 8/2015)

    4,000        4,000        300   
   

Senior Term Debt (4.0%, Due 8/2015)

    2,575        2,575        193   
   

Senior Term Debt (4.0%, Due 8/2015)

    8,795        8,795        660   
   

Senior Term Debt (5.0%, Due 8/2015)(E)

    1,150        1,150        86   
   

Preferred Stock (25 shares)(C)(F)

      2,500        —     
   

Common Stock (1,241 shares)(C)(F)

      3        —     
       

 

 

   

 

 

 
          19,023        1,239   

Edge Adhesives Holdings, Inc.(K)

 

Diversified/Conglomerate Manufacturing

 

Line of Credit, $345 available (10.5%, Due 8/2015)

    1,155        1,155        1,152   
   

Senior Term Debt (12.5%, Due 2/2019)

    9,300        9,300        9,312   
   

Senior Term Debt (13.75%, Due
11/2014)(J)

    877        877        877   
   

Senior Subordinated Term Debt (13.75%, Due 2/2019)

    2,400        2,400        2,406   
   

Preferred Stock (3,474 shares)(C)(F)

      3,474        4,327   
       

 

 

   

 

 

 
          17,206        18,074   

Head Country Food Products, Inc.

 

Beverage, Food and Tobacco

 

Senior Term Debt (12.5%, Due 2/2019)

    9,050        9,050        9,050   
   

Preferred Stock (4,000 shares)(C)(F)

      4,000        1,757   
       

 

 

   

 

 

 
          13,050        10,807   

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

 

7


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

September 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

Meridian Rack & Pinion, Inc. (K)

 

Automobile

 

Senior Term Debt (13.5%, Due 12/2018)

  $ 9,660      $ 9,660      $ 9,648   
   

Preferred Stock (3,381 shares) (C)(F)

      3,381        3,613   
       

 

 

   

 

 

 
          13,041        13,261   

NDLI Inc.

 

Cargo Transport

 

Line of Credit, $0 available (10.5%, Due 1/2015)

    1,225        1,225        968   
   

Senior Term Debt (11.0%, Due 1/2015)

    7,227        7,227        5,709   
   

Senior Term Debt (10.5%, Due 1/2015)

    3,650        3,650        2,847   
   

Senior Term Debt (10.5%, Due 1/2015)(E)

    3,650        3,650        2,865   
   

Preferred Stock (3,600 shares)(C)(F)

      3,600        —     
   

Common Stock (545 shares)(C)(F)

      —          —     
       

 

 

   

 

 

 
          19,352        12,389   

SOG Specialty K&T, LLC

 

Leisure, Amusement, Motion Pictures, Entertainment

 

Senior Term Debt (13.3%, Due 10/2017)

    6,200        6,200        6,200   
   

Senior Term Debt (14.8%, Due 10/2017)

    12,199        12,199        12,199   
   

Preferred Stock (9,749 shares)(C)(F)

      9,749        5,590   
       

 

 

   

 

 

 
          28,148        23,989   

Tread Corp.

 

Oil and Gas

 

Line of Credit, $496 available (12.5%, Due 2/2015)(G)(I)

    2,754        2,754        —     
   

Senior Subordinated Term Debt (12.5%, Due 2/2015)(G)(I)

    5,000        5,000        —     
   

Senior Subordinated Term Debt (12.5%, Due 2/2015)(G)(I)

    2,750        2,750        —     
   

Senior Subordinated Term Debt (12.5%, Due 2/2015)(G)(I)

    1,000        1,000        —     
   

Senior Subordinated Term Debt (12.5%, Due on Demand)(G)(I)

    510        510        —     
   

Preferred Stock (3,332,765 shares)(C)(F)

      3,333        —     
   

Common Stock (7,716,320 shares)(C)(F)

      501        —     
   

Common Stock Warrants (2,372,727 shares)(C)(F)

      3        —     
       

 

 

   

 

 

 
          15,851        —     
       

 

 

   

 

 

 

Total Affiliate Investments (represents 45.1% of total investments at fair value)

  

  $ 201,605      $ 156,661   
       

 

 

   

 

 

 

CONTROL INVESTMENTS(N):

       

Galaxy Tool Holding Corp.

 

Aerospace and Defense

 

Senior Subordinated Term Debt (13.5%, Due 8/2017)

  $ 15,520      $ 15,520      $ 15,520   
   

Preferred Stock (6,039,387 shares)(C)(F)

      11,464        —     
   

Common Stock (88,843 shares)(C)(F)

      48        —     
       

 

 

   

 

 

 
          27,032        15,520   

Tread Real Estate Corp.

 

Buildings and Real Estate

 

Common Stock (1,000 shares)(C)(F)(J)

      1,750        1,750   
       

 

 

   

 

 

 
    1,750        1,750   
       

 

 

   

 

 

 

Total Control Investments (represents 5.0% of total investments at fair value)

  

  $ 28,782      $ 17,270   
       

 

 

   

 

 

 

TOTAL INVESTMENTS

      $ 412,080      $ 346,901   
       

 

 

   

 

 

 

 

8


(A)  Certain of the securities listed above are issued by affiliate(s) of the indicated portfolio company. Additionally, the majority of the securities listed above, totaling $315.7 million at fair value, is pledged as collateral to our Credit Facility as described further in Note 5—Borrowings.
(B)  Percentages represent the weighted average cash interest rates in effect at September 30, 2014, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day LIBOR. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates.
(C)  Security is non-income producing.
(D)  Refer to Note 10—Commitments and Contingencies for additional information regarding these guaranties.
(E)  Last Out Tranche (“LOT”) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior debt but before the senior subordinated debt.
(F)  Where applicable, aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(G)  Debt security is on non-accrual status.
(H)  $5.1 million of the debt security participated to a third party but accounted for as collateral for a secured borrowing for accounting principles generally accepted in the U.S. (“GAAP”) purposes.
(I)  Debt security has a fixed interest rate.
(J)  New proprietary portfolio investment valued at cost, as it was determined that the price paid during the three months ended September 30, 2014 best represents fair value as of September 30, 2014.
(K)  One of our affiliated funds, Gladstone Capital Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the Securities and Exchange Commission (“SEC”).
(L)  Non-Control/Non-Affiliate investments, as defined by the Investment Company Act of 1940, as amended, (the “1940 Act”), are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(M)  Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(N)  Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

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

 

9


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS(L):

  

Acme Cryogenics, Inc.

 

Chemicals, Plastics, and Rubber

 

Senior Subordinated Term Debt (11.5%, Due 3/2015)(K)

  $ 14,500      $ 14,500      $ 14,500   
   

Preferred Stock (898,814 shares)(C)(F)

      6,984        11,276   
   

Common Stock (418,072 shares)(C)(F)

      1,045        —     
   

Common Stock Warrants (465,639
shares)(C)(F)

      25        —     
       

 

 

   

 

 

 
          22,554        25,776   

Alloy Die Casting Corp.

 

Diversified/Conglomerate Manufacturing

 

Senior Term Debt (13.5%, Due 10/2018)(D)

    12,215        12,215        12,261   
   

Preferred Stock (4,064 shares)(C)(F)

      4,064        1,948   
   

Common Stock (630 shares)(C)(F)

      41        —     
       

 

 

   

 

 

 
          16,320        14,209   

Auto Safety House, LLC

 

Automobile

 

Line of Credit, $1,000 available (7.0%, Due 10/2018)(D)(K)

    5,000        5,000        4,925   
   

Guaranty ($500)

     
   

Guaranty ($250)

     
       

 

 

   

 

 

 
          5,000        4,925   

B-Dry, LLC

 

Personal, Food and Miscellaneous Services

 

Line of Credit, $0 available (6.5%, Due 5/2014)

    750        750        566   
   

Senior Term Debt (13.5%, Due 5/2014)

    6,433        6,443        4,865   
   

Senior Term Debt (13.5%, Due 5/2014)

    2,840        2,840        2,144   
   

Common Stock Warrants (85 shares)(C)(F)

      300        —     
       

 

 

   

 

 

 
          10,333        7,575   

Cavert II Holding Corp.

 

Containers, Packaging, and Glass

 

Preferred Stock (18,446 shares)(C)(F)

      1,845        3,023   
       

 

 

   

 

 

 
          1,845        3,023   

Country Club Enterprises, LLC

 

Automobile

 

Senior Subordinated Term Debt (18.6%, Due 11/2014)

    4,000        4,000        4,000   
   

Preferred Stock (7,079,792 shares)(C)(F)

      7,725        3,670   
   

Guaranty ($2,000)

     
   

Guaranty ($878)

     
       

 

 

   

 

 

 
          11,725        7,670   

Drew Foam Company, Inc.

 

Chemicals, Plastics, and Rubber

 

Senior Term Debt (13.5%, Due 8/2017)

    10,913        10,913        10,913   
   

Preferred Stock (34,045 shares)(C)(F)

      3,375        1,351   
   

Common Stock (5,372 shares)(C)(F)

      63        —     
       

 

 

   

 

 

 
          14,351        12,264   

Frontier Packaging, Inc.

 

Containers, Packaging, and Glass

 

Senior Term Debt (12.0%, Due 12/2017)

    12,500        12,500        12,500   
   

Preferred Stock (1,373 shares)(C)(F)

      1,373        1,522   
   

Common Stock (152 shares)(C)(F)

      152        843   
       

 

 

   

 

 

 
          14,025        14,865   

Funko, LLC

 

Personal and Non-Durable Consumer Products (Manufacturing Only)

 

Senior Subordinated Term Debt (12.0% and 1.5% PIK, Due 5/2019)(D)

    7,587        7,587        7,729   
   

Preferred Stock (1,305 shares)(C)(F)

      1,305        2,276   
       

 

 

   

 

 

 
          8,892        10,005   

Ginsey Home Solutions, Inc.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

 

Senior Subordinate Term Debt (13.5%, Due 1/2018) (I)

    13,050        13,050        13,050   
   

Preferred Stock (18,898 shares)(C)(F)

      9,393        3,082   
   

Common Stock (63,747 shares)(C)(F)

      8        —     
       

 

 

   

 

 

 
          22,451        16,132   

Jackrabbit, Inc.

 

Farming and Agriculture

 

Line of Credit, $3,000 available (13.5%, Due 4/2014)

    —          —          —     
   

Senior Term Debt (13.5%, Due 4/2018)

    11,000        11,000        11,000   
   

Preferred Stock (3,556 shares)(C)(F)

      3,556        1,963   
   

Common Stock (548 shares)(C)(F)

      94        —     
       

 

 

   

 

 

 
          14,650        12,963   

Mathey Investments, Inc.

 

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

 

Senior Term Debt (10.0%, Due 3/2016)

    1,375        1,375        1,375   
   

Senior Term Debt (12.0%, Due 3/2016)

    3,727        3,727        3,727   
   

Senior Term Debt (12.5%, Due
3/2016)(E)(K)

    3,500        3,500        3,500   
   

Common Stock (29,102 shares)(C)(F)

      777        4,895   
       

 

 

   

 

 

 
          9,379        13,497   

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

 

10


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

Mitchell Rubber Products, Inc.

 

Chemicals, Plastics, and Rubber

 

Subordinated Term Debt (13.0%, Due 10/2016)(D)(K)

  $ 13,560      $ 13,560      $ 13,628   
   

Preferred Stock (27,900 shares)(C)(F)

      2,790        1,086   
   

Common Stock (27,900 shares)(C)(F)

      28        —     
       

 

 

   

 

 

 
          16,378        14,714   

Noble Logistics, Inc.

 

Cargo Transport

 

Line of Credit, $0 available (10.5%, Due 1/2015)(D)

    800        800        204   
   

Senior Term Debt (11.0%, Due
1/2015)(D)

    7,227        7,227        1,842   
   

Senior Term Debt (10.5%, Due
1/2015)(D)

    3,650        3,650        931   
   

Senior Term Debt (10.5%, Due
1/2015)(D)(E)

    3,650        3,650        931   
       

 

 

   

 

 

 
          15,327        3,908   

Precision Southeast, Inc.

 

Diversified/Conglomerate Manufacturing

 

Senior Term Debt (14.0%, Due 12/2015)

    5,617        5,617        5,617   
   

Preferred Stock (19,091 shares)(C)(F)

      1,909        —     
   

Common Stock (90,909 shares)(C)(F)

      91        —     
       

 

 

   

 

 

 
          7,617        5,617   

Quench Holdings Corp.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

 

Common Stock (4,770,391
shares)(C)(F)

      3,397        5,056   
       

 

 

   

 

 

 
          3,397        5,056   

SBS, Industries, LLC

 

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

 

Senior Term Debt (14.0%, Due 8/2016)

    11,355        11,355        11,355   
   

Preferred Stock (19,935 shares)(C)(F)

      1,994        1,064   
   

Common Stock (221,500 shares)(C)(F)

      221        —     
       

 

 

   

 

 

 
          13,570        12,419   

Schylling Investments, LLC

 

Leisure, Amusement, Motion Pictures, Entertainment

 

Senior Term Debt (13.0%, Due
8/2017)(D)

    13,081        13,081        13,228   
   

Preferred Stock (4,000 shares) (C)(F)

      4,000        —     
       

 

 

   

 

 

 
          17,081        13,228   

Star Seed, Inc.

 

Farming and Agriculture

 

Senior Term Debt (12.5%, Due
4/2018)(D)

    7,500        7,500        7,594   
   

Preferred Stock (1,499 shares)(C)(F)

      1,499        —     
   

Common Stock (600 shares)(C)(F)

      1        —     
       

 

 

   

 

 

 
          9,000        7,594   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 65.4% of total investments at fair value)

  

  $ 233,895      $ 205,440   
       

 

 

   

 

 

 

AFFILIATE INVESTMENTS(M):

       

Behrens Manufacturing, LLC

 

Diversified/Conglomerate Manufacturing

  Senior Term Debt (13.0%, Due 12/2018)   $ 9,975      $ 9,975      $ 9,975   
    Preferred Stock (2,923 shares) (C)(F)       2,922        2,754   
       

 

 

   

 

 

 
          12,897        12,729   

Channel Technologies Group, LLC

 

Diversified/Conglomerate Manufacturing

  Preferred Stock (2,279 shares)(C)(F)       2,864        3,122   
    Common Stock (2,279,020 shares)(C)(F)       —          —     
       

 

 

   

 

 

 
          2,864        3,122   

Danco Acquisition Corp.

 

Diversified/Conglomerate Manufacturing

 

Line of Credit, $700 available (4.0%, Due 8/2015)(D)

    3,450        3,450        690   
   

Senior Term Debt (4.0%, Due 8/2015)(D)

    2,575        2,575        515   
   

Senior Term Debt (4.0%, Due 8/2015)(D)

    8,795        8,795        1,759   
   

Senior Term Debt (5.0%, Due
8/2015)(D)(E)

    1,150        1,150        236   
   

Preferred Stock (25 shares)(C)(F)

      2,500        —     
   

Common Stock (1,241 shares)(C)(F)

      3        —     
       

 

 

   

 

 

 
          18,473        3,200   

Edge Adhesives Holdings, Inc.

 

Diversified/Conglomerate Manufacturing

 

Line of Credit, $705 available (10.5%, Due 8/2014)(H)

    795        795        795   
   

Senior Term Debt (12.5%, Due
2/2019)(H)

    9,300        9,300        9,300   
   

Senior Subordinated Term Debt (13.5%, Due 2/2019)(H)

    2,400        2,400        2,400   
   

Preferred Stock (3,474 shares) (C)(F)(H)

      3,474        3,474   
       

 

 

   

 

 

 
          15,969        15,969   

Head Country Food Products, Inc.

 

Beverage, Food and Tobacco

 

Line of Credit, $500 available (10.0%, Due 8/2014)(H)

    —          —          —     
   

Senior Term Debt (12.5%, Due
2/2019)(H)

    9,050        9,050        9,050   
   

Preferred Stock (4,000 shares)(C)(F)(H)

      4,000        4,000   
       

 

 

   

 

 

 
          13,050        13,050   

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

 

11


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

Meridian Rack & Pinion, Inc.

  

Automobile

  

Senior Term Debt (13.5%, Due
12/2018) (D)

   $ 9,660       $ 9,660       $ 9,672   
     

Preferred Stock (3,381 shares) (C)(F)

        3,381         3,468   
           

 

 

    

 

 

 
              13,041         13,140   

SOG Specialty K&T, LLC

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Senior Term Debt (13.3%, Due 8/2016)

     6,200         6,200         6,200   
     

Senior Term Debt (14.8%, Due 8/2016)

     12,199         12,199         12,199   
     

Preferred Stock (9,749 shares)(C)(F)

        9,749         8,240   
           

 

 

    

 

 

 
              28,148         26,639   
Tread Corp.   

Oil and Gas

  

Line of Credit, $779 available (12.5%, Due 6/2014)(G)(K)

     2,471         2,471         —     
     

Senior Subordinated Term Debt (12.5%, Due 2/2015)(G)(K)

     5,000         5,000         —     
     

Senior Subordinated Term Debt (12.5%, Due 2/2015)(G)(K)

     2,750         2,750         —     
     

Senior Subordinated Term Debt (12.5%, Due 2/2015)(G)(K)

     1,000         1,000         —     
     

Senior Subordinated Term Debt (12.5%, Due on Demand)(G)(K)

     510         510         —     
     

Preferred Stock (3,332,765 shares)(C)(F)

        3,333         —     
     

Common Stock (7,716,320 shares)(C)(F)

        501         —     
     

Common Stock Warrants (2,372,727 shares)(C)(F)

        3         —     
           

 

 

    

 

 

 
              15,568         —     
           

 

 

    

 

 

 

Total Affiliate Investments (represents 27.9% of total investments at fair value)

  

   $ 120,010       $ 87,849   
           

 

 

    

 

 

 

CONTROL INVESTMENTS(N):

  

     

Galaxy Tool Holding Corp.

  

Aerospace and Defense

  

Senior Subordinated Term Debt (13.5%, Due 8/2017)

   $ 15,520       $ 15,520       $ 15,520   
     

Preferred Stock (6,039,387 shares)(C)(F)

        11,464         2,992   
     

Common Stock (88,843 shares)(C)(F)

        48         —     
           

 

 

    

 

 

 
              27,032         18,512   
NDLI Acquisition Inc.   

Cargo Transport

  

Preferred Stock (2,600 shares)(C)(F)

        2,600         2,592   
     

Common Stock (545 shares)(C)(F)

        —           —     
           

 

 

    

 

 

 
              2,600         2,592   
           

 

 

    

 

 

 

Total Control Investments (represents 6.7% of total investments at fair value)

  

   $ 29,632       $ 21,104   
           

 

 

    

 

 

 

TOTAL INVESTMENTS(J)

         $ 383,537       $ 314,393   
           

 

 

    

 

 

 

 

(A)  Certain of the securities listed above are issued by affiliate(s) of the indicated portfolio company.
(B)  Percentages represent the weighted average cash interest rates in effect at March 31, 2014, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day LIBOR. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates.
(C)  Security is non-income producing.
(D)  Fair value based primarily on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc. as of March 31, 2014.
(E)  Last Out Tranche (“LOT”) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior debt but before the senior subordinated debt.
(F)  Where applicable, aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(G)  Debt security is on non-accrual status.
(H)  New proprietary portfolio investment valued at cost, as it was determined that the price paid during the three months ended March 31, 2014 best represents fair value as of March 31, 2014.
(I)  $5 million of the debt security participated to a third party but accounted for as collateral for a secured borrowing for accounting principles generally accepted in the U.S. (“GAAP”) purposes.
(J)  Cumulative gross unrealized depreciation for federal income tax purposes is $83,197; cumulative gross unrealized appreciation for federal income tax purposes is $13,913. Cumulative net unrealized depreciation is $69,284, based on a tax cost of $383,677.
(K)  Debt security has a fixed interest rate.
(L)  Non-Control/Non-Affiliate investments, as defined by the Investment Company Act of 1940, as amended, (the “1940 Act”), are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(M)  Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(N)  Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

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

 

12


GLADSTONE INVESTMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND AS OTHERWISE INDICATED)

NOTE 1. ORGANIZATION

Gladstone Investment Corporation (“Gladstone Investment”) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005, and completed an initial public offering on June 22, 2005. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Investment and its consolidated subsidiaries. We are an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Debt investments primarily come in the form of three types of loans: senior term loans, senior subordinated loans and junior subordinated debt. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. Our investment objectives are: (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that we anticipate will grow over time, and (b) to provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. We aim to maintain a portfolio allocation of approximately 80% debt investments and 20% equity investments, at cost.

Gladstone Business Investment, LLC (“Business Investment”), a wholly-owned subsidiary, was established on August 11, 2006 for the sole purpose of owning our portfolio of investments in connection with our line of credit. The financial statements of Business Investment are consolidated with those of Gladstone Investment. We also have significant subsidiaries whose financial statements are not consolidated with ours. Refer to Note 12—Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

We are externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of ours and a SEC registered investment adviser, pursuant to an investment advisory agreement and management agreement. Administrative services are provided by Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, pursuant to an administration agreement.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of SEC Regulation S-X. Accordingly, we have omitted certain disclosures accompanying annual financial statements prepared in accordance with GAAP. The accompanying Condensed Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X, and the authoritative accounting guidance provided by the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, we are not required to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended September 30, 2014, are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended March 31, 2014, as filed with the SEC on May 13, 2014.

Our fiscal year-end Condensed Consolidated Statement of Assets and Liabilities presented in this Form 10-Q was derived from audited financial statements, but does not include all disclosures required by GAAP.

Revisions

Certain amounts in the prior year’s consolidated financial statements have been revised to correct the presentation for the three and six months ended September 30, 2014 with no effect on our financial condition or results of operations. Certain amounts that were revised relate to our change in the classification of certain of our investments between control, affiliate and non-control/non-affiliate. The general change in the definitions from prior reported periods to the three and six months ended September 30, 2014, relate to the use of voting equity securities as the primary determinate of classification compared to the use of both voting and non-voting equity securities in prior periods.

 

13


Other revisions related to the net presentation of certain fees in our results of operations. The Adviser services, administers and collects on the loans held by Business Investment, in return for which the Adviser receives a 2% annual fee from Business Investment. All loan servicing fees are credited back to us by our Advisor. Previously, we incorrectly presented the loan servicing fee on a net basis, which is zero because it is 100% credited back to us. We have revised our fee presentation related to these loan servicing fees to reflect the gross fee and related gross credit amounts.

Management evaluated these errors in presentation and concluded they were not material to the previously issued financial statements for the three and six months ended September 30, 2013. The impact of the revisions are shown in the table below:

 

     Three Months Ended September 30,
2013
    Six Months Ended September 30,
2013
 
     As Previously
Reported
    As Revised     As Previously
Reported
    As Revised  

Interest income

        

Non-Control/Non-Affiliate investments

   $ 917      $ 5,216      $ 1,353      $ 9,893   

Affiliate investments

     1,107        473        2,215        931   

Control investments

     5,682        2,017        11,319        4,063   

Cash and cash equivalents

     —          —          1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     7,706        7,706        14,888        14,888   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income

        

Non-Control/Non-Affiliate investments

     —          25        —          241   

Affiliate investments

     333        333        333        333   

Control investments

     3,320        3,295        3,536        3,295   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     3,653        3,653        3,869        3,869   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Non-revised expenses, in aggregate

     5,465        5,465        9,341        9,341   

Loan servicing fee

     —          1,116        —          2,141   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     5,465        6,581        9,341        11,482   

Credit of loan servicing fee

     —          (1,116     —          (2,141

Other credits to Adviser fees

     (334     (334     (845     (845
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits to fees

     5,131        5,131        8,496        8,496   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized (depreciation) appreciation

        

Non-Control/Non-Affiliate investments

     (106     1,258        (3,116     (8,378

Affiliate investments

     1,571        411        2,449        (3,022

Control investments

     (17,149     (17,353     (26,423     (15,690

Other

     (409     (409     445        445   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized depreciation

   $ (16,093   $ (16,093   $ (26,645   $ (26,645
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment Valuation Policy

Accounting Recognition

We record our investments at fair value in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized depreciation or appreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized depreciation or appreciation primarily reflect the change in investment fair values, including the reversal of previously recorded unrealized depreciation or appreciation when gains or losses are realized.

Board Responsibility

In accordance with the 1940 Act, our board of directors (our “Board of Directors”) has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our established investment valuation policy (the “Policy”). Our Board of Directors reviews valuation recommendations that are provided by professionals of the Adviser and Administrator with oversight and direction from the Valuation Officer, employed by the Administrator (the “Valuation Team”). There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the Valuation Officer, uses the Policy, which has been approved by our Board of Directors, and each quarter our Board of Directors reviews the Policy to determine if changes thereto are advisable and also reviews whether the Valuation Team has applied the Policy consistently.

 

14


Use of Third Party Valuation Firms

The Valuation Team engages third party valuation firms to provide independent assessments of the fair value of certain of our investments. Currently, the third-party service provider Standard & Poor’s Securities Evaluation, Inc. (“SPSE”) provides estimates of fair value on the majority of our debt investments.

The Valuation Team generally assigns SPSE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates SPSE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimates of value on a specific debt investment may significantly differ from SPSE’s. When this occurs, our Board of Directors reviews whether the Valuation Team has followed the Policy, whether the Valuation Team’s recommended value is reasonable in light of the Policy and other facts and circumstances, and in light of all relevant information, then votes to accept or reject the Valuation Team’s recommended valuation.

Valuation Techniques

In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:

 

    Total Enterprise Value — In determining the fair value using a total enterprise value (“TEV”), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes, depreciation and amortization (“EBITDA”)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries; and other pertinent factors. To gather information regarding these factors, the Valuation Team generally references industry statistics and may use outside experts. Once the TEV is determined for a portfolio company, the Valuation Team then allocates the TEV to the portfolio company’s securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.

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

 

    Yield Analysis — The Valuation Team generally determines the fair value of our debt investments using the yield analysis, which includes a DCF calculation and the Valuation Team’s own assumptions, including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes.

In addition to the above valuation techniques, the Valuation Team may also consider other factors when determining fair values of our investments, including, but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates. If applicable, new debt and equity investments made during the three months ended September 30, 2014 are generally valued at original cost basis. Fair value measurements of our investments may involve subjective judgments and estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.

Refer to Note 3—Investments for additional information regarding fair value measurements and our application of ASC 820.

 

15


Interest Income Recognition

Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid, and, in management’s judgment, are likely to remain current, or due to a restructuring, the interest income is deemed to be collectible. As of September 30, 2014, our loans to Tread Corp. (“Tread”) were on non-accrual, with an aggregate debt cost basis of $12.0 million, or 4.0% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0. As of March 31, 2014, our loans to Tread were on non-accrual, with an aggregate debt cost basis of $11.7 million, or 4.2% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0.

PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income. During the three and six months ended September 30, 2014, we recorded PIK income of $29 and $58, respectively. During the three and six months ended September 30, 2013, we recorded PIK income of $29 and $39, respectively.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company. We recorded $0.5 million of success fees for the three and six months ended September 30, 2014. During the three months ended September 30, 2014, we received success fees of $0.2 million from each of Auto Safety House, LLC (“ASH”) and Frontier Packaging, Inc (“Frontier”) and $0.1 million from Mathey Investments, Inc (“Mathey”). We recorded $2.1 million and $2.3 million of success fees during the three and six months ended September 30, 2013, respectively. During the three months ended September 30, 2013, we received $0.3 million in success fee prepayments from Cavert II Holding Corp. (“Cavert”) and we received $1.8 million related to the exit of Venyu Solutions, Inc. (“Venyu”).

We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration. For the three and six months ended September 30, 2014, we recorded $1.4 million of dividend income from Mathey. For the three and six months ended September 30, 2013, we recorded $1.4 million in dividend income related to the exit of Venyu.

Both dividend and success fee income are recorded in Other income in our accompanying Condensed Consolidated Statements of Operations.

Recent Accounting Pronouncements

In June 2013, the FASB issued ASU 2013-08, “Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so there was no impact from adopting this standard on our financial position or results of operations. We adopted ASU 2013-08 beginning with our quarter ended June 30, 2014, and have increased our disclosure requirements as necessary. We did not adopt any new accounting standards during the three months ending September 30, 2014.

NOTE 3. INVESTMENTS

Fair Value

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

 

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

 

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

 

16


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

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. As of September 30 and March 31, 2014, all of our investments were valued using Level 3 inputs and during the three and six months ended September 30, 2014 and 2013, there were no investments transferred in to or out of Level 1, 2 or 3.

The following table presents our investments carried at fair value as of September 30 and March 31, 2014, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type and input level on the ASC 820 fair value hierarchy:

 

     Total Recurring Fair Value Measurement
Reported in Condensed Consolidated  Statements
of Assets and Liabilities
 
     September 30, 2014      March 31, 2014  

Non-Control/Non-Affiliate Investments

     

Senior debt

   $ 92,782       $ 109,479   

Senior subordinated debt

     39,048         52,907   

Preferred equity

     23,360         32,259   

Common equity/equivalents

     17,780         10,795   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     172,970         205,440   

Affiliate Investments

     

Senior debt

     99,916         60,391   

Senior subordinated debt

     16,906         2,400   

Preferred equity

     39,839         25,058   
  

 

 

    

 

 

 

Total Affiliate Investments

     156,661         87,849   

Control Investments

     

Senior subordinated debt

     15,520         15,520   

Preferred equity

     —           5,584   

Common equity/equivalents

     1,750         —     
  

 

 

    

 

 

 

Total Control Investments

     17,270         21,104   
  

 

 

    

 

 

 

Total Investments at fair value using
Level 3 inputs

   $ 346,901       $ 314,393   
  

 

 

    

 

 

 

In accordance with the FASB’s ASU No. 2011-04, “Fair Value Measurement (Topic820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”), (“ASU 2011-04”), the following table provides quantitative information about our Level 3 fair value measurements of our investments as of September 30 and March 31, 2014. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations for the particular input.

 

17


     Quantitative Information about Level 3 Fair Value Measurements
     Fair Value as
of September 30,
2014
     Fair Value as
of March 31,
2014
     Valuation
Technique/

Methodology
   Unobservable
Input
  

Range /
Weighted
Average as of

September 30, 2014

  

Range /
Weighted
Average as of March 31,
2014

Senior debt

   $ 133,667       $ 115,081       TEV    EBITDA
multiples
   3.6x – 7.0x / 5.3x    4.6x – 7.3x / 5.6x
            EBITDA    $344 – $5,628 / $3,594    $1,558 – $6,230 / $3,609
     59,031         54,789       Yield Analysis    Discount Rate    8% – 30% / 22%    8% – 30% / 19%

Senior subordinated debt

     47,320         49,470       TEV    EBITDA
multiples
   4.2x – 7.1x / 5.5x    4.1x – 7.3x / 5.0x
            EBITDA    $344 – $5,142 / $3,369    $36 – $6,156 /$4,159
     24,154         21,357       Yield Analysis    Discount Rate    13% – 17% / 16%    13% – 13% / 13%

Preferred equity

     63,199         62,901       TEV    EBITDA
multiples
   3.6x – 8.7x / 5.8x    3.5x – 8.5x / 5.1x
            EBITDA    $344 - $12,790 / $3,744    $36 - $10,621 / $4,266

Common equity/equivalents

     19,530         10,795       TEV    EBITDA
multiples
   3.5x – 18.0x / 11.0x    3.4x – 16.0x / 10.5x
            EBITDA    $197 - $ 9,291 / $5,018    $36 - $10,621 / $6,008
  

 

 

    

 

 

             

Total

   $ 346,901       $ 314,393      
  

 

 

    

 

 

             

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

The following tables provide the changes in fair value, broken out by security type, during the three and six months ended September 30, 2014 and 2013 for all of our investments.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

     Senior
Debt
    Senior
Subordinated
Debt
    Preferred
Equity
    Common
Equity/
Equivalents
     Total  

Three months ended September 30, 2014:

           

Fair value as of June 30, 2014

   $ 177,599      $ 70,382      $ 60,934      $ 12,917       $ 321,832   

Total (losses) gains:

           

Net realized losses(A)(D)

     —          —          (12     —           (12

Net unrealized (depreciation) appreciation(B)

     (2,028     29        (4,207     4,711         (1,495

New investments, repayments and settlements(C):

           

Issuances / Originations

     17,127        1,805        6,472        1,902         27,306   

Settlements / Repayments

     —          (742     —          —           (742

Sales(D)

     —          —          12        —           12   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fair value as of September 30, 2014

   $ 192,698      $ 71,474      $ 63,199      $ 19,530       $ 346,901   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Six months ended September 30, 2014:

           

Fair value as of March 31, 2014

   $ 169,870      $ 70,827      $ 62,901      $ 10,795       $ 314,393   

Total (losses) gains:

           

Net realized losses(A)(D)

     —          —          (12     —           (12

Net unrealized appreciation (depreciation)(B)

     4,941        (1,445     (6,365     6,834         3,965   

New investments, repayments and settlements(C):

           

Issuances / Originations

     17,887        2,834        6,723        1,901         29,345   

Settlements / Repayments

     —          (742     (60     —           (802

Sales(D)

     —          —          12        —           12   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fair value as of September 30, 2014

   $ 192,698      $ 71,474      $ 63,199      $ 19,530       $ 346,901   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

18


     Senior
Debt
    Senior
Subordinated
Debt
    Preferred
Equity
    Common
Equity/
Equivalents
     Total  

Three months ended September 30, 2013:

           

Fair value as of June 30, 2013

   $ 118,790      $ 93,969      $ 84,541      $ 11,027       $ 308,327   

Total gains (losses):

           

Net realized gains(A)(D)

     —          —          24,804        —           24,804   

Net unrealized appreciation (depreciation)(B)

     438        (158     (2,658     4,068         1,690   

Reversal of previously-recorded appreciation upon realization(B)

     —          —          (17,374     —           (17,374

New investments, repayments and settlements(C):

           

Issuances / Originations

     16,000        429        4,000        —           20,429   

Settlements / Repayments

     (360     (19,500     —          —           (19,860

Sales(D)

     —          —          (30,804     —           (30,804
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fair value as of September 30, 2013

   $ 134,868      $ 74,740      $ 62,509      $ 15,095       $ 287,212   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Six months ended September 30, 2013:

           

Fair value as of March 31, 2013

   $ 103,882      $ 86,811      $ 82,157      $ 13,632       $ 286,482   

Total gains (losses):

           

Net realized gains(A)(D)

     —          —          24,804        —           24,804   

Net unrealized (depreciation) appreciation(B)

     (3,406     (1,102     (6,580     1,370         (9,718

Reversal of previously-recorded depreciation (appreciation) upon realization(B)

     2        —          (17,374     —           (17,372

New investments, repayments and settlements(C):

           

Issuances / Originations

     36,690        8,931        10,306        93         56,020   

Settlements / Repayments

     (2,300     (19,900     —          —           (22,200

Sales(D)

     —          —          (30,804     —           (30,804
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fair value as of September 30, 2013

   $ 134,868      $ 74,740      $ 62,509      $ 15,095       $ 287,212   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(A)  Included in Net realized (loss) gain on our accompanying Condensed Consolidated Statements of Operations for the periods ended September 30, 2014 and 2013.
(B)  Included in Net unrealized (depreciation) appreciation on our accompanying Condensed Consolidated Statements of Operations for the periods ended September 30, 2014 and 2013.
(C)  Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts,
PIK and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments.
(D)  Included in Net realized (losses) gains and Sales are post-closing adjustments recorded in the current period related to exits from prior periods.

Investment Activity

During the six months ended September 30, 2014, the following significant transactions occurred:

 

    In May 2014, NDLI Acquisition Inc. completed the purchase of certain of Noble Logistics, Inc.’s assets out of bankruptcy. The resulting entity was listed as one portfolio company under NDLI Inc. on our Condensed Consolidated Schedules of Investments beginning in the period ended June 30, 2014.

 

    In August 2014, we made a $1.8 million equity investment in Tread Real Estate Corp. (“TREC”), which purchased the building owned by another one of our portfolio companies, Tread. This building has subsequently been leased back to Tread.

 

    In September 2014, we invested $20.2 million in Cambridge Sound Management, Inc. (“CSM”) through a combination of debt and equity. CSM, based in Waltham, Massachusetts, is the developer of sound systems and solutions.

Refer to Note 13—Subsequent Events for significant portfolio activity that occurred after September 30, 2014.

 

19


Investment Concentrations

As of September 30, 2014, our investment portfolio consisted of investments in 30 portfolio companies located in 14 states across 15 different industries with an aggregate fair value of $346.9 million, of which our investments in Acme Cryogenics, Inc. (“Acme”), SOG Specialty K&T, LLC (“SOG”), and CSM, our three largest portfolio investments at fair value, collectively comprised $71.3 million, or 20.6%, of our total investment portfolio at fair value. The following table summarizes our investments by security type as of September 30 and March 31, 2014:

 

     September 30, 2014     March 31, 2014  
     Cost     Fair Value     Cost     Fair Value  

Senior debt

   $ 214,181         52.0   $ 192,698         55.5   $ 196,293         51.2   $ 169,870         54.0

Senior subordinated debt

     84,439         20.5        71,474         20.6        82,348         21.5        70,827         22.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

     298,620         72.5        264,172         76.1        278,641         72.7        240,697         76.5   

Preferred equity

     104,761         25.4        63,199         18.3        98,099         25.6        62,901         20.0   

Common equity/equivalents

     8,699         2.1        19,530         5.6        6,797         1.7        10,795         3.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity/equivalents

     113,460         27.5        82,729         23.9        104,896         27.3        73,696         23.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 412,080         100.0   $ 346,901         100.0   $ 383,537         100.0 %    $ 314,393         100.0 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications as of September 30 and March 31, 2014:

 

     September 30, 2014     March 31, 2014  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

Diversified/Conglomerate Manufacturing

   $ 54,626         15.7   $ 54,845         17.4

Chemicals, Plastics, and Rubber

     53,751         15.5        52,753         16.8   

Home and Office Furnishings, Housewares, and Durable Consumer Products

     39,888         11.5        21,188         6.7   

Leisure, Amusement, Motion Pictures, Entertainment

     37,070         10.7        39,867         12.7   

Machinery (Non-agriculture, Non-construction, Non-electronic)

     30,069         8.7        25,917         8.2   

Farming and Agriculture

     26,827         7.7        20,557         6.5   

Automobile

     25,049         7.2        25,735         8.2   

Containers, Packaging, and Glass

     18,333         5.3        17,889         5.7   

Aerospace and Defense

     15,520         4.5        18,512         5.9   

Personal and Non-Durable Consumer Products (Manufacturing Only)

     13,508         3.9        10,005         3.2   

Cargo Transport

     12,390         3.6        6,500         2.1   

Beverage Food and Tobacco

     10,807         3.1        13,050         4.2   

Personal, Food and Miscellaneous Services

     7,313         2.1        7,575         2.4   

Buildings and Real Estate

     1,750         0.5        —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 346,901         100.0   $ 314,393         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value were included in the following geographic regions of the U.S. as of September 30 and March 31, 2014:

 

     September 30, 2014     March 31, 2014  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

West

   $ 122,276         35.2   $ 117,781         37.5

South

     101,950         29.4        89,915         28.6   

Northeast

     86,996         25.1        67,862         21.6   

Midwest

     35,679         10.3        38,835         12.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 346,901         100.0   $ 314,393         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

20


Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of September 30, 2014:

 

          Amount  

For the remaining six months ending March 31:

   2015    $ 43,144   

For the fiscal year ending March 31:

   2016      44,103   
   2017      24,915   
   2018      74,632   
   2019      84,181   
   Thereafter      27,645   
     

 

 

 
  

Total contractual repayments

   $ 298,620   
   Investments in equity securities      113,460   
     

 

 

 
  

Total cost basis of investments held at September 30, 2014:

   $ 412,080   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We maintain an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and management’s expectations of future losses. We charge the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of September 30 and March 31, 2014, we had gross receivables from portfolio companies of $1.0 million and $0.9 million, respectively. The allowance for uncollectible receivables was $0.2 million as of September 30 and March 31, 2014.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

We entered into an investment advisory and management agreement with the Adviser (the “Advisory Agreement”). The Adviser is controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee, each as described below. On July 15, 2014, our Board of Directors approved the renewal of the Advisory Agreement through August 31, 2015.

The following table summarizes the management fees, loan servicing fees which are paid in accordance with our line of credit, incentive fees and associated credits reflected in our accompanying Condensed Consolidated Statements of Operations:

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 
     2014     2013     2014     2013  

Average total assets subject to base management fee(A)

   $ 348,800      $ 312,200      $ 341,000      $ 311,000   

Multiplied by prorated annual base management fee of 2%

     0.5     0.5     1.0     1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(B)

     1,744        1,561        3,410        3,110   

Other credits to Adviser fees(B)

     (606     (334     (988     (845
  

 

 

   

 

 

   

 

 

   

 

 

 

Net base management fee

   $ 1,138      $ 1,227      $ 2,422      $ 2,265   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee(B)

     1,158        1,116        2,293        2,141   

Credit of loan servicing fee(B)

     (1,158     (1,116     (2,293     (2,141
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan servicing fee

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee(B)

   $ 1,051      $ 1,557      $ 2,266      $ 1,722   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)  Average gross assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B)  Reflected as a line item on our accompanying Condensed Consolidated Statement of Operations.

Base Management Fee

The base management fee is computed and payable quarterly and is assessed at an annual rate of 2%. It is computed on the basis of the value of our average gross assets at the end of the two most recently completed quarters, which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. As a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. Although neither we nor the Adviser receive fees in connection with managerial assistance, the Adviser provides other services to our portfolio companies and receives fees for these other services. 50% of certain of these fees and

 

21


100% of others historically have been credited against the base management fee that we would otherwise be required to pay to the Adviser. Effective October 1, 2013, 100% of all these fees are credited against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees are retained by the Adviser in the form of reimbursement for certain tasks completed by personnel of the Adviser.

Loan Servicing Fee

In addition, the Adviser services, administers and collects on the loans held by Business Investment, in return for which our

Adviser receives a 2% annual fee payable monthly by Business Investment based on the monthly aggregate balance of loans held by Business Investment in accordance with our line of credit. All loan servicing fees are credited back to us by the Adviser. Overall, the base management fee due to the Adviser cannot exceed 2% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year.

Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the “hurdle rate”). We will pay the Adviser an income-based incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

    no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized);

 

    100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); and

 

    20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we will calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the aggregate net unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in our portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since our inception. Aggregate net unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate net unrealized capital depreciation, with respect to our portfolio of investments. If this number is positive at the end of such year, then the capital gains-based incentive fee for such year equals 20% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded since our inception through September 30, 2014, as cumulative net unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded since our inception through September 30, 2014.

 

22


Administration Agreement

We have entered into an administration agreement (the “Administration Agreement”) with the Administrator, whereby we pay for our allocable portion of the Administrator’s expenses incurred while performing services to us, including, but not limited to, rent and the salaries and benefits expenses of the Administrator’s employees, including our chief financial officer and treasurer, chief compliance officer, and general counsel and secretary (who also serves as the Administrator’s president). Prior to July 1, 2014, our allocable portion was derived by multiplying that portion of the Administrator’s expenses allocable to all funds managed by the Adviser by the percentage of our total assets at the beginning of each quarter in comparison to the total assets of all funds managed by the Adviser. As approved by our Board of Directors, effective July 1, 2014, our allocable portion of the Administrator’s expenses will be derived by multiplying the Administrator’s total expenses by the approximate percentage of time the Administrator’s employees perform services for us in relation to their time spent performing services for all companies serviced by the Administrator under contractual agreements. On July 15, 2014, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2015.

Related Party Fees Due

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

 

     As of September 30,     As of March 31  
     2014     2014  

Base management fee due to Adviser

   $ 259      $ 63   

Incentive fee due to Adviser

     1,051        1,161   

Other (from) due to Adviser

     (3     1   
  

 

 

   

 

 

 

Total fees due to Adviser

   $ 1,307      $ 1,225   

Fee due to Administrator

   $ 209      $ 224   
  

 

 

   

 

 

 

Total related party fees due

   $ 1,516      $ 1,449   
  

 

 

   

 

 

 

NOTE 5. BORROWINGS

Line of Credit

On June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013, with Key Equipment Finance Inc., as administrative agent, lead arranger and a lender (the “Administrative Agent”), Branch Banking and Trust Company (“BB&T”) as a lender and managing agent, and the Adviser, as servicer, to extend the revolving period and reduce the interest rate of the line of credit (the “Credit Facility”). The revolving period was extended 14 months to June 26, 2017, and if not renewed or extended by June 26, 2017, all principal and interest will be due and payable on or before June 26, 2019 (two years after the revolving period end date). In addition, we have retained the two one-year extension options, to be agreed upon by all parties, which may be exercised on or before June 26, 2015 and 2016, respectively, and upon exercise, the options would extend the revolving period to June 26, 2018 and 2019 and the maturity date to June 26, 2020 and 2021, respectively. Subject to certain terms and conditions, the Credit Facility can be expanded by up to $145 million, to a total facility amount of $250 million, through additional commitments of existing or new committed lenders. Advances under the Credit Facility generally bear interest at 30-day LIBOR, plus 3.25% per annum, down from 3.75% prior to the amendment, and the Credit Facility includes a fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity. We incurred fees of $0.4 million in connection with this Amendment No 1.

On September 19, 2014, we further increased our borrowing capacity under the Credit Facility from $105 million to $185 million by entering into Joinder Agreements pursuant to the Credit Facility, by and among Business Investment, the Administrative Agent, the Adviser and each of East West Bank, Manufacturers and Traders Trust, Customers Bank and Talmer Bank and Trust. We incurred fees of $0.8 million in connection with this expansion.

The following tables summarize noteworthy information related to our Credit Facility:

 

     As of September 30,      As of March 31,  
     2014      2014  

Commitment amount

   $ 185,000       $ 105,000   

Borrowings outstanding at cost

     87,750         61,250   

Commitment availability

     97,250         43,750   

 

23


     For the Three Months Ended
September 30,
    For the Six Months Ended
September 30,
 
     2014     2013     2014     2013  

Weighted average borrowings outstanding

   $ 64,934      $ 41,424      $ 62,690      $ 37,063   

Effective interest rate(A)

     3.9     4.8     4.1     4.7

Commitment (unused) fees incurred

   $ 65      $ 81      $ 121      $ 133   

 

(A)  Excludes the impact of deferred financing fees.

Interest is payable monthly during the term of the Credit Facility. Available borrowings are subject to various constraints imposed under the Credit Facility, based on the aggregate loan balance pledged by Business Investment, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Based on these constraints and pledged collateral, as of September 30, 2014, we had $27.1 million in available borrowings.

The Administrative Agent also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with The Bank of New York Mellon Trust Company, N.A as custodian. The Administrative Agent is also the trustee of the account and remits the collected funds to us once a month.

Among other things, our Credit Facility contains covenants that require Business Investment to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility generally also limits payments on distributions to the aggregate net investment income for each of the twelve month periods ending March 31, 2015, 2016 and 2017. Business Investment is also subject to certain limitations on the type of loan investments it can apply toward available credit in the borrowing base, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Investment to comply with other financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of the credit agreement. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatory redeemable term preferred stock) of $170 million plus 50% of all equity and subordinated debt raised after April 30, 2013, which equates to $170 million as of September 30, 2014, (ii) “asset coverage” with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) its status as a BDC under the 1940 Act and as a RIC under the Code. As of September 30, 2014, and as defined in the performance guaranty of our Credit Facility, we had a minimum net worth of $264.8 million, an asset coverage of 264% and an active status as a BDC and RIC. Our Credit Facility requires a minimum of 12 obligors in the borrowing base and, as of September 30, 2014, Business Investment had 22 obligors. As of September 30, 2014, we continued to be in compliance with all covenants.

We have entered into an interest rate cap agreement with Keybank National Association that effectively limits the interest rate on a portion of our borrowings under the line of credit pursuant to the terms of our Credit Facility. The agreement, which expires April 2016, provides that the interest rate on $45 million of our borrowings is capped at 6%, plus 3.25% per annum, when 30-day LIBOR is in excess of 6%.

Secured Borrowing

In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our senior subordinated term debt investment in Ginsey Home Solutions, Inc. (“Ginsey”). In May 2014, we amended the agreement with the third-party to include an additional $0.1 million. ASC 860 requires us to treat the participation as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual rate established at origination. Therefore, our accompanying Condensed Consolidated Statements of Assets and Liabilities reflects the entire senior subordinated term debt investment in Ginsey and a corresponding $5.1 million secured borrowing liability. The secured borrowing has a stated interest rate of 7.0% and a maturity date of January 3, 2018.

Fair Value

We elected to apply ASC 825, “Financial Instruments,” specifically for our Credit Facility, which was consistent with the application of ASC 820 to our investments. Generally, the Valuation Team estimates the fair value of our Credit Facility using a yield analysis, which includes a DCF calculation, and its own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. During the three months ended September 30, 2014, due to the addition of four new lenders, amongst other things, cost was deemed to approximate fair value. At each of September 30 and March 31, 2014, all of our borrowings were valued using Level 3 inputs. The following tables present the short-term loan, where applicable, and Credit Facility carried at fair value as of September 30 and March 31, 2014, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and a roll-forward of the changes in fair value during the three and six months ended September 30, 2014 and 2013:

 

     Level 3 – Borrowings  
     Total Recurring Fair Value Measurement
Reported in 
Condensed Consolidated
Statements of Assets and Liabilities
 
     September 30, 2014      March 31, 2014  

Credit Facility

   $ 87,750       $ 61,701   
  

 

 

    

 

 

 

 

24


Fair Value Measurements of Borrowings Using Significant

Unobservable Inputs (Level 3)

 

     Credit
Facility
 

Three months ended September 30, 2014:

  

Fair value at June 30, 2014

   $ 62,950   

Borrowings

     30,500   

Repayments

     (5,700

Net unrealized appreciation(A)

     —     
  

 

 

 

Fair value at September 30, 2014

   $ 87,750   
  

 

 

 

Six months ended September 30, 2014:

  

Fair value at March 31, 2014

   $ 61,701   

Borrowings

     36,800   

Repayments

     (10,300

Net unrealized depreciation(A)

     (451
  

 

 

 

Fair value at September 30, 2014

   $ 87,750   
  

 

 

 

Fair Value Measurements of Borrowings Using Significant

Unobservable Inputs (Level 3)

 

     Short-Term
Loan
    Credit
Facility
    Total  

Three months ended September 30, 2013:

      

Fair value at June 30, 2013

   $ 26,009      $ 49,000      $ 75,009   

Borrowings

     22,005        43,000        65,005   

Repayments

     (26,009     (58,000     (84,009

Net unrealized appreciation(A)

     —          341        341   
  

 

 

   

 

 

   

 

 

 

Fair value at September 30, 2013

   $ 22,005      $ 34,341      $ 56,346   
  

 

 

   

 

 

   

 

 

 

Six months ended September 30, 2013:

      

Fair value at March 31, 2013

   $ 58,016      $ 31,854      $ 89,870   

Borrowings

     48,014        71,500        119,514   

Repayments

     (84,025     (68,500     (152,525

Net unrealized depreciation(A)

     —          (513     (513
  

 

 

   

 

 

   

 

 

 

Fair value at September 30, 2013

   $ 22,005      $ 34,341      $ 56,346   
  

 

 

   

 

 

   

 

 

 

 

(A)  Included in net unrealized (depreciation) appreciation on our accompanying Condensed Consolidated Statement of Operations for periods ended September 30, 2014 and 2013.

The fair value of the collateral under our Credit Facility was $315.7 million and $288.6 million as of September 30 and March 31, 2014, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In March 2012, we completed a public offering of 1,600,000 shares of 7.125% Series A Cumulative Term Preferred Stock (our “Term Preferred Stock”) at a public offering price of $25.00 per share. Gross proceeds totaled $40 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $38 million. We incurred $2 million in total offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanying Condensed Consolidated Statements of Assets and Liabilities and will be amortized over the redemption period ending February 28, 2017.

The shares have a redemption date of February 28, 2017, and are traded under the ticker symbol GAINP on the NASDAQ Global Select Market. The Term Preferred Stock is not convertible into our common stock or any other security. The Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly. We are required to redeem all of the outstanding Term Preferred Stock on February 28, 2017, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, three other potential redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all

 

25


of the outstanding Term Preferred Stock, (2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of the outstanding Term Preferred Stock or otherwise cure the ratio redemption trigger and (3) at our sole option, at any time on or after February 28, 2016, we may redeem some or all of the Term Preferred Stock.

For six months ended September 30, 2014 and 2013, our Board of Directors declared and paid a monthly distribution of $0.1484375 per share, or $0.8906250 per share in aggregate, to preferred stockholders. The tax character of distributions paid by us to preferred stockholders is from ordinary income.

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities on the balance sheet and, therefore, the related dividend payments are treated as dividend expense on our accompanying Condensed Consolidated Statements of Operations at the ex-dividend date. The fair value of the Term Preferred Stock, which we consider to be a level 1 liability within the fair value hierarchy, based on the last reported closing sale price as of September 30 and March 31, 2014, was $42.1 million and $42.4 million, respectively.

NOTE 7. COMMON STOCK

Registration Statement

We filed a registration statement on Form N-2 (File No. 333-181879) with the SEC on June 4, 2012, and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 17, 2012, which the SEC declared effective on July 26, 2012. On June 7, 2013, we filed Post-Effective Amendment No. 2 to the registration statement, which the SEC declared effective on July 26, 2013. On June 3, 2014, we filed Post-Effective Amendment No. 3 to the registration statement, and subsequently filed a Post-Effective Amendment No. 4 to the registration statement on September 2, 2014, which the SEC declared effective on September 4, 2014. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, including through a combined offering of two or more of such securities.

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

The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per weighted average common share for the three and six months ended September 30, 2014 and 2013:

 

     Three Months Ended September 30,      Six Months Ended September 30,  
     2014      2013      2014      2013  

Numerator for basic and diluted net increase in net assets resulting from operations per common share

   $ 2,697       $ 14,939       $ 13,467       $ 8,420   

Denominator for basic and diluted weighted average common shares

     26,475,958         26,475,958         26,475,958         26,475,958   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted net increase in net assets resulting from operations per average common share

   $ 0.10       $ 0.57       $ 0.51       $ 0.32   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code, we are required to distribute to our stockholders 90% of our “investment company taxable income,” which is generally our net ordinary income plus the excess of our net short-term capital gains over net long-term capital losses. The amount to be paid out as a distribution is determined by our Board of Directors each quarter and is based on management’s estimate of our estimated taxable income. Based on that estimate, our Board of Directors declares three monthly distributions each quarter.

Our Board of Directors declared the following monthly distributions to common stockholders for the six months ended September 30, 2014 and 2013:

 

Fiscal Year

   Declaration Date    Record Date    Payment Date    Distribution per
Common Share
 

2015

   April 8, 2014    April 21, 2014    April 30, 2014    $ 0.06   
   April 8, 2014    May 20, 2014    May 30, 2014      0.06   
   April 8, 2014    June 19, 2014    June 30, 2014      0.06   
   July 15, 2014    July 25, 2014    August 5, 2014      0.06   
   July 15, 2014    August 20, 2014    August 29, 2014      0.06   
   July 15, 2014    September 19, 2014    September 30, 2014      0.06   
           

 

 

 

Six months ended September 30, 2014:

   $ 0.36   
           

 

 

 

 

26


Fiscal Year

   Declaration Date    Record Date    Payment Date    Distribution
per Common Share
 

2014

   April 9, 2013    April 22, 2013    April 30, 2013    $ 0.05   
   April 9, 2013    May 14, 2013    May 31, 2013      0.05   
   April 9, 2013    June 19, 2013    June 28, 2013      0.05   
   July 9, 2013    July 17, 2013    July 31, 2013      0.05   
   July 9, 2013    August 19, 2013    August 30, 2013      0.05   
   July 9, 2013    September 16, 2013    September 30, 2013      0.05   
           

 

 

 

Six months ended September 30, 2013:

   $ 0.30   
           

 

 

 

Aggregate common distributions declared quarterly and paid for the six months ended September 30, 2014 and 2013 were approximately $9.5 million and $7.9 million, respectively. We determine the tax characterization of our common distributions as of the end of our fiscal year based upon our taxable income for the full year and distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year. If we determined the tax attributes of our distributions as of September 30, 2014, 100% would be from ordinary income and 0% would be a return of capital. For the six months ended September 30, 2014, we recorded a $0.2 million adjustment for estimated book-tax differences which decreased Capital in excess of par value and increased Net investment income in excess of distributions. For the fiscal year ended March 31, 2014, taxable income available for common distributions exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $3.9 million of the first common distributions paid in fiscal year 2015, as having been paid in the prior year.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on current knowledge, we do not believe such loss contingencies are probable and estimable and therefore, as of September 30, 2014, we have not established reserves for such loss contingencies.

Financial Commitments and Obligations

As of September 30, 2014, we have lines of credit commitments to certain of our portfolio companies that have not been fully drawn. Since these lines of credit have expiration dates and we expect many will never be fully drawn, the total line of credit commitment amounts do not necessarily represent future cash requirements.

In addition to the lines of credit to certain portfolio companies, we have also extended certain guarantees on behalf of some of our portfolio companies. As of September 30, 2014, we have not been required to make any payments on the guarantees discussed below, and we consider the credit risk to be remote and the fair values of the guarantees to be minimal.

 

    In February 2010, we executed a guarantee of a wholesale financing facility agreement (the “Floor Plan Facility”) between Agricredit Acceptance, LLC (“Agricredit”) and Country Club Enterprises, LLC (“CCE”). The Floor Plan Facility provides CCE with financing of up to $2.0 million to bridge the time and cash flow gap between the order and delivery of golf carts to customers. The guarantee was renewed in February 2011, 2012, 2013 and 2014 and expires in February 2015, unless it is renewed again by us, CCE and Agricredit. In connection with this guarantee and its subsequent renewals, we recorded aggregate premiums of $0.4 million from CCE.

 

    In April 2010, we executed a guarantee of vendor recourse for up to $2.0 million in individual customer transactions (the “Recourse Facility”) between Wells Fargo Financial Leasing, Inc. and CCE. The Recourse Facility provides CCE with the ability to provide vendor recourse up to a limit of $2.0 million on transactions with long-time customers who lack the financial history to qualify for third-party financing. The terms to maturity of these individual transactions range from October 2014 to October 2016. In connection with this guarantee, we received aggregate premiums of $0.1 million from CCE.

The following table summarizes the dollar balance of unused line of credit commitments and guarantees as of September 30 and March 31, 2014:

 

     September 30, 2014      March 31, 2014  

Unused line of credit commitments

   $ 2,716       $ 6,684   

Guarantees

     2,716         3,628   
  

 

 

    

 

 

 

Total

   $ 5,432       $ 10,312   
  

 

 

    

 

 

 

 

27


Escrow Holdbacks

From time to time, we will enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations, as stipulated in the sales agreements. We record escrow amounts in restricted cash on our accompanying Condensed Consolidated Statements of Assets and Liabilities. In August 2013, the sale of Venyu resulted in $4.9 million in escrow amounts, of which $0.6 million is held on behalf of the other sellers, which we record in other liabilities on our accompanying Condensed Consolidated Statements of Assets and Liabilities. In September 2014, $1.9 million of the escrow funds related to were released. As of September 30, 2014, there remains $2.9 million in escrow amounts, of which $0.6 million is held on behalf of the sellers, related to the sale of Venyu. We establish a contingent liability against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liability recorded against the escrow amounts was $35 for both September 30 and March 31, 2014.

NOTE 11. FINANCIAL HIGHLIGHTS

 

    Three Months Ended September 30,     Six Months Ended September 30,  
    2014     2013     2014     2013  

Per Common Share Data

       

NAV at beginning of period(A)

  $ 8.57      $ 8.70      $ 8.34      $ 9.10   

Net investment income(B)

    0.16        0.24        0.34        0.39   

Realized gain on sale of investments and other(B)

    —          0.94        —          0.94   

Net unrealized (depreciation) appreciation of investments and other(B)

    (0.06     (0.61     0.17        (1.01
 

 

 

   

 

 

   

 

 

   

 

 

 

Total from investment operations(B)

    0.10        0.57        0.51        0.32   

Cash distributions from net investment income(B)(C)

    (0.18     (0.15     (0.36     (0.30
 

 

 

   

 

 

   

 

 

   

 

 

 

NAV at end of period(A)

  $ 8.49      $ 9.12      $ 8.49      $ 9.12   
 

 

 

   

 

 

   

 

 

   

 

 

 

Per common share market value at beginning of period

  $ 7.40      $ 7.35      $ 8.27      $ 7.31   

Per common share market value at end of period

    7.11        7.05        7.11        7.05   

Total return(D)

    (1.55 )%      (2.02 )%      (9.82 )%      0.54

Common stock outstanding at end of period

    26,475,958        26,475,958        26,475,958        26,475,958   

Statement of Assets and Liabilities Data:

       

Net assets at end of period

  $ 224,773      $ 241,440      $ 224,773      $ 241,440   

Average net assets(E)

    227,307        237,871        225,013        237,509   

Senior Securities Data(F):

       

Total borrowings, at cost

  $ 92,846      $ 61,005      $ 92,846      $ 61,005   

Mandatorily redeemable preferred stock

    40,000        40,000        40,000        40,000   

Asset coverage ratio(G)

    264     328     264     328

Average coverage per unit(H)

  $ 2,636      $ 3,276      $ 2,636      $ 3,276   

Ratios/Supplemental Data:

       

Ratio of expenses to average net assets(I)(J)(L)

    11.67     11.07     11.67     9.67

Ratio of net expenses to average net assets(I)(K)

    8.56        8.63        8.75        7.15   

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

    7.40        10.47        8.06        8.64   

 

(A)  Based on actual common shares outstanding at the end of the corresponding period.
(B)  Based on weighted average per basic common share data.
(C)  Distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.
(D)  Total return equals the change in the market value of our common stock from the beginning of the period, taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9—Distributions to Common Stockholders.
(E)  Calculated using the average balance of net assets at the end of each month of the reporting period.
(F)  The 1940 Act currently permits BDCs to issue senior securities representing indebtedness and senior securities that are stock, to which we refer as “senior securities.”
(G)  As a BDC, we are generally required to maintain an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200% on our senior securities representing indebtedness and our senior securities that are stock. Our mandatorily redeemable preferred stock is a senior security that is stock.
(H)  Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness.
(I)  Amounts are annualized.
(J)  Ratio of expenses to average net assets is computed using expenses before credits from the Adviser.
(K)  Ratio of net expenses to average net assets is computed using total expenses net of any credits received from the Adviser.
(L)  The ratio of expenses to average net assets for the three and six months ended September 30, 2013 were revised from the previously reported ratios, which were 9.19% and 7.87% ,respectively, to correct an error as discussed in footnote 2.

 

28


NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES

In accordance with the SEC’s Regulation S-X, we have one unconsolidated subsidiary, Galaxy Tool Holdings, Inc. (“Galaxy”), that met at least one of the significance conditions of the SEC’s Regulation S-X as of September 30, 2014 and 2013 and for the six months ended September 30, 2014 and 2013. Additionally, we have one unconsolidated subsidiary, SOG Specialty K&T, LLC (“SOG”), and one former unconsolidated subsidiary, Venyu Solutions Inc. (“Venyu”), which met at least one of the significance conditions of the SEC’s Regulation S-X for the six months ended September 30, 2013. Accordingly, summarized, comparative financial information, in aggregate, is presented below for our significant unconsolidated subsidiaries.

 

     For the Six Months Ended September 30,  

Income Statement(A)

   2014     2013  

Net Sales

   $ 32,746      $ 46,573   

Gross Profit

     9,066        17,017   

Net loss

     (1,700     294   

 

(A)  Reflects only four months of summarized income statement information of Venyu in 2013, as it was exited in August 2013.

NOTE 13. SUBSEQUENT EVENTS

New Investment

In October 2014, we invested $24.4 million in Old World Christmas, Inc. (“OWC”) through a combination of debt and equity. OWC, headquartered in Spokane, Washington, is a designer and distributor of an extensive collection of blown glass Christmas ornaments, table top figurines, vintage-style light covers and nostalgic greeting cards into the independent gift channel.

Distributions

On October 7, 2014, our Board of Directors declared the following monthly cash distributions to common and preferred stockholders:

 

Declaration Date

  

Record Date

  

Payment Date

   Distribution per
Common Share
     Distribution per Term
Preferred Share
 

October 7, 2014

   October 22, 2014    October 31, 2014    $ 0.06       $ 0.1484375   

October 7, 2014

   November 17, 2014    November 26, 2014      0.06         0.1484375   

October 7, 2014

   December 19, 2014    December 31, 2014      0.06         0.1484375   
        

 

 

    

 

 

 

Total for the Quarter:

   $ 0.18       $ 0.4453125   
        

 

 

    

 

 

 

Additionally, on October 7, 2014, our Board of Directors declared the following one-time special cash distribution to common stockholders:

 

Declaration Date

  

Record Date

  

Payment Date

   Distribution per
Common Share
 

October 7, 2014

   December 19, 2014    December 31, 2014    $ 0.05   

This represents the third calendar year in a row that a one-time special cash distribution to common stockholders has been declared by our Board of Directors.

 

29


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

All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: (1) further adverse changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David A.R. Dullum; (4) changes in our investment objectives and strategy; (5) availability, terms and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; (8) our ability to maintain our qualification as a RIC and as business development company; and (9) those factors described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on May 13, 2014. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014, filed with the SEC on May 13, 2014. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods.

OVERVIEW

General

We are an externally-managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for United States (“U.S.”) federal income tax purposes, we have elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a BDC and a RIC, we are also subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. We were established for the purpose of investing in debt and equity securities of established private businesses in the U.S. Debt investments primarily come in the form of three types of loans: senior term loans, senior subordinated loans and junior subordinated debt. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. To a much lesser extent, we also invest in senior and subordinated syndicated loans. Our investment objectives are (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that we anticipate will grow over time and (b) to provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we hope will appreciate over time so that we can sell them for capital gains. We expect that our investment allocation over time will consist of approximately 80% in debt securities and 20% in equity securities. As of September 30, 2014, our investment allocation was 72% in debt securities and 28% in equity securities, at cost.

 

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We focus on investing in small and medium-sized private U.S. businesses that meet certain of the following criteria which we believe will give us the best potential to sell our equity positions at a later date for capital gains: the potential for growth in cash flow, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, profitable operations based on the borrower’s cash flow and reasonable capitalization of the borrower (usually by leveraged buyout funds or venture capital funds). We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the borrower, a public offering of the borrower’s stock or by exercising our right to require the borrower to repurchase our warrants, though there can be no assurance that we will always have these rights. We lend to borrowers that need funds to finance growth, restructure their balance sheets or effect a change of control. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

Our common stock and 7.125% Series A Cumulative Term Preferred Stock (our “Term Preferred Stock”) are traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbols “GAIN” and “GAINP,” respectively.

We are externally managed by our investment advisor, Gladstone Management Corporation (the “Adviser”), an SEC registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). The Adviser manages our investment activities. Our Board of Directors, which is composed of a majority of independent directors, supervises such investment activities. We have also entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (our “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services.

Business Environment

The strength of the global economy, and the U.S. economy in particular, continues to be uncertain and volatile, and we remain cautious about a long-term economic recovery. The effects of the previous recession and the disruptions in the capital markets have impacted our liquidity options and increased our cost of debt and equity capital. In addition, the federal government shutdown in October 2013 combined with the uncertainty surrounding the ability of the federal government to address its fiscal condition in both the short and long term have increased domestic and global economic instability. Many of our portfolio companies, as well as those that we evaluate for possible investments, are adversely impacted by these political and economic conditions. If these conditions persist, it may adversely affect their ability to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering.

Portfolio Activity

While conditions remain challenging, we are seeing an increase in the number of new investment opportunities consistent with our investing strategy of providing a combination of debt and equity in support of management and sponsor-led buyouts of small and medium-sized companies in the U.S. During the three months ended September 30, 2014, we invested a total of $21.9 million in two new deals, and subsequent to September 30, 2014, we invested $24.4 million in another new deal. These new investments, along with the capital raising efforts discussed below, have allowed us to invest $356.4 million in 22 new proprietary debt and equity deals since October 2010.

These new investments, as well as the majority of our debt securities in our portfolio, have a success fee component, which enhances the yield on our debt investments. Unlike paid-in-kind (“PIK”) income, we generally do not recognize success fees as income until they are received in cash. Due to their contingent nature, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of such collections. As a result, as of September 30, 2014, we had unrecognized success fees of $21.0 million, or $0.79 per common share, which do not meet the recognition criteria under the relevant accounting guidance.

The improved investing environment presented us with an opportunity to realize gains and other income from our investment in Venyu Solutions, Inc. (“Venyu”) as a result of its sale in August 2013. As a result of the sale, we received net cash proceeds of $32.2 million, resulting in a realized gain of $24.8 million and dividend income of $1.4 million. In addition, we received full repayment of our debt investments of $19 million and $1.8 million in success fee income. This represents our fourth management-supported buyout liquidity event since June 2010, and in the aggregate, these four liquidity events have generated $54.5 million in realized gains and $13.1 million in other income, for a total increase to our net assets of $67.6 million. We believe each of these transactions was an equity-oriented investment success and exemplify our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. These successes, in part, enabled us to increase the monthly distribution 50% since March 2011, allowed us to declare and pay a $0.03 per common share one-time special distribution in fiscal year 2012, a $0.05 per common share one-time special distribution in November 2013, and a $0.05 per common share one-time special distribution payable in December 2014.

 

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With the four liquidity events that have generated $54.5 million in realized gains since June 2010, we have nearly overcome our cumulative realized losses since inception that were primarily incurred during the recession and in connection with the sale of performing loans at a realized loss to pay off a former lender. We took the opportunity during the fiscal year ended March 31, 2014, to strategically sell our investments in two of our portfolio companies, ASH Holding Corp. (“ASH”) and Packerland Whey Products, Inc. (“Packerland”) to existing members of their management teams and other existing owners, respectively, which resulted in realized losses of $11.4 million and $1.8 million, respectively, as well as the write off our equity investments in Noble Logistics, Inc. (“Noble”), which resulted in a realized loss of $3.4 million. These sales and write off, while at a realized loss, were accretive to our net asset value in aggregate by $5.7 million, reduced our distribution requirements related to our realized gains and reduced our non-accruals outstanding.

Capital Raising Efforts

Despite the challenges that have existed in the economy for the past several years, we have been able to meet our capital needs through increases to our revolving line of credit (our “Credit Facility”) and by accessing the capital markets in the form of public offerings of stock. For example, in October 2012, we issued 4.4 million shares of common stock for gross proceeds of $33 million. Regarding our Credit Facility over the last two years, we have successfully extended the revolving period multiple times, most recently to June 2017, increased the commitment from $60 million to $185 million and reduced the interest rate margin from 3.75% to 3.25%.

Although we were able to access the capital markets during 2012, we believe market conditions continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of equity. On October 27, 2014, the closing market price of our common stock was $7.27, which represented a 14.4% discount to our September 30, 2014 net asset value (“NAV”) per share of $8.49. When our stock trades below NAV, our ability to issue equity is constrained by provisions of the1940 Act, which generally prohibit the issuance and sale of our common stock at an issuance price below the then current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering.

At our 2014 Annual Meeting of Stockholders held on August 7, 2014, our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then current NAV per share, subject to certain limitations, including that the number of shares issued and sold pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale, provided that our Board of Directors makes certain determinations prior to any such sale. This August 2014 stockholder authorization is in effect for one year from the date of stockholder approval. Prior to the August 2014 stockholder authorization, we sought and obtained stockholder approval concerning a similar proposal at the Annual Meeting of Stockholders held in August 2012, and with our Board of Directors’ subsequent approval, we issued shares of our common stock in October and November 2012 at a price per share below the then current NAV per share. The resulting proceeds, in part, have allowed us to grow the portfolio by making new investments, generate additional income through these new investments, provide us additional equity capital to help ensure continued compliance with regulatory tests and increase our debt capital while still complying with our applicable debt-to-equity ratios.

Regulatory Compliance

Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage ratio (as defined in Section 18(h) of the 1940 Act), of at least 200% on our senior securities representing indebtedness and our senior securities that are stock, which we refer to collectively as “Senior Securities.” As of September 30, 2014, our asset coverage ratio was 264%. Our status as a RIC under Subchapter M of the Code, in addition to other requirements, also requires us, at the close of each quarter of the taxable year, to meet an asset diversification test, which requires that at least 50% of the value of our assets consists of cash, cash items, U.S. government securities or certain other qualified securities (the “50% threshold”). In the past, we have obtained this ratio by entering into a short-term loan at quarter end to purchase qualifying assets; however, a short term loan was not necessary at the end of the quarter ended September 30, 2014. Until the composition of our assets is above the required 50% threshold on a consistent basis by a significant margin, we may have to continue to obtain short-term loans on a quarterly basis. When deployed, this strategy, while allowing us to satisfy the 50% threshold for our RIC status, limits our ability to use increased debt capital to make new investments, due to our asset coverage ratio limitations under the 1940 Act.

 

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Investment Highlights

During the six months ended September 30, 2014, we disbursed $21.9 million in new debt and equity investments and extended $7.4 million of investments to existing portfolio companies through revolver draws or additions to term notes. From our initial public offering in June 2005 through September 30, 2014, we have made 221 investments in 109 companies for a total of approximately $956.9 million, before giving effect to principal repayments on investments and divestitures.

Investment Activity

During the six months ended September 30, 2014, the following significant transactions occurred:

 

    In May 2014, NDLI Acquisition Inc. completed the purchase of certain of Noble’s assets out of bankruptcy. The resulting entity was listed as one portfolio company under NDLI Inc. on our Condensed Consolidated Schedules of Investments beginning in the period ended June 30, 2014.

 

    In August 2014, we made a $1.8 million equity investment in Tread Real Estate Corp. (“TREC”), which purchased the building owned by another one of our portfolio companies, Tread. This building has subsequently been leased back to Tread.

 

    In September 2014, we invested $20.2 million in Cambridge Sound Management, Inc. (“CSM”) through a combination of debt and equity. CSM, based in Waltham, Massachusetts, is the developer of sound systems and solutions.

Subsequent to September 30, 2014, the following significant transaction occurred:

 

    In October 2014, we invested $24.4 million in Old World Christmas, Inc. (“OWC”) through a combination of debt and equity. OWC, headquartered in Spokane, Washington, is a designer and distributor of an extensive collection of blown glass Christmas ornaments, table top figurines, vintage-style light covers and nostalgic greeting cards into the independent gift channel.

Recent Developments

Credit Facility Extension and Expansion

On June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013, with Key Equipment Finance Inc., as administrative agent, lead arranger and a lender (the “Administrative Agent”), Branch Banking and Trust Company (“BB&T”) as a lender and managing agent, and the Adviser, as servicer, to extend the revolving period and reduce the interest rate of the line of credit. The revolving period was extended 14 months to June 26, 2017, and if not renewed or extended by June 26, 2017, all principal and interest will be due and payable on or before June 26, 2019 (two years after the revolving period end date). In addition, we have retained the two one-year extension options, to be agreed upon by all parties, which may be exercised on or before June 26, 2015 and 2016, respectively, and upon exercise, the options would extend the revolving period to June 26, 2018 and 2019 and the maturity date to June 26, 2020 and 2021, respectively. Subject to certain terms and conditions, the Credit Facility can be expanded by up to $145 million, to a total facility amount of $250 million, through additional commitments of existing or new committed lenders. Advances under the Credit Facility generally bear interest at 30-day LIBOR, plus 3.25% per annum, down from 3.75% prior to the amendment, and the Credit Facility includes an unused fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity. We incurred fees of $0.4 million in connection with this amendment.

On September 19, 2014, we further increased our borrowing capacity under the Credit Facility from $105 million to $185 million by entering into Joinder Agreements pursuant to the Credit Facility, by and among Business Investment, the Administrative Agent, the Adviser and each of East West Bank, Manufacturers and Traders Trust, Customers Bank and Talmer Bank and Trust. We incurred fees of $0.8 million in connection with this expansion.

 

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2014, to the Three Months Ended September 30, 2013

 

     For the Three Months Ended September 30,  
     2014     2013     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 8,570      $ 7,706      $ 864        11.2

Other income

     501        3,653        (3,152     (86.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,071        11,359        (2,288     (20.1
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     1,744        1,561        183        11.7   

Incentive fee

     1,051        1,557        (506     (32.5

Administration fee

     209        156        53        34.0   

Interest and dividend expense

     1,432        1,309        123        9.4   

Amortization of deferred financing costs

     282        256        26        10.2   

Other

     755        626        129        20.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     5,473        5,465        8        0.1   

Other credits to Adviser fees

     (606     (334     (272     (81.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits to fees

     4,867        5,131        (264     (5.1
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,204        6,228        (2,024     (32.5
  

 

 

   

 

 

   

 

 

   

 

 

 

UNREALIZED (LOSS) GAIN:

        

Net realized (loss) gain on investments

     (12     24,804        (24,816     NM   

Net unrealized depreciation of investments

     (1,495     (15,684     14,189        (90.5

Net unrealized depreciation of other

     —          (409     409        100.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain on investments and other

     (1,507     8,711        (10,218     NM   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 2,697      $ 14,939      $ (12,242     (81.9
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.16      $ 0.24      $ (0.08     (33.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.10      $ 0.57      $ (0.47     (82.5
  

 

 

   

 

 

   

 

 

   

 

 

 

NM = Not Meaningful

Investment Income

Total investment income decreased by 20.1% for the three months ended September 30, 2014, as compared to the prior year period. This decrease was due to a decrease in other income, which primarily consisted of success fee and dividend income resulting from our exit of Venyu during the three months ended September 30, 2013. The decrease in other income was partially offset by an increase in interest income resulting from an increase in the size of our portfolio during the three months ended September 30, 2014.

Interest income from our investments in debt securities increased 11.2% for the three months ended September 30, 2014, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended September 30, 2014, was approximately $270.9 million, compared to approximately $242.8 million for the prior year period. This increase was primarily due to approximately $92.9 million in new investments originated after September 30, 2013, including Alloy Die Casting Corp. (“ADC”), Behrens Manufacturing, LLC (“Behrens”), Meridian Rack & Pinion, Inc. (“Meridian”), Head Country Inc. (“Head Country”), Edge Adhesives Holdings, Inc. (“Edge”), TREC, and CSM. At September 30, 2014, loans of one portfolio company, Tread Corp. (Tread”), were on non-accrual, with an aggregate weighted average principal balance of $12.0 million. At September 30, 2013, loans to two portfolio companies, ASH and Tread, were on non-accrual, with an aggregate weighted average principal balance of $26.1 million during the three months ended September 30, 2013. The weighted average yield on our interest-bearing investments was 12.6% for the three months ended September 30, 2014 and 2013, excluding cash and cash equivalents and receipts recorded as other income. The weighted average yield varies from period to period, based on the current stated interest rate on interest-bearing investments.

 

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The following table lists the investment income for our five largest portfolio company investments based on fair value during the respective periods:

 

    As of September 30, 2014     Three months ended September 30, 2014  

Portfolio Company

  Fair Value     % of Portfolio     Investment
Income
    % of Total
Investment Income
 

Acme Cryogenics, Inc.

  $ 27,139        7.8   $ 426        4.7

SOG Specialty Knives and Tools, LLC

    23,989        6.9        670        7.4   

Cambridge Sound Management, LLC(A)

    20,175        5.8        6        0.1   

Jackrabbit, Inc.

    19,327        5.6        380        4.2   

Edge Adhesives Holdings, Inc.

    18,074        5.2        440        4.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal—five largest investments

    108,704        31.3        1,922        21.3   

Other portfolio companies

    238,197        68.7        7,149        78.7   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment portfolio

  $ 346,901        100.0   $ 9,071        100.0
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    As of September 30, 2013     Three months ended September 30, 2013  

Portfolio Company

  Fair Value     % of Portfolio     Investment
Income
    % of Total
Investment Income
 

Acme Cryogenics, Inc.

  $ 27,771        9.7   $ 426        3.8

Galaxy Tool Holding Corp.

    24,156        8.4        535        4.7   

SOG Specialty Knives and Tools, LLC

    24,131        8.4        670        5.9   

Schylling Investments, LLC (A)

    20,000        7.0        312        2.7   

Channel Technologies Group, LLC

    19,642        6.8        468        4.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal—five largest investments(B)

    115,700        40.3        2,411        21.2   

Other portfolio companies

    171,512        59.7        8,948        78.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment portfolio

  $ 287,212        100.0   $ 11,359        100.0
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)  New investment during the applicable period.
(B)  We exited Venyu in August 2013. Investment income for Venyu for the three months ended September 30, 2013 was $3.7 million, or 32.6% of total investment income.

Other income decreased 86.3% from the prior year period. During the three months ended September 30, 2014, other income primarily consisted of $0.2, $0.2, and $0.1 million resulting from prepayments of success fees received from ASH, Frontier Packaging, Inc. (“Frontier”), and Mathey Investments, Inc. (“Mathey”), respectively. During the three months ended September 30, 2013, other income primarily consisted of $3.3 million in success fee and dividend income received in connection with the exit of Venyu and $0.3 million in success fee income resulting from prepayments received from Cavert II Holding Corp. (“Cavert”).

Expenses

Total expenses, excluding any voluntary and irrevocable credits to the base management and incentive fees, increased 0.1% for the three months ended September 30, 2014, as compared to the prior year period, primarily due to an increase in the base management fee, interest expense, and other expenses as compared to the prior year period. This was partially offset by a decrease in the incentive fee for the three months ended September 30, 2014, as compared to the prior year period.

The base management fee increased for the three months ended September 30, 2014, as compared to the prior year period, as a result of the increased size of our portfolio over the respective periods. An incentive fee of $1.1 million was earned by the Adviser during the three months ended September 30, 2014, compared to an incentive fee of $1.6 million for the prior year period. The base

 

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management and incentive fees are computed quarterly, as described under “Investment Advisory and Management Agreement” in Note 4 of the notes to our accompanying Condensed Consolidated Financial Statements and are summarized in the following table:

 

     Three Months Ended
September 30,
 
     2014     2013  

Average gross assets subject to base management fee(A)

   $ 348,800      $ 312,200   

Multiplied by prorated annual base management fee of 2%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee(B)

     1,744        1,561   

Other credits to Adviser fees(B)

     (606     (334
  

 

 

   

 

 

 

Net base management fee

   $ 1,138      $ 1,227   
  

 

 

   

 

 

 

Incentive fee(B)

   $ 1,051      $ 1,557   
  

 

 

   

 

 

 

 

(A)  Average gross assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B)  Reflected as a line item on our accompanying Condensed Consolidated Statement of Operations.

Interest and dividend expense increased 9.4% for the three months ended September 30, 2014, as compared to the prior year period, primarily due to increased average borrowings under the Credit Facility. The average balance outstanding on our Credit Facility during the three months ended September 30, 2014, was $64.9 million, as compared to $41.4 million in the prior year period. The increase in average borrowings under the Credit Facility was partially offset by the decrease in interest rate due to an amendment of the Credit facility that occurred June 26, 2014.

Other expenses increased 20.6% for the three months ended September 30, 2014, as compared to the prior year period, primarily due to an increase in legal expenses, as compared to the prior year period.

Realized and Unrealized (Loss) Gain on Investments

Realized (Loss) Gain

During the three months ended September 30, 2014, we recorded a realized loss of $12 relating to post-closing adjustments on previous investment exits. During the three months ended September 30, 2013, we recorded a realized gain of $24.8 million related to the Venyu exit.

Unrealized (Depreciation) Appreciation

During the three months ended September 30, 2014, we recorded net unrealized depreciation on investments in the aggregate amount of $1.5 million. The unrealized appreciation (depreciation) across our investments for the three months ended September 30, 2014, were as follows:

 

     Three months ended September 30, 2014  

Portfolio Company

   Realized
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
(Appreciation)
     Net Gain
(Loss)
 

Funko, LLC

   $ —        $ 3,116      $ —         $ 3,116   

Jackrabbit, Inc.

     —          2,364        —           2,364   

SBS, Industries, LLC

     —          2,323        —           2,323   

Alloy Die Casting Corp.

     —          1,682        —           1,682   

Mathey Investments, Inc.

     —          1,628        —           1,628   

Frontier Packaging, Inc.

     —          1,034        —           1,034   

Ginsey Home Solutions, Inc.

     —          640        —           640   

Tread Corp.

     —          467        —           467   

B-Dry, LLC

     —          (251     —           (251

Drew Foam Company, Inc.

     —          (338     —           (338

Head Country Inc.

     —          (399     —           (399

Mitchell Rubber Products, Inc.

     —          (452     —           (452

Behrens Manufacturing, LLC

     —          (548     —           (548

Country Club Enterprises, LLC

     —          (626     —           (626

NDLI Inc.

     —          (1,297     —           (1,297

Acme Cryogenics, Inc.

     —          (1,306     —           (1,306

Danco Acquisition Corp.

     —          (1,367     —           (1,367

SOG Specialty K&T, LLC

     —          (1,398     —           (1,398

Galaxy Tool Holding Corp.

     —          (6,666     —           (6,666

Other, net (<$250 Net)

     (12     (101     —           (113
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ (12   $ (1,495   $       $ (1,507
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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The primary change in our net unrealized depreciation of $1.5 million for the three months ended September 30, 2014, was a decrease in the equity valuation of one of our portfolio companies, Galaxy Tool Holding Corp. (“Galaxy”), due to a decrease in company performance. This was partially offset by increased performance in several of our portfolio companies and, to a lesser extent, an increase in certain comparable multiples used to estimate the fair value of our investments.

During the three months ended September 30, 2013, we recorded net unrealized depreciation on investments in the aggregate amount of $15.7 million, which included the reversal of $17.4 million in aggregate unrealized appreciation, related to the Venyu exit. Excluding reversals, we had $1.7 million in net unrealized appreciation for the three months ended September 30, 2013.

The realized gains and unrealized appreciation (depreciation) across our investments for the three months ended September 30, 2013, were as follows:

 

     Three months ended September 30, 2013  

Portfolio Company

   Realized
Gain
     Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Appreciation
    Net Gain
(Loss)
 

Venyu Solutions, Inc.(A)

   $ 24,804       $ —        $ (17,374   $ 7,430   

Channel Technologies Group, LLC

     —           3,372        —          3,372   

Jackrabbit, Inc.

     —           3,261        —          3,261   

Country Club Enterprises, LLC

     —           1,565        —          1,565   

Star Seed, Inc.

     —           926        —          926   

Acme Cryogenics, Inc.

     —           864        —          864   

Frontier Packaging, Inc.

     —           757        —          757   

Funko, LLC

     —