Sierra Income Corp - FORM 10-Q

Sierra Income Corp - FORM 10-Q - November 6, 2014

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Sierra Income Corp Reports

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EX-32.1 - EX-32.1 - Sierra Income Corp	d813766dex321.htm
EX-31.1 - EX-31.1 - Sierra Income Corp	d813766dex311.htm
EX-31.2 - EX-31.2 - Sierra Income Corp	d813766dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2014

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

For the transition period from to

Commission File Number 814-00924

Sierra Income Corporation

(Exact name of registrant as specified in its charter)

Maryland

45-2544432

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

375 Park Avenue, 33^rd Floor

New York, NY 10152

(Address of principal executive offices)

(212) 759-0777

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of November 6, 2014, the Registrant had 50,638,957 shares of common stock, $0.001 par value, outstanding.

TABLE OF CONTENTS


		Page
Part I. Financial Information

Item 1. Financial Statements			F-1

	Consolidated Statements of Assets and Liabilities as of September 30, 2014 (unaudited) and December 31, 2013		F-1

	Consolidated Statements of Operations for the three and nine months ended September 30, 2014 (unaudited) and September 30, 2013 (unaudited)		F-2

	Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2014 (unaudited) and September 30, 2013 (unaudited)		F-3

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 (unaudited) and September 30, 2013 (unaudited)		F-4

	Consolidated Schedules of Investments as of September 30, 2014 (unaudited) and December 31, 2013		F-5

	Notes to Financial Statements (unaudited)		F-12

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk			18

Item 4. Controls and Procedures			19

Part II. Other Information

Item 1. Legal Proceedings			20

Item 1A. Risk Factors			20

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			21

Item 3. Defaults Upon Senior Securities			21

Item 4. Mine Safety Disclosures			21

Item 5. Other Information			21

Item 6. Exhibits			21

SIGNATURES			22

Sierra Income Corporation

Consolidated Statements of Assets and Liabilities


	As of
	September 30, 2014			December 31, 2013
	(unaudited)
ASSETS
Non-controlled/non-affiliated investments, at fair value (amortized cost of $507,443,399 and $137,332,276, respectively)	$	511,126,015		$	137,801,537
Cash collateral on total return swap (Note 5)		56,389,954			6,706,159
Cash and cash equivalents		56,104,960			34,939,948
Due from affiliate (Note 7)		6,803,999			2,592,989
Interest receivable		3,058,652			1,989,128
Deferred financing costs		2,697,754			1,150,139
Prepaid expenses and other assets		1,989,155			23,975
Receivable due on total return swap (Note 5)		1,822,859			155,317
Unsettled trades receivable		—			496,250
Unrealized appreciation on total return swap (Note 5)		—			351,396

Total assets	$	639,993,348		$	186,206,838

LIABILITIES
Revolving credit facilities payable	$	179,000,000		$	16,000,000
Unsettled trades payable		23,000,000			15,492,500
Management fee		2,788,604			814,655
Unrealized depreciation on total return swap (Note 5)		1,929,801			—
Due to affiliate		1,767,825			33,311
Provisional incentive fee		1,165,312			182,989
Accounts payable and accrued expenses		939,583			495,893
Interest payable		546,253			33,055
Administrator fees		362,316			152,162
Directors fees		6,547			—

Total liabilities	$	211,506,241		$	33,204,565

Commitments (Note 11)

NET ASSETS
Common shares, par value $.001 per share, 250,000,000 common shares authorized, 46,477,048 and 16,663,500 common shares issued and outstanding, respectively	$	46,477		$	16,664
Capital in excess of par value		428,459,670			152,552,912
Accumulated net realized gain/(loss) (distribution in excess of net realized gain/(loss)) from investments and total return swap		(138,783	)		(138,783	)
Distributions in excess of net investment income		(1,633,072	)		(249,177	)
Net unrealized appreciation on investments and total return swap		1,752,815			820,657

Total net assets		428,487,107			153,002,273

Total liabilities and net assets	$	639,993,348		$	186,206,838

NET ASSET VALUE PER SHARE	$	9.22		$	9.18

See accompanying notes to the consolidated financial statements.

F-1

Sierra Income Corporation

Consolidated Statements of Operations


	For the three months ended September 30,						For the nine months ended September 30,
	2014			2013			2014			2013
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
INVESTMENT INCOME
Interest from non-controlled/non-affiliated investments	$	8,145,087		$	2,008,108		$	17,958,601		$	4,462,568
Other fee income		3,786,405			21,523			5,274,782			150,983
Paid-in-kind interest income		123,053			—			231,200			—
Interest from cash		106			—			106			441

Total investment income		12,054,651			2,029,631			23,464,689			4,613,992

EXPENSES
Base management fee		2,791,528			487,843			5,702,346			1,091,731
Organizational and offering costs reimbursed to SIC Advisors (Note 7)		1,459,647			441,989			3,668,105			900,509
General and administrative expenses		629,541			169,506			1,683,406			392,222
Interest and financing expenses		917,738			41,960			1,587,438			107,455
Professional fees		564,522			337,806			1,070,220			826,031
Provisional incentive fee		542,746			(34,108	)		981,695			—
Administrator expenses		350,118			143,509			850,913			440,423
Offering costs		393,613			—			583,713			—
Directors fees		41,646			41,646			124,481			127,286
Insurance expenses		51,053			36,720			107,641			95,051

Total gross expenses		7,742,152			1,666,871			16,359,958			3,980,708
Net expense support reimbursement (Note 7)		—			(1,262,848	)		(3,456,536	)		(2,680,676	)

Net expenses		7,742,152			404,023			12,903,422			1,300,032

NET INVESTMENT INCOME		4,312,499			1,625,608			10,561,267			3,313,960

REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS AND TOTAL RETURN SWAP
Net realized gain/(loss) from investments		70,012			(714,665	)		2,201,834			(605,457	)
Net realized gain on total return swap (Note 5)		2,498,893			—			4,310,381			—
Net change in unrealized appreciation/(depreciation) on investments		2,640,577			565,613			3,213,355			649,243
Net change in unrealized appreciation/(depreciation) on total return swap (Note 5)		(3,199,218	)		(32,400	)		(2,281,197	)		(32,400	)

Net gain/(loss) on investments and total return swap		2,010,264			(181,452	)		7,444,373			11,386

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	6,322,763		$	1,444,156		$	18,005,640		$	3,325,346

WEIGHTED AVERAGE — BASIC AND DILUTED EARNINGS PER COMMON SHARE	$	0.16		$	0.18		$	0.60		$	0.61
WEIGHTED AVERAGE — BASIC AND DILUTED NET INVESTMENT INCOME PER COMMON SHARE	$	0.11		$	0.21		$	0.35		$	0.61
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING — BASIC AND DILUTED (Note 10)		40,543,811			7,896,446			30,107,034			5,441,473
DIVIDENDS DECLARED PER COMMON SHARE	$	0.20		$	0.20		$	0.60		$	0.60

See accompanying notes to the consolidated financial statements.

F-2

Sierra Income Corporation

Consolidated Statements of Changes in Net Assets


	For the nine months ended September 30,
	2014			2013
	(unaudited)			(unaudited)
INCREASE FROM OPERATIONS
Net investment income	$	10,561,267		$	3,313,960
Net realized gain/(loss) on investments		2,201,834			(605,457	)
Net realized gain on total return swap (Note 5)		4,310,381			—
Net change in unrealized appreciation/(depreciation) on investments		3,213,355			649,243
Net change in unrealized appreciation/(depreciation) on total return swap (Note 5)		(2,281,197	)		(32,400	)

Net increase in net assets resulting from operations		18,005,640			3,325,346

SHAREHOLDER DISTRIBUTIONS
Distributions from return of capital (Note 2)		(1,383,895	)		—
Distributions from net realized gains		(6,512,215	)		(110,635	)
Distributions from net investment income (Note 2)		(10,561,267	)		(3,188,961	)

Net decrease in net assets from shareholder distributions		(18,457,377	)		(3,299,596	)

COMMON SHARE TRANSACTIONS
Issuance of common shares, net of underwriting costs		268,198,799			68,523,071
Issuance of common shares pursuant to distribution reinvestment plan		8,356,464			1,007,977
Repurchase of common shares		(618,692	)		(33,253	)

Net increase in net assets resulting from common share transactions		275,936,571			69,497,795

Total increase in net assets		275,484,834			69,523,545
Net assets at beginning of period		153,002,273			20,622,982

Net assets at end of period (including distribution in excess of net investment income and accumulated undistributed net investment income/(loss) of $(1,633,072) and $328,131, respectively)	$	428,487,107		$	90,146,527

Net asset value per common share	$	9.22		$	9.14
Common shares outstanding, beginning of period		16,663,500			2,300,573
Issuance of common shares		28,975,372			7,455,291
Issuance of common shares pursuant to distribution reinvestment plan		904,675			109,795
Repurchase of common shares		(66,499	)		(3,642	)

Common shares outstanding, end of period		46,477,048			9,862,017

See accompanying notes to the consolidated financial statements.

F-3

Sierra Income Corporation

Consolidated Statements of Cash Flows


	For the nine months ended September 30,
	2014			2013
	(unaudited)			(unaudited)
Cash flows from operating activities
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	18,005,640		$	3,325,346
ADJUSTMENT TO RECONCILE NET INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS TO NET CASH USED IN OPERATING ACTIVITIES
Paid-in-kind interest income		(231,200	)		(580	)
Net amortization of premium on investments		(111,106	)		22,741
Amortization of deferred financing costs		(1,547,615	)		—
Net realized (gain)/loss on investments		(2,201,834	)		605,457
Net change in unrealized appreciation/(depreciation) on investments		(3,213,355	)		(649,243	)
Net change in unrealized appreciation/(depreciation) on total return swap (Note 5)		2,281,197			32,400
Purchases of investments		(466,291,195	)		(95,326,340	)
Proceeds from sale of investments and principal repayments		98,724,212			21,140,648
(Increase)/decrease in operating assets:
Cash collateral on total return swap (Note 5)		(49,683,795	)		(2,209,000	)
Due from affiliate		(4,211,010	)		(1,151,124	)
Interest receivable		(1,069,524	)		(1,126,720	)
Prepaid expenses and other assets		(1,965,180	)		(39,665	)
Receivable due on total return swap (Note 5)		(1,667,542	)		—
Unsettled trades receivable		496,250			—
Increase/(decrease) in operating liabilities:
Unsettled trades payable		7,507,500			2,730,400
Management fee		1,973,949			316,526
Due to affiliate		1,734,514			(40,225	)
Provisional incentive fee		982,323			(628	)
Accounts payable and accrued expenses		443,690			213,946
Interest payable		513,198			955
Administrator fees		210,154			15,050
Directors fee		6,547			22,913

NET CASH USED IN OPERATING ACTIVITIES		(399,314,182	)		(72,117,143	)

Cash flows from financing activities
Borrowings under revolving credit facility		229,000,000			(149,244	)
Repayments of revolving credit facility		(66,000,000	)		—
Proceeds from issuance of common stock, net of underwriting costs		268,198,799			68,489,819
Payment of cash dividends		(10,100,913	)		(2,291,620	)
Repurchase of common shares		(618,692	)		33,253

NET CASH PROVIDED BY FINANCING ACTIVITIES		420,479,194			66,082,208

TOTAL INCREASE/(DECREASE) IN CASH		21,165,012			(6,034,935	)
CASH AT BEGINNING OF PERIOD		34,939,948			6,651,767

CASH AT END OF PERIOD	$	56,104,960		$	616,832

Supplemental Information
Cash paid during the period for interest	$	1,074,240		$	106,500
Supplemental non-cash information
Paid-in-kind interest income	$	231,200		$	580
Amortization of deferred financing costs	$	1,547,615		$	—
Net amortization of premium on investments	$	111,106		$	(22,741	)
Issuance of common shares in connection with distribution reinvestment plan	$	8,356,464		$	1,007,977

See accompanying notes to the consolidated financial statements.

F-4

Sierra Income Corporation

Consolidated Schedule of Investments

As of September 30, 2014

(unaudited)


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par/Share Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Non-controlled/non-affiliated investments – 119.3%
AAR Intermediate Holdings, LLC	Oil and Gas	Senior Secured First Lien Term Loans LIBOR + 12.000%, 1.000%		6/30/2015	$	1,108,911	$	1,018,911	$	1,018,911		0.3	%
		Floor(3)(4)		3/30/2019		12,891,089		12,109,619		12,103,373		2.8	%
AAR Intermediate Holdings, LLC, Warrants	Oil and Gas	Warrants/Equity⁽⁵⁾				871,470		871,470		871,470		0.2	%

						14,871,470		14,000,000		13,993,754
Access Media 3, Inc.	Telecommunications	Senior Secured First Lien Term Loans 10.000%⁽³⁾⁽⁶⁾		10/22/2018		6,855,576		6,855,576		6,855,576		1.7	%

						6,855,576		6,855,576		6,855,576
Aderant North America, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor⁽³⁾⁽⁴⁾		6/20/2019		450,000		450,000		456,379		0.1	%

						450,000		450,000		456,379
ALG USA Holdings, Inc.	Leisure, Amusement, Motion Pictures, and Entertainment	Senior Secured Second Lien Term Loans LIBOR + 9.000%, 1.250% Floor⁽⁷⁾		2/28/2020		2,000,000		1,966,348		2,040,000		0.5	%

						2,000,000		1,966,348		2,040,000
Allen Edmonds Corp.	Retail Stores	Senior Secured Second Lien Term Loans LIBOR + 9.000%, 1.000% Floor⁽³⁾⁽⁴⁾		5/27/2019		7,000,000		7,000,000		7,072,211		1.6	%

						7,000,000		7,000,000		7,072,211
American Pacific Corp.	Chemicals, Plastics, and Rubber	Senior Secured First Lien Term Loans LIBOR + 6.000%, 1.000% Floor⁽⁷⁾		2/27/2019		7,960,000		7,905,953		8,119,200		1.9	%

						7,960,000		7,905,953		8,119,200
Anaren, Inc.	Aerospace and Defense	Senior Secured First Lien Term Loans LIBOR + 4.500%, 1.000% Floor⁽⁷⁾		2/18/2021		3,970,000		3,933,014		4,009,700		0.9	%
		Senior Secured Second Lien Term Loans LIBOR + 8.250%, 1.000% Floor⁽⁷⁾		8/18/2021		10,000,000		9,905,808		10,248,642		2.4	%

						13,970,000		13,838,822		14,258,342
Ascensus, Inc.	Finance	Senior Secured Second Lien Term Loans LIBOR + 8.000%, 1.000% Floor⁽⁷⁾		12/2/2020		4,000,000		3,946,813		4,000,000		0.9	%

						4,000,000		3,946,813		4,000,000

See accompanying notes to consolidated financial statements.

F-5


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par/Share Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Associated Asphalt Partners, LLC	Chemicals, Plastics, and Rubber	Senior Secured First Lien Notes 8.500%⁽⁸⁾⁽⁹⁾		2/15/2018	$	2,000,000	$	2,014,407	$	2,100,000		0.5	%

						2,000,000		2,014,407		2,100,000
Atrium Innovations, Inc.⁽¹⁰⁾	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 6.750%, 1.000% Floor⁽⁷⁾		8/13/2021		5,000,000		4,976,663		5,100,000		1.2	%

						5,000,000		4,976,663		5,100,000
Bennu Oil & Gas, LLC	Oil and Gas	Senior Secured Second Lien Term Loans LIBOR + 7.500%, 1.250% Floor⁽⁷⁾		11/1/2018		5,539,307		5,534,457		5,647,352		1.3	%

						5,539,307		5,534,457		5,647,352
Birch Communications, Inc.	Telecommunications	Senior Secured First Lien Term Loans LIBOR + 6.750%, 1.000% Floor⁽³⁾⁽⁴⁾		7/18/2020		15,000,000		14,707,476		14,680,359		3.4	%

						15,000,000		14,707,476		14,680,359
Brundage-Bone Concrete Pumping, Inc.	Buildings and Real Estate	Senior Secured First Lien Notes 10.375%⁽⁸⁾		9/1/2021		7,500,000		7,645,442		7,743,750		1.8	%

						7,500,000		7,645,442		7,743,750
Caesars Entertainment Operating Co., Inc.⁽¹⁰⁾	Hotels, Motels, Inns, and Gaming	Senior Secured First Lien Notes 11.250%⁽⁹⁾		6/1/2017		6,000,000		6,194,191		4,650,000		1.1	%

						6,000,000		6,194,191		4,650,000
Charming Charlie, Inc.	Retail Stores	Senior Secured First Lien Term Loans LIBOR + 8.000%, 1.000% Floor⁽⁷⁾		12/24/2019		8,967,774		8,987,051		9,147,129		2.1	%

						8,967,774		8,987,051		9,147,129
Collective Brands Finance, Inc.^(10)(11)	Retail Stores	Senior Secured Second Lien Term Loans LIBOR + 7.500%, 1.000% Floor⁽⁷⁾		3/11/2022		6,000,000		6,019,135		6,076,106		1.4	%

						6,000,000		6,019,135		6,076,106
Contmid, Inc.	Automobile	Senior Secured Second Lien Term Loans LIBOR + 8.000%, 1.000% Floor⁽³⁾⁽⁷⁾		10/25/2019		14,317,924		14,317,924		14,317,924		3.3	%

						14,317,924		14,317,924		14,317,924
ConvergeOne Holdings Corp.	Telecommunications	Senior Secured Second Lien Term Loans LIBOR + 8.000%, 1.000% Floor⁽³⁾⁽⁴⁾		6/17/2021		12,500,000		12,378,160		12,458,745		2.9	%

						12,500,000		12,378,160		12,458,745
Cornerstone Chemical Company	Chemicals, Plastics, and Rubber	Senior Secured First Lien Notes 9.375%⁽⁸⁾		3/15/2018		2,500,000		2,594,288		2,602,236		0.6	%

						2,500,000		2,594,288		2,602,236

See accompanying notes to consolidated financial statements.

F-6


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par/Share Amount		Cost		Fair Value		% of Net Assets⁽²⁾
CP Opco, LLC	Leisure, Amusement, Motion Pictures, and Entertainment	Senior Secured First Lien Term Loans LIBOR + 6.750%, 1.000% Floor⁽³⁾⁽⁷⁾		9/30/2020	$	8,000,000	$	8,000,000	$	8,000,000		1.9	%

						8,000,000		8,000,000		8,000,000
Deltek, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor⁽⁷⁾		10/10/2019		3,000,000		2,980,626		3,090,000		0.7	%

						3,000,000		2,980,626		3,090,000
Drew Marine Partners LP	Cargo Transport	Senior Secured Second Lien Term Loans LIBOR + 7.000%, 1.000% Floor⁽⁷⁾		5/19/2021		10,000,000		10,081,985		10,200,000		2.4	%

						10,000,000		10,081,985		10,200,000
Dynamic Energy Services International, LLC	Oil and Gas	Senior Secured First Lien Term Loans LIBOR + 8.500%, 1.000% Floor⁽³⁾⁽⁴⁾		3/6/2018		9,750,000		9,750,000		9,761,351		2.3	%

						9,750,000		9,750,000		9,761,351
EarthLink, Inc.⁽¹⁰⁾	Telecommunications	Senior Secured First Lien Notes 7.375%⁽⁸⁾⁽⁹⁾		6/1/2020		2,450,000		2,438,629		2,511,250		0.6	%

						2,450,000		2,438,629		2,511,250
Encompass Digital Media, Inc.⁽¹¹⁾	Broadcasting and Entertainment	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.000% Floor⁽⁷⁾		6/6/2022		1,500,000		1,485,555		1,513,016		0.4	%

						1,500,000		1,485,555		1,513,016
F.H.G. Corp.	Healthcare, Education, and Childcare	Senior Secured First Lien Term Loans LIBOR + 9.500%, 1.000% Floor⁽³⁾⁽⁴⁾		4/28/2019		15,000,000		15,000,000		15,008,946		3.5	%

						15,000,000		15,000,000		15,008,946
F.H.G. Corp. Cornerstone Research	Healthcare, Education, and Childcare	Common Stock⁽³⁾⁽⁵⁾				288		300,000		259,700		0.1	%

						288		300,000		259,700
Flexera Software, Inc.⁽¹¹⁾	Electronics	Senior Secured Second Lien Term Loans LIBOR + 7.000%, 1.000% Floor⁽⁷⁾		4/2/2021		5,000,000		5,019,049		4,999,595		1.2	%

						5,000,000		5,019,049		4,999,595
Gastar Exploration USA, Inc.⁽¹⁰⁾	Oil and Gas	Senior Secured First Lien Notes 8.625%⁽⁸⁾⁽⁹⁾		5/15/2018		5,400,000		5,414,575		5,609,250		1.3	%

						5,400,000		5,414,575		5,609,250
Genex Services, Inc.⁽¹¹⁾	Insurance	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.000% Floor⁽⁷⁾		5/30/2022		9,500,000		9,532,522		9,401,215		2.2	%

						9,500,000		9,532,522		9,401,215
Green Field Energy Services, Inc.	Oil and Gas	Senior Secured First Lien Notes 13.000%^(3)(8)(12)		11/15/2016		766,615		755,284		318,145		0.1	%

						766,615		755,284		318,145

See accompanying notes to consolidated financial statements.

F-7


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par/Share Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Green Field Energy Services, Inc., Warrants, expires 11/15/21	Oil and Gas	Warrants/Equity⁽³⁾⁽⁵⁾			$	709	$	29,000	$	—		0.0	%

						709		29,000		—
Greenway Medical Technologies, Inc.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 8.250%, 1.000% Floor⁽⁷⁾		11/4/2021		1,000,000		986,181		975,000		0.2	%

						1,000,000		986,181		975,000
GTCR Valor Companies, Inc.	Electronics	Senior Secured First Lien Term Loans LIBOR + 5.000%, 1.000% Floor⁽⁶⁾⁽⁷⁾		5/30/2021		4,542,462		4,498,403		4,583,424		1.1	%

		Senior Secured Second Lien Term Loans LIBOR + 8.500%, 1.000% Floor⁽⁷⁾		11/30/2021		4,000,000		3,960,907		3,924,695		0.9	%

						8,542,462		8,459,310		8,508,119
HBC Holdings, LLC	Diversified/ Conglomerate Service	Senior Secured First Lien Term Loans Base Rate + 4.750%^(3)(13)		3/30/2020		15,000,000		15,000,000		15,000,000		3.5	%

						15,000,000		15,000,000		15,000,000
Hill International, Inc.	Buildings and Real Estate	Senior Secured First Lien Term Loans Base Rate + 5.750%^(3)(13)		9/26/2020		17,000,000		17,000,000		17,000,000		4.0	%

						17,000,000		17,000,000		17,000,000
Holland Acquisition Corp.	Oil and Gas	Senior Secured First Lien Term Loans LIBOR + 9.000%, 1.000% Floor⁽⁷⁾		5/29/2018		5,000,000		4,917,340		5,100,000		1.2	%

						5,000,000		4,917,340		5,100,000
Integra Telecom, Inc.	Telecommunications	Senior Secured Second Lien Term Loans LIBOR + 8.500%, 1.250% Floor⁽³⁾⁽⁴⁾		2/22/2020		1,618,000		1,608,804		1,650,360		0.4	%

						1,618,000		1,608,804		1,650,360
Interface Security Systems, Inc.	Electronics	Senior Secured First Lien Notes 9.250%^(3)(8)(9)		1/15/2018		3,417,000		3,469,220		3,510,968		0.8	%

						3,417,000		3,469,220		3,510,968
IronGate Energy Services, LLC	Oil and Gas	Senior Secured First Lien Notes 11.000%⁽⁸⁾⁽⁹⁾		7/1/2018		3,000,000		2,954,158		3,015,000		0.7	%

						3,000,000		2,954,158		3,015,000
Isola USA⁽¹¹⁾	Electronics	Senior Secured First Lien Term Loans LIBOR + 8.250%, 1.000% Floor⁽⁷⁾		11/29/2018		5,912,186		6,046,161		6,088,179		1.4	%

						5,912,186		6,046,161		6,088,179
JAC Holdings Corp.	Automobile	Senior Secured First Lien Notes 11.500%⁽³⁾⁽⁸⁾		10/1/2019		12,000,000		12,000,000		12,000,000		2.8	%

						12,000,000		12,000,000		12,000,000
Kik Custom Products, Inc.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 8.250%, 1.250% Floor⁽¹⁴⁾		10/29/2019		5,000,000		4,991,112		5,047,490		1.2	%

						5,000,000		4,991,112		5,047,490

See accompanying notes to consolidated financial statements.

F-8


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par/Share Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Linc Energy Finance (USA), Inc.	Oil and Gas	Senior Secured First Lien Notes 12.500%⁽³⁾		10/31/2017	$	500,000	$	486,989	$	537,906		0.1	%
		Senior Secured First Lien Notes 12.500%⁽³⁾⁽⁸⁾		10/31/2017		500,000		498,623		537,906		0.1	%

						1,000,000		985,612		1,075,812
Liquidnet Holdings, Inc.	Finance	Senior Secured First Lien Term Loans LIBOR + 6.750%, 1.000% Floor⁽⁷⁾		5/22/2019		6,912,500		6,814,741		6,981,625		1.6	%

						6,912,500		6,814,741		6,981,625
Livingston International, Inc.^(10)(11)	Cargo Transport	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.250% Floor⁽⁷⁾		4/18/2020		2,658,504		2,654,129		2,685,088		0.6	%

						2,658,504		2,654,129		2,685,088
LTCG Holdings Corp.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 5.000%, 1.000% Floor⁽⁷⁾		6/6/2020		3,950,000		3,931,098		3,989,500		0.9	%

						3,950,000		3,931,098		3,989,500
Miller Heiman, Inc.	Diversified/ Conglomerate Service	Senior Secured First Lien Term Loans LIBOR + 5.750%, 1.000% Floor⁽⁷⁾		9/30/2019		25,000,000		25,000,000		25,000,000		5.8	%

						25,000,000		25,000,000		25,000,000
Nation Safe Drivers Holdings, Inc.	Insurance	Senior Secured Second Lien Term Loans LIBOR + 8.000%, 2.000% Floor^(3)(6)(7)		9/29/2020		18,236,058		18,236,058		18,236,058		4.3	%

						18,236,058		18,236,058		18,236,058
New Media Holdings II, LLC	Printing and Publishing	Senior Secured First Lien Term Loans LIBOR + 6.250%, 1.000% Floor⁽⁷⁾		6/4/2020		12,468,750		12,468,750		12,468,750		2.9	%

						12,468,750		12,468,750		12,468,750
Newpage Corp.	Containers, Packaging, and Glass	Senior Secured First Lien Term Loans LIBOR + 8.250%, 1.250% Floor⁽⁷⁾		2/11/2021		10,000,000		9,876,118		10,186,224		2.4	%

						10,000,000		9,876,118		10,186,224
Northstar Aerospace, Inc.	Aerospace and Defense	Senior Secured First Lien Notes 10.250%⁽³⁾⁽⁸⁾		10/7/2019		15,000,000		15,000,000		15,000,000		3.5	%

						15,000,000		15,000,000		15,000,000
OH Acquisition, LLC	Finance	Senior Secured First Lien Term Loans LIBOR + 6.250%, 1.000% Floor⁽⁴⁾		8/29/2019		7,500,000		7,463,001		7,462,500		1.7	%

						7,500,000		7,463,001		7,462,500
Omnitracs, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.000% Floor⁽⁷⁾		5/25/2021		7,000,000		7,014,852		7,070,000		1.6	%

						7,000,000		7,014,852		7,070,000
Pangea Finance, LLC	Electronics	Senior Secured Second Lien Term Loans LIBOR + 10.750%, 1.000% Floor⁽⁷⁾		4/3/2020		7,500,000		7,358,197		7,540,614		1.8	%

						7,500,000		7,358,197		7,540,614

See accompanying notes to consolidated financial statements.

F-9


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par/Share Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Reddy Ice Group, Inc.	Beverage, Food, and Tobacco	Senior Secured Second Lien Term Loans LIBOR + 9.500%, 1.250% Floor⁽³⁾⁽⁴⁾		10/1/2019	$	2,000,000	$	2,000,000	$	1,908,581		0.4	%

						2,000,000		2,000,000		1,908,581
Response Team Holdings, LLC	Buildings and Real Estate	Senior Secured First Lien Term Loans LIBOR + 8.500%, 2.000% Floor, 1% PIK⁽³⁾⁽⁴⁾		3/28/2019		15,168,413		15,168,413		15,387,806		3.6	%

		Preferred Equity 12%⁽³⁾				2,954,641		2,697,233		2,832,495		0.7	%

		Warrants to purchase 3.70% of the outstanding common units⁽³⁾⁽⁵⁾				257,407		257,407		905,166		0.2	%

						18,380,461		18,123,053		19,125,467
School Specialty, Inc.	Healthcare, Education, and Childcare	Senior Secured First Lien Term Loans LIBOR + 8.500%, 1.000% Floor⁽⁷⁾		6/11/2019		5,895,272		5,791,081		5,954,224		1.4	%

						5,895,272		5,791,081		5,954,224
Securus Technologies, Inc.	Telecommunications	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.250% Floor⁽⁷⁾		4/30/2021		2,000,000		1,983,419		2,040,000		0.5	%

						2,000,000		1,983,419		2,040,000
Sizzling Platter, LLC	Personal, Food, and Miscellaneous Services	Senior Secured Second Lien Term Loans LIBOR + 7.500%, 1.000% Floor⁽⁷⁾		4/28/2019		15,000,000		15,000,000		15,423,357		3.6	%

						15,000,000		15,000,000		15,423,357
Tempel Steel Company	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured First Lien Notes 12.000%⁽³⁾⁽⁸⁾		8/15/2016		1,115,000		1,108,031		1,126,150		0.3	%

						1,115,000		1,108,031		1,126,150
TGI Friday’s, Inc.	Personal, Food, and Miscellaneous Services	Senior Secured Second Lien Term Loans LIBOR + 8.250%, 1.000% Floor⁽³⁾⁽⁷⁾		6/24/2021		15,000,000		14,778,583		14,775,000		3.4	%

						15,000,000		14,778,583		14,775,000
Travelclick, Inc.⁽¹¹⁾	Hotels, Motels, Inns, and Gaming	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.000% Floor⁽⁷⁾		2/19/2019		6,000,000		5,912,964		5,880,909		1.4	%

						6,000,000		5,912,964		5,880,909
True Religion Apparel, Inc.	Personal and Nondurable Consumer Products (Manufacturing Only)	Senior Secured Second Lien Term Loans LIBOR + 10.000%, 1.000% Floor⁽¹⁴⁾		1/30/2020		4,000,000		3,849,112		3,844,892		0.9	%

						4,000,000		3,849,112		3,844,892
U.S. Well Services, LLC, Warrants, expires 2/15/19⁽¹⁰⁾	Oil and Gas	Warrants/Equity⁽⁵⁾				1,731		173		416,288		0.1	%

						1,731		173		416,288
Valence Surface Technologies, Inc.	Chemicals, Plastics, and Rubber	Senior Secured Second Lien Term Loans LIBOR + 5.500%, 1.000% Floor⁽⁴⁾⁽⁶⁾		6/12/2019		1,047,655		1,037,569		1,043,401		0.2	%
		Senior Secured Second Lien Term Loans LIBOR + 5.500%, 1.000% Floor⁽⁴⁾		6/12/2019		8,571,429		8,510,689		8,536,624		2.0	%

						9,619,084		9,548,258		9,580,025

See accompanying notes to consolidated financial statements.

F-10


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par/Share Amount		Cost		Fair Value			% of Net Assets⁽²⁾
Velocity Pooling Vehicle, LLC	Automobile	Senior Secured Second Lien Term Loans LIBOR + 7.250%, 1.000% Floor⁽³⁾⁽⁴⁾		5/14/2022	$	20,625,000	$	17,820,130	$	18,289,173			4.3	%

						20,625,000		17,820,130		18,289,173
YP LLC⁽¹¹⁾	Business Services	Senior Secured First Lien Term Loans LIBOR + 6.750%, 1.250% Floor⁽⁷⁾		6/4/2018		5,130,435		5,173,822		5,179,131			1.2	%

						5,130,435		5,173,822		5,179,131

Total non-controlled/non-affiliated investments							$	507,443,399	$	511,126,015			119.3	%


							Notional Amount		Unrealized Gain (Loss)
Derivative Instrument — Long Exposure
Total return swap with Citibank, N.A. (Note 5)		Total Return Swap					$	216,417,013	$	(1,929,801	)

							$	216,417,013	$	(1,929,801	)

(1)	All of our investments are domiciled in the United States except for Atrium Innovations, Inc. and Livingston International, Inc. which are domiciled in Canada.

(2)	Percentage is based on net assets of $428,487,107 as of September 30, 2014.

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

(4)

The interest rate on these loans is subject to a base rate plus 1M LIBOR, which at September 30, 2014 was 0.16%. As the interest rate is subject to a minimum LIBOR floor which was greater than the 1M LIBOR rate at September 30, 2014, the prevailing rate in effect at September 30, 2014 was the base rate plus the LIBOR floor.

(5)	Security is non-income producing.

(6)	The investment has an unfunded commitment as of September 30, 2014 which is excluded from the presentation (see Note 11). Fair value includes an analysis of the unfunded commitment.

(7)

The interest rate on these loans is subject to a base rate plus 3M LIBOR, which at September 30, 2014 was 0.24%. As the interest rate is subject to a minimum LIBOR floor which was greater than the 3M LIBOR rate at September 30, 2014, the prevailing rate in effect at September 30, 2014 was the base rate plus the LIBOR floor.

(8)	Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent a fair value of $56,074,655 and 13.1% of net assets as of September 30, 2014 and are considered restricted.

(9)	Represents securities in Level 2 in the ASC 820 table (see Note 4).

(10)	The investment is not a qualifying asset under Section 55 of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 6.3% of the Company’s portfolio at fair value.

(11)

Security is also held in the underlying portfolio of the total return swap with Citibank, N.A. (see Note 5). The Company’s total commitment to Collective Brands Finance, Inc., Encompass Digital Media, Inc., Flexera Software, LLC, Genex Holdings, Inc., Isola USA, Livingston International, Inc., Travelclick, Inc., and YP LLC is $12,038,662 or 2.8%, $6,488,016 or 1.5%, $7,266,470 or 1.7%, $11,391,215 or 2.7%, $9,978,929 or 2.3%, 4,654,531 or 1.1%, $20,730,909 or 4.8%, $10,348,044 or 2.4%, respectively, of Net Assets as of September 30, 2014.

(12)	The investment was on non-accrual status as of September 30, 2014.

(13)	The base rate in effect as of September 30, 2014 was 3.25%.

(14)

The interest rate on these loans is subject to a base rate plus 6M LIBOR, which at September 30, 2014 was 0.33%. As the interest rate is subject to a minimum LIBOR floor which was greater than the 6M LIBOR rate at September 30, 2014, the prevailing rate in effect at September 30, 2014 was the base rate plus the LIBOR floor.

1 Month

3 Month

6 Month

See accompanying notes to consolidated financial statements.

F-11

SIERRA INCOME CORPORATION

Notes to Consolidated Financial Statements

September 30, 2014

(unaudited)

Note 1. Organization

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

On April 17, 2012, the Company successfully reached its minimum escrow requirement and officially commenced operations by issuing 1,108,033 shares of common stock to SIC Advisors for gross proceeds of $10,000,000. The Company’s offering period is currently scheduled to terminate on April 17, 2015, unless further extended. Since commencing its operations, the Company has sold a total of 46,477,048 shares of common stock, which includes shares issued as part of the distribution reinvestment plan (see Note 12), for total proceeds of $467.8 million, which includes the shares sold to SIC Advisors. The proceeds from the issuance of common stock are presented in the Company’s consolidated statements of changes in net assets and consolidated statements of cash flows and are presented net of selling commissions and dealer manager fees.

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

On June 18, 2014, the Company formed Alpine Funding LLC, a wholly-owned financing subsidiary.

The Company has formed and expects to continue to form certain taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes. These Taxable Subsidiaries allow us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.

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

Note 2. Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) and includes the accounts of the Company and its wholly-owned subsidiaries, Alpine Funding LLC, Arbor Funding LLC, SIC AAR, LLC and SIC RT1 LLC. Additionally, the accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited interim financial results

F-12

included herein contain all adjustments and reclassifications that are necessary for the fair presentation of financial statements for the periods included herein. Therefore, this Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2013, which was filed with the U.S. Securities and Exchange Commission on March 13, 2014. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2014. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

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

Offering Costs

Offering costs incurred directly by the Company are expensed in the period incurred. See Note 7 regarding offering costs paid for by SIC Advisors.

Use of Estimates in the Preparation of Financial Statements

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

Deferred Financing Costs

Financing costs, incurred in connection with our credit facilities (discussed in Note 6), are deferred and amortized over the life of each facility.

Indemnification

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

Revenue Recognition

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

Origination/closing, amendment and transaction break-up fees associated with investments in portfolio companies are recognized as income in the period that we become entitled to such fees. Other fees related to loan administration requirements are capitalized as deferred revenue and recorded into income over the respective period. Other fee income for the three and nine months ended September 30, 2014 was $3,786,405 and $5,274,782, respectively. Other fee income for the three and nine months ended September 30, 2013 was $21,523 and $150,983, respectively.

F-13

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

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. For the three and nine months ended September 30, 2014, the Company earned $123,053 and $231,200 in PIK interest, respectively. For the three and nine months ended September 30, 2013, the Company earned $0 and $580 in PIK interest, respectively.

Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. The Company reports changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations. For total return swap transactions (discussed in Note 5), periodic payments are received or made at the end of each settlement period, but prior to settlement are recorded as realized gains or losses on total return swap in the consolidated statements of operations.

Management reviews all loans that become 90 days or more past due on principal and interest or when there is reasonable doubt that principal or interest will be collected for possible placement on management’s designation of non-accrual status. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although the Company may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. At September 30, 2014, one portfolio company was on non-accrual status with a fair value of $318,145 or 0.1% of the fair value of our portfolio. At December 31, 2013, one portfolio company was on non-accrual status with a fair value of $322,744, or 0.2% of the fair value of our portfolio.

Investment Classification

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, the Company would be deemed to “control” a portfolio company if it owns more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. The Company refers to such investments in portfolio companies that it “controls” as “Controlled Investments.” Under the 1940 Act, the Company would be deemed to be an “Affiliated Person” of a portfolio company if it owns between 5% and 25% of the portfolio company’s outstanding voting securities or if it is under common control with such portfolio company. The Company refers to such investments in Affiliated Persons as “Affiliated Investments.” As of September 30, 2014 and December 31, 2013, the Company has no Controlled Investments or Affiliated Investments.

Valuation of Investments

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

F-14

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

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

Over-the-counter (OTC) derivative contracts, such as total return swaps (discussed in Note 5) are fair valued using models that measure the change in fair value of reference assets underlying the swaps offset against any fees payable to the swap counterparty. The fair values of the reference assets underlying the swaps are determined using similar methods as described above for debt and equity investments where the Company also invests directly in such assets.

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

•

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

•

conclusions are then documented and discussed with senior management; and

•

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

F-15

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

•

management reviews preliminary valuations and their own independent assessment;

•

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

•

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

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

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and accounts payable and accrued expenses, approximate fair value due to their short-term nature. The carrying amounts and fair values of our long-term obligations are discussed in Note 4.

Federal Income Taxes

The Company has elected to be treated as a RIC under subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of its investment company taxable income (“ICTI”) including PIK, as defined by the Code, and net tax-exempt interest income (which is the excess of the Company’s gross tax-exempt interest income over certain disallowed deductions) for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.

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

The Company’s Taxable Subsidiaries accrue income taxes payable based on the applicable corporate rates on the unrealized gains generated by the investments held by the Taxable Subsidiaries. There were no such deferred tax liabilities for the nine months ended September 30, 2014 or September 30, 2013. There was no tax expense recorded during the nine month period ended September 30, 2014.

ICTI generally differs from net investment income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. The Company may be required to recognize ICTI in certain circumstances in which it does not receive cash. For example, if the Company holds debt obligations that are treated under applicable tax rules as having original issue discount, the Company must include in ICTI each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by the Company in the same taxable year. The Company may also have to include in ICTI other amounts that it has not yet received in cash, such as 1) PIK

F-16

interest income and 2) interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. Because any original issue discount or other amounts accrued will be included in the Company’s ICTI for the year of accrual, the Company may be required to make a distribution to its stockholders in order to satisfy the minimum distribution requirements, even though the Company will not have received and may not ever receive any corresponding cash amount. ICTI also excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.

Although we file federal and state tax returns, our major tax jurisdiction is federal. The Company’s federal tax returns from inception-to-date remain subject to examination by the Internal Revenue Service.

The Company accounts for income taxes in conformity with ASC Topic 740 — Income Taxes (“ASC 740”). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. There were no material uncertain income tax positions at September 30, 2014.

The following table reflects, for tax purposes, the sources of the cash distributions that the Company has paid on its common stock during the nine months ended September 30, 2014 and the nine months ended September 30, 2013:


	Nine months ended September 30, 2014					Nine months ended September 30, 2013
Source of Distribution	Distribution Amount⁽¹⁾		Percentage⁽¹⁾			Distribution Amount		Percentage
Return of capital from offering proceeds	$	—		—	%	$	—		—	%
Return of capital from borrowings		—		—			—		—
Ordinary income		17,073,482		92.5			3,299,596		100.0
Return of capital (other)		1,383,895		7.5			—		—

Distributions on a tax basis:	$	18,457,377		100.0	%	$	3,299,596		100.0	%

⁽¹⁾	The Distribution Amount and Percentage reflected for September 30, 2014 are estimated figures. The actual source of distributions for the fiscal year ending 2014 will be calculated in connection with the Company’s year-end procedures.

Segments

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

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

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

F-17

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

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

Note 3. Investments

The following table shows the composition of the Company’s portfolio investments by industry classification at fair value at September 30, 2014:


	Fair Value		Percentage
Oil and Gas	$	44,936,952		8.8	%
Automobile		44,607,097		8.7	%
Buildings and Real Estate		43,869,217		8.6	%
Electronics		41,263,854		8.1	%
Telecommunications		40,196,290		7.9	%
Diversified/Conglomerate Service		40,000,000		7.8	%
Healthcare, Education, and Childcare		36,334,860		7.1	%
Personal, Food, and Miscellaneous Services		30,198,357		5.9	%
Aerospace and Defense		29,258,342		5.7	%
Insurance		27,637,273		5.4	%
Chemicals, Plastics, and Rubber		22,401,461		4.4	%
Retail Stores		22,295,446		4.4	%
Finance		18,444,125		3.6	%
Cargo Transport		12,885,088		2.5	%
Printing and Publishing		12,468,750		2.4	%
Hotels, Motels, Inns, and Gaming		10,530,909		2.1	%
Containers, Packaging, and Glass		10,186,224		2.0	%
Leisure, Amusement, Motion Pictures, and Entertainment		10,040,000		2.0	%
Business Services		5,179,131		1.0	%
Personal and Nondurable Consumer Products (Manufacturing Only)		3,844,892		0.7	%
Beverage, Food, and Tobacco		1,908,581		0.4	%
Broadcasting and Entertainment		1,513,016		0.3	%
Mining, Steel, Iron, and Nonprecious Metals		1,126,150		0.2	%

Total	$	511,126,015		100.0	%

See Note 5 for industry classifications of the underlying TRS reference assets as of September 30, 2014.

F-18

The following table shows the composition of the Company’s portfolio investments by industry classification at fair value at December 31, 2013:


	Fair Value		Percentage
Oil and Gas	$	18,862,779		13.7	%
Telecommunications		17,073,865		12.4	%
Retail Stores		16,995,844		12.3	%
Electronics		13,996,099		10.2	%
Healthcare, Education, and Childcare		12,307,691		8.9	%
Chemicals, Plastics, and Rubber		9,810,000		7.1	%
Personal and Nondurable Consumer Products (Manufacturing Only)		9,154,092		6.7	%
Finance		6,808,098		4.9	%
Automobile		6,119,250		4.4	%
Beverage, Food, and Tobacco		5,755,736		4.2	%
Cargo Transport		5,677,727		4.1	%
Hotels, Motels, Inns, and Gaming		3,056,250		2.2	%
Diversified/Conglomerate Service		2,511,528		1.8	%
Mining, Steel, Iron, and Nonprecious Metals		2,396,489		1.7	%
Broadcasting and Entertainment		2,300,535		1.7	%
Aerospace and Defense		2,016,472		1.5	%
Leisure, Amusement, Motion Pictures, and Entertainment		2,007,080		1.5	%
Grocery		952,002		0.7	%

Total	$	137,801,537		100.0	%

See Note 5 for industry classifications of the underlying TRS reference assets as of December 31, 2013.

The following table summarizes the amortized cost and the fair value of the Company’s portfolio investments as of September 30, 2014:


	Amortized Cost		Percentage			Value		Percentage
Senior secured first lien term loans	$	223,485,430		44.1	%	$	225,096,408		44.0	%
Senior secured first lien notes		62,573,837		12.3			61,262,561		12.0
Senior secured second lien term loans		217,228,849		42.8			219,481,927		43.0
Warrants/Equity		4,155,283		0.8			5,285,119		1.0

Total	$	507,443,399		100.0	%	$	511,126,015		100.0	%

The following table summarizes the amortized cost and the fair value of the Company’s portfolio investments as of December 31, 2013:


	Amortized Cost		Percentage			Fair Value		Percentage
Senior secured first lien term loans	$	28,617,156		20.9	%	$	28,583,326		20.8	%
Senior secured first lien notes		47,352,921		34.5			47,427,311		34.4
Senior secured second lien term loans		56,224,549		40.9			56,481,247		41.0
Senior secured second lien notes		5,108,477		3.7			5,254,676		3.8
Warrants/Equity		29,173		—			54,977		—

Total	$	137,332,276		100.0	%	$	137,801,537		100.0	%

F-19

The following table shows the composition of the Company’s portfolio investments by geography classification at fair value at September 30, 2014:


Geography	Fair Value		Percentage
United States	$	503,340,927		98.5	%
Canada		7,785,088		1.5

Total	$	511,126,015		100.0	%

The following table shows the composition of the Company’s portfolio investments by geography classification at fair value at December 31, 2013:


Geography	Fair Value		Percentage
United States	$	135,116,448		98.1	%
Canada		2,685,089		1.9

Total	$	137,801,537		100.0	%

Opportunities for co-investments may arise when SIC Advisors or an affiliated adviser becomes aware of investment opportunities that may be appropriate for the Company and other clients, or affiliated funds. As a BDC, the Company was substantially limited in its ability to co-invest in privately negotiated transactions with affiliated funds until it obtained an exemptive order from the SEC on November 25, 2013 (the “Exemptive Order”). The Exemptive Order permits the Company to participate in negotiated co-investment transactions with certain affiliates, each of whose investment adviser is Medley LLC, the parent company of SIC Advisors and several other investment advisors, or an investment adviser controlled by Medley LLC, in a manner consistent with its investment objective, strategies and restrictions, as well as regulatory requirements and other pertinent factors. Co-investment under the Exemptive Order is subject to certain conditions therein, including the condition that, in the case of each co-investment transaction, the Company’s board of directors determines that it would be advantageous for the Company to co-invest in a manner described in the Exemptive Order. Before receiving the Exemptive Order, the Company only participated in co-investments that were allowed under existing regulatory guidance, such as syndicated loan transactions where price was the only negotiated term, which limited the types of investments that the Company could make. Please refer to footnote 3 to the Schedule of Investments as of September 30, 2014 for disclosures regarding securities also held by affiliated funds.

In June 2013, the FASB issued Accounting Standards Update 2013-08 “Financial Services-Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”). ASU 2013-08 clarifies the characteristics of an investment company and requires reporting entities to disclose information about the following items: (i) the type and amount of financial support provided to investee companies, including situations in which the Company assisted an investee in obtaining financial support, (ii) the primary reasons for providing the financial support, (iii) the type and amount of financial support the Company is contractually required to provide to an investee, but has not yet provided, and (iv) the primary reasons for the contractual requirement to provide the financial support. The Company adopted ASU 2013-08 for the fiscal year ending December 31, 2014 as the amendments in ASU 2013-08 are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013.

As part of the Company’s investment objective, in addition to purchasing loans on the secondary market, it makes loans directly to privately-held middle market companies to help provide these companies with capital as the trend of bank consolidation that has occurred over the last 20 years has reduced the amount of capital available for such companies. As of September 30, 2014, the Company holds loans it has made directly to 39 investee companies with aggregate principal amounts of $363.0 million. As of December 31, 2013, the Company holds loans it has made directly to 28 investee companies with aggregate principal amounts of $80.8 million. During the three and nine month period ended September 30, 2014, the Company made 12 and 29 loans to investee companies, respectively, with aggregate principal amounts of $168.5 million and

F-20

$319.8 million, respectively. The details of the Company’s loans have been disclosed on the consolidated schedule of investments as well as in Note 4. In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by leading a syndicate of lenders to provide the investee companies with financing. During the three and nine months periods ended September 30, 2014 and September 30, 2013, the Company did not make any such introductions or lead any syndicates. Affiliates of the Company’s Advisor do not serve as officers or directors of any investee companies or provide managerial direction as part of their roles.

In addition to the loans that the Company has provided, the Company has unfunded commitments to provide additional financings through undrawn term loans or revolving lines of credit. The details of such arrangements are disclosed in Note 8 (Commitments and Contingencies).

Note 4. Fair Value Measurements

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

•

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

•

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

•

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

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

F-21

The following table presents the fair value measurements of the Company’s total investments, by major class according to the fair value hierarchy, as of September 30, 2014:


Type of Investment	Level 1		Level 2		Level 3			Total
Senior secured first lien term loans	$	—	$	—	$	225,096,408		$	225,096,408
Senior secured first lien notes		—		21,396,468		39,866,093			61,262,561
Senior secured second lien term loans		—		—		219,481,927			219,481,927
Warrants/Equity		—		—		5,285,119			5,285,119

Total	$	—	$	21,396,468	$	489,729,547		$	511,126,015


Derivative Instrument-Long Exposure	Level 1		Level 2		Level 3			Total
Liability
Total return swap with Citibank, N.A.	$	—	$	—	$	(1,929,801	)	$	(1,929,801	)

The following table presents the fair value measurements of the Company’s total investments, by major class according to the fair value hierarchy, as of December 31, 2013:


Type of Investment	Level 1		Level 2		Level 3		Total
Senior secured first lien term loans	$	—	$	—	$	28,583,326	$	28,583,326
Senior secured first lien notes		—		5,509,312		41,917,999		47,427,311
Senior secured second lien term loans		—		—		56,481,247		56,481,247
Senior secured second lien notes		—		—		5,254,676		5,254,676
Warrants/Equity		—		—		54,977		54,977

Total	$	—	$	5,509,312	$	132,292,225	$	137,801,537


Derivative Instrument-Long Exposure	Level 1		Level 2		Level 3		Total
Asset
Total return swap with Citibank, N.A.	$	—	$	—	$	351,396	$	351,396

F-22

The following table provides a reconciliation of the beginning and ending balances for total investments that use Level 3 inputs for the nine months ended September 30, 2014 based off of fair value hierarchy at September 30, 2014:


	Senior Secured First Lien Notes			Senior Secured Second Lien Notes			Senior Secured First Lien Term Loans			Senior Secured Second Lien Term Loans			Warrants/ Equity		Total Return Swap			Total
Balance, December 31, 2013	$	41,917,999		$	5,254,676		$	28,583,326		$	56,481,247		$	54,977	$	351,396		$	132,643,621
Purchases		39,677,539			—			229,958,005			226,632,289			3,949,247		—			500,217,080
Sales		(31,395,385	)		(5,257,511	)		(35,201,367	)		(65,753,339	)		—		—			(137,607,602	)
Transfers in		—			—			—			—			—		—			—
Transfers out		(11,620,967	)		—			—			—			—		—			(11,620,967	)
Amortization of discount/(premium)		(30,252	)		7,092			26,926			136,319			—		—			140,085
Paid-in-kind interest income		—			—			54,337			—			176,863		—			231,200
Net realized gains (losses)		1,512,799			141,943			30,372			(10,971	)		—		—			1,674,143
Net change in unrealized appreciation/ (depreciation)		(195,640	)		(146,200	)		1,644,809			1,996,382			1,104,032		(2,281,197	)		2,122,186

Balance, September 30, 2014	$	39,866,093		$	—		$	225,096,408		$	219,481,927		$	5,285,119	$	(1,929,801	)	$	487,799,746

Change in net unrealized appreciation
Change in net unrealized appreciation (depreciation) in investments held as of September 30, 2014 ⁽¹⁾	$	(1,401,554	)	$	—		$	994,199		$	2,039,476		$	994,588	$	(2,281,197	)	$	345,512

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

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the nine months ended September 30, 2014, the Company recorded $11,620,967 in transfers from Level 3 to Level 2 due to an increase in observable inputs in market data and no other transfers between levels.

F-23

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


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

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

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

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

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the nine months ended September 30, 2013, there were no transfers from Level 3 to Level 2 due to an increase in observable market data and $1,659,221, in transfers from Level 2 to Level 3 due to a decrease in observable market data.

The following table presents the quantitative information about Level 3 fair value measurements of our total investments, as of September 30, 2014:

Fair Value

Valuation techniques

Unobservable input

Range (weighted average)

Senior secured first lien term loans

225,096,408

Income approach (DLF)

Market yield

6.01% – 13.00% (8.77%)

Senior secured first lien notes

39,547,948

Income approach (DLF)

Market yield

8.01% – 11.43% (9.87%)

318,145

Enterprise valuation analysis

Estimated Liquidation
proceeds

$189.1M –$222.4M ($205.8M)

Senior secured second lien term loans

219,163,782

Income approach (DLF)

Market yield

6.65% – 13.09% (9.77%)

Warrants/Equity

1,581,155

Enterprise valuation analysis

EBITDA multiple⁽¹⁾

5.75x (21.0x)

2,832,494

Income approach (DLF)

Market yield

12.97% (12.97%)

871,470

Recent Arms-length
transaction

N/A

Total return swap

(1,929,801

)

Income approach (DLF)

Market yield

5.86% – 23.05% (7.93%)

⁽¹⁾	Represents amounts used when the Company has determined that market participants would use such multiples when measuring the fair value of these investments.

F-24

The following table presents the quantitative information about Level 3 fair value measurements of our total investments, as of December 31, 2013:

Fair Value

Valuation techniques

Unobservable input

Range (weighted average)

Senior secured first
lien term loans

28,583,326

Income approach (DLF)

Market yield

5.66% – 10.51% (9.52%)

Senior secured first
lien notes

41,595,255

Income approach (DLF)

Market yield

7.35% –15.05% (10.22%)

322,744

Enterprise valuation analysis

Estimated Liquidation
proceeds

$189.0M – $222.4M

($205.8M)

Senior secured second
lien term loans

56,481,247

Income approach (DLF)

Market yield

8.05% – 11.83% (9.65%)

Senior secured second
lien notes

5,254,676

Income approach (DLF)

Market yield

7.59% – 10.67% (9.23%)

Warrants/Equity

54,977

Enterprise valuation analysis

EBITDA multiple⁽¹⁾

5.00x (5.00x)

Liquidation proceeds

$189.0M – $222.4M

($205.8M)

Total return swap

351,396

Income approach (DLF)

Market yield of
underlying assets

5.16% – 10.18% (8.49%)

⁽¹⁾	Represents amounts used when the Company has determined that market participants would use such multiples when measuring the fair value of these investments.

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

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

Note 5. Total Return Swap

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

SIC Advisors acts as the investment manager of Arbor and has discretion over the composition of the basket of loans underlying the TRS. The terms of the TRS are governed by an ISDA 2002 Master Agreement, the Schedule thereto and Credit Support Annex to such Schedule, and the Confirmation exchanged thereunder, between Arbor and Citibank, which collectively establish the TRS, and are collectively referred to herein as the “TRS Agreement”. On March 21, 2014, the Company amended and restated its Confirmation Letter Agreement (the “Amended Confirmation Agreement”) with Citibank. The Amended Confirmation Agreement increases the maximum market value (determined at the time each such loan becomes subject to the TRS) of the portfolio of loans that Arbor may select from $100,000,000 to $200,000,000, and increased the interest rate payable to Citibank from LIBOR plus 1.30% per annum to LIBOR plus 1.35% per annum. Other than the foregoing, the Amended Confirmation Agreement did not change any of the other terms of the TRS.

F-25

On July 23, 2014, the Company, through Arbor, entered into the Second Amended and Restated Confirmation Letter Agreement (the “Second Amended Confirmation Agreement”) with Citi. The Second Amended Confirmation Agreement increases the maximum market value (determined at the time each such loan becomes subject to the TRS) of the portfolio of loans that Arbor may select from $200,000,000 to $350,000,000. Other than the foregoing, the Second Amended Confirmation Agreement did not change any of the other terms of the TRS. As of September 30, 2014, Arbor has posted $56,389,954 in collateral to Citi in relation to the TRS.

Pursuant to the terms of the TRS Agreement, as amended by the Second Amended Confirmation Agreement, and subject to conditions customary for transactions of this nature, Arbor may select a portfolio of loans with a maximum market value (determined at the time each such loan becomes subject to the TRS) of $350,000,000, which is also referred to as the maximum notional amount of the TRS. Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the Amended TRS Agreement. Arbor receives from Citibank a periodic payment on set dates that is based upon any coupons, both earned and accrued, generated by the loans underlying the TRS, subject to limitations described in the Amended TRS Agreement as well as any fees associated with the loans included in the portfolio. Arbor pays to Citibank interest at a rate equal to one-month LIBOR plus 1.35% per annum. In addition, upon the termination or repayment of any loan subject to the TRS, Arbor either receives from Citibank the appreciation in the value of such loan, or pays to Citibank any depreciation in the value of such loan.

Citibank may terminate the TRS on or after the second anniversary of the effectiveness of the TRS. SIC Advisors may terminate the TRS on behalf of Arbor at any time upon providing 10 days prior notice to Citibank. Any termination by SIC Advisors on behalf of Arbor prior to the second anniversary of the effectiveness of the TRS will result in payment of an early termination fee to Citibank. The early termination fee shall equal the present value of the following two cash flows: (a) interest payments at a rate equal 1.35% based on 70% of the maximum notional amount of $350,000,000, payable from the later of the first anniversary of the effectiveness of the TRS or the termination date until the second anniversary of the effectiveness of the TRS and (b) interest payments at a rate equal to 0.15% based on the maximum notional amount of $350,000,000, payable from the later of the first anniversary of the effectiveness of the TRS or the termination date until the second anniversary of the effectiveness of the TRS.

Arbor is required to pay a minimum usage fee in connection with the TRS of 1.35% on the amount equal to 85% of the average daily unused portion of the maximum amount permitted under the TRS. Such minimum usage fee will not apply during the first 365 days and last 60 days of the term of the TRS. Arbor will also pay Citibank customary fees in connection with the establishment and maintenance of the TRS.

Arbor is required to initially cash collateralize a specified percentage of each loan (generally 25% to 35% of the market value of such loan) included under the TRS in accordance with margin requirements described in the Amended TRS Agreement. As of September 30, 2014 and December 31, 2013, Arbor has posted $56,389,954 and $6,706,159, respectively, in collateral to Citibank in relation to the TRS which is recorded on the consolidated statements of assets and liabilities as cash collateral on total return swap. Arbor may be required to post additional collateral from time to time as a result of a decline in the mark-to-market value of the portfolio of loans subject to the TRS. The obligations of Arbor under the Amended TRS Agreement are non-recourse to the Company and the Company’s exposure under the Amended TRS Agreement is limited to the value of the Company’s investment in Arbor, which generally equals the value of cash collateral provided by Arbor under the Amended TRS Agreement.

In connection with the TRS, Arbor has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default and termination events included in the form ISDA 2002 Master Agreement, the Amended TRS Agreement contains the following termination events: (a) a failure to satisfy the portfolio criteria for at least 30 days; (b) a failure to post initial cash collateral or additional collateral as required by the Amended TRS Agreement; (c) a default by Arbor or the Company with respect to indebtedness in an amount equal to or greater than the lesser of $10,000,000 and 2% of the Company’s net asset

F-26

value at such time; (d) a merger of Arbor or the Company meeting certain criteria; (e) the Company or Arbor amending their respective constituent documents to alter their investment strategy in a manner that has or could reasonably be expected to have a material adverse effect; and (f) SIC Advisors ceasing to be the investment manager of Arbor or to have authority to enter into transactions under the Amended TRS Agreement on behalf of Arbor, and not being replaced by an entity reasonably acceptable to Citibank. As of December 31, 2013 the Company did not have any derivatives with contingent features in net liability positions. Therefore, if a trigger event had occurred, no amount would have been required to be posted by the Company. As of September 30, 2014, the Company had a derivative with contingent features in net liability positions. If a trigger event had occurred, $64,545 would have been required to be posted by the Company.

The Company’s maximum derivative risk exposure as of September 30, 2014 and December 31, 2013 is $56,389,954 and $6,706,159, respectively, which is recorded on the consolidated statements of assets and liabilities as cash collateral on total return swap.

The Company’s derivative asset due from Citibank, net of amounts available for offset under a master netting agreement as of September 30, 2014 and December 31, 2013 was $1,822,859 and $155,317, respectively, which is recorded on the consolidated statements of assets and liabilities as receivable due on total return swap. The Company does not offset collateral posted in relation to the TRS with any unrealized appreciation or depreciation outstanding in the consolidated statements of assets and liabilities as of September 30, 2014 or December 31, 2013.

Transactions in total return swap contracts during the three and nine months ended September 30, 2014 resulted in $2,498,893 and $4,310,381 in realized gains/(losses) and $(3,199,218) and $(2,281,197) in unrealized gains/(losses), respectively, which is recorded on the consolidated statements of operations. Transactions in total return swap contracts during the three and nine months ended September 30, 2013 were $0 in realized gains/(losses) and $(32,400) in unrealized gains/(losses), which is recorded on the consolidated statement of operations as net change in unrealized appreciation/(depreciation) on total return swap.

The Company only held one derivative position as of the nine months ended September 30, 2014 and the year ended December 31, 2013 and the derivative held is subject to a netting arrangement. The following table represents the Company’s gross and net amounts after offset under Master Agreements (“MA”) of the derivative assets and liabilities presented by derivative type net of the related collateral pledged by the Company as of September 30, 2014 and December 31, 2013:


	Gross Derivative Assets/(Liabilities) Subject to MA			Derivative Amount Available for Offset		Net Amount Presented in the Consolidated Statements of Assets and Liabilities			Cash Collateral Received		Net Amount of Derivative Assets/(Liabilities)
September 30, 2014
Total Return Swap⁽¹⁾	$	(1,929,801	)	$	—	$	(1,929,801	)	$	—	$	(1,929,801	)

December 31, 2013
Total Return Swap⁽¹⁾	$	351,396		$	—	$	351,396		$	—	$	351,396

⁽¹⁾	Cash was posted for initial margin requirements for the total return swap as of September 30, 2014 and December 31, 2013 and is reported on the consolidated statements of assets and liabilities as cash collateral on total return swap.

The following represents the volume of the Company’s derivative transactions during the three and nine months ended September 30, 2014 and 2013:


	Three months ended September 30				Nine months ended September 30
	2014		2013		2014		2013
Average notional par amount of contracts	$	183,546,213	$	781,111	$	118,757,421	$	781,111

F-27

The following is a summary of the TRS reference assets as of September 30, 2014 (unaudited):


Company⁽¹⁾	Industry	Type of Investment	Coupon Rate	Maturity		Par Amount		Initial Notional Cost⁽²⁾		Fair Value		Unrealized Appreciation (Depreciation)
Albertsons, LLC	Grocery	Senior Secured First Lien Term Loan	LIBOR + 4.500%, 1.00% Floor		8/25/2021		8,000,000		7,880,000		7,958,320		78,320
ANVC Merger Corp.	Aerospace and Defense	Senior Secured First Lien Term Loan	LIBOR + 4.500%, 1.00% Floor		2/18/2021		4,975,000		4,925,250		5,024,750		99,500
AP Gaming I, LLC	Electronics	Senior Secured First Lien Term Loan	LIBOR + 8.250%, 1.000% Floor		12/18/2020		6,716,250		6,514,762		6,749,831		235,069
Asurion Corporation	Insurance	Senior Secured First Lien Term Loan	LIBOR + 3.750%, 1.25% Floor		5/24/2019		9,971,690		9,970,449		9,913,156		(57,293	)
Atkore International, Inc.	Mining, Steel, Iron and Nonprecious Metals	Senior Secured Second Lien Term Loan	LIBOR + 6.750%, 1.00% Floor		10/9/2021		10,000,000		10,032,500		9,900,000		(132,500	)
Collective Brands Finance, Inc.	Retail Stores	Senior Secured First Lien Term Loan	LIBOR + 4.000%, 1.00% Floor		3/11/2021		5,985,000		5,962,556		5,745,600		(216,956	)
CSM NV	Beverage, Food and Tobacco	Senior Secured First Lien Term Loan	LIBOR + 4.000%, 1.00% Floor		7/3/2020		3,500,000		3,465,000		3,450,405		(14,595	)
Encompass Digital Media, Inc.	Broadcasting and Entertainment	Senior Secured First Lien Term Loan	LIBOR + 4.500%, 1.000% Floor		6/6/2021		5,000,000		4,975,000		4,975,000		—
Fieldwood Energy LLC	Oil and Gas	Senior Secured Second Lien Term Loan	LIBOR + 7.125%, 1.250% Floor		9/30/2020		4,246,305		4,317,500		4,251,613		(65,887	)
Flexera Software, Inc.	Electronics	Senior Secured Second Lien Term Loan	LIBOR + 7.000%, 1.000% Floor		4/2/2021		2,250,000		2,266,875		2,249,818		(17,057	)
Genex Services, Inc.	Insurance	Senior Secured First Lien Term Loan	LIBOR + 4.250%, 1.000% Floor		5/21/2021		2,000,000		1,990,000		1,987,500		(2,500	)
Caesars Entertainment Operating Co.	Hotels, Motels, Inns and Gaming	Senior Secured First Lien Term Notes	11.25%		6/1/2017		3,000,000		3,067,500		2,325,000		(742,500	)
Hudson Products Holdings, Inc.	Machinery (Non-Agriculture, Non-Construction, Non-Electronic)	Senior Secured First Lien Term Loan	LIBOR + 4.000%, 1.000% Floor		3/15/2019		4,987,500		4,962,562		4,925,156		(37,406	)
Iqor US, Inc.	Diversified/ Conglomerate Service	Senior Secured First Lien Term Loan	LIBOR + 5.00%, 1.000% Floor		4/1/2021		7,746,032		7,591,111		7,048,889		(542,222	)
Isola USA	Electronics	Senior Secured First Lien Term Loan	LIBOR + 8.250%, 1.000% Floor		11/23/2018		3,950,000		3,890,750		4,067,612		176,862
Key Safety Systems, Inc.	Automobile	Senior Secured First Lien Term Loan	LIBOR + 3.750%, 1.000% Floor		7/23/2021		7,000,000		6,965,000		6,970,250		5,250
Livingston International, Inc.	Cargo Transport	Senior Secured Second Lien Term Loan	LIBOR + 7.750%, 1.250% Floor⁽¹⁾⁽⁴⁾		4/16/2020		1,954,783		1,969,443		1,974,330		4,887
Maxim Crane Works LP	Diversified/ Conglomerate Service	Senior Secured Second Lien Term Loan	LIBOR + 9.250%, 1.000% Floor		11/26/2018		3,500,000		3,567,500		3,567,095		(405	)
Mitel Networks Corporation	Telecommunications	Senior Secured First Lien Term Loan	LIBOR + 4.250%, 1.000% Floor		1/31/2020		1,713,310		1,704,743		1,716,171		11,428

F-28


Company⁽¹⁾	Industry	Type of Investment	Coupon Rate	Maturity		Par Amount		Initial Notional Cost⁽²⁾		Fair Value		Unrealized Appreciation (Depreciation)
Mohegan Tribal Gaming	Hotels, Motels, Inns and Gaming	Senior Secured First Lien Term Loan	LIBOR + 4.500%, 1.000% Floor		11/19/2019		1,990,000		1,970,101		1,952,688		(17,413	)
Nine West Holdings, Inc.	Retail Stores	Senior Secured First Lien Term Loan	LIBOR + 3.750%, 1.000% Floor		10/8/2019		6,000,000		5,985,000		5,790,000		(195,000	)
Packaging Coordinators, Inc.	Containers, Packaging and Glass	Senior Secured First Lien Term Loan	LIBOR + 4.250%, 1.000% Floor		8/1/2021		5,000,000		4,950,000		4,991,650		41,650
Pharmed Group Corporation	Healthcare, Education and Childcare	Senior Secured First Lien Term Loan	LIBOR + 3.250%, 1.000% Floor		1/28/2021		486,250		483,819		475,310		(8,509	)
Pharmed Group Corporation	Healthcare, Education and Childcare	Senior Secured Second Lien Term Loan	LIBOR + 6.750%, 1.000% Floor		1/28/2022		5,000,000		4,975,000		4,937,500		(37,500	)
Polymer Group, Inc.	Containers, Packaging and Glass	Senior Secured First Lien Term Loan	LIBOR + 4.250%, 1.000% Floor		12/19/2019		3,989,384		3,984,409		3,969,437		(14,972	)
Preferred Sands Holding Company, LLC	Mining, Steel, Iron and Non-Precious Metals	Senior Secured First Lien Term Loan	LIBOR + 5.750%, 1.000% Floor		8/12/2020		10,000,000		9,900,000		9,825,000		(75,000	)
Sungard Availability Services Capital, Inc.	Diversified/ Conglomerate Service	Senior Secured First Lien Term Loan	LIBOR + 5.000%, 1.000% Floor		3/31/2019		11,970,000		11,917,631		11,048,310		(869,321	)
Tensar Corp.	Diversified/ Conglomerate Manufacturing	Senior Secured First Lien Term Loan	LIBOR + 4.750%, 1.000% Floor		7/9/2021		12,000,000		11,880,000		11,925,000		45,000
Thomson Multimedia	Printing and Publishing	Senior Secured First Lien Term Loan	LIBOR + 6.000%, 1.000% Floor		3/31/2020		5,985,000		6,088,540		5,972,192		(116,348	)
Travelclick, Inc.	Hotels, Motels, Inns and Gaming	Senior Secured First Lien Term Loan	LIBOR + 4.500%, 1.250% Floor		5/12/2021		15,000,000		14,850,000		14,850,000		—
Tribune Publishing Co.	Printing and Publishing	Senior Secured First Lien Term Loan	LIBOR + 4.7500%, 1.000% Floor		8/4/2021		10,000,000		9,920,000		9,900,000		(20,000	)
Viking Acquisition, Inc.	Automobile	Senior Secured First Lien Term Loan	LIBOR + 4.250%, 1.250% Floor		11/5/2016		3,670,385		3,674,973		3,629,093		(45,880	)
Visant Corporation	Diversified/ Conglomerate Manufacturing	Senior Secured First Lien Term Loan	LIBOR + 6.000%, 1.000% Floor		9/23/2021		15,000,000		14,700,000		14,803,200		103,200
YP LLC	Business Services	Senior Secured First Lien Term Loan	LIBOR + 6.750%, 1.250% Floor		6/4/2018		5,130,435		5,168,913		5,179,131		10,218
YRC Worldwide, Inc.	Cargo Transport	Senior Secured First Lien Term Loan	LIBOR + 7.000%, 1.000% Floor		2/13/2019		9,962,469		9,950,125		9,981,198		31,073

								$	216,417,012	$	214,030,205	$	(2,386,807	)
Total accrued interest income, net of expenses												$	457,006

Total unrealized depreciation on total return swap												$	(1,929,801	)

⁽¹⁾	All investments are domiciled in the United States except for Livingston International, Inc., which is domiciled in Canada.

⁽²⁾	Represents the initial amount of par of an investment in which the TRS is referenced.

⁽³⁾	The referenced asset or portion thereof is unsettled as of September 30, 2014.

⁽⁴⁾	The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.

F-29

The following is a summary of the TRS reference assets as of December 31, 2013:


Company⁽¹⁾	Industry	Type of Investment	Coupon Rate	Maturity		Par Amount		Initial Notional Cost⁽²⁾		Fair Value		Unrealized Appreciation (Depreciation)
AMF Bowling Worldwide, Inc.	Broadcasting and Entertainment	Senior Secured First Lien Term Loan	LIBOR + 7.500%, 1.250% Floor		6/29/2018		2,981,250	$	2,966,345	$	2,988,703	$	22,358
AP Gaming I, LLC	Electronics	Senior Secured First Lien Term Loan	LIBOR + 8.250%, 1.000% Floor⁽³⁾		12/18/2020		6,750,000		6,547,500		6,581,250		33,750
El Pollo Loco Inc.	Personal, Food, and Miscellaneous Services	Senior Secured Second Lien Term Loan	LIBOR + 8.500%, 1.000% Floor		4/9/2019		1,500,000		1,485,000		1,507,500		22,500
Fieldwood Energy LLC	Oil and Gas	Senior Secured Second Lien Term Loan	LIBOR + 7.125%, 1.250% Floor		9/30/2020		1,000,000		970,000		1,020,000		50,000
Greenway Medical Technologies, Inc.	Healthcare, Education, and Childcare	Senior Secured First Lien Term Loan	LIBOR + 5.000%, 1.000% Floor		11/2/2020		1,500,000		1,485,000		1,492,500		7,500
Isola USA	Diversified/ Conglomerate Service	Senior Secured First Lien Term Loan	LIBOR + 8.250%, 1.000% Floor		11/23/2018		4,000,000		3,940,000		4,020,000		80,000
Livingston International, Inc.	Diversified/ Conglomerate Manufacturing	Senior Secured Second Lien Term Loan	LIBOR + 7.750%, 1.250% Floor⁽¹⁾⁽⁴⁾		4/18/2020		1,954,783		1,969,443		1,976,813		7,370
Maxim Crane Works Holdings, Inc.	Diversified/ Conglomerate Service	Senior Secured Second Lien Term Loan	LIBOR + 9.250%, 1.000% Floor⁽³⁾		11/26/2018		500,000		492,500		501,250		8,750
McGraw-Hill Companies, Inc.	Healthcare, Education, and Childcare	Senior Secured First Lien Term Loan	LIBOR + 7.750%, 1.250% Floor		3/22/2019		1,994,987		2,024,912		2,029,062		4,150
Mohegan Tribal Gaming Authority	Hotels, Motels, Inns, and Gaming	Senior Secured First Lien Term Loan	LIBOR + 4.500%, 1.000% Floor		11/19/2019		2,000,000		1,980,000		2,028,760		48,760
Polymer Group Inc.	Containers, Packaging, and Glass	Senior Secured First Lien Term Loan	LIBOR + 4.250%, 1.000% Floor⁽³⁾		12/13/2019		1,000,000		995,000		1,004,380		9,380

								$	24,855,700	$	25,150,218	$	294,518
Total accrued interest income, net of expenses													56,878

Total unrealized appreciation on total return swap												$	351,396

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

(2)	Represents the initial amount of par of an investment in which the TRS is referenced.

(3)	The referenced asset or portion thereof is unsettled as of December 31, 2013.

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

Note 6. Borrowings

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

The fair value of the Company’s debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s margin

F-30

borrowings are estimated based upon market interest rates for its own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. The Company’s debt obligation is recorded at its carrying value, which approximates fair value. As of September 30, 2014, Alpine’s borrowings under the Alpine Credit Facility totaled $64,000,000 and were recorded as part of revolving credit facility payable on the consolidated statements of assets and liabilities.

Prime Brokerage Agreement

Prior to December 4, 2013 the Company maintained a prime brokerage account and margin borrowing facility (the “Margin Facility”) with Barclays Capital Inc. (“Barclays”) for investment purposes that was based on the fair value of investments held at Barclays as determined by Barclays. The prime brokerage account and margin borrowing facility was closed on December 4, 2013.

ING Credit Facility

On December 4, 2013, the Company entered into a three-year senior secured syndicated revolving credit facility with a one-year term out period (the “ING Credit Facility”) pursuant to a Senior Secured Revolving Credit Agreement (the “Revolving Credit Agreement”) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING Credit Facility matures on December 4, 2017 and is secured by substantially all of the Company’s assets, subject to certain exclusions as further set forth in a Guarantee, Pledge and Security Agreement (the “Security Agreement”) entered into in connection with the Revolving Credit Agreement, among the Company, the Subsidiary Guarantors party thereto, ING Capital LLC, as Administrative Agent, each Financial Agent and Designated Indebtedness Holder party thereto and ING Capital LLC, as Collateral Agent. The ING Credit Facility also includes usual and customary representations, covenants and events of default for senior secured revolving credit facilities of this nature.

The ING Credit Facility allows for the Company, at its option, to borrow money at a rate of either (i) an alternate base rate plus 2.00% per annum or (ii) LIBOR plus 3.00% per annum. The interest rate margins are subject to certain step-downs upon the satisfaction of certain conditions described in the Revolving Credit Agreement. The alternate base rate will be the greatest of (i) the U.S. Prime Rate set forth in the Wall Street Journal, (ii) the federal funds effective rate plus 1/2 of 1%, and (iii) three month LIBOR plus 1%. The current commitment under the ING Credit Facility is $125,000,000, and the ING Credit Facility includes an accordion feature that allows for potential future expansion of the ING Credit Facility up to a total of $250,000,000. Availability of loans under the ING Credit Facility is linked to the valuation of the collateral pursuant to a borrowing base mechanism.

The Company is also required to pay a commitment fee to the lenders based on the daily unused portion of the aggregate commitments under the ING Credit Facility. The commitment fee is (i) 0.50% for the initial six month period commencing on the closing date and (ii) thereafter, 1% of the aggregate unused commitments if the used portion of the aggregate commitments is less than or equal to 35% of the aggregate commitments, or 0.50% if the used portion of the aggregate commitments is greater than 35% of the aggregate commitments. The ING Credit Facility provides that the Company may use the proceeds of the facility for general corporate purposes, including making investments in accordance with the Company’s investment objective and strategy.

Borrowings under the Revolving Credit Agreement are subject to, among other things, a minimum borrowing base. Substantially all of the Company’s assets are pledged as collateral under the Revolving Credit Agreement. The ING Credit Facility requires the Company to, among other things (i) make representations and warranties regarding the collateral as well the Company’s business and operations, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants. The documents for the Revolving Credit Agreement also include default provisions, such as the failure to make timely payments under the Revolving Credit Agreement, the occurrence of a change in control, and the failure by the Company to materially perform under the operative agreements governing the Revolving Credit Agreement, which, if not complied with, could accelerate repayment under the Revolving Credit Agreement, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations.

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In connection with the security interest established under the Security Agreement, the Company, ING Capital LLC, in its capacity as collateral agent, and State Street Bank and Trust Company, in its capacity as the Company’s custodian, entered into a Control Agreement dated as of December 4, 2013 (the “Control Agreement”), in order to, among other things, perfect the security interest granted pursuant to the Security Agreement in, and provide for control over, the related collateral.

As of September 30, 2014 and December 31, 2013 the carrying amount of the Company’s borrowings under the ING Credit Facility approximated their fair value. The fair value of the Company’s debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s borrowing under the ING Credit Facility is estimated based upon market interest rates of the Company’s borrowing or entities with similar credit risk, adjusted for nonperformance risk, if any. At September 30, 2014 and December 31, 2013, the ING Credit Facility would be deemed to be Level 3, as defined in Note 4.

As of September 30, 2014 and December 31, 2013, $2,697,754 and $1,150,139 of financing costs related to the ING Credit Facility have been capitalized and are being amortized over the respective terms, respectively. For the three and nine months ended September 30, 2014, the Company recorded $748,376 and $1,418,076, respectively, of interest and financing expenses related to the ING Credit Facility, of which $587,698 and $989,352 was attributable to interest and $160,678 and $428,724 was attributable to amortization of deferred financing costs, respectively. For the three and nine months ended September 30, 2013, the Company did not record any financing expenses related to the ING Credit Facility and did not record any deferred financing costs. As of September 30, 2014 and December 31, 2013, the Company’s outstanding borrowings under the ING Credit Facility were $115,000,000 and $16,000,000, respectively. For the three and nine months ended September 30, 2014, our weighted average outstanding debt balance and interest rate on the ING Credit Facility was $78,750,000 and 2.4%, and $49,200,000 and 2.4%, respectively. For the three and nine months September 30, 2013, the Company had no borrowings under the ING Credit Facility.

Alpine Credit Facility

On July 23, 2014, the Company’s newly-formed, wholly-owned, special purpose financing subsidiary, Alpine Funding LLC (“Alpine”), entered into a revolving credit facility (the “Alpine Credit Facility”) pursuant to a Loan Agreement with JPMorgan Chase Bank, National Association (“JPMorgan”), as administrative agent and lender, the Financing Providers from time to time party thereto, SIC Advisors LLC, as the portfolio manager, and the Collateral Administrator, Collateral Agent and Securities Intermediary party thereto (the “Loan Agreement”). Alpine’s obligations to JPMorgan under the Alpine Credit Facility are secured by a first priority security interest in substantially all of the assets of Alpine, including its portfolio of loans. The obligations of Alpine under the Alpine Credit Facility are non-recourse to the Company.

The Alpine Credit Facility provides for borrowings in an aggregate principal amount up to $150,000,000 on a committed basis. Borrowings under the Alpine Credit Facility are subject to compliance with a net asset value coverage ratio with respect to the current value of Alpine’s portfolio and various eligibility criteria must be satisfied with respect to the initial acquisition of each loan in Alpine’s portfolio. Any amounts borrowed under the Alpine Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on January 23, 2019.

Pricing under the Alpine Credit Facility for each one month calculation period is based on the London Interbank Offered Rate (“LIBOR”) for an interest period of one month, plus a spread of 3.25% per annum. If LIBOR is unavailable, pricing will be determined at the prime rate offered by JPMorgan or the federal funds effective rate, plus a spread of 3.25% per annum. Interest is payable monthly in arrears. Beginning February 22, 2015, Alpine will be required to pay a non-usage fee equal to .50% on the average daily unused amount of the financing commitments to the extent the aggregate principal amount available under the Alpine Credit Facility

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has not been borrowed. Alpine also paid a set-up fee and incurred certain other customary costs and expenses in connection with obtaining the Alpine Credit Facility.

Borrowings of Alpine will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the Investment Company Act of 1940 Act, as amended, applicable to business development companies.

Pursuant to a Sale and Contribution Agreement entered into between the Company and Alpine (the “Sale Agreement”) in connection with the Alpine Credit Facility, the Company may sell loans or contribute cash or loans to Alpine from time to time and will retain a residual interest in any assets contributed through its ownership of Alpine or will receive fair market value for any assets sold to Alpine. In certain circumstances the Company may be required to repurchase certain loans sold to Alpine. In addition to the acquisition of loans pursuant to the Sale Agreement, Alpine may purchase additional assets from various sources. Alpine has appointed SIC Advisors LLC to manage its portfolio of assets pursuant to the terms of a Portfolio Management Agreement between SIC Advisors LLC and Alpine.

As of September 30, 2014, the carrying amount of the Company’s borrowings under the Alpine Credit Facility approximated their fair value. The fair value of the Company’s debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s borrowing under the Alpine Credit Facility is estimated based upon market interest rates of the Company’s borrowing or entities with similar credit risk, adjusted for nonperformance risk, if any. At September 30, 2014, the Alpine Credit Facility would be deemed to be Level 3, as defined in Note 4.

As of September 30, 2014, $1,050,000 of financing costs related to the Alpine Credit Facility has been capitalized and is being amortized over the respective terms, respectively. For the three and nine months ended September 30, 2014, the Company recorded $374,695 of interest and financing expenses related to the Alpine Credit Facility, of which $330,041 was attributable to interest and $44,654 was attributable to amortization of deferred financing costs. As of September 30, 2014, the Company’s outstanding borrowing under the Alpine Credit Facility was $64,000,000. For the three and nine months ended September 30, 2014, the weighted average outstanding debt balance and interest rate on the Alpine Credit Facility was $30,500,000 and 2.6%, and $12,200,000 and 1.0%, respectively.

Note 7. Agreements

Investment Advisory Agreement

On April 15, 2012, the Company entered into an investment advisory agreement (“IAA”) with SIC Advisors to manage the Company’s investment activities. The IAA became effective as of April 17, 2012, the date that the Company met its minimum offering requirement. Pursuant to the 1940 Act, the initial term of the IAA was for two years from its effective date, with one-year renewals subject to approval by the Company’s board of directors, a majority of whom must be independent directors. On March 12, 2014, the Company’s board of directors approved the renewal of the IAA for an additional one-year term at an in-person meeting. Pursuant to the IAA, SIC Advisors implements the Company’s business strategy on a day-to-day basis and performs certain services for the Company, subject to oversight by the Company’s board of directors. SIC Advisors is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the IAA, the Company has agreed to pay SIC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.75% of the Company’s gross assets payable quarterly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any

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assets acquired with the proceeds of leverage. “Gross assets” also includes any cash collateral posted with respect to the TRS, adjusted for realized and unrealized appreciation. For the first quarter of the Company’s operations, the base management fee was calculated based on the initial value of the Company’s gross assets. Subsequently, the base management fee is calculated based on the gross assets at the end of each completed calendar quarter. Base management fees for any partial quarter are appropriately prorated. For the three and nine months ended September 30, 2014 the Company recorded an expense for base management fees of $2,791,528 and $5,702,346, respectively, of which $2,788,604 was payable at September 30, 2014. For the three and nine months ended September 30, 2013, the Company recorded an expense for base management fees of $487,843 and $1,091,731, respectively. As of December 31, 2013, the Company had $814,655 of base management fees payable.

The incentive fee consists of the following two parts:

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

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

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

For the three and nine months ended September 30, 2014 the Company recorded a provisional capital gains incentive fee of $542,746 and $981,695, respectively. For the three and nine months ended September 30, 2013 the Company recorded a provisional capital gains incentive fee of $(34,108) and $0, respectively. As of September 30, 2014 and December 31, 2013, the Company recorded a provisional capital gains incentive fee payable of $1,165,312 and $182,989, respectively.

Prior to June 2, 2014, SIC Advisors bore all organizational and offering expenses, as defined in the IAA, on behalf of the Company until the Company’s gross proceeds in connection with the sale of its common stock exceeded $300,000,000. As of June 2, 2014, the Company is responsible for all ongoing organization and offering expenses.

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Pursuant to the terms of the IAA, the Company has agreed to reimburse SIC Advisors for any such organizational and offering expenses incurred by SIC Advisors (“O&O Reimbursable Expenses”) not to exceed 1.25% of the gross subscriptions raised by the Company over the course of the offering period, which is currently scheduled to terminate April 17, 2015, unless further extended.

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

During the nine months ended September 30, 2014, SIC Advisors incurred O&O Reimbursable Expenses of $1,880,248 related to the period through June 30, 2014. For the three and nine months ended September 30, 2013, SIC Advisors incurred organizational and offering costs of $335,297 and $835,452, respectively. Of the total $5,931,441 of O&O Reimbursable Expenses incurred from inception through September 30, 2014, $1,514,400 and $3,628,305 were reimbursed to SIC Advisors during the three and nine months ended September 30, 2014, respectively. For the three and nine months ended September 30, 2013, the Company reimbursed SIC Advisors $504,640 and $272,205, respectively. As of September 30, 2014 and December 31, 2013, $50,232 and $33,311 have been accrued and are reflected in the consolidated statements of assets and liabilities as part of due to affiliate, respectively. The remaining unreimbursed amount will be eligible for reimbursement to the extent the Company receives subscriptions until April 17, 2015, which is the currently scheduled date that the offering period ends, unless it is extended. O&O Reimbursable Expenses paid for by SIC Advisors and reimbursed by the Company will be expensed on the Company’s consolidated statements of operations.

Administration Agreement

On April 5, 2012, the Company entered into an administration agreement (the “Administration Agreement”) with Medley Capital LLC, with an initial term of two years pursuant to which Medley Capital LLC furnishes the Company with administrative services necessary to conduct its day-to-day operations. On March 12, 2014, the Company’s board of directors approved the renewal of the Administration Agreement for an additional one-year term at an in-person meeting. Medley Capital LLC is reimbursed for administrative expenses it incurs on the Company’s behalf in performing its obligations. Such costs are reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. The Company does not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC. Medley Capital LLC is an affiliate of SIC Advisors. For the three and nine months ended September 30, 2014, the Company recorded an expense of $350,118 and $850,913, respectively, of which $362,316 was payable at September 30, 2014, relating to administrator expenses. For the three and nine months ended September 30, 2013, the Company recorded an expense of $143,509 and $440,423, respectively. As of December 31, 2013, the Company had $152,162 in administrator expenses payable.

Expense Support and Reimbursement Agreement

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distributions are paid to the Company’s stockholders in any given month, then the Expense Support Reimbursement for such month shall be equal to such amount necessary in order for Available Operating Funds for the month to equal zero. The terms of the Expense Support Agreement commenced as of the date that the Company’s registration statement was declared effective by the SEC and continued monthly thereafter until December 31, 2012. Most recently, on June 4, 2014, the Company’s board of directors approved an extension of the Expense Support Agreement through December 31, 2014.

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

Pursuant to the Expense Support Agreement, the Company will reimburse SIC Advisors for expense support payments it previously made following any calendar quarter in which the Company received net investment income, net capital gains and dividends from its portfolio companies in excess of the distributions paid to the Company’s stockholders during such calendar quarter (the “Excess Operating Funds”). Any such reimbursement will be made within three years of the date that the expense support payment obligation was incurred by SIC Advisors, subject to the conditions described below. The amount of the reimbursement during any calendar quarter will equal the lesser of (i) the Excess Operating Funds received during the quarter and (ii) the aggregate amount of all expense payments made by SIC Advisors that have not yet been reimbursed. In addition, the Company will only make reimbursement payments if its “operating expense ratio” (as described in footnote 1 to the table below) is equal to or less than its operating expense ratio at the time the corresponding expense payment was incurred and if the annualized rate of its regular cash distributions to the Company’s stockholders is equal to or greater than the annualized rate of the Company’s regular cash distributions to stockholders at the time the corresponding expense payment was incurred.

For the three and nine months ended September 30, 2014, the Company recorded net Expense Support Reimbursements of $0 and $3,456,536, respectively, on the consolidated statements of operations and gross Expense Support Reimbursements of $1,717,593 and $5,174,129, respectively. For the three and nine months ended September 30, 2013, the Company recorded net and gross Expense Support Reimbursements of $1,262,848 and $2,680,676, respectively, on the consolidated statements of operations, which includes $125,000 that SIC Advisors elected to reimburse on June 27, 2013 related to expenses from prior periods. Repayments of amounts paid by SIC Advisors to the Company under the Expense Support Agreement will be accrued as they become probable and estimable. As of September 30, 2014 and December 31, 2013, the Company recorded $6,803,999 and $2,592,989, respectively, in its consolidated statements of assets and liabilities as due from affiliate relating to the Expense Support Agreement. The Company may only reimburse SIC Advisors for Expense Support Reimbursements to the extent that the Company’s excess net income eligible for reimbursement (i) does not cause the Operating Expense Ratio to exceed such ratio in effect at the time that the original Expense Payment Obligation was incurred, and (ii) to the extent that the current Annualized Distribution Rate is not below such rate in effect at the time that the original Expense Payment Obligation was incurred. The Company refers to Expense Support Reimbursements that are eligible for reimbursement to SIC Advisors by virtue of having satisfied the conditions described above as a “Crystalized Reimbursement.” From inception through June 30, 2014, the Company did not record any Crystalized Reimbursements. For the three months ended September 30, 2014, the Company accrued $1,717,593 of excess net income as reimbursement to SIC Advisors for Expense Support Reimbursements. Of the $1,717,593 accrued, only $123,025 was a Crystalized Reimbursement and the remaining $1,594,568 may be reimbursed in future periods to the extent the conditions of Crystalized Reimbursement are met.

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


Quarter Ended	Amount of Expense Payment Obligation		Crystalized Reimbursement		Operating Expense Ratio⁽¹⁾			Annualized Distribution Rate⁽²⁾			Eligible to be Repaid Through
June 30, 2012	$	454,874	$	—		6.13	%		8.00	%	June 30, 2015
September 30, 2012		437,303		—		4.05	%		8.00	%	September 30, 2015
December 31, 2012		573,733		—		3.91	%		8.00	%	December 31, 2015
March 31, 2013		685,404		—		1.71	%		8.00	%	March 31, 2016
June 30, 2013		732,424		—		1.00	%		7.84	%	June 30, 2016
September 30, 2013		1,262,848		—		0.83	%		7.84	%	September 30, 2016
December 31, 2013		1,258,575		—		0.45	%		7.84	%	December 31, 2016
March 31, 2014		1,313,470		—		0.45	%		7.80	%	March 31, 2017
June 30, 2014		2,143,066		—		0.38	%		7.80	%	June 30, 2017
September 30, 2014		1,717,593		123,025		0.38	%		7.77	%	September 30, 2017

⁽¹⁾

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

⁽²⁾

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

Note 8. Related Party Transactions

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

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

Due from affiliate relates to amounts due from SIC Advisors pursuant to the Expense Support Agreement as discussed in Note 7.

Due to affiliate relates to reimbursements of organizational and offering expenses pursuant to the IAA paid to SIC Advisors as discussed in Note 7.

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

Note 9. Directors Fees

The Company’s independent directors receive an annual retainer fee of $30,000 and further receive a fee of $2,500 ($1,000 for telephonic attendance) for each regularly scheduled board meeting and a fee of $1,000 for each special board meeting and all committee meetings as well as reimbursement of reasonable and documented out-of-pocket expenses incurred in connection with attending each board or committee meeting. In addition, the chairman of the audit committee receives an annual retainer of $10,000, while the chairman of any other committee receives an annual retainer of $2,500. For the three and nine months ended September 30, 2014, the

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Company recorded directors’ fees expenses of $41,646 and $124,481, respectively, of which $6,547 was payable at September 30, 2014. For the three and nine months ended September 30, 2013, the Company recorded directors’ fees expenses of $41,646 and $127,286, respectively. As of December 31, 2013 the Company did not have any directors’ fees payable.

Note 10. Earnings Per Share

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

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


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2014		2013		2014		2013
Net increase/(decrease) in net assets from operations	$	6,322,763	$	1,444,156	$	18,005,640	$	3,325,346
Weighted average common shares outstanding		40,543,811		7,896,446		30,107,034		5,441,473
Earnings per common share-basic and diluted	$	0.16	$	0.18	$	0.60	$	0.61

Note 11. Commitments and Contingencies

The Company’s investment portfolio may contain debt investments that are in the form of lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2014 the Company had $6,411,916 unfunded commitments under loan and financing agreements. As of December 31, 2013 the Company had no unfunded commitments under loan and financing agreements.


	As of
	September 30, 2014		December 31, 2013
Access Media 3, Inc.	$	144,424	$	—
GTCR Valor Companies, Inc.		3,446,154		—
Nation Safe Drivers Holdings, Inc.		2,440,421		—
Valence Surface Technologies, Inc.		380,917		—

Total	$	6,411,916	$	—

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Note 12. Other Fee Income

The other fee income consists of origination/closing fee, amendment fee, prepayment penalty, administrative agent fee, transaction break-up fee and other miscellaneous fees. The following tables summarize the Company’s other fee income for the three and nine months ended September 30, 2014 and 2013:


	For the three months ended September 30,				For the nine months ended September 30,
	2014		2013		2014		2013
Origination fee	$	3,240,117	$	—	$	4,407,307	$	54,710
Prepayment fee		27,733		—		292,733		—
Amendment fee		35,500		2,500		62,938		23,930
Administrative agent fee		9,045		—		17,723		10,000
Other fees		474,010		19,023		494,081		62,343

Other fee income	$	3,786,405	$	21,523	$	5,274,782	$	150,983

Note 13. Distributions and Share Repurchase Plan Distributions

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

The Company has adopted an “opt in” distribution reinvestment plan (“DRIP”) pursuant to which the Company’s common stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of the Company’s common stock. As a result, if the Company declares a cash dividend or other distribution, each stockholder that has “opted in” to the Company’s reinvestment plan will have their distributions automatically reinvested in additional shares of the Company’s common stock rather than receiving cash distributions. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions. For the nine months ended September 30, 2014, the Company distributed a total of $18,457,377, of which, $10,100,913 was in cash and $8,356,464 was in the form of common shares associated with the DRIP. For the nine months ended September 30, 2013, the Company distributed a total of $3,299,596, of which, $2,291,619, was in cash and $1,007,977 was in the form of common shares associated with the DRIP.

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


Record Date	Payment Date		Amount per share
July 13 and 31, 2012		August 1, 2012	$	0.03333
August 15 and 31, 2012		September 4, 2012		0.03333
September 14 and 28, 2012		October 1, 2012		0.03333
October 15 and 30, 2012		October 31, 2012		0.03333
November 15 and 29, 2012		November 30, 2012		0.03333
December 14 and 28, 2012		December 31, 2012		0.03333
January 15 and 31, 2013		January 31, 2013		0.03333
February 15 and 28, 2013		February 28, 2013		0.03333
March 15 and 29, 2013		March 29, 2013		0.03333
April 15 and 30, 2013		April 30, 2013		0.03333
May 15 and 31, 2013		May 31, 2013		0.03333
June 14 and 28, 2013		June 28, 2013		0.03333
July 15 and 31, 2013		July 31, 2013		0.03333
August 15 and 30, 2013		August 30, 2013		0.03333
September 13 and 30, 2013		September 30, 2013		0.03333
October 15 and 31, 2013		October 31, 2013		0.03333
November 15 and 29, 2013		November 29, 2013		0.03333
December 13 and 31, 2013		December 31, 2013		0.03333
January 15 and 31, 2014		January 31, 2014		0.03333
February 14 and 28, 2014		February 28, 2014		0.03333
March 14 and 31, 2014		March 31, 2014		0.03333
April 15 and 30, 2014		April 30, 2014		0.03333
May 15 and 30, 2014		May 30, 2014		0.03333
June 13 and 30, 2014		June 30, 2014		0.03333
July 15 and 31, 2014		July 31, 2014		0.03333
August 15 and 29, 2014		August 29, 2014		0.03333
September 15 and 30, 2014		September 30, 2014		0.03333
October 15 and 31, 2014		October 31, 2014		0.03333
November 14 and 28, 2014		November 28, 2014		0.03333
December 15 and 31, 2014		December 31, 2014		0.03333

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

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

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

F-40

Share Repurchase Program

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

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

On August 8, 2013, the Company offered to repurchase up to 32,627 shares at a price per share of $9.13, which represented the Company’s net asset value per share as of June 30, 2013. On September 27, 2013, the Company repurchased 3,642 shares.

On November 7, 2013, the Company offered a repurchase up to 60,966 shares at a price per share of $9.14, which represented the Company’s net asset value per share as of September 30, 2013. On December 19, 2013, the Company repurchased 5,826 shares.

On March 12, 2014, the Company offered to repurchase up to 120,816 shares at a price per share of $9.18, which represented the Company’s net asset value per share as of December 31, 2013. On April 25, 2014, the Company repurchased 9,835 shares.

On May 6, 2014, the Company offered to repurchase up to 199,476 shares at a price per share of $9.20, which represented the Company’s net asset value per share as of March 31, 2014. On June 13, 2014, the Company repurchased 17,777 shares.

On August 5, 2014, the Company offered to repurchase up to 294,068 shares at a price of $9.25, which represents the Company’s net asset value per share as of June 30, 2014. On September 12, 2014, the Company repurchased 35,887 shares.

On November 5, 2014, the Company offered to repurchase up to 411,894 shares at a price per share of $9.22, which represented the Company’s net asset value per share as of September 30, 2014.

F-41

Note 14. Financial Highlights

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


	2014			2013
Per Share Data:⁽¹⁾
Net asset value at beginning of period	$	9.18		$	8.96
Net investment income/(loss)		0.35			0.61
Net realized gains/(losses) on investments and total return swap		0.22			(0.11	)
Net unrealized appreciation/(depreciation) on investments and total return swap		0.03			0.11

Net increase/(decrease) in net assets		0.60			0.61
Distributions declared from net investment income⁽²⁾		(0.38	)		(0.58	)
Distributions from net realized capital gains		(0.22	)		(0.02	)

Total distributions to stockholders		(0.60	)		(0.60	)
Issuance of common stock above net asset value⁽³⁾		0.04			0.17
Net asset value at end of period		9.22			9.14
Total return based on net asset value⁽⁴⁾⁽⁵⁾		7.12	%		8.86	%
Portfolio turnover rate		36.68	%		33.94	%
Shares outstanding at end of period		46,477,048			9,862,017
Net assets at end of period		428,487,107			90,146,527
Ratio/Supplemental Data (annualized):
Ratio of net investment income/(loss) to average net assets⁽⁵⁾		5.15	%		8.82	%
Ratio of net expenses (including incentive fees) to average net assets⁽⁵⁾		6.29	%		3.46	%
Ratio of incentive fees to average net assets		0.48	%		0.00	%
Supplemental data (annualized):
Ratio of operating expenses to average net assets		5.81	%		5.29	%
Ratio of interest and financing related expenses to average net assets		0.77	%		0.29	%

⁽¹⁾	The per share data was derived by using the weighted average shares outstanding during the nine months ended September 30, 2014 and September 30, 2013, which were 30,107,034 and 5,441,473, respectively.

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

⁽³⁾	Shares issued under the DRIP (see Note 12) as well as the continuous issuance of shares of common stock may cause on incremental increase/decrease in net asset value per share due to the effect of issuing shares at amounts that differ from the prevailing net asset value at each issuance.

⁽⁴⁾	Total annual returns are historical and assume reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales charge.

⁽⁵⁾

Total returns, ratios of net investment income/(loss), and ratios of net expenses to average net assets for the nine months ended September 30, 2014 and September 30, 2013 prior to the effect of the Expense Support and Reimbursement Agreement were as follows: total return 5.83% and 5.49%, ratio of net investment income/(loss): 3.50% and 1.70% and ratio of net expenses to average net assets: 8.05% and 10.97%, respectively.

Note 15. Subsequent Events

Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the consolidated financial statements as of and for the nine months ended September 30, 2014, except as disclosed below.

The Company issued common shares and received gross proceeds of approximately $39.9 subsequent to September 30, 2014.

F-42

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

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

•

our future operating results;

•

our business prospects and the prospects of our portfolio companies;

•

changes in the economy;

•

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

•

the effect of investments that we expect to make;

•

our contractual arrangements and relationships with third parties;

•

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

•

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

•

the ability of our portfolio companies to achieve their objectives;

•

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

•

the adequacy of our financing sources and working capital;

•

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

•

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

•

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

•

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

•

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

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

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

Overview

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

On April 17, 2012 we successfully reached the minimum escrow requirement and officially commenced operations by receiving gross proceeds of $10 million in exchange for 1,108,033.24 shares of our common stock sold to SIC Advisors. As of September 30, 2014, we have combined proceeds, as well as a modest amount of leverage through a revolving credit facility with ING Capital LLC, which we have used to invest $513 million across 72 transactions.

Under our Investment Advisory Agreement, we pay SIC Advisors an annual management fee as well as an incentive fee based on our investment performance. Also, under the Administration Agreement, we reimburse Medley for the allocable portion of overhead and other expenses incurred by Medley Capital LLC in performing its obligations under the Administration Agreement, including our allocable portion of the costs of compensation and related expenses of our chief compliance officer, chief financial officer and their respective staffs.

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

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

As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing, with certain limited exceptions. To obtain and maintain our RIC status, we must meet specified source-of-income and asset diversification requirements. To be eligible for tax treatment under Subchapter M for U.S. federal income tax purposes, we must distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.

Revenues

We generate revenue in the form of interest on the debt securities that we hold and distributions and capital gains on other interests that we acquire in our portfolio companies. We expect that the senior debt we invest in

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

Expenses

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

•

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

•

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

•

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

•

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

•

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

•

transfer agent and custodial fees;

•

fees and expenses associated with marketing efforts;

•

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

•

federal, state and local taxes;

•

independent directors’ fees and expenses, including travel expenses;

•

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

•

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

•

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

•

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

•

brokerage commissions for our investments;

•

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

•

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

Reimbursement of Medley for Administrative Services

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

Portfolio and Investment Activity

As of September 30, 2014, our portfolio consisted of investments in 66 portfolio companies with a fair value of $511.1 million, and was comprised of 44.0% Senior secured first lien term loans, 42.9% Senior secured second lien term loans, 12.0% Senior Secured first lien notes, and 1.0% warrants and equity.

As of December 31, 2013, our portfolio consisted of investments in 49 portfolio companies with a fair value of $137.8 million, and was comprised of 20.8% Senior Secured first lien term loans, 41.0% Senior Secured second lien term loans, 34.4% senior secured notes, 3.8% Senior Secured second lien notes and 0.0% warrants.

As of September 30, 2014, our income-bearing investment portfolio, which represented 99.5% of our total portfolio, had a weighted average yield based upon the cost of our portfolio investments of approximately 9.2%, and 14.0% of our income-bearing portfolio bore interest based on fixed rates, and 86.0% of our income-bearing portfolio bore interest on floating rates, such as LIBOR.

As of December 31, 2013, our income-bearing investment portfolio, which represented 99.9% of our total portfolio, had a weighted average yield based upon the cost of our portfolio investments of approximately 9.9%, and 43.3% of our income-bearing portfolio bore interest based on fixed rates, and 56.7% of our income-bearing portfolio bore interest on floating rates, such as LIBOR.

For the quarter ended September 30, 2014, we invested $168.5 million of principal in directly originated transactions across 12 new portfolio companies and $30 million of principal in syndicated transactions across 2 new portfolio companies. As of September 30, 2014, the investment portfolio was comprised of $363.0 million of principal in directly originated transactions across 39 portfolio companies and $146.7 million of principal in syndicated transactions across 28 portfolio companies.

The following table summarizes the amortized cost and the fair value of investments not including cash as of September 30, 2014:


	Amortized Cost		Percentage			Fair Value		Percentage
Senior secured first lien term loans	$	223,485,430		44.1	%	$	225,096,408		44.0	%
Senior secured first lien notes		62,573,837		12.3			61,262,561		12.0
Senior secured second lien term loans		217,228,849		42.8			219,481,927		43.0
Warrants/Equity		4,155,283		0.8			5,285,119		1.0

Total	$	507,443,399		100.0	%	$	511,126,015		100.0	%

The following table summarizes the amortized cost and the fair value of investments, not including cash as of December 31, 2013:


	Amortized Cost		Percentage			Fair Value		Percentage
Senior secured first lien term loans	$	28,617,156		20.9	%	$	28,583,326		20.8	%
Senior secured first lien notes		47,352,921		34.5			47,427,311		34.4
Senior secured second lien term loans		56,224,549		40.9			56,481,247		41.0
Senior secured second lien notes		5,108,477		3.7			5,254,676		3.8
Warrants/Equity		29,173		—			54,977		—

Total	$	137,332,276		100.0	%	$	137,801,537		100.0	%

Our portfolio composition, based on fair value, including the value of the TRS underlying loans, at September 30, 2014 was as follows:


	Percentage of Total Investments			Weighted Average Current Yield for Total Investments
Senior Secured First Lien Term Loans		39.6	%		8.8	%
Senior Secured First Lien Notes		10.8			9.9
Senior Secured Second Lien Term Loans		38.7			9.8
Equity/Warrants		10.9			18.1

Total		100.0	%		10.3	%

The following table shows the portfolio composition by industry grouping, including the TRS underlying loans, based on fair value at September 30, 2014:


	Investments at Fair Value⁽¹⁾		Percentage of Total Portfolio⁽¹⁾			Value of TRS Underlying Loans		Percentage of TRS Underlying Loans			Total Investments at Fair Value including the value of TRS Underlying Loans		Percentage of Total Portfolio Including the value of TRS Underlying Loans
Diversified/Conglomerate Service		40,000,000		7.7	%		21,664,294		10.2	%		61,664,294		8.5	%
Automobile		44,607,097		8.7	%		10,599,343		5.0	%		55,206,440		7.6	%
Electronics		41,263,854		8.1	%		13,067,261		6.1	%		54,331,115		7.5	%
Oil and Gas		44,936,952		8.8	%		4,251,613		2.0	%		49,188,565		6.8	%
Buildings and Real Estate		43,869,217		8.6	%		—		0.0	%		43,869,217		6.0	%
Telecommunications		40,196,290		7.9	%		1,716,171		0.8	%		41,912,461		5.8	%
Healthcare, Education, and Childcare		36,334,860		7.1	%		5,412,809		2.5	%		41,747,669		5.8	%
Insurance		27,637,273		5.4	%		11,900,656		5.6	%		39,537,929		5.5	%
Aerospace and Defense		29,258,342		5.7	%		5,024,750		2.3	%		34,283,092		4.7	%
Retail Stores		22,295,446		4.4	%		11,535,600		5.4	%		33,831,046		4.7	%
Personal, Food, and Miscellaneous Services		30,198,357		5.9	%		—		0.0	%		30,198,357		4.2	%
Hotels, Motels, Inns and Gaming		10,530,909		2.1	%		19,127,688		8.9	%		29,658,597		4.1	%
Printing and Publishing		12,468,750		2.4	%		15,872,192		7.4	%		28,340,942		3.9	%
Diversified/Conglomerate Manufacturing		—		0.0	%		26,728,200		12.5	%		26,728,200		3.7	%
Cargo Transport		12,885,088		2.5	%		11,955,529		5.6	%		24,840,617		3.4	%
Chemicals, Plastics, and Rubber		22,401,461		4.4	%		—		0.0	%		22,401,461		3.1	%


	Investments at Fair Value⁽¹⁾		Percentage of Total Portfolio⁽¹⁾			Value of TRS Underlying Loans		Percentage of TRS Underlying Loans			Total Investments at Fair Value including the value of TRS Underlying Loans		Percentage of Total Portfolio Including the value of TRS Underlying Loans
Mining, Steel, Iron, and Nonprecious Metals		1,126,150		0.2	%		19,725,000		9.2	%		20,851,150		2.9	%
Containers, Packaging, and Glass		10,186,224		2.0	%		8,961,087		4.2	%		19,147,311		2.6	%
Finance		18,444,125		3.6	%		—		0.0	%		18,444,125		2.5	%
Business Services		5,179,131		1.0	%		5,179,131		2.4	%		10,358,262		1.4	%
Leisure, Amusement, Motion Pictures, Entertainment		10,040,000		2.0	%		—		0.0	%		10,040,000		1.4	%
Grocery		—		0.0	%		7,958,320		3.7	%		7,958,320		1.1	%
Broadcasting and Entertainment		1,513,016		0.3	%		4,975,000		2.3	%		6,488,016		0.9	%
Beverage, Food and Tobacco		1,908,581		0.4	%		3,450,405		1.6	%		5,358,986		0.7	%
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)		—		0.0	%		4,925,156		2.3	%		4,925,156		0.7	%
Personal and Nondurable Consumer Products (Manufacturing Only)		3,844,892		0.8	%		—		0.0	%		3,844,892		0.5	%

		511,126,015		100.0	%		214,030,205		100.0	%		725,156,220		100.0	%

⁽¹⁾	Does not include TRS underlying loans

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


Credit Rating		Definition
1		Investments that are performing above expectations.

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

		All new loans are rated ‘2’.

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

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

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

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

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

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

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

		Some loss of principal is expected.

The following table shows the distribution of our investments, not including cash, on the 1 to 5 investment performance rating scale at fair value as of September 30, 2014:


	September 30, 2014					December 31, 2013
Investment Performance Rating	Investments at Fair Value		Percentage			Investments at Fair Value		Percentage
1	$	—		—	%	$	2,198,601		1.6	%
2		510,807,870		99.9			135,280,191		98.2
3		—		—			—		—
4		—		—			—		—
5		318,145		0.1			322,745		0.2

Total	$	511,126,015		100.0	%	$	137,801,537		100.0	%

Results of Operations

Operating results for the three and nine months ended September 30, 2014 and 2013 are as follows:


	For the three months ended September 30						For the nine months ended September 30
	2014			2013			2014		2013
Total investment income	$	12,054,651		$	2,029,631		$	23,464,689	$	4,462,568
Total expenses, net		7,742,152			404,023			12,903,422		1,300,032
Net investment income/(loss)		4,312,499			1,625,608			10,561,267		3,313,960
Net realized gain/(loss) from investments and total return swap		2,568,905			(714,665	)		6,512,215		(605,457	)
Net unrealized gain/(loss) on investments and total return swap		(558,641	)		533,213			932,158		616,843

Net increase/(decrease) in net assets resulting from operations		6,322,763		$	1,444,156			18,005,640	$	3,325,346

Investment Income

For the three months ended September 30, 2014, investment income totaled $12,054,651, of which $8,145,087 was attributable to portfolio interest, $3,786,405 was attributable to other fee income, $123,053 was attributable to PIK interest and $106 to interest earned on cash and cash equivalents. For the three months ended September 30, 2013, investment income totaled $2,029,631, of which $2,008,108 was attributable to portfolio interest and $21,523 was attributable to other fee income.

For the nine months ended September 30, 2014, investment income totaled $23,464,689, of which $17,958,601 was attributable to portfolio interest, $5,274,782 was attributable to other fee income, $231,200 to PIK interest and $106 to interest earned on cash and cash equivalents. For the nine months ended September 30, 2013, investment income totaled $4,613,992, of which $4,462,568 was attributable to portfolio interest, $150,983 was attributable to other fee income and $441 to interest earned on cash and cash equivalents.

Operating Expenses

Operating expenses for the three and nine months ended September 30, 2014 and 2013 were as follows:


	For the three months ended September 30					For the nine months ended September 30
	2014		2013			2014		2013
Base management fees		2,791,528	$	487,843			5,702,346	$	1,091,731
Provisional incentive fees		542,746		(34,108	)		981,695		—
Administrator expenses		350,118		143,509			850,913		440,423
Professional fees		564,522		337,806			1,070,220		826,031
Interest and financing expenses		917,738		41,960			1,587,438		107,455
Insurance expense		51,053		36,720			107,641		95,051
Directors fees		41,646		41,646			124,481		127,286
Organizational and offering costs reimbursed to an affiliate		1,459,647		441,989			3,668,105		900,509
Offering costs		393,613		—			583,713		—
General and administrative expenses		629,541		169,506			1,683,406		392,222

Expenses before expense reimbursement	$	7,742,152	$	1,666,871		$	16,359,958	$	3,980,708

Expense Support and Reimbursement Agreement

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

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

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

As of September 30, 2014, we recorded $6,803,999 in our statements of assets and liabilities as due from affiliate relating to the Expense Support Agreement. For the three and nine months ended September 30, 2014, we recorded net Expense Support Reimbursements of $0 and $3,456,536 on the statement of operations. Expense reimbursements to SIC Advisors will be accrued as they become probable and estimable. For the three months ended September 30, 2014, we reimbursed $123,025 to SIC Advisors. As of December 31, 2013, we recorded $2,592,989 in our statement of assets and liabilities as due from affiliate relating to the Expense Support Agreement.

For the three months ended September 30, 2013, total expense reimbursement from SIC Advisors pursuant to the Expense Support and Reimbursement Agreement was $1,262,848 and net expenses after taking into account the expense reimbursement from SIC Advisors, was $404,023.

For the three months ended September 30, 2014 gross expense reimbursement from SIC Advisors pursuant to the Expense Support and Reimbursement Agreement was $1,717,593 and net expenses after taking into account the expense reimbursement from SIC Advisors, was $7,742,152.

Net Realized Gains/Losses from Investments

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

During the three and nine months ended September 30, 2014, we recognized $2,568,905 and 6,512,215 in net realized gains on total investments.

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

Net Unrealized Appreciation/Depreciation on Investments

Net change in unrealized appreciation on investments reflects the net change in the fair value of our total investments. For the three and nine months ended September 30, 2014, we had unrealized depreciation of $558,641 and unrealized appreciation of $932,158 respectively on total investments. For the three and nine months ended September 30, 2013, we had unrealized appreciation of $533,213 and 616,843 on our portfolio investments.

Changes in Net Assets from Operations

For the three and nine months ended September 30, 2014, we recorded a net increase in net assets resulting from operations of $6,322,763 and $18,005,640, respectively. Based on 40,543,811 weighted average common shares outstanding for the three months ended September 30, 2014, our per share basic and diluted earnings was $0.16. Based on 30,107,034 weighted average common shares outstanding for the nine months ended September 30, 2014, our per share basic and diluted earnings was $0.60.

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

Financial Condition, Liquidity and Capital Resources

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

Our liquidity and capital resources have been generated primarily from the net proceeds of our public offering of common stock.

As of September 30, 2014, we had $56,104,960 in cash. In the future, we may generate cash from future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes.

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

On December 4, 2013, we entered into a three-year senior secured syndicated revolving credit facility with a one-year term out period (the “ING Facility”) pursuant to a Senior Secured Revolving Credit Agreement (the “Revolving Credit Agreement”) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING Facility matures on December 4, 2017 and is secured by substantially all of our assets, subject to certain exclusions as further set forth in a Guarantee, Pledge and Security Agreement (the “Security Agreement”) entered into in connection with the Revolving Credit Agreement, among us, the Subsidiary Guarantors party thereto, ING Capital LLC, as Administrative Agent, each Financial Agent and Designated Indebtedness Holder party thereto and ING Capital LLC, as Collateral Agent. The ING Facility also includes usual and customary representations, covenants and events of default for senior secured revolving credit facilities of this nature. As of September 30, 2014, our borrowings under the ING Facility totaled $115,000,000 and were recorded as part of revolving credit facility payable on our consolidated statements of assets and liabilities.

On July 23, 2014, our newly-formed, wholly-owned, special purpose financing subsidiary, Alpine Funding LLC (“Alpine”), entered into a revolving credit facility (the “Alpine Credit Facility”) pursuant to a Loan Agreement with JPMorgan Chase Bank, National Association (“JPMorgan”), as administrative agent and lender, the Financing Providers from time to time party thereto, SIC Advisors LLC, as the portfolio manager, and the Collateral Administrator, Collateral Agent and Securities Intermediary party thereto (the “Loan Agreement”). Alpine’s obligations to JPMorgan under the Alpine Credit Facility are secured by a first priority security interest in substantially all of the assets of Alpine, including its portfolio of loans. The obligations of Alpine under the Alpine Credit Facility are non-recourse to the Company.

Borrowings under the Alpine Credit Facility are subject to compliance with a net asset value coverage ratio with respect to the current value of Alpine’s portfolio and various eligibility criteria must be satisfied with

respect to the initial acquisition of each loan in Alpine’s portfolio. Any amounts borrowed under the Alpine Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on January 23, 2019. As of September 30, 2014, Alpine’s borrowings under the Alpine Credit Facility totaled $64,000,000 and were recorded as part of revolving credit facility payable on our consolidated statements of assets and liabilities.

Contractual Obligations and Off-Balance Sheet Arrangements

We have entered into certain contracts under which we have material future commitments. On April 5, 2012, we entered into the Investment Advisory Agreement with SIC Advisors in accordance with the 1940 Act. The Investment Advisory Agreement became effective as of April 17, 2012, the date that we met the minimum offering requirement. Pursuant to the 1940 Act, the initial term of the Investment Advisory Agreement was for two years from its effective date, with one-year renewals subject to approval by our board of directors, a majority of whom must be independent directors. On March 12, 2014, the board of directors approved the renewal of the Investment Advisory Agreement for an additional one-year term at an in-person meeting. SIC Advisors serves as our investment advisor in accordance with the terms of the Investment Advisory Agreement. Payments under our Investment Advisory Agreement in each reporting period consist of (i) a management fee equal to a percentage of the value of our gross assets and (ii) an incentive fee based on our performance.

On April 5, 2012, we entered into the Administration Agreement with Medley Capital LLC with an initial term of two years, pursuant to which Medley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. On March 12, 2014, the board of directors approved the renewal of the Administration Agreement for an additional one-year term at an in-person meeting. Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC.

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

Off-Balance Sheet Arrangements

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

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

Our derivative asset from Citibank, net of amounts available for offset under a master netting agreement as of September 30, 2014 was $1,822,859, which is recorded on the consolidated statements of assets and liabilities as receivable due on total return swap.

Transactions in total return swap contracts during the three months ended September 30, 2014 were $2,498,893 in realized gains and $3,199,218 in unrealized losses, which is recorded on the consolidated statements of operations.

For the three months ended September 30, 2014, the average notional par amount of total return swap contracts was $183.5 million.

Distributions

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

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

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

Subject to our board of directors’ discretion and applicable legal restrictions, we expect to authorize and pay monthly distributions to our stockholders. Any distributions to our stockholders will be declared out of assets legally available for distribution. We expect to continue making monthly distributions unless our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from doing so. From time to time, but not less than quarterly, we will review our accounts to determine whether distributions to our stockholders are appropriate. We have not established limits on the amount of funds we may use from available sources to make distributions. We expect that for a significant time after the commencement of this offering, substantially all of our distributions will result from expense support payments made by SIC Advisors that may be subject to repayment by us within three years. The purpose of this arrangement is to avoid such distributions being characterized as returns of capital for GAAP purposes. We may still have distributions which could be characterized as a return of capital for tax purposes. Such distributions are not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods and/or SIC Advisors continues to make Expense Support Payments under the Expense Support Agreement. Any future reimbursements to SIC Advisors will reduce the distributions that may otherwise be available for distribution to stockholders. There can be no assurance that we will achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at all. SIC Advisors has no obligation to make Expense Support Payments pursuant to the Expense Support Agreement after December 31, 2014, unless the Expense

Support Agreement is extended. For the three and nine months ended September 30, 2014, if net Expense Support Payments of $0 and $3,456,536 were not made by SIC Advisors, approximately 18% and 26% of the distributions would have been a return of capital, respectively.

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

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


Record Date	Payment Date	Amount per share
July 13 and 31, 2012	August 1, 2012	$	0.03333
August 15 and 31, 2012	September 4, 2012		0.03333
September 14 and 28, 2012	October 1, 2012		0.03333
October 15 and 30, 2012	October 31, 2012		0.03333
November 15 and 29, 2012	November 30, 2012		0.03333
December 14 and 28, 2012	December 31, 2012		0.03333
January 15 and 31, 2013	January 31, 2013		0.03333
February 15 and 28, 2013	February 28, 2013		0.03333
March 15 and 29, 2013	March 29, 2013		0.03333
April 15 and 30, 2013	April 30, 2013		0.03333
May 15 and 31, 2013	May 31, 2013		0.03333
June 14 and 28, 2013	June 28, 2013		0.03333
July 15 and 31, 2013	July 31, 2013		0.03333
August 15 and 30, 2013	August 30, 2013		0.03333
September 13 and 30, 2013	September 30, 2013		0.03333
October 15 and 31, 2013	October 31, 2013		0.03333
November 15 and 29, 2013	November 29, 2013		0.03333
December 13 and 31, 2013	December 31, 2013		0.03333
January 15 and 31, 2014	January 31, 2014		0.03333
February 14 and 28, 2014	February 28, 2014		0.03333
March 14 and 31, 2014	March 31, 2014		0.03333
April 15 and 30, 2014	April 30, 2014		0.03333
May 15 and 30, 2014	May 30, 2014		0.03333
June 13 and 30, 2014	September 30, 2014		0.03333
July 15 and July 31, 2014	July 31, 2014		0.03333
August 15 and August 29, 2014	August 29, 2014		0.03333
September 15 and September 30, 2014	September 30, 2014		0.03333
October 15 and October 31, 2014	October 31, 2014		0.03333
November 14 and 28, 2014	November 28, 2014		0.03333
December 15 and 31, 2014	December 31, 2014		0.03333

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

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

Related Party Transactions

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

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

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

We have entered into an Administration Agreement with Medley Capital LLC, pursuant to which Medley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf. We do not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC. Medley Capital LLC is an affiliate of SIC Advisors.

We have entered into a dealer manager agreement with SC Distributors, LLC and pay them a dealer manager fee of up to 2.75% of gross proceeds raised in the offering. An affiliated entity of SC Distributors, LLC owns an equity interest in SIC Advisors, which provides the right to receive a fixed percentage of the management fees received by SIC Advisors.

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

Management Fee

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

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

•

exceeds the quarterly preferred return, but is less than or equal to 2.1875% of net assets at the end of the immediately preceding fiscal quarter in any quarter, will be payable to SIC Advisors. The Company refers to this portion of its subordinated incentive fee on income as the catch up. It is intended to provide an incentive fee of 20% on pre-incentive fee net investment income when pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter in any quarter. For any quarter in which the Company’s pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter, the subordinated incentive fee on income shall equal 20% of the amount of pre-incentive fee net investment income, because the preferred return and catch up will have been achieved.

•

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

Under the terms of the investment advisory agreement, SIC Advisors bears all organization and offering expenses on our behalf. Upon such time that we have raised $300 million in gross proceeds in connection with the sale of shares of our common stock, SIC Advisors shall no longer be obligated to bear, pay or otherwise be responsible for any ongoing organization and offering expenses on our behalf, and we will be responsible for paying or otherwise incurring all such organization and offering expenses. As of June 2, 2014 we are responsible for all ongoing organizational and offering expenses. Pursuant to the terms of the Investment Advisory Agreement, we have agreed to reimburse SIC Advisors for any such organizational and offering expenses incurred by SIC Advisors not to exceed 1.25% of the gross subscriptions raised by us over the course of the offering period, which was initially scheduled to terminate two years from the initial offering date, unless extended. At a meeting held on June 12, 2014, our board of directors approved an extension of our offering for an additional year. Notwithstanding the foregoing, in the event that organizational and offering expenses, together with sales commissions, the dealer manager fee and any discounts paid to members of the Financial Industry Regulatory Authority, exceed 15% of the gross proceeds from the sale of shares of our common stock pursuant to our registration statement or otherwise at the time of the completion of our offering, then SIC Advisors shall be required to pay or, if already paid by us, reimburse us for amounts exceeding such 15% limit.

Critical Accounting Policies

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

Valuation of Investments

the priority of the valuation technique, into a three-level fair value hierarchy as identified below and discussed in Note 4.

•

Level 1 — Quoted prices are available in active markets for identical investments as of the reporting date. Publicly listed equities and publicly listed derivatives will be included in Level 1. In addition, securities sold, but not yet purchased and call options will be included in Level 1. We will not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably affect the quoted price.

•

Level 2 — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. In certain cases, debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments, and various relationships between investments. Investments which are generally expected to be included in this category include corporate bonds and loans, convertible debt indexed to publicly listed securities, and certain over-the-counter derivatives.

•

Level 3 — Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation. Investments that are expected to be included in this category are our private portfolio companies.

Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

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

valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities using an expected recovery model. We may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.

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

•

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

•

conclusions are then documented and discussed with senior management; and

•

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

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

•

management reviews preliminary valuations and their own independent assessment;

•

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

•

We will value the TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS will be based on the increase or decrease in the value of the assets underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The assets underlying the TRS will be valued by Citibank. Citibank will base its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations will be sent to us for review and testing. Our board of directors will review and approve the value of the TRS, as well as the value of the assets underlying the TRS, on a quarterly basis as part of their quarterly determination of net asset value. To the extent our board of directors has any questions or concerns regarding the valuation of the assets underlying the TRS, such valuation will be discussed or challenged pursuant to the terms of the TRS. For additional disclosures on the TRS, see “— Financial Condition, Liquidity and Capital Resources — Total Return Swap.”

Revenue Recognition

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

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

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

Payment-in-Kind Interest

We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash.

Organization and Offering Expenses

As of June 2, 2014, the Company is responsible for all ongoing organization and offering expenses.

Federal Income Taxes

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

Recent Developments

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

Item 3: Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. Under the terms of the TRS between Arbor and Citibank, Arbor will pay fees to Citibank at a floating rate based on LIBOR in exchange for the right to receive the economic benefit of a portfolio of assets having a maximum notional amount of $350,000,000. We expect any future credit facilities, total return swap agreements or other financing

arrangements that we or any of our subsidiaries may enter into will also be based on a floating interest rate. As a result, we are subject to risks relating to changes in market interest rates. In periods of rising interest rates, when we or our subsidiaries have debt outstanding or swap agreements in effect, our cost of funds would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.

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

Based on our consolidated Statement of Assets and Liabilities as of September 30, 2014, the following table shows the approximate increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investment and capital structure:


Basis point increase	Interest Income		Interest Expense			Net Increase (Decrease)
100	$	705,104	$	(1,215,000	)	$	(509,896	)
200		4,496,526		(3,005,000	)		1,491,526
300		8,582,370		(4,795,000	)		3,787,370
400		12,908,215		(6,585,000	)		6,323,215
500		17,314,059		(8,375,000	)		8,939,059

Based on our consolidated Statement of Assets and Liabilities as of December 31, 2013, the following table shows the approximate increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investment and capital structure:


Basis point increase	Interest Income		Interest Expense			Net Increase (Decrease)
100	$	780,646	$	(160,000	)	$	620,646
200		1,561,291		(320,000	)		1,241,291
300		2,341,937		(480,000	)		1,861,937
400		3,122,583		(640,000	)		2,482,583
500		3,903,229		(800,000	)		3,103,229

Item 4: Controls and Procedures.

Disclosure Controls

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

Change In Internal Control Over Financial Reporting

No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information

Item 1:

Legal Proceedings.

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

Item 1A:

Risk Factors.

In addition to other information set forth in this report, you should carefully consider the “Risk Factors” discussed in our annual report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on March 14, 2014, which could materially affect our business, financial condition and/or operating results. Except as set forth below, there have been no material changes during the six months ended September 30, 2014 to the risk factors discussed in “Item 1A. Risk Factors” of our annual report on Form 10-K. Additional risks or uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

Economic recessions or downturns may have a material adverse effect on our business, financial condition and results of operations, and could impair the ability of our portfolio companies to repay loans.

Economic recessions or downturns may result in a prolonged period of market illiquidity which could have a material adverse effect on our business, financial condition and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results.

In addition, to the extent that recessionary conditions return, the financial results of small and mid-sized companies, like those in which we invest, will likely experience deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. Additionally, the end markets for certain of our portfolio companies’ products and services would likely experience negative economic trends. The performances of certain of our portfolio companies have been, and may continue to be, negatively impacted by these economic or other conditions, which may ultimately result in our receipt of a reduced level of interest income from our portfolio companies and/or losses or charge offs related to our investments, and, in turn, may adversely affect distributable income. Further, adverse economic conditions may decrease the value of collateral securing some of our loans and the value of our equity investments. As a result, we may need to modify the payment terms of our investments, including changes in payment-in-kind interest provisions and/or cash interest rates. These factors may result in our receipt of a reduced level of interest income from our portfolio companies and/or losses or charge offs related to our investments, and, in turn, may adversely affect distributable income and have a material adverse effect on our results of operations.

Further downgrades of the U.S. credit rating, impending automatic spending cuts or another government shutdown could negatively impact our liquidity, financial condition and earnings.

Recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economic slowdowns. Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States, or the US, from “AAA” to “AA+” in August 2011. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. Absent further quantitative easing by the Federal Reserve, these developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.

Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.

The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, may continue to contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties or deterioration in the United States and worldwide. Since 2010, several European Union (“EU”) countries, including Greece, Ireland, Italy, Spain, and Portugal, have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal policy of foreign nations, such as China, may have a severe impact on the worldwide and United states financial markets. Moreover, there are concerns that the recent economic slowdown in China could have a negative impact on markets throughout the world. We do not know how long the financial markets will continue to be affected by these events and cannot predict the effects of these or similar events in the future on the United States economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3:

Defaults Upon Senior Securities.

None.

Item 4:

Mine Safety Disclosures.

None.

Item 5:

Other Information.

None.

Item 6:

Exhibits.

EXHIBIT INDEX


Number		Description

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

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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Dated: November 6, 2014	Sierra Income Corporation.

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

Dated: November 6, 2014	By	/s/ Richard T. Allorto, Jr.
		Richard T. Allorto, Jr. Chief Financial Officer (Principal Accounting and Financial Officer)

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