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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended December 31, 2014

OR

 

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

For the transition period from                      to                     

Commission file number: 001-34007

 

 

GLADSTONE INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   83-0423116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

(703) 287-5800

(Registrant’s telephone number, including area code)

Not Applicable

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of February 3, 2015, was 26,475,958.

 

 

 


Table of Contents

GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

 

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

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

     2   
 

Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2014 and 2013

     3   
 

Condensed Consolidated Statements of Changes in Net Assets for the nine months ended December 31, 2014 and 2013

     4   
 

Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2014 and 2013

     5   
 

Condensed Consolidated Schedules of Investments as of December 31 and March 31, 2014

     6   
 

Notes to Condensed Consolidated Financial Statements

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

Overview

     32   
 

Results of Operations

     37   
 

Liquidity and Capital Resources

     45   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      53   
Item 4.   Controls and Procedures      53   
PART II.   OTHER INFORMATION:   
Item 1.   Legal Proceedings      54   
Item 1A.   Risk Factors      54   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      54   
Item 3.   Defaults Upon Senior Securities      54   
Item 4.   Mine Safety Disclosures      54   
Item 5.   Other Information      54   
Item 6.   Exhibits      54   
SIGNATURES      55   


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,     March 31,  
     2014     2014  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $165,597 and $233,895, respectively)

   $ 165,518      $ 205,440   

Affiliate investments (Cost of $260,936 and $120,010, respectively)

     209,307        87,849   

Control investments (Cost of $30,832 and $29,632 respectively)

     19,320        21,104   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $457,365 and $383,537, respectively)

  394,145      314,393   

Cash and cash equivalents

  4,909      4,553   

Restricted cash and cash equivalents

  3,105      5,314   

Interest receivable

  1,690      1,289   

Due from custodian

  2,410      1,704   

Deferred financing costs

  4,931      2,355   

Other assets

  846      1,086   
  

 

 

   

 

 

 

TOTAL ASSETS

$ 412,036    $ 330,694   
  

 

 

   

 

 

 

LIABILITIES

Borrowings:

Line of credit at fair value (Cost of $95,800 and $61,250, respectively)

$ 95,800    $ 61,701   

Secured borrowing

  5,096      5,000   
  

 

 

   

 

 

 

Total borrowings

  100,896      66,701   

Mandatorily redeemable preferred stock, $0.001 par value per share, $25.00 liquidation preference per share; 3,610,000 and 1,610,000 shares authorized, respectively; 3,256,000 and 1,600,000 shares issued and outstanding, respectively

  81,400      40,000   

Accounts payable and accrued expenses

  800      665   

Fees due to Adviser(A)

  1,588      1,225   

Fee due to Administrator(A)

  226      224   

Other liabilities

  854      1,042   
  

 

 

   

 

 

 

TOTAL LIABILITIES

$ 185,764    $ 109,857   
  

 

 

   

 

 

 

Commitments and contingencies(B)

NET ASSETS

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

$ 26    $ 26   

Capital in excess of par value

  286,726      287,062   

Cumulative net unrealized depreciation of investments

  (63,220   (69,144

Cumulative net unrealized appreciation of other

  (74   (525

Net investment income in excess of distributions

  3,233      3,616   

Accumulated net realized loss

  (419   (198
  

 

 

   

 

 

 

TOTAL NET ASSETS

$ 226,272    $ 220,837   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

$ 8.55    $ 8.34   
  

 

 

   

 

 

 

 

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

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

 

2


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended December 31,     Nine Months Ended December 31,  
     2014     2013     2014     2013  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 3,969      $ 5,826      $ 13,720      $ 15,719   

Affiliate investments

     5,154        160        11,310        1,091   

Control investments

     608        1,606        1,673        5,669   

Cash and cash equivalents

     1        1        3        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

  9,732      7,593      26,706      22,481   

Other income

Non-Control/Non-Affiliate investments

  1,330      304      3,230      878   

Affiliate investments

  500      799      534      799   

Control investments

  —        —        —        3,295   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

  1,830      1,103      3,764      4,972   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

  11,562      8,696      30,470      27,453   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

Base management fee(A)

  1,927      1,515      5,337      4,625   

Loan servicing fee(A)

  1,295      1,089      3,588      3,230   

Incentive fee(A)

  1,460      1,100      3,726      2,822   

Administration fee(A)

  226      239      670      638   

Interest expense on borrowings

  1,042      395      2,500      1,469   

Dividends on mandatorily redeemable preferred stock

  1,085      713      2,510      2,138   

Amortization of deferred financing fees

  404      262      940      761   

Professional fees

  63      329      610      609   

Other general and administrative expenses

  383      523      1,130      1,355   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

  7,885      6,165      21,011      17,647   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

  (1,295   (1,089   (3,588   (3,230

Credit to fees from Adviser - other(A)

  (867   (782   (1,855   (1,627
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

  5,723      4,294      15,568      12,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

  5,839      4,402      14,902      14,663   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED (LOSS) GAIN

Net realized (loss) gain:

Non-Control/Non-Affiliate investments

  —        (11,361   —        (11,361

Affiliate investments

  —        (1,754   —        (1,754

Control investments

  (209   —        (221   24,804   

Other

  —        (29   —        (29
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized (loss) gain

  (209   (13,144   (221   11,660   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation):

Non-Control/Non-Affiliate investments

  3,731      (2,548   13,630      (10,926

Affiliate investments

  (1,772   4,651      (4,713   1,629   

Control investments

  —        (4,413   (2,993   (20,103

Other

  —        366      451      811   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation)

  1,959      (1,944   6,375      (28,589
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

  1,750      (15,088   6,154      (16,929
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

$ 7,589    $ (10,686 $ 21,056    $ (2,266
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

Net investment income

$ 0.22    $ 0.17    $ 0.56    $ 0.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

$ 0.29    $ (0.40 $ 0.80    $ (0.09
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared and paid

$ 0.23    $ 0.23    $ 0.59    $ 0.53   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

Basic and diluted

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

 

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

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

 

3


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended December 31,  
     2014     2013  

OPERATIONS

    

Net investment income

   $ 14,902      $ 14,663   

Net realized (loss) gain on investments

     (221     11,689   

Net realized loss on other

     —          (29

Net unrealized appreciation (depreciation) of investments

     5,924        (29,400

Net unrealized depreciation of other

     451        811   
  

 

 

   

 

 

 

Net increase (decrease) in net assets from operations

  21,056      (2,266
  

 

 

   

 

 

 

DISTRIBUTIONS TO COMMON STOCKHOLDERS

  (15,621   (14,032
  

 

 

   

 

 

 

TOTAL INCREASE (DECREASE) IN NET ASSETS

  5,435      (16,298

NET ASSETS, BEGINNING OF PERIOD

  220,837      240,963   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

$ 226,272    $ 224,665   
  

 

 

   

 

 

 

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

 

4


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended December 31,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase (decrease) in net assets resulting from operations

   $ 21,056      $ (2,266

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

    

Purchase of investments

     (79,329     (100,134

Principal repayments of investments

     5,579        46,634   

Increase in investment balance due to paid in kind interest

     (78     (58

Net proceeds from the sale of investments

     (221     31,602   

Net realized loss (gain) on investments

     221        (11,689

Net realized loss on other

     —          29   

Net unrealized (appreciation) depreciation of investments

     (5,924     29,400   

Net unrealized appreciation of other

     (451     (811

Amortization of deferred financing costs

     940        761   

Decrease (increase) in restricted cash

     2,209        (4,750

Increase in interest receivable

     (401     (11

(Increase) decrease in due from custodian

     (706     330   

Decrease in other assets

     240        340   

Increase (decrease) in accounts payable and accrued expenses

     64        (160

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

     363        (1,044

Increase in administration fee due to Administrator(A)

     2        18   

(Decrease) increase in other liabilities

     (188     461   
  

 

 

   

 

 

 

Net cash used in operating activities

  (56,624   (11,348
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from short-term loans

  —        56,515   

Repayments on short-term loans

  —        (106,030

Proceeds from line of credit

  90,550      108,500   

Repayments on line of credit

  (56,000   (103,300

Proceeds from secured borrowing

  96      —     

Purchase of derivative

  —        (75

Proceeds from issuance of preferred stock

  41,400      —     

Deferred financing costs

  (3,445   (1,100

Distributions paid to common stockholders

  (15,621   (14,032
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  56,980      (59,522
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  356      (70,870

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

  4,553      85,904   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

$ 4,909    $ 15,034   
  

 

 

   

 

 

 

 

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

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

 

5


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

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

   

Auto Safety House, LLC

  Automobile  

Line of Credit, $1,000 available (7.0%, Due 10/2019)(I)(K)

  $ —        $ —        $ —     
    Senior Term Debt (7.0%, Due 10/2019)(I)(K)     5,000        5,000        4,863   
       

 

 

   

 

 

 
  5,000      4,863   

Cavert II Holding Corp.

Containers, Packaging, and Glass

Preferred Stock (18,446 shares)(C)(F)(L)   1,845      3,203   
       

 

 

   

 

 

 
  1,845      3,203   

Country Club Enterprises, LLC

Automobile

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

  4,000      4,000      4,000   
Preferred Stock (7,079,792 shares)(C)(F)(L)   7,725      2,104   
Guaranty ($2,000)(D)
Guaranty ($670)(D)
       

 

 

   

 

 

 
  11,725      6,104   

Drew Foam Company, Inc.

Chemicals, Plastics, and Rubber

Senior Term Debt (13.5%, Due 8/2017)(L)   10,913      10,913      10,913   
Preferred Stock (34,045 shares)(C)(F)(L)   3,375      3,245   
Common Stock (5,372 shares)(C)(F)(L)   63      —     
       

 

 

   

 

 

 
  14,351      14,158   

Frontier Packaging, Inc.

Containers, Packaging, and Glass

Senior Term Debt (12.0%, Due 12/2017)(L)   12,500      12,500      12,500   
Preferred Stock (1,373 shares)(C)(F)(L)   1,373      1,613   
Common Stock (152 shares)(C)(F)(L)   152      850   
       

 

 

   

 

 

 
  14,025      14,963   

Funko, LLC(M)

Personal and Non-Durable Consumer Products (Manufacturing Only)

Senior Subordinated Term Debt (9.5%, Due 5/2019)(I)(J)

  7,500      7,500      7,500   

Senior Subordinated Term Debt (9.5%, Due 5/2019)(I)(J)

  2,000      2,000      2,000   
Preferred Stock (1,305 shares)(C)(F)(L)   1,305      9,511   
       

 

 

   

 

 

 
  10,805      19,011   

Ginsey Home Solutions, Inc.

Home and Office Furnishings, Housewares, and Durable Consumer Products

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

  13,300      13,300      13,300   
Preferred Stock (18,898 shares)(C)(F)(L)   9,583      3,109   
Common Stock (63,747 shares)(C)(F)(L)   8      —     
       

 

 

   

 

 

 
  22,891      16,409   

Jackrabbit, Inc.

Farming and Agriculture Senior Term Debt (13.5%, Due 4/2018)(L)   11,000      11,000      11,000   
Preferred Stock (3,556 shares)(C)(F)(L)   3,556      4,063   
Common Stock (548 shares)(C)(F)(L)   94      3,803   
       

 

 

   

 

 

 
  14,650      18,866   

Mathey Investments, Inc.

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

Senior Term Debt (10.0%, Due 3/2016)(L)   1,375      1,375      1,375   
Senior Term Debt (12.0%, Due 3/2016)(L)   3,727      3,727      3,727   
Senior Term Debt (12.5%, Due 3/2016)(E)(I)(L)   3,500      3,500      3,500   
Common Stock (29,102 shares)(C)(F)(L)   777      7,644   
       

 

 

   

 

 

 
  9,379      16,246   

Mitchell Rubber Products, Inc.

Chemicals, Plastics, and Rubber

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

  13,560      13,560      10,848   

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

  1,500      1,500      1,200   
Preferred Stock (27,900 shares)(C)(F)(L)   2,790      —     
Common Stock (27,900 shares)(C)(F)(L)   28      —     
       

 

 

   

 

 

 
  17,878      12,048   

Quench Holdings Corp.

Home and Office Furnishings, Housewares, and Durable Consumer Products

Common Stock (4,770,392 shares)(C)(F)(L)   3,397      4,753   
       

 

 

   

 

 

 
  3,397      4,753   

SBS, Industries, LLC

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

Senior Term Debt (14.0%, Due 8/2016)(L)   11,355      11,355      11,355   
Preferred Stock (19,935 shares)(C)(F)(L)   1,994      2,577   
Common Stock (221,500 shares)(C)(F)(L)   221      381   
       

 

 

   

 

 

 
  13,570      14,313   

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

 

6


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

Schylling Investments, LLC

 

Leisure, Amusement, Motion Pictures, Entertainment

 

Senior Term Debt (13.0%, Due 8/2018)(L)

  $ 13,081      $ 13,081      $ 13,081   
   

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

      4,000        —     
       

 

 

   

 

 

 
  17,081      13,081   

Star Seed, Inc.

Farming and Agriculture

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

  7,500      7,500      7,500   

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

  1,499      —     

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

  1      —     
       

 

 

   

 

 

 
  9,000      7,500   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 42.0% of total investments at fair value)

  

$ 165,597    $ 165,518   
       

 

 

   

 

 

 

AFFILIATE INVESTMENTS(O):

Acme Cryogenics, Inc.

Chemicals, Plastics, and Rubber

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

$ 14,500    $ 14,500    $ 14,500   

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

  7,956      8,442   

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

  1,197      —     

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

  25      —     
       

 

 

   

 

 

 
  23,678      22,942   

Alloy Die Casting
Corp.(M)

Diversified/Conglomerate Manufacturing

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

  12,215      12,215      12,093   

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

  4,064      3,699   

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

  41      —     
       

 

 

   

 

 

 
  16,320      15,792   

Behrens Manufacturing,
LLC(M)

Diversified/Conglomerate Manufacturing

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

  9,975      9,975      9,975   
Preferred Stock (2,923 shares) (C)(F)(L)   2,922      2,808   
       

 

 

   

 

 

 
  12,897      12,783   

B-Dry, LLC

Personal, Food and Miscellaneous Services

Line of Credit, $0 available (6.5% (0.8% Unused Fee), Due 5/2015)(L)

  1,250      1,250      813   

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

  6,433      6,443      4,188   

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

  840      840      546   

Preferred Stock (2,250 shares)(C)(F)(L)

  2,250      —     

Common Stock (2,250 shares)(C)(F)(L)

  —        —     

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

  300      —     
       

 

 

   

 

 

 
  11,083      5,547   

B+T Group Acquisition Inc.(M)

Telecommunications

Line of Credit, $700 available (1.0% Unused Fee), Due 6/2015)(J)

  700      700      700   

Senior Term Debt (13.0%, Due 12/2019)(J)

  14,000      14,000      14,000   

Convertible Preferred Stock (12,841 shares)(C)(F)(J)

  4,197      4,197   
       

 

 

   

 

 

 
  18,897      18,897   

Cambridge Sound Management, LLC

Home and office Furnishings, Housewares and Durable Consumer Products

Line of Credit, $1,000 available (13.0% (1.0% Unused Fee), Due 9/2015)(L)

  —        —        —     

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

  15,000      15,000      15,000   

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

  4,500      7,556   
       

 

 

   

 

 

 
  19,500      22,556   

Channel Technologies Group, LLC

Diversified/Conglomerate Manufacturing

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

  2,864      1,278   

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

  —        —     
       

 

 

   

 

 

 
  2,864      1,278   

Danco Acquisition Corp.

Diversified/Conglomerate Manufacturing

Line of Credit, $550 available (4.0% (0.5% Unused Fee), Due 8/2015)(L)

  4,000      4,000      349   

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

  2,575      2,575      225   

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

  8,795      8,795      767   

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

  1,150      1,150      100   

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

  2,500      —     

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

  3      —     
       

 

 

   

 

 

 
  19,023      1,441   

 

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

 

7


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

  

Investment(B)

  Principal     Cost     Fair Value  

Edge Adhesives Holdings, Inc.(M)

 

Diversified/Conglomerate

  

Line of Credit, $850 available (10.5% (1.0% Unused Fee), Due 8/2015)(K)

  $ 650      $ 650      $ 647   
    

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

    9,300        9,300        9,277   
    

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

    2,400        2,400        2,397   
    

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

      3,474        3,920   
        

 

 

   

 

 

 
  15,824      16,241   

Head Country Food Products,

Beverage, Food and Tobacco

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

  9,050      9,050      9,050   

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

  4,000      2,880   
        

 

 

   

 

 

 
  13,050      11,930   

Meridian Rack &
Pinion, Inc. (M)

Automobile

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

  9,660      9,660      9,600   

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

  3,381      2,983   
        

 

 

   

 

 

 
  13,041      12,583   

NDLI Inc.

Cargo Transport

Line of Credit, $0 available (10.5% (0.5% Unused Fee), Due 1/2016)(K)

  1,925      1,925      1,448   

Senior Term Debt
(11.0%, Due 1/2018)(K)

  7,227      7,227      5,438   

Senior Term Debt
(10.5%, Due 1/2018)(K)

  3,650      3,650      2,738   

Senior Term Debt
(10.5%, Due 1/2018)(E)(K)

  3,650      3,650      2,756   

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

  3,600      —     

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

  —        —     
        

 

 

   

 

 

 
  20,052      12,380   
Precision Southeast, Inc.

Diversified/Conglomerate Manufacturing

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

  5,617      5,617      5,617   

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

  1,909      —     

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

  91      —     
        

 

 

   

 

 

 
  7,617      5,617   

Old World Christmas, Inc.

Home and Office Furnishings, Housewares, and Durable Consumer Products

Line of Credit, $570 available (10% (1.0% Unused Fee), Due 4/2015)(J)

  2,430      2,430      2,430   

Senior Term Debt
(13.3%, Due 10/2019)(J)

  15,770      15,770      15,770   

Preferred Stock (6,180 shares)(C)(F)(J)

  6,180      6,180   
        

 

 

   

 

 

 
  24,380      24,380   

SOG Specialty K&T, LLC

Leisure, Amusement, Motion Pictures, Entertainment

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

  6,200      6,200      6,200   

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

  12,200      12,200      12,200   

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

  9,749      6,540   
        

 

 

   

 

 

 
  28,149      24,940   

Tread Corp.

Oil and Gas

Line of Credit, $1,786 available (12.5%, Due 2/2015)(G)(I)(L)

  1,464      1,464      —     

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

  5,000      5,000      —     

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

  2,750      2,750      —     

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

  1,000      1,000      —     

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

  510      510      —     

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

  3,333      —     

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

  501      —     

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

  3      —     
        

 

 

   

 

 

 
  14,561      —     
        

 

 

   

 

 

 

Total Affiliate Investments (represents 53.1% of total investments at fair value)

  

$ 260,936    $ 209,307   
        

 

 

   

 

 

 

CONTROL INVESTMENTS(P):

Galaxy Tool Holding Corp.

Aerospace and Defense

Line of Credit, $450 available (10.0%, Due 9/2015)(L)

$ 2,050    $ 2,050    $ 2,050   

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

  15,520      15,520      15,520   

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

  11,464      —     

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

  48      —     
        

 

 

   

 

 

 
  29,082      17,570   

Roanoke Industries Corp.

Buildings and Real Estate

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

  1,650      1,650      1,650   

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

  100      100   
        

 

 

   

 

 

 
  1,750      1,750   
        

 

 

   

 

 

 

Total Control Investments (represents 4.9% of total investments at fair value)

  

$ 30,832    $ 19,320   
        

 

 

   

 

 

 

TOTAL INVESTMENTS

$ 457,365    $ 394,145   
        

 

 

   

 

 

 

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

 

8


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

(A)  Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $371.0 million at fair value, are pledged as collateral to our Credit Facility as described further in Note 5—Borrowings. Additionally, all of our investments are considered non-qualifying assets under Section 55 of the Investment Company Act of 1940, as amended, (the “1940 Act”) as of December 31, 2014.
(B)  Percentages represent the weighted average cash interest rates in effect at December 31, 2014, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR”). If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates.
(C)  Security is non-income producing.
(D)  Refer to Note 10—Commitments and Contingencies for additional information regarding these guaranties.
(E)  Last Out Tranche (“LOT”) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior debt but before the senior subordinated debt.
(F)  Where applicable, aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(G)  Debt security is on non-accrual status.
(H)  $5.1 million of the debt security participated to a third party but accounted for as collateral for a secured borrowing for accounting principles generally accepted in the U.S. (“GAAP”) purposes as of December 31, 2014.
(I)  Debt security has a fixed interest rate.
(J)  New portfolio investment valued at cost, as it was determined that the price paid during the three months ended December 31, 2014 best represents fair value as of December 31, 2014.
(K)  Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”).
(L)  Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
(M)  One of our affiliated funds, Gladstone Capital Corporation (“Gladstone Capital”), co-invested with us in this portfolio company pursuant to an exemptive order granted by the Securities and Exchange Commission (“SEC”).
(N)  Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(O)  Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(P)  Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

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

 

9


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

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

  

Acme Cryogenics, Inc.

 

Chemicals, Plastics, and Rubber

 

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

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

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

      6,984        11,276   
   

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

      1,045        —     
   

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

      25        —     
         
       

 

 

   

 

 

 
  22,554      25,776   

Alloy Die Casting
Corp.(M)

Diversified/Conglomerate Manufacturing

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

  12,215      12,215      12,261   

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

  4,064      1,948   

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

  41      —     
       

 

 

   

 

 

 
  16,320      14,209   

Auto Safety House, LLC

Automobile

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

  5,000      5,000      4,925   

Guaranty ($500)(D)

Guaranty ($250)(D)

       

 

 

   

 

 

 
  5,000      4,925   

B-Dry, LLC

Personal, Food and Miscellaneous Services

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

  750      750      566   

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

  6,433      6,443      4,865   

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

  2,840      2,840      2,144   

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

  300      —     
       

 

 

   

 

 

 
  10,333      7,575   

Cavert II Holding Corp.

Containers, Packaging, and Glass

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

  1,845      3,023   
       

 

 

   

 

 

 
  1,845      3,023   

Country Club Enterprises, LLC

Automobile

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

  4,000      4,000      4,000   

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

  7,725      3,670   

Guaranty ($2,000)(D)

Guaranty ($878)(D)

       

 

 

   

 

 

 
  11,725      7,670   

Drew Foam
Company, Inc.

Chemicals, Plastics, and Rubber

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

  10,913      10,913      10,913   

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

  3,375      1,351   

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

  63      —     
       

 

 

   

 

 

 
  14,351      12,264   

Frontier Packaging, Inc.

Containers, Packaging, and Glass

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

  12,500      12,500      12,500   

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

  1,373      1,522   

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

  152      843   
       

 

 

   

 

 

 
  14,025      14,865   

Funko, LLC(M)

Personal and Non-Durable Consumer Products (Manufacturing Only)

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

  7,587      7,587      7,729   

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

  1,305      2,276   
       

 

 

   

 

 

 
  8,892      10,005   

Ginsey Home Solutions, Inc.

Home and Office Furnishings, Housewares, and Durable Consumer Products

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

  13,050      13,050      13,050   

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

  9,393      3,082   

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

  8      —     
       

 

 

   

 

 

 
  22,451      16,132   

Jackrabbit, Inc.

Farming and Agriculture

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

  —        —        —     

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

  11,000      11,000      11,000   

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

  3,556      1,963   

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

  94      —     
       

 

 

   

 

 

 
  14,650      12,963   

Mathey Investments, Inc.

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

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

  1,375      1,375      1,375   

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

  3,727      3,727      3,727   

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

  3,500      3,500      3,500   

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

  777      4,895   
       

 

 

   

 

 

 
  9,379      13,497   

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

 

10


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

Mitchell Rubber Products, Inc.

 

Chemicals, Plastics, and Rubber

 

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

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

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

      2,790        1,086   
   

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

      28        —     
       

 

 

   

 

 

 
  16,378      14,714   

Noble Logistics, Inc.

Cargo Transport

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

  800      800      204   

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

  7,227      7,227      1,842   

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

  3,650      3,650      931   

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

  3,650      3,650      931   
       

 

 

   

 

 

 
  15,327      3,908   

Precision Southeast, Inc.

Diversified/Conglomerate
Manufacturing

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

  5,617      5,617      5,617   

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

  1,909      —     

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

  91      —     
       

 

 

   

 

 

 
  7,617      5,617   

Quench Holdings Corp.

Home and Office Furnishings, Housewares, and Durable Consumer Products

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

  3,397      5,056   
       

 

 

   

 

 

 
  3,397      5,056   

SBS, Industries, LLC

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

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

  11,355      11,355      11,355   

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

  1,994      1,064   

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

  221      —     
       

 

 

   

 

 

 
  13,570      12,419   

Schylling Investments, LLC

Leisure, Amusement, Motion Pictures, Entertainment

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

  13,081      13,081      13,228   

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

  4,000      —     
       

 

 

   

 

 

 
  17,081      13,228   

Star Seed, Inc.

Farming and Agriculture

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

  7,500      7,500      7,594   

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

  1,499      —     

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

  1      —     
       

 

 

   

 

 

 
  9,000      7,594   
       

 

 

   

 

 

 

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

  

$ 233,895    $ 205,440   
       

 

 

   

 

 

 

AFFILIATE INVESTMENTS(O):

Behrens Manufacturing, LLC(M)

Diversified/Conglomerate
Manufacturing

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

$ 9,975    $ 9,975    $ 9,975   
Preferred Stock (2,923 shares) (C)(F)(L)   2,922      2,754   
       

 

 

   

 

 

 
  12,897      12,729   

Channel Technologies Group, LLC

Diversified/Conglomerate
Manufacturing

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

 

 

   

 

 

 
  2,864      3,122   

Danco Acquisition Corp.

Diversified/Conglomerate
Manufacturing

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

  3,450      3,450      690   

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

  2,575      2,575      515   

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

  8,795      8,795      1,759   

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

  1,150      1,150      236   

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

  2,500      —     

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

  3      —     
       

 

 

   

 

 

 
  18,473      3,200   

Edge Adhesives Holdings, Inc.(M)

Diversified/Conglomerate
Manufacturing

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

  795      795      795   

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

  9,300      9,300      9,300   

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

  2,400      2,400      2,400   

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

  3,474      3,474   
       

 

 

   

 

 

 
  15,969      15,969   

Head Country Food Products, Inc.

Beverage, Food and Tobacco

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

  —        —        —     

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

  9,050      9,050      9,050   

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

  4,000      4,000   
       

 

 

   

 

 

 
  13,050      13,050   

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

 

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GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

MARCH 31, 2014

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

Meridian Rack & Pinion, Inc. (M)

  

Automobile

  

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

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

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

        3,381         3,468   
           

 

 

    

 

 

 
  13,041      13,140   

SOG Specialty K&T, LLC

Leisure, Amusement, Motion Pictures, Entertainment

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

  6,200      6,200      6,200   

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

  12,199      12,199      12,199   

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

  9,749      8,240   
           

 

 

    

 

 

 
  28,148      26,639   

Tread Corp.

Oil and Gas

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

  2,471      2,471      —     

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

  5,000      5,000      —     

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

  2,750      2,750      —     

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

  1,000      1,000      —     

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

  510      510      —     

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

  3,333      —     

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

  501      —     

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

  3      —     
           

 

 

    

 

 

 
  15,568      —     
           

 

 

    

 

 

 

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

  

$ 120,010    $ 87,849   
           

 

 

    

 

 

 

CONTROL INVESTMENTS(P):

Galaxy Tool Holding Corp.

Aerospace and Defense

Senior Subordinated Term Debt (13.5%, Due 8/2017)(L) $ 15,520    $ 15,520    $ 15,520   
Preferred Stock (6,039,387 shares)(C)(F)(L)   11,464      2,992   
Common Stock (88,843 shares)(C)(F)(L)   48      —     
           

 

 

    

 

 

 
  27,032      18,512   

NDLI Acquisition Inc.

Cargo Transport

Preferred Stock (2,600 shares)(C)(F)(L)   2,600      2,592   
Common Stock (545 shares)(C)(F)(L)   —        —     
           

 

 

    

 

 

 
  2,600      2,592   
           

 

 

    

 

 

 

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

  

$ 29,632    $ 21,104   
           

 

 

    

 

 

 

TOTAL INVESTMENTS(Q)

  

$ 383,537    $ 314,393   
           

 

 

    

 

 

 

 

(A)  Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $388.6 million at fair value, are pledged as collateral to our Credit Facility as described further in Note 5—Borrowings. Additionally, all of our investments are considered non-qualifying assets under Section 55 of the 1940 Act as of March 31, 2014.
(B)  Percentages represent the weighted average cash interest rates in effect at March 31, 2014, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day LIBOR. If applicable, PIK interest rates are noted separately from the cash interest rates.
(C)  Security is non-income producing.
(D)  Refer to Note 10—Commitments and Contingencies for additional information regarding these guaranties.
(E)  Last Out Tranche (“LOT”) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior debt but before the senior subordinated debt.
(F)  Where applicable, aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(G)  Debt security is on non-accrual status.
(H)  $5.0 million of the debt security participated to a third party but accounted for as collateral for a secured borrowing for GAAP purposes as of March 31, 2014.
(I)  Debt security has a fixed interest rate.
(J)  New portfolio investment valued at cost, as it was determined that the price paid during the three months ended March 31, 2014 best represents fair value as of March 31, 2014.
(K)  Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”)
(L)  Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
(M)  One of our affiliated funds, Gladstone Capital Corporation (“Gladstone Capital”), co-invested with us in this portfolio company pursuant to an exemptive order granted by the Securities and Exchange Commission (“SEC”).
(N)  Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(O)  Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(P)  Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(Q)  Cumulative gross unrealized depreciation for federal income tax purposes is $83,197; cumulative gross unrealized appreciation for federal income tax purposes is $13,913. Cumulative net unrealized depreciation is $69,284, based on a tax cost of $383,677.

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

 

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GLADSTONE INVESTMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

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

NOTE 1. ORGANIZATION

Gladstone Investment Corporation (“Gladstone Investment”) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005, and completed an initial public offering on June 22, 2005. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Investment and its consolidated subsidiaries. We are an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Debt investments primarily come in the form of three types of loans: senior term loans, senior subordinated loans and junior subordinated debt. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. Our investment objectives are: (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that we anticipate will grow over time, and (b) to provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. We aim to maintain a portfolio allocation of approximately 80.0% debt investments and 20.0% equity investments, at cost.

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

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

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

Revisions

Certain amounts in the prior year’s consolidated financial statements have been revised to correct the presentation for the three and nine months ended December 31, 2013 with no effect on our financial condition or results of operations. Certain amounts that were revised relate to our change in the classification of certain of our investments among control, affiliate and non-control/non-affiliate investments. The general change in the definitions from prior reported periods to the three and nine months ended December 31, 2013, relate to the use of voting equity securities as the primary determinate of classification compared to the use of both voting and non-voting equity securities in prior periods.

 

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Other revisions relate to the net presentation of certain fees in our results of operations. The Adviser services, administers and collects on the loans held by Business Investment, in return for which the Adviser receives a 2.0% annual fee from Business Investment. All loan servicing fees are voluntarily and irrevocably credited back to us by the Adviser. Previously, we incorrectly presented the loan servicing fee on a net basis, which is zero because it is 100.0% credited back to us. We have revised our fee presentation related to these loan servicing fees to reflect the gross fee and related gross unconditional, non-contractual and irrevocable credit amounts. Management evaluated these errors in presentation and concluded they were not material to the previously issued financial statements for the three and nine months ended December 31, 2013. The impact of the revisions are shown in the table below:

 

     Three Months Ended December 31,
2013
     Nine Months Ended December 31,
2013
 
     As Previously
Reported
     As Revised      As Previously
Reported
     As Revised  

Interest income

           

Non-Control/Non-Affiliate investments

   $ 1,625       $ 5,826       $ 2,978       $ 15,719   

Affiliate investments

     708         160         2,923         1,091   

Control investments

     5,259         1,606         16,578         5,669   

Cash and cash equivalents

     1         1         2         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

  7,593      7,593      22,481      22,481   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other income

Non-Control/Non-Affiliate investments

  5      304      5      878   

Affiliate investments

  1,000      799      1,333      799   

Control investments

  98           3,634      3,295   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

  1,103      1,103      4,972      4,972   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses

Aggregate expenses

  5,076      5,076      14,417      14,417   

Loan servicing fee

  —        1,089      —        3,230   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses, before credits from Adviser

  5,076      6,165      14,417      17,647   

Credit to base management fee - loan servicing fee

       (1,089   —        (3,230

Credit to fees from Adviser - other

  (782   (782   (1,627   (1,627
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses, net of credits to fees

  4,294      4,294      12,790      12,790   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized (loss) gain

Non-Control/Non-Affiliate investments

          (11,361           (11,361

Affiliate investments

  (1,754   (1,754   (1,754   (1,754

Control investments

  (11,361           13,443      24,804   

Other

  (29   (29   (29   (29
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net unrealized (loss) gain

  (13,144    (13,144    11,660      11,660   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net unrealized (depreciation) appreciation

Non-Control/Non-Affiliate investments

  (3,694   (2,548   (6,810   (10,926

Affiliate investments

  983      4,651      3,432      1,629   

Control investments

  401      (4,413   (26,022   (20,103

Other

  366      366      811      811   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net unrealized depreciation

$ (1,944 $ (1,944 $ (28,589 $ (28,589
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment Valuation Policy

Accounting Recognition

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

Board Responsibility

In accordance with the 1940 Act, our board of directors (our “Board of Directors”) has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our established investment valuation policy (the “Policy”). Our

 

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Board of Directors reviews valuation recommendations that are provided by professionals of the Adviser and Administrator with oversight and direction from the valuation officer (the “Valuation Team”). There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the valuation officer, uses the Policy and each quarter our Board of Directors reviews the Policy to determine if changes thereto are advisable and also reviews whether the Valuation Team has applied the Policy consistently.

Use of Third Party Valuation Firms

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

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

Valuation Techniques

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

 

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

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

 

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

In addition to the above valuation techniques, the Valuation Team may also consider other factors when determining fair values of our investments, including, but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates. If applicable, new and follow-on debt and equity investments made during the most recently completed quarter are generally valued at original cost basis. Fair value measurements of our investments may involve subjective judgments and estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are

 

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generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.

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

Interest Income Recognition

Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid, and, in management’s judgment, are likely to remain current, or due to a restructuring, the interest income is deemed to be collectible. As of December 31, 2014, our loans to Tread Corp. (“Tread”) were on non-accrual status, with an aggregate debt cost basis of $10.7 million, or 3.2% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0. As of March 31, 2014, our loans to Tread were on non-accrual status, with an aggregate debt cost basis of $11.7 million, or 4.2% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0.

PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income over the life of the obligation. As of December 31, 2014, we did not have any loans with a PIK interest component and as of March 31, 2014, we had one loan with a PIK interest component. During the three and nine months ended December 31, 2014, we recorded PIK income of $20 and $78, respectively. During the three and nine months ended December 31, 2013, we recorded PIK income of $29 and $68, respectively. We collected $0.2 million PIK interest in cash during the three and nine months ended December 31, 2014 and $0 PIK interest in cash during the three and nine months ended December 31, 2013.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company. We received an aggregate of $0.5 million and $1.0 million of success fees for the three and nine months ended December 31, 2014, respectively, which resulted from prepaid success fees of $0.5 million from SOG Specialty K&T, LLC (“SOG”) in December 2014, $0.2 million from Auto Safety House, LLC in September 2014, $0.2 million from Frontier Packaging, Inc. in September 2014, and $0.1 million from Mathey Investments, Inc. (“Mathey”) in September 2014. We received an aggregate of $1.1 million and $3.4 million of success fees during the three and nine months ended December 31, 2013, respectively, which resulted from $0.8 million related to the Channel Technologies Group, LLC debt repayment in October 2013 and $0.2 million related to the Cavert II Holding Corp. debt repayment in December 2013.

We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration. During the three and nine months ended December 31, 2014, we recorded $1.4 million and $2.7 million of dividend income from Mathey, respectively. During the three and nine months ended December 31, 2013, we recorded $1.4 million in dividend income related to the exit of Venyu Solutions, Inc. (“Venyu”).

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

Recent Accounting Pronouncements

In June 2013, the FASB issued ASU 2013-08, “Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so there was no impact from adopting this standard on our financial position or results of operations. We adopted ASU 2013-08 beginning with our quarter ended June 30, 2014, and have increased our disclosure requirements as necessary.

In August 2014, the FASB issued Accounting Standards Update 2014-15 (“ASU 2014-15), “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. Since this guidance is primarily around certain disclosures to the financial statements, we anticipate no impact on our financial position, results of operations or cash

 

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flows from adopting this standard. We are currently assessing the additional disclosure requirements, if any, of ASU 2014-15. ASU 2014-15 is effective for the annual period ending after December 31, 2016 and for annual periods and interim periods thereafter, with early adoption permitted.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. We are currently assessing the impact of ASU 2014-09 and anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those years. Early adoption is not permitted.

NOTE 3. INVESTMENTS

Fair Value

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

 

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

 

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

 

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

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

 

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The following table presents our portfolio investments carried at fair value as of December 31 and March 31, 2014, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type and all valued at Level 3 on the ASC 820 fair value hierarchy:

 

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

Non-Control/Non-Affiliate Investments

     

Senior debt

   $ 79,814       $ 109,479   

Senior subordinated debt

     38,848         52,907   

Preferred equity

     29,424         32,259   

Common equity/equivalents

     17,432         10,795   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

  165,518      205,440   

Affiliate Investments

Senior debt

  141,926      60,391   

Senior subordinated debt

  16,897      2,400   

Preferred equity

  50,484      25,058   
  

 

 

    

 

 

 

Total Affiliate Investments

  209,307      87,849   

Control Investments

Senior debt

  3,700      —     

Senior subordinated debt

  15,520      15,520   

Preferred equity

  —        5,584   

Common equity/equivalents

  100      —     
  

 

 

    

 

 

 

Total Control Investments

  19,320      21,104   
  

 

 

    

 

 

 

Total Investments at fair value using
Level 3 inputs

$ 394,145    $ 314,393   
  

 

 

    

 

 

 

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

 

     Quantitative Information about Level 3 Fair Value Measurements
     Fair Value as
of December 31,
2014
     Fair Value as
of March 31,
2014
     Valuation
Technique/
Methodology
   Unobservable
Input
  

Range / Weighted
Average as of
December 31, 2014

  

Range / Weighted
Average as of
March 31, 2014

Senior debt

   $ 176,581       $ 115,081       TEV    EBITDA
multiples
   3.6x – 7.3x / 5.4x    4.6x – 7.3x / 5.6x
            EBITDA    $327 – $5,911 / $3,270    $1,558 – $6,230 / $3,609
     48,859         54,789       Yield Analysis    Discount Rate    7.9% – 22.2% / 15.5%    7.6% – 30.0% / 19.2%

Senior subordinated debt

     47,320         49,470       TEV    EBITDA
multiples
   4.2x – 7.1x / 5.8x    4.1x – 7.3x / 5.0x
            EBITDA    $1,280 – $5,424 / $3,221    $36 – $6,156 / $4,159
     23,945         21,357       Yield Analysis    Discount Rate    9.3% – 27.2% / 19.7%    12.8% – 12.8% / 12.8%

Preferred equity

     79,908         62,901       TEV    EBITDA
multiples
   3.6x – 8.8x / 5.9x    3.5x – 8.5x / 5.1x
            EBITDA    $327 – $19,240 / $3,641    $36 – $10,621 / $4,266

Common equity/equivalents

     17,532         10,795       TEV    EBITDA
multiples
   3.6x – 18.0x / 11.5x    3.4x – 16.0x / 10.5x
            EBITDA    $327 – $9,291 / $6,040    $36 – $10,621 / $6,008
  

 

 

    

 

 

             

Total

$ 394,145    $ 314,393   
  

 

 

    

 

 

             

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

 

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The following tables provide the changes in fair value, broken out by security type, during the three and nine months ended December 31, 2014 and 2013 for all of our investments.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

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

FISCAL YEAR TO DATE 2015:

          

Three months ended December 31, 2014:

          

Fair value as of September 30, 2014

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

Total (losses) gains:

          

Net realized loss(A)(D)

     —          —          (208     (1     (209

Net unrealized (depreciation) appreciation(B)

     (1,002     (773     4,082        (348     1,959   

New investments, repayments and settlements(C):

          

Issuances / Originations

     36,541        2,894        10,627        —          50,062   

Settlements / Repayments

     (2,447     (2,330     —          —          (4,777

Sales(D)

     —          —          208        1        209   

Transfers(E)

     (350     —          2,000        (1,650     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2014

$ 225,440    $ 71,265    $ 79,908    $ 17,532    $ 394,145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended December 31, 2014:

Fair value as of March 31, 2014

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

Total (losses) gains:

Net realized loss(A)(D)

  —        —        (220   (1   (221

Net unrealized appreciation (depreciation)(B)

  3,939      (2,219   (2,281   6,485      5,924   

New investments, repayments and settlements(C):

Issuances / Originations

  54,428      5,728      17,349      1,902      79,407   

Settlements / Repayments

  (2,447   (3,071   (61   —        (5,579

Sales(D)

  —        —        220      1      221   

Transfers(E)

  (350   —        2,000      (1,650   —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2014

$ 225,440    $ 71,265    $ 79,908    $ 17,532    $ 394,145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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FISCAL YEAR TO DATE 2014:    Senior
Debt
    Senior
Subordinated
Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Three months ended December 31, 2013:

          

Fair value as of September 30, 2013

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

Total (losses) gains:

          

Net realized (loss) gain(A)(D)

     (2,856     (6,050     (4,233     24        (13,115

Net unrealized appreciation (depreciation)(B)

     973        122        (10,060     (6,495     (15,460

Reversal of previously-recorded depreciation upon realization(B)

     2,272        5,875        4,979        24        13,150   

New investments, repayments and settlements(C):

          

Issuances / Originations

     32,131        309        11,689        44        44,173   

Settlements / Repayments

     (17,893     (6,541     —          —          (24,434

Sales(D)

     —          —          (747     (52     (799

Transfers(F)

     —          —          (2,950     2,950        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2013

$ 149,495    $ 68,455    $ 61,187    $ 11,590    $ 290,727   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended December 31, 2013:

Fair value as of March 31, 2013

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

Total (losses) gains:

Net realized (loss) gain(A)(D)

  (2,856   (6,050   20,571      24      11,689   

Net unrealized depreciation(B)

  (2,433   (979   (16,640   (5,126   (25,178

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

  2,274      5,875      (12,395   24      (4,222

New investments, repayments and settlements(C):

Issuances / Originations

  68,821      9,239      21,994      138      100,192   

Settlements / Repayments

  (20,193   (26,441   —        —        (46,634

Sales(D)

  —        —        (31,550   (52   (31,602

Transfers(F)

  —        —        (2,950   2,950      —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2013

$ 149,495    $ 68,455    $ 61,187    $ 11,590    $ 290,727   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)  Included in net realized gain (loss) on investments on our accompanying Condensed Consolidated Statements of Operations for the respective periods ended December 31, 2014 and 2013.
(B)  Included in net unrealized appreciation (depreciation) of investments on our accompanying Condensed Consolidated Statements of Operations for the periods ended December 31, 2014 and 2013.
(C)  Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, PIK and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments.
(D)  Included in Net realized gains (losses) and Sales are post-closing adjustments recorded in the current period related to exits from prior periods.
(E)  Transfers represent $2.0 million of senior term debt of B-Dry, LLC (“B-Dry”) and $1.7 million of common equity of Roanoke Industries Corp. (“Roanoke”), at cost, as of December 31, 2014, which was converted into preferred equity and senior term debt during the quarter ended December 31, 2014, respectively.
(F)  Transfers represent $3.0 million of preferred equity of Quench Holding Corp. (“Quench”), at cost, as of December 31, 2013, which was converted into common equity during the quarter ended December 31, 2013.

Investment Activity

During the nine months ended December 31, 2014, the following significant transactions occurred:

 

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

 

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

 

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

 

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

 

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    In December 2014, we invested $19.6 million in B+T Group Acquisition Inc. (“B+T”) through a combination of debt and equity. B+T, headquartered in Tulsa, Oklahoma, is a full-service provider of structural engineering, construction, and technical services to the wireless tower industry for tower upgrades and modifications. Gladstone Capital Corporation (“Gladstone Capital”), an affiliated fund, also participated as a co-investor by providing $8.4 million of debt and equity financing at the same price and terms as our investment.

 

    In December 2014, B-Dry, LLC was restructured, resulting in its $2.0 million of senior term debt being converted into preferred equity.

Investment Concentrations

As of December 31, 2014, our investment portfolio consisted of investments in 32 portfolio companies located in 14 states across 16 different industries with an aggregate fair value of $394.1 million, of which our investments in SOG, Old World, and Acme Cryogenics, Inc., our three largest portfolio investments at fair value, collectively comprised $72.3 million, or 18.3%, of our total investment portfolio at fair value. The following table summarizes our investments by security type as of December 31 and March 31, 2014:

 

     December 31, 2014     March 31, 2014  
     Cost     Fair Value     Cost     Fair Value  

Senior debt

   $ 247,924         54.2   $ 225,440         57.2   $ 196,293         51.2   $ 169,870         54.0

Senior subordinated debt

     85,004         18.6        71,265         18.1        82,348         21.5        70,827         22.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

  332,928      72.8      296,705      75.3      278,641      72.7      240,697      76.5   

Preferred equity

  117,387      25.7      79,908      20.3      98,099      25.6      62,901      20.0   

Common equity/equivalents

  7,050      1.5      17,532      4.4      6,797      1.7      10,795      3.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity/equivalents

  124,437      27.2      97,440      24.7      104,896      27.3      73,696      23.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

$ 457,365      100.0 $ 394,145      100.0 $ 383,537      100.0 $ 314,393      100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     December 31, 2014     March 31, 2014  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

Home and Office Furnishings, Housewares, and Durable Consumer Products

   $ 68,098         17.3   $ 21,188         6.7

Diversified/Conglomerate Manufacturing

     53,153         13.5        54,845         17.4   

Chemicals, Plastics, and Rubber

     49,147         12.5        52,753         16.8   

Leisure, Amusement, Motion Pictures, Entertainment

     38,021         9.6        39,867         12.7   

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

     30,560         7.8        25,917         8.2   

Farming and Agriculture

     26,367         6.7        20,557         6.5   

Automobile

     23,550         6.0        25,735         8.2   

Personal and Non-Durable Consumer Products (Manufacturing Only)

     19,011         4.8        10,005         3.2   

Telecommunications

     18,897         4.8        —           —     

Containers, Packaging, and Glass

     18,165         4.6        17,889         5.7   

Aerospace and Defense

     17,570         4.5        18,512         5.9   

Cargo Transport

     12,380         3.1        6,500         2.1   

Beverage Food and Tobacco

     11,930         3.0        13,050         4.2   

Personal, Food and Miscellaneous Services

     5,546         1.4        7,575         2.4   

Buildings and Real Estate

     1,750         0.4        —           —     

Oil and Gas

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

$ 394,145      100.0 $ 314,393      100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     December 31, 2014     March 31, 2014  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

West

   $ 150,165         38.1   $ 117,781         37.5

South

     120,281         30.5        89,915         28.6   

Northeast

     85,846         21.8        67,862         21.6   

Midwest

     37,853         9.6        38,835         12.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

$ 394,145      100.0 $ 314,393      100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of December 31, 2014:

 

          Amount  

For the remaining three months ending March 31:

   2015    $ 25,224   

For the fiscal year ending March 31:

   2016      48,529   
   2017      24,915   
   2018      89,159   
   2019      84,181   
   Thereafter      60,920   
     

 

 

 

Total contractual repayments

$ 332,928   
Investments in equity securities   124,437   
     

 

 

 

Total cost basis of investments held at December 31, 2014:

$ 457,365   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined based upon management’s judgment that the portfolio company is unable to pay its obligations. As of December 31 and March 31, 2014, we had gross receivables from portfolio companies of $0.7 million and $0.9 million, respectively. The allowance for uncollectible receivables was $0.2 million as of December 31 and March 31, 2014, which is reflected in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

In accordance with the Advisory Agreement, we pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee, loan servicing fee and an incentive fee. The Adviser is controlled by our chairman and chief executive officer. On July 15, 2014, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, approved the annual renewal of the Advisory Agreement through August 31, 2015.

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

 

     Three Months Ended
December 31,
    Nine Months Ended
December 31,
 
     2014     2013     2014     2013  

Average total assets subject to base management fee(A)

   $ 385,400      $ 303,000      $ 355,800      $ 308,333   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.5     1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(B)

  1,927      1,515      5,337      4,625   

Other credits to Adviser fees(B)

  (867   (782   (1,855   (1,627
  

 

 

   

 

 

   

 

 

   

 

 

 

Net base management fee

$ 1,060    $ 733    $ 3,482    $ 2,998   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee(B)

  1,295      1,089      3,588      3,230   

Credit of loan servicing fee(B)

  (1,295   (1,089   (3,588   (3,230
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan servicing fee

$ —      $ —      $ —      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee(B)

$ 1,460    $ 1,100    $ 3,726    $ 2,822   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Base Management Fee

The base management fee is computed and payable quarterly and is assessed at an annual rate of 2.0%. It is computed on the basis of the value of our average gross assets at the end of the two most recently completed quarters, which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. As a BDC, we make available significant managerial assistance to our portfolio companies through the personnel of

 

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the Adviser. The Adviser may also provide other services to our portfolio companies under other agreements and may receive fees for services other than managerial assistance. 50.0% of certain of these fees and 100.0% of others historically have been voluntarily credited against the base management fee that we would otherwise be required to pay to the Adviser. Effective October 1, 2013, 100.0% of all these fees are voluntarily and irrevocably credited against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, primarily for valuation of portfolio companies, is retained by the Adviser in the form of reimbursement at cost for certain tasks completed by personnel of the Adviser.

Loan Servicing Fee

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

Adviser receives a 2.0% annual loan servicing fee payable monthly by Business Investment based on the monthly aggregate balance of loans held by Business Investment in accordance with our revolving line of credit. All loan servicing fees are voluntarily and irrevocably credited back to us by the Adviser. Overall, the base management fee due to the Adviser (including any loan servicing fees) cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year.

Incentive Fee

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

 

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

 

    100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); and

 

    20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we will calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the aggregate net unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in our portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since our inception. Aggregate net unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate net unrealized capital depreciation, with respect to our portfolio of investments. If this number is positive at the end of such year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded since our inception through December 31, 2014, as cumulative net unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the

 

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future. No GAAP accrual for a capital gains-based incentive fee has been recorded since our inception through December 31, 2014.

Administration Agreement

The Administration Agreement provides for payments equal to our portion of the Administrator’s expenses incurred while performing services to us, which are primarily rent and the salaries, benefits and expenses of the Administrator’s employees, including, but not limited to, the chief financial officer and treasurer, chief compliance officer, and general counsel and secretary (who also serves as the Administrator’s president). Prior to July 1, 2014, our portion of the expenses were generally derived by multiplying that portion of the Administrator’s expenses allocable to all funds managed by the Adviser by the percentage of our total assets at the beginning of each quarter in comparison to the total assets at the beginning of each quarter of all funds managed by the Adviser.

Effective July 1, 2014, our portion of the Administrator’s expenses are generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator under contractual agreements. These administrative fees are accrued at the end of the quarter when the services are performed and recorded on our accompanying Consolidated Statements of Operations and generally paid the following quarter to the Administrator. On July 15, 2014, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2015.

Related Party Fees Due

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

 

     As of December 31,      As of March 31  
     2014      2014  

Net base management fee due to Adviser

   $ 102       $ 63   

Net incentive fee due to Adviser

     1,460         1,161   

Other due to Adviser

     26         1   
  

 

 

    

 

 

 

Total fees due to Adviser, net of credits

$ 1,588    $ 1,225   

Fee due to Administrator

$ 226    $ 224   
  

 

 

    

 

 

 

Total related party fees due

$ 1,814    $ 1,449   
  

 

 

    

 

 

 

In addition, other net co-investment expenses payable to Gladstone Capital (for reimbursement purposes) totaled $0 and $41 as of December 31 and March 31, 2014, respectively. These expenses were paid in full in the quarter subsequent to being incurred and have been included in other liabilities on the accompanying Condensed Consolidated Statements of Assets and Liabilities as of December 31 and March 31, 2014, respectively.

NOTE 5. BORROWINGS

Revolving Line of Credit

On June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013, with Key Equipment Finance, a division of KeyBank National Association (“Key Equipment”), as administrative agent, lead arranger and a lender, Branch Banking and Trust Company (“BB&T”) as a lender and managing agent, and the Adviser, as servicer, to extend the revolving period and reduce the interest rate of our revolving line of credit (our “Credit Facility”). The revolving period was extended 14 months to June 26, 2017, and if not renewed or extended by June 26, 2017, all principal and interest will be due and payable on or before June 26, 2019 (two years after the revolving period end date). In addition, we have retained the two one-year extension options, to be agreed upon by all parties, which may be exercised on or before June 26, 2015 and 2016, respectively, and upon exercise, the options would extend the revolving period to June 26, 2018 and 2019 and the maturity date to June 26, 2020 and 2021, respectively. Subject to certain terms and conditions, our Credit Facility can be expanded by up to $145.0 million, to a total facility amount of $250.0 million, through additional commitments of existing or new committed lenders. Advances under our Credit Facility generally bear interest at 30-day LIBOR, plus 3.25% per annum, down from 3.75% prior to the amendment, and our Credit Facility includes a fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity. We incurred fees of $0.4 million in connection with this amendment, which are being amortized through our Credit Facility’s revolver period end date of June 26, 2017.

On September 19, 2014, we further increased our borrowing capacity under our Credit Facility from $105.0 million to $185.0 million by entering into Joinder Agreements pursuant to our Credit Facility, by and among Business Investment, Key Equipment, the Adviser and each of East West Bank, Manufacturers and Traders Trust, Customers Bank and Talmer Bank and Trust. We incurred fees of $1.3 million

 

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in connection with this expansion, which are being amortized through our Credit Facility’s revolver period end date of June 26, 2017.

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

 

     As of December 31,      As of March 31,  
     2014      2014  

Commitment amount

   $ 185,000       $ 105,000   

Borrowings outstanding at cost

     95,800         61,250   

Availability

     32,926         39,545   

 

     For the Three Months Ended
December 31,
    For the Nine Months Ended
December 31,
 
     2014     2013     2014     2013  

Weighted average borrowings outstanding

   $ 97,614      $ 19,460      $ 74,374      $ 31,174   

Effective interest rate(A)

     3.9     6.3     4.0     5.1

Commitment (unused) fees incurred

   $ 113      $ 109      $ 234      $ 243   

 

(A)  Excludes the impact of deferred financing fees.

Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Investment, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required.

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

Among other things, our Credit Facility contains covenants that require Business Investment to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility generally also limits payments on distributions to the aggregate net investment income for each of the twelve month periods ending March 31, 2015, 2016 and 2017. Business Investment is also subject to certain limitations on the type of loan investments it can apply toward available credit in the borrowing base, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Investment to comply with other financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of the credit agreement. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatory redeemable term preferred stock) of $170 million plus 50.0% of all equity and subordinated debt raised after April 30, 2013, which equates to $170 million as of December 31, 2014, (ii) “asset coverage” with respect to “senior securities representing indebtedness” of at least 200.0%, in accordance with Section 18 of the 1940 Act and (iii) its status as a BDC under the 1940 Act and as a RIC under the Code. As of December 31, 2014, and as defined in the performance guaranty of our Credit Facility, we had a minimum net worth of $307.7 million, an asset coverage of 220.7% and an active status as a BDC and RIC. Our Credit Facility requires a minimum of 12 obligors in the borrowing base and, as of December 31, 2014, Business Investment had 26 obligors. As of December 31, 2014, we were in compliance with all covenants.

Pursuant to the terms of our Credit Facility, in July 2013, we entered into an interest rate cap agreement with KeyBank National Association that effectively limits the interest rate on a portion of our borrowings under our Credit Facility. The agreement, which expires April 2016, provides that the interest rate on $45.0 million of our borrowings is capped at 6.0%, plus 3.25% per annum, when 30-day LIBOR is in excess of 6.0%. We incurred a premium fee of $75 in conjunction with this agreement, which is recorded in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. As of December 31 and March 31, 2014, the fair value of our interest rate cap agreement was $0.

Secured Borrowing

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

 

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Fair Value

We elected to apply ASC 825, “Financial Instruments,” specifically for our Credit Facility, which was consistent with the application of ASC 820 to our investments. Generally, the Valuation Team estimates the fair value of our Credit Facility using a yield analysis, which includes a DCF calculation and also takes into account the Valuation Team’s own assumptions, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of December 31 and March 31, 2014, the discount rate used to determine the fair value of our Credit Facility was 3.9% and 4.2%, respectively. Generally, an increase or decrease in the discount rate used in the DCF calculation, may result in a corresponding increase or decrease, respectively, in the fair value of our Credit Facility. As of December 31 and March 31, 2014, all of our borrowings were valued using Level 3 inputs and any changes in their fair values are recorded in net unrealized appreciation (depreciation) of other on our accompanying Condensed Consolidated Statements of Operations.

The following tables present the short-term loan, where applicable, and our Credit Facility carried at fair value as of December 31 and March 31, 2014, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value during the three and nine months ended December 31, 2014 and 2013:

 

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

Credit Facility

   $ 95,800       $ 61,701   
  

 

 

    

 

 

 

Fair Value Measurements of Borrowings Using Significant

Unobservable Inputs (Level 3)

 

      Credit
Facility
 

Three months ended December 31, 2014:

  

Fair value at September 30, 2014

   $ 87,750   

Borrowings

     53,750   

Repayments

     (45,700

Net unrealized appreciation(A)

     —     
  

 

 

 

Fair value at December 31, 2014

$ 95,800   
  

 

 

 

Nine months ended December 31, 2014:

Fair value at March 31, 2014

$ 61,701   

Borrowings

  90,550   

Repayments

  (56,000

Net unrealized depreciation(A)

  (451
  

 

 

 

Fair value at December 31, 2014

$ 95,800   
  

 

 

 

Fair Value Measurements of Borrowings Using Significant

Unobservable Inputs (Level 3)

 

      Short-Term
Loan
     Credit
Facility
     Total  

Three months ended December 31, 2013:

        

Fair value at September 30, 2013

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

Borrowings

     8,501         37,000         45,501   

Repayments

     (22,005      (34,800      (56,805

Net unrealized depreciation(A)

     —           (341      (341
  

 

 

    

 

 

    

 

 

 

Fair value at December 31, 2013

$ 8,501    $ 36,200    $ 44,701   
  

 

 

    

 

 

    

 

 

 

Nine months ended December 31, 2013:

Fair value at March 31, 2013

$ 58,016    $ 31,854    $ 89,870   

Borrowings

  56,515      108,500      165,015   

Repayments

  (106,030   (103,300   (209,330

Net unrealized depreciation(A)

  —        (854   (854
  

 

 

    

 

 

    

 

 

 

Fair value at December 31, 2013

$ 8,501    $ 36,200    $ 44,701   
  

 

 

    

 

 

    

 

 

 

 

(A)  Included in net unrealized (depreciation) appreciation of other on our accompanying Condensed Consolidated Statement of Operations for the periods ended December 31, 2014 and 2013.

 

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The fair value of the collateral under our Credit Facility was $371.0 million and $288.6 million as of December 31 and March 31, 2014, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In November 2014, we completed a public offering of 1,656,000 shares of 6.75% Series B Cumulative Term Preferred Stock (our “Series B Term Preferred Stock”) at a public offering price of $25.00 per share. Gross proceeds totaled $41.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $39.7 million. We incurred $1.7 million in total offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanying Condensed Consolidated Statements of Assets and Liabilities and are being amortized over the period ending December 31, 2021, the mandatory redemption date.

The shares of Series B Term Preferred Stock are traded under the ticker symbol GAINO on the NASDAQ Global Select Market (“NASDAQ”). Our Series B Term Preferred Stock is not convertible into our common stock or any other security. Our Series B Term Preferred Stock provides for a fixed dividend equal to 6.75% per year, payable monthly. We are required to redeem all shares of our outstanding Series B Term Preferred Stock on December 31, 2021, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series B Term Preferred Stock, (2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of our outstanding Series B Term Preferred Stock or otherwise cure the ratio redemption trigger. We may also voluntarily redeem all or a portion of our Series B Term Preferred Stock at our sole option at the redemption price in order to have an asset coverage ratio of up to and including 215.0% and at any time on or after December 31, 2017.

In March 2012, we completed a public offering of 1,600,000 shares of 7.125% Series A Cumulative Term Preferred Stock (our “Series A Term Preferred Stock”) at a public offering price of $25.00 per share. Gross proceeds totaled $40.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $38.0 million. We incurred $2.0 million in total offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanying Condensed Consolidated Statements of Assets and Liabilities and are being amortized over the period ending February 28, 2017, the mandatory redemption period.

The shares of Series A Term Preferred Stock are traded under the ticker symbol GAINP on the NASDAQ. Our Series A Term Preferred Stock is not convertible into our common stock or any other security. Our Series A Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly. We are required to redeem all of our outstanding Series A Term Preferred Stock on February 28, 2017, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, three other potential redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series A Term Preferred Stock, (2) if we fail to maintain an asset coverage ratio of at least 200.0%, we are required to redeem a portion of our outstanding Series A Term Preferred Stock or otherwise cure the ratio redemption trigger and (3) at our sole option, at any time on or after February 28, 2016, we may redeem some or all of our Series A Term Preferred Stock.

For the nine months ended December 31, 2014 and 2013, our Board of Directors declared and we paid a monthly distribution of $0.1484375 per share, or $0.8906250 per share in aggregate, to holders of our Series A Term Preferred Stock. For the nine months ended December 31, 2014, our Board of Directors declared and we paid distributions for the pro-rated month of November 2014 (based on the number of days between the issuance date and November 30, 2014) and the full month of December 2014, that totaled $0.2250 per share to holders of our Series B Term Preferred Stock. The tax character of distributions paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities on the balance sheet and, therefore, the related dividend payments are treated as dividend expense on our accompanying Condensed Consolidated Statements of Operations at the ex-dividend date. The fair value of our Series A Term Preferred Stock, which we consider to be a Level 1 liability within the fair value hierarchy, based on the last reported closing sale price as of December 31 and March 31, 2014, was $41.8 million and $42.4 million, respectively. The fair value of our Series B Term Preferred Stock, which we consider to be a Level 1 liability within the fair value hierarchy, based on the last reported closing sale price as of December 31, 2014, was $42.0 million.

NOTE 7. REGISTRATION STATEMENT

Registration Statement

 

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We filed a registration statement on Form N-2 (File No. 333-181879) with the SEC on June 4, 2012, and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 17, 2012, which the SEC declared effective on July 26, 2012. On June 7, 2013, we filed Post-Effective Amendment No. 2 to the registration statement, which the SEC declared effective on July 26, 2013. On June 3, 2014, we filed Post-Effective Amendment No. 3 to the registration statement, and subsequently filed a Post-Effective Amendment No. 4 to the registration statement on September 2, 2014, which the SEC declared effective on September 4, 2014. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through a combined offering of two or more of such securities. We currently have the ability to issue up to $225.6 million in securities under the registration statement. We issued approximately $33.0 million of common stock under the registration statement in October and November 2012 and approximately $41.4 million of our Series B Term Preferred Stock under the registration statement in November 2014. No other securities have been issued to date under the registration statement.

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

The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted average common share for the three and nine months ended December 31, 2014 and 2013:

 

     Three Months Ended December 31,      Nine Months Ended December 31,  
     2014      2013      2014      2013  

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

   $ 7,589       $ (10,686    $ 21,056       $ (2,266

Denominator for basic and diluted weighted average common shares

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

 

 

    

 

 

    

 

 

    

 

 

 

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

$ 0.29    $ (0.40 $ 0.80    $ (0.09
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC under Subchapter M of the Code, we are required to distribute to our stockholders 90.0% of our “investment company taxable income,” which is generally our net ordinary income plus the excess of our net short-term capital gains over net long-term capital losses. The amount to be paid out as a distribution is determined by our Board of Directors each quarter and is based on management’s estimate of our estimated taxable income. Based on that estimate, our Board of Directors declares three monthly distributions each quarter.

We paid the following monthly distributions to common stockholders for the nine months ended December 31, 2014 and 2013:

 

Fiscal Year

   Declaration Date    Record Date    Payment Date    Distribution per
Common Share
 

2015

   April 8, 2014    April 21, 2014    April 30, 2014    $ 0.06   
   April 8, 2014    May 20, 2014    May 30, 2014      0.06   
   April 8, 2014    June 19, 2014    June 30, 2014      0.06   
   July 15, 2014    July 25, 2014    August 5, 2014      0.06   
   July 15, 2014    August 20, 2014    August 29, 2014      0.06   
   July 15, 2014    September 19, 2014    September 30, 2014      0.06   
   October 7, 2014    October 22, 2014    October 31, 2014      0.06   
   October 7, 2014    November 17, 2014    November 26, 2014      0.06   
   October 7, 2014    December 19, 2014    December 31, 2014      0.06   
   October 7, 2014    December 19, 2014    December 31, 2014      0.05 (A) 
           

 

 

 

Nine months ended December 31, 2014:

$ 0.59   
           

 

 

 

 

Fiscal Year

   Declaration Date    Record Date    Payment Date    Distribution per
Common Share
 

2014

   April 9, 2013    April 22, 2013    April 30, 2013    $ 0.05   
   April 9, 2013    May 14, 2013    May 31, 2013      0.05   
   April 9, 2013    June 19, 2013    June 28, 2013      0.05   
   July 9, 2013    July 17, 2013    July 31, 2013      0.05   
   July 9, 2013    August 19, 2013    August 30, 2013      0.05   
   July 9, 2013    September 16, 2013    September 30, 2013      0.05   
   October 8, 2013    October 22, 2013    October 31, 2013      0.06   
   October 8, 2013    November 14, 2013    November 29, 2013      0.06   
   November 6, 2013    November 18, 2013    November 29, 2013      0.05 (A) 
   October 8, 2013    December 16, 2013    December 31, 2013      0.06   
           

 

 

 

Nine months ended December 31, 2013:

$ 0.53   
           

 

 

 

 

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(A)  A bonus dividend on our common stock of $0.05 per share was declared by our Board of Directors.

The federal income tax characterization of all distributions is reported to our stockholders on the Internal Revenue Service Form 1099 at the end of each calendar year. For the twelve months ended December 31, 2014 and 2013, 100% of our common distributions were deemed to be paid from ordinary income for Form 1099 purposes.

For our federal income tax reporting purposes, we determine the tax characterization of our common distributions as of the end of our fiscal year based upon our taxable income for the full fiscal year and distributions paid during the full fiscal year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full fiscal year. If we determined the tax attributes of our distributions as of December 31, 2014, 100.0% would be from ordinary income. For the nine months ended December 31, 2014, we recorded a $0.3 million adjustment for estimated book-tax differences which decreased capital in excess of par value and increased net investment income in excess of distributions. For the fiscal year ended March 31, 2014, taxable income available for common distributions exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $3.9 million of the first common distributions paid in fiscal year 2015, as having been paid in the prior fiscal year.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on current knowledge, we do not believe such loss contingencies are probable and estimable and therefore, as of December 31, 2014, we have not established reserves for such loss contingencies.

Financial Commitments and Obligations

As of December 31, 2014, we have lines of credit commitments to certain of our portfolio companies that have not been fully drawn. Since these lines of credit have expiration dates and we expect many will never be fully drawn, the total line of credit commitment amounts do not necessarily represent future cash requirements.

In addition to the lines of credit to certain portfolio companies, we have also extended certain guarantees on behalf of some of our portfolio companies. For the nine months ended December 31, 2014, we have not been required to make any payments on the guarantees discussed below, and we consider the credit risk to be remote and the fair values of the guarantees to be minimal.

 

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

 

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

The following table summarizes the dollar balance of unused line of credit commitments and guarantees as of December 31 and March 31, 2014, which are not reflected as liabilities in the accompanying Condensed Consolidated Statements of Assets and Liabilities:

 

     December 31, 2014      March 31, 2014  

Unused line of credit commitments

   $ 6,906       $ 6,684   

Guarantees

     2,670         3,628   
  

 

 

    

 

 

 

Total

$ 9,576    $ 10,312   
  

 

 

    

 

 

 

 

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Escrow Holdbacks

From time to time, we will enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations, as stipulated in the sales agreements. We record escrow amounts in restricted cash and cash equivalents on our accompanying Condensed Consolidated Statements of Assets and Liabilities. In August 2013, the sale of Venyu resulted in $4.9 million in escrow amounts, which were recorded in other liabilities on our accompanying Condensed Consolidated Statements of Assets and Liabilities as of March 31, 2014. In September 2014, $1.9 million of the escrow funds were released. As of December 31, 2014, the remaining escrow amounts related to Venyu totaled $3.0 million, of which $0.5 million was held on behalf of the sellers. We establish a contingent liability against escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liability recorded against the Venyu escrow amounts were $0.5 million and $0.7 million as of December 31 and March 31, 2014, respectively.

NOTE 11. FINANCIAL HIGHLIGHTS

 

    Three Months Ended December 31,     Nine Months Ended December 31,  
    2014     2013     2014     2013  

Per Common Share Data

       

Net asset value at beginning of period(A)

  $ 8.49      $ 9.12      $ 8.34      $ 9.10   

Net investment income(B)

    0.22        0.17        0.56        0.55   

Realized (loss) gain on sale of investments and other(B)

    (0.01     (0.50     (0.01     0.44   

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

    0.08        (0.07     0.25        (1.07
 

 

 

   

 

 

   

 

 

   

 

 

 

Total from investment operations(B)

  0.29      (0.40   0.80      (0.08

Distributions to common stockholders from net investment income(B)(C)

  (0.23   (0.23   (0.59   (0.53
 

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value at end of period(A)

$ 8.55    $ 8.49    $ 8.55    $ 8.49   
 

 

 

   

 

 

   

 

 

   

 

 

 

Market value at beginning of period

$ 7.11    $ 7.05    $ 8.27    $ 7.31   

Market value at end of period

  7.00      8.06      7.00      8.06   

Total return(D)

  1.64   17.84   (8.34 )%    18.48

Common stock outstanding at end of period

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

Statement of Assets and Liabilities Data:

Net assets at end of period

$ 226,272    $ 224,665    $ 226,272    $ 224,665   

Average net assets(E)

  226,578      227,838      225,534      234,285   

Senior Securities Data:

Total borrowings, at cost

$ 100,896    $ 49,701    $ 100,896    $ 49,701   

Mandatorily redeemable preferred stock

  81,400      40,000      81,400      40,000   

Asset coverage ratio(F)

  220.7   336.0   220.7   336.0

Average coverage per unit(G)

$ 2,207    $ 3,360    $ 2,207    $ 3,360   

Ratios/Supplemental Data:

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

  13.92   10.82   12.42   10.04

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

  10.10      7.54      9.20      7.28   

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

  10.31      7.73      8.81      8.34   

 

(A)  Based on actual common shares outstanding at the end of the corresponding period.
(B)  Based on weighted average per basic common share data.
(C)  Distributions to common stockholders are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.
(D)  Total return equals the change in the market value of our common stock from the beginning of the period, taking into account dividends reinvested in accordance with the terms of the dividend reinvestment plan. Total return does not take into account common stockholder distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9—Distributions to Common Stockholders. Total return is not annualized.
(E)  Average net assets are computed using the average balance of net assets at the end of each month of the reporting period.
(F)  As a BDC, we are generally required to maintain an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200% on our senior securities representing indebtedness and our senior securities that are stock. Our mandatorily redeemable preferred stock is a senior security that is stock.
(G)  Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness.
(H)  Amounts are annualized.
(I)  Ratio of expenses to average net assets is computed using expenses before credits from the Adviser.
(J)  Ratio of net expenses to average net assets is computed using total expenses net of credits received from the Adviser.
(K)  The ratio of expenses to average net assets for the three and nine months ended December 31, 2013 were revised from the previously reported ratios, which were 8.91% and 8.20%, respectively, to correct an error as discussed in Note 2—Summary of Significant Accounting Policies.

 

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NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES

In accordance with the SEC’s Regulation S-X, we have one unconsolidated subsidiary, Galaxy Tool Holdings, Inc., that met at least one of the significance conditions of the SEC’s Regulation S-X as of December 31, 2014 and 2013 and for the nine months ended December 31, 2014 and 2013. Additionally, we have one unconsolidated subsidiary, SOG, and one former unconsolidated subsidiary, Venyu, which met at least one of the significance conditions of the SEC’s Regulation S-X for the nine months ended December 31, 2013. Accordingly, summarized, comparative financial information, in aggregate, is presented below for our significant unconsolidated subsidiaries.

 

     For the Nine Months Ended December 31,  

Income Statement

   2014      2013(A)  

Net sales

   $ 50,608       $ 65,197   

Gross profit

     13,404         23,844   

Net (loss) gain

     (2,839      1,206   

 

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

NOTE 13. SUBSEQUENT EVENTS

Distributions

Our Board of Directors declared the following monthly cash distributions to common and preferred stockholders:

 

Declaration Date

  

Record Date

  

Payment Date

   Distribution per
Common Share
     Distribution per Series A
Term Preferred Share
     Distribution per Series B
Term Preferred Share
 

January 13, 2015

   January 23, 2015    February 3, 2015    $ 0.06       $ 0.1484375       $ 0.140625   

January 13, 2015

   February 18, 2015    February 27, 2015      0.06         0.1484375         0.140625   

January 13, 2015

   March 20, 2015    March 31, 2015      0.06         0.1484375         0.140625   
        

 

 

    

 

 

    

 

 

 

Total for the Quarter:

$ 0.18    $ 0.4453125    $ 0.421875   
        

 

 

    

 

 

    

 

 

 

 

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

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

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

OVERVIEW

General

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

We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. We were established for the purpose of investing in debt and equity securities of established private businesses in the U.S. Debt investments primarily come in the form of three types of loans: senior term loans, senior subordinated loans and junior subordinated debt. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. To a much lesser extent, we also invest in senior and subordinated syndicated loans. Our investment objectives are (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that we anticipate will grow over time and (b) to provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we hope will appreciate over time so that we can sell them for capital gains. We expect that our investment allocation over time will consist of approximately 80.0% in debt securities and 20.0% in equity securities. As of December 31, 2014, our investment allocation was 73.0% in debt securities and 27.0% in equity securities, at cost.

 

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

In July 2012, the SEC granted us an exemptive order that expanded our ability, under certain circumstances, to co-invest with Gladstone Capital Corporation (“Gladstone Capital”) and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by Gladstone Management Corporation, our external investment adviser (the “Adviser”) or any combination of the foregoing subject to the conditions in the SEC’s order. We believe this ability to co-invest has enhanced and will continue to enhance our ability to further our investment objectives and strategies. Pursuant to this exemptive order, we co-invested with Gladstone Capital in one new proprietary investment during the three months ended December 31, 2014, as discussed under “—Investment Highlights.”

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

Our common stock, 7.125% Series A Cumulative Term Preferred Stock (our “Series A Term Preferred Stock”), and 6.75% Series B Cumulative Term Preferred Stock (our “Series B Term Preferred Stock”) are traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbols “GAIN”, “GAINP”, and “GAINO”, respectively.

Business Environment

The strength of the global economy and the U.S. economy in particular, continues to be uncertain, although economic conditions generally appear to be improving, albeit slowly. The impacts from the 2008 recession in general, and the resulting disruptions in the capital markets in particular, have had lingering effects on our liquidity options and have increased our cost of debt and equity capital. Many of our portfolio companies, as well as those small and medium-sized companies that we evaluate for prospective investment, may remain vulnerable to the impacts of the uncertain economy. Concerns linger over the ability of the U.S. Congress to pass additional debt ceiling legislation prior to March 2015, given the budget impasse that resulted in the partial shutdown of the U.S. government in October 2013. Uncertain political, regulatory and economic conditions, including the current volatility of oil and gas demand and prices, could disproportionately impact some of the industries in which we have invested, causing us to be more vulnerable to losses in our portfolio, resulting in an increase in the number of our non-performing assets and a decrease in the fair market value of our portfolio.

We do not know if general economic conditions will continue to improve or if adverse conditions will recur and we do not know the full extent to which the inability of the U.S. government to address its fiscal condition in the near and long term will affect us. If market instability persists or intensifies, we may experience difficulty in successfully raising and investing capital. In summary, we believe we are in a prolonged economic recovery; however, we do not know the full extent to which the impact of the current economic conditions will affect us or our portfolio companies.

Portfolio Activity

While conditions remain challenging, we are seeing many new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and sponsor-led buyouts of small and medium-sized companies in the U.S. During the three months ended December 31, 2014, we invested a total of $43.3 million in two new deals, resulting in a net expansion in our overall portfolio to 32 portfolio companies and an increase quarter over quarter of 13.6% in our portfolio at fair value. These new investments, along with our capital raising efforts discussed below, have allowed us to invest $375.3 million in 23 new debt and equity deals since October 2010.

 

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During the three and nine months ended December 31, 2014, our new investments provided a weighted average current pay interest rate of 12.4% and 12.7%, a going in weighted average leverage of 5.0x and 4.7x, and a current weighted average life of 4.4 and 4.5 years, respectively, all based on the originating principal balances. For the three and nine months ended December 31, 2014, our new investments consisted of approximately 77.9% and 77.7% senior term loans and 22.1% and 22.3% equity investments, based on the originating principal balances, respectively.

These new investments, as well as the majority of our debt securities in our portfolio, have a success fee component, which enhances the yield on our debt investments. Unlike paid-in-kind (“PIK”) income, we generally do not recognize success fees as income until they are received in cash. Due to their contingent nature, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of such collections. As a result, as of December 31, 2014, we had unrecognized success fees of $23.5 million, or $0.89 per common share. Consistent with accounting principles generally accepted in the U.S. (“GAAP”), we have not recognized our success fee receivable on our balance sheet or our income statement.

The improved investing environment has presented us with an opportunity to realize gains and other income from four management-supported buyout liquidity events since June 2010, and in the aggregate, we have generated $54.5 million in realized gains and $13.1 million in other income, for a total increase to our net assets of $67.6 million. We believe each of these transactions was an equity-oriented investment success and exemplifies our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. These successes, in part, enabled us to increase the monthly distribution 50.0% since March 2011, allowed us to declare and pay a $0.03 per common share one-time special distribution in fiscal year 2012, a $0.05 per common share one-time special distribution in November 2013, and a $0.05 per common share one-time special distribution in December 2014.

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

Capital Raising Efforts

Despite the challenges that have existed in the economy for the past several years, we have been able to meet our capital needs through extensions and increases to our revolving line of credit (our “Credit Facility”) and by accessing the capital markets in the form of public offerings of stock. We have successfully extended our Credit Facility’s revolving period multiple times, most recently to June 2017 and increased the commitment from $60.0 million to $185.0 million, and in November 2014, we issued approximately 1.7 million shares of our Series B Term Preferred Stock for gross proceeds of $41.4 million. Refer to “Liquidity and Capital Resources—Equity—Term Preferred Stock”) for further discussion of our term preferred stock and “Liquidity and Capital Resources—Revolving Credit Facility”) for further discussion of our Credit Facility.

Although we were able to access the capital markets during 2014, we believe market conditions continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of equity. On February 3, 2015, the closing market price of our common stock was $7.37, which represented a 13.8% discount to our December 31, 2014 net asset value (“NAV”) per share of $8.55. When our stock trades below NAV, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibit the issuance and sale of our common stock at an issuance price below the then current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering.

At our 2014 Annual Meeting of Stockholders held on August 7, 2014, our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then current NAV per share, subject to certain limitations, including that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each such sale, provided that our board of directors (our “Board of Directors”) makes certain determinations prior to any such sale. This August 2014 stockholder authorization is in effect for one year from the date of stockholder approval. We sought and obtained stockholder approval concerning a similar proposal at the Annual Meeting of Stockholders held in August 2012, and with our Board of Directors’ subsequent approval, we issued shares of our common stock in October and November 2012 at a price per share below the then current NAV per share. The resulting proceeds, in part, have allowed us to grow the portfolio by making new investments, generate additional income through these new investments, provide us additional equity capital to help

 

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ensure continued compliance with regulatory tests and increase our debt capital while still complying with our applicable debt-to-equity ratios. Refer to “Liquidity and Capital Resources—Equity—Common Stock”) for further discussion of our common stock

Regulatory Compliance

Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage ratio (as defined in Section 18(h) of the 1940 Act), of at least 200.0% on our senior securities representing indebtedness and our senior securities that are stock, which we refer to collectively as “Senior Securities.” As of December 31, 2014, our asset coverage ratio was 220.7%. Our status as a RIC under Subchapter M of the Code, in addition to other requirements, also requires us, at the close of each quarter of the taxable year, to meet an asset diversification test, which requires that at least 50.0% of the value of our assets consists of cash, cash items, U.S. government securities or certain other qualified securities (the “50.0% threshold”). In the past, we have obtained this ratio by entering into a short-term loan at quarter end to purchase qualifying assets; however, a short term loan was not necessary in or for the nine months ended December 31, 2014. Until the composition of our assets is above the required 50.0% threshold on a consistent basis by a significant margin, we may have to continue to obtain short-term loans on a quarterly basis. When deployed, this strategy, while allowing us to satisfy the 50.0% threshold for our RIC status, limits our ability to use increased debt capital to make new investments, due to our asset coverage ratio limitations under the 1940 Act.

Investment Highlights

During the nine months ended December 31, 2014, we disbursed $67.2 million in new debt and equity investments and extended $12.1 million of investments to existing portfolio companies through revolver draws or additions to term notes. From our initial public offering in June 2005 through December 31, 2014, we have made 228 investments in 111 companies for a total of approximately $1.0 billion, before giving effect to principal repayments on investments and divestitures.

Investment Activity

During the nine months ended December 31, 2014, the following significant transactions occurred:

 

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

 

    In August 2014, we made a $1.8 million equity investment in Roanoke Industries Corp. (“Roanoke”), formerly known as Tread Real Estate Corp., which purchased the building owned by another one of our portfolio companies, Tread Corp. (“Tread”). This building has subsequently been leased back to Tread. The resulting entity was listed as a portfolio company under Roanoke Industries Corp. on our accompanying Condensed Consolidated Schedules of Investments beginning in the period ended December 31, 2014.

 

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

 

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

 

    In December 2014, we invested $19.6 million in B+T Group Acquisition Inc. (“B+T”) through a combination of debt and equity. B+T, headquartered in Tulsa, Oklahoma, is a full-service provider of structural engineering, construction, and technical services to the wireless tower industry for tower upgrades and modifications. Gladstone Capital also participated as a co-investor by providing $8.4 million of debt and equity financing at the same price and terms as our investment.

 

    In December 2014, B-Dry, LLC (“B-Dry”) was restructured, resulting in $2.0 million of senior term debt being converted into preferred equity.

 

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Recent Developments

Executive Officers

On January 9, 2015, David Watson resigned as the Company’s chief financial officer and treasurer. On January, 13, 2015, our Board of Directors accepted Mr. Watson’s resignation and appointed Melissa Morrison, Gladstone Capital’s chief financial officer and treasurer, as the Company’s chief financial officer and treasurer.

Term Preferred Stock Offering

In November 2014, we completed a public offering of 1,656,000 shares of our Series B Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $41.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $39.7 million. We incurred $1.7 million in total offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanying Condensed Consolidated Statements of Assets and Liabilities and is being amortized over the period ending December 31, 2021, the mandatory redemption date. Refer to “Liquidity and Capital Resources—Equity—Term Preferred Stock” for further discussion of our term preferred stock.

Credit Facility Extension and Expansion

On June 26, 2014, we, through our wholly-owned subsidiary, Gladstone Business Investment (“Business Investment”), entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement (our “Credit Facility”) originally entered into on April 30, 2013, with Key Equipment Finance, a division of KeyBank National Association (“Key Equipment”) as administrative agent, lead arranger and a lender; Branch Banking and Trust Company (“BB&T”) as a lender and managing agent; and the Adviser, as servicer, to extend the revolving period and reduce the interest rate of our revolving line of credit. The revolving period was extended 14 months to June 26, 2017. We incurred fees of $0.4 million in connection with this amendment, which are being amortized through our Credit Facility’s revolver period end date of June 26, 2017.

On September 19, 2014, we further increased our borrowing capacity under our Credit Facility from $105.0 million to $185.0 million (with a total commitment up to $250.0 million through additional commitments of existing or new committed lenders) by entering into Joinder Agreements pursuant to our Credit Facility, by and among Business Investment, Key Equipment, the Adviser and each of East West Bank, Manufacturers and Traders Trust, Customers Bank and Talmer Bank and Trust. We incurred fees of $1.3 million in connection with this expansion, which are being amortized through our Credit Facility’s revolver period end date of June 26, 2017. Refer to “Liquidity and Capital Resources—Revolving Credit Facility” for further discussion of our Credit Facility.

Registration Statement

On June 3, 2014, we filed Post-Effective Amendment No. 3 to the registration statement on Form N-2 (File No. 333-181879), and subsequently filed a Post-Effective Amendment No. 4 to the registration statement on September 2, 2014, which the SEC declared effective on September 4, 2014. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through a combined offering of two or more of such securities. We currently have the ability to issue up to $225.6 million in securities under the registration statement.

 

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended December 31, 2014, to the Three Months Ended December 31, 2013

 

     For the Three Months Ended December 31,  
     2014      2013      $ Change      % Change  

INVESTMENT INCOME

           

Interest income

   $ 9,732       $ 7,593       $ 2,139         28.2 

Other income

     1,830         1,103         727         65.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment income

  11,562      8,696      2,866      33.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

EXPENSES

Base management fee

  1,927      1,515      412      27.2   

Incentive fee

  1,460      1,100      360      32.7   

Administration fee

  226      239      (13   (5.4

Interest and dividend expense

  2,127      1,108      1,019      92.0   

Amortization of deferred financing costs

  404      262      142      54.2   

Other

  446      852      (406   (47.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses before credits from Adviser

  6,590      5,076      1,514      29.8   

Credits to Adviser fees

  (867   (782   85      10.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses net of credits to fees

  5,723      4,294      1,429      33.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INVESTMENT INCOME

  5,839      4,402      1,437      32.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

Net realized loss on investments

  (209   (13,115   12,906      98.4   

Net realized loss on other

  —        (29   29      100.0   

Net unrealized appreciation (depreciation) of investments

  1,959      (2,310   4,269      NM   

Net unrealized depreciation of other

  —        366      (366   (100.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized and unrealized gain (loss)

  1,750      (15,088   16,838      NM   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

$ 7,589    $ (10,686 $ 18,275      NM   
  

 

 

    

 

 

    

 

 

    

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

Net investment income

$ 0.22    $ 0.17    $ 0.05      29.4 
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations

$ 0.29    $ (0.40 $ 0.69      172.5 
  

 

 

    

 

 

    

 

 

    

 

 

 

NM = Not Meaningful

Investment Income

Total investment income increased by 33.0% for the three months ended December 31, 2014, as compared to the prior year period. This increase was due to an increase in both other income and also interest income, which resulted from an increase in the size of our portfolio during the three months ended December 31, 2014.

Interest income from our investments in debt securities increased 28.2% for the three months ended December 31, 2014, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended December 31, 2014, was approximately $307.7 million, compared to approximately $237.5 million for the prior year period. This increase was primarily due to approximately $95.9 million in new investments originated after December 31, 2013, including Head Country Inc. (“Head Country”), Edge Adhesives Holdings, Inc. (“Edge”), Roanoke, Cambridge, Old World, and B+T.

At December 31, 2014, loans of one portfolio company, Tread, were on non-accrual status, with an aggregate weighted average principal balance of $11.0 million during the three months ended December 31, 2014. Our loans to Tread on non-accrual status had an aggregate weighted average principal balance of $14.1 million during the three months ended December 31, 2013. The weighted average yield on our interest-bearing investments was 12.5% and 12.7% for the three months ended December 31, 2014 and 2013, excluding cash and cash equivalents and receipts recorded as other income, respectively. The weighted average yield varies from period to period, based on the current stated interest rate on interest-bearing investments.

 

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

 

    As of December 31, 2014     Three months ended December 31, 2014  

Portfolio Company

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

SOG Specialty Knives and Tools, LLC

  $ 24,940        6.4   $ 1,170        10.1

Old World Christmas, Inc. (A)

    24,380        6.2        513        4.4   

Acme Cryogenics, Inc.

    22,942        5.8        426        3.7   

Cambridge Sound Management, LLC (B)

    22,556        5.7        511        4.5   

Funko, LLC

    19,011        4.8        249        2.2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal—five largest investments

  113,829      28.9      2,869      24.9   

Other portfolio companies

  280,316      71.1      8,693      75.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment portfolio

$ 394,145      100.0 $ 11,562      100.0
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    As of December 31, 2013     Three months ended December 31, 2013  

Portfolio Company

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

Acme Cryogenics, Inc.

  $ 27,719        9.5   $ 426        4.9

SOG Specialty Knives and Tools, LLC

    27,271        9.4        670        7.7   

Galaxy Tool Holding Corp.

    19,743        6.8        535        6.2   

Alloy Die Casting Corp. (A)

    16,320        5.6        421        4.8   

Schylling Investments, LLC

    16,160        5.6        532        6.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal—five largest investments

  107,213      36.9      2,584      29.7   

Other portfolio companies

  183,514      63.1      6,112      70.3   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment portfolio

$ 290,727      100.0 $ 8,696      100.0
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)  New investment during the applicable period.
(B)  Investment added in September 2014.

Other income increased 65.9% from the prior year period. During the three months ended December 31, 2014, other income primarily consisted of $1.3 million of dividends received from Mathey Investments, Inc. (“Mathey”) and $0.5 million resulting from prepayments of success fees received from SOG Specialty Knives and Tools, LLC (“SOG”), respectively. During the three months ended December 31, 2013, other income primarily consisted of $0.2 million and $0.8 million in success fee income resulting from debt investment repayments received from Cavert II Holding Corp. (“Cavert”) and Channel Technologies Group, LLC (“Channel”), respectively.

Expenses

Total expenses, excluding any voluntary, irrevocable and non-contractual credits from the Adviser to the base management and incentive fees, increased 29.8% for the three months ended December 31, 2014, as compared to the prior year period, primarily due to an increase in the base management fee, interest and dividend expense, and incentive fee as compared to the prior year period. This was partially offset by a decrease in other expenses for the three months ended December 31, 2014, as compared to the prior year period.

The base management fee increased for the three months ended December 31, 2014, as compared to the prior year period, as a result of the increased size of our portfolio over the respective periods. An incentive fee of $1.5 million was earned by the Adviser during the three months ended December 31, 2014, compared to an incentive fee of $1.1 million for the prior year period. The base management fees, incentive fees, and their related unconditional and irrevocable voluntary credits are computed quarterly, as described under “Investment Advisory and Management Agreement” in Note 4 of the notes to our accompanying Condensed Consolidated Financial Statements and are summarized in the following table:

 

     Three Months Ended
December 31,
 
     2014     2013  

Average gross assets subject to base management fee(A)

   $ 385,400      $ 303,000   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee(B)

  1,927      1,515   

Other credits to Adviser fees(B)

  (867   (782
  

 

 

   

 

 

 

Net base management fee

$ 1,060    $ 733   
  

 

 

   

 

 

 

Incentive fee(B)

$ 1,460    $ 1,100   
  

 

 

   

 

 

 

 

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

Interest and dividend expense increased 92.0% for the three months ended December 31, 2014, as compared to the prior year period, primarily due to increased average borrowings under our Credit Facility. The weighted average balance outstanding on our Credit Facility during the three months ended December 31, 2014, was $97.6 million, as compared to $19.5 million in the prior year period. The increase in average borrowings under our Credit Facility was partially offset by the decrease in interest rate due to an amendment of our Credit Facility that occurred in June 2014. The dividend expense also increased with the offering of our Series B Term Preferred Stock in November 2014. We paid distributions on the Series B Term Preferred Stock for the pro-rated month of November 2014 and the full month of December 2014, which distribution represented a $0.4 million increase from the prior year period, when the Series B Term Preferred Stock was not yet outstanding.

Other expenses decreased 47.7% for the three months ended December 31, 2014, as compared to the prior year period, primarily due to a decrease in the excise tax expense of $0.1 million and also a decrease in legal expenses, as compared to the prior year period.

Realized and Unrealized (Loss) Gain on Investments

Realized Loss

During the three months ended December 31, 2014, we recorded a realized loss on investments of $0.2 million relating to post-closing adjustments on previous investment exits. During the three months ended December 31, 2013, we recorded a net realized loss of $13.1 million related to the ASH and Packerland exits.

Unrealized Appreciation (Depreciation)

During the three months ended December 31, 2014, we recorded net unrealized appreciation of investments in the aggregate amount of $2.0 million.

The realized loss and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2014, were as follows:

 

     Three months ended December 31, 2014  

Portfolio Company

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

Funko, LLC

   $ —         $ 3,648       $ 3,648   

Cambridge Sound Management, LLC

     —           3,056         3,056   

Drew Foam Company, Inc.

     —           1,475         1,475   

Ginsey Home Solutions, Inc.

     —           1,450         1,450   

Tread Corp.

     —           1,290         1,290   

Head Country Inc.

     —           1,123         1,123   

Alloy Die Casting Corp.

     —           973         973   

SOG Specialty K&T, LLC

     —           951         951   

Mathey Investments, Inc.

     —           440         440   

Danco Acquisition Corp.

     —           203         203   

Frontier Packaging, Inc.

     —           (231      (231

Edge Adhesives Holdings, Inc.

     —           (451      (451

Jackrabbit, Inc.

     —           (460      (460

Meridian Rack & Pinion, Inc.

     —           (678      (678

NDLI Inc.

     —           (709      (709

Country Club Enterprises, LLC

     —           (784      (784

Channel Technologies Group, LLC

     —           (831      (831

Mitchell Rubber Products, Inc.

     —           (1,883      (1,883

B-Dry, LLC

     —           (2,517      (2,517

Acme Cryogenics, Inc.

     —           (4,197      (4,197

Other, net (<$250 Net)

     (209      91         (118
  

 

 

    

 

 

    

 

 

 

Total

$ (209 $ 1,959    $ 1,750   
  

 

 

    

 

 

    

 

 

 

 

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The primary reason for the change in our net unrealized appreciation of $2.0 million for the three months ended December 31, 2014, was an increase in the equity valuation of two of our portfolio companies, Funko, LLC (“Funko”) and Cambridge, due to an increase in company performance and, to a lesser extent, an increase in certain comparable multiples used to estimate the fair value of our investments. This was partially offset by decreased performance in several of our portfolio companies.

During the three months ended December 31, 2013, we recorded net unrealized depreciation of investments in the aggregate amount of $2.3 million, which included the reversal of $13.2 million in aggregate unrealized depreciation, primarily related to the sales of ASH and Packerland. Excluding reversals, we had $15.5 million in net unrealized depreciation of investments for the three months ended December 31, 2013.

The realized losses and gains and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2013, were as follows:

 

     Three months ended December 31, 2013  

Portfolio Company

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

Auto Safety House, LLC(A)

   $ (11,402    $ 4,938       $ 11,410       $ 4,946   

SOG Specialty K&T, LLC

     —           3,140         —           3,140   

Quench Holdings Corp.

     —           2,864         —           2,864   

Mitchell Rubber Products, Inc.

     —           951         —           951   

Packerland Whey Products, Inc.(B)

     (1,754      —           2,500         746   

Cavert II Holding Corp

     —           58         (175      (117

Drew Foam Companies, Inc.

     —           (480      —           (480

B-Dry, LLC

     —           (502      —           (502

Channel Technologies Group, LLC

     —           (232      (583      (815

SBS, Industries, LLC

     —           (1,606      —           (1,606

Country Club Enterprises, LLC

     —           (1,777      —           (1,777

Mathey Investments, Inc.

     —           (1,806      —           (1,806

Star Seed, Inc.

     —           (1,862      —           (1,862

Precision Southeast, Inc.

     —           (2,168      —           (2,168

Ginsey Holdings, Inc.

     —           (2,229      —           (2,229

Jackrabbit, Inc.

     —           (3,245      —           (3,245

Noble Logistics, Inc.

     —           (3,448      —           (3,448

Schylling Investments, LLC

     —           (3,840      —           (3,840

Galaxy Tool Holding Corp.

     —           (4,413      —           (4,413

Other, net (<$250 Net)

     41         195         —           236   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ (13,115 $ (15,462 $ 13,152    $ (15,425