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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 June 30, 2015

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 August 3, 2015, was 30,270,958.

 

 

 


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 June 30 and March 31, 2015

     2   
  

Condensed Consolidated Statements of Operations for the three months ended June 30, 2015 and 2014

     3   
  

Condensed Consolidated Statements of Changes in Net Assets for the three months ended June 30, 2015 and 2014

     4   
  

Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2015 and 2014

     5   
  

Condensed Consolidated Schedules of Investments as of June 30 and March 31, 2015

     6   
  

Notes to Condensed Consolidated Financial Statements

     14   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations   
  

Overview

     34   
  

Results of Operations

     38   
  

Liquidity and Capital Resources

     43   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      49   
Item 4.    Controls and Procedures      49   
PART II.    OTHER INFORMATION:   
Item 1.    Legal Proceedings      50   
Item 1A.    Risk Factors      50   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      50   
Item 3.    Defaults Upon Senior Securities      50   
Item 4.    Mine Safety Disclosures      50   
Item 5.    Other Information      50   
Item 6.    Exhibits      50   
SIGNATURES      52   

 


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,     March 31,  
     2015     2015  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $161,298 and $162,598, respectively)

   $ 179,581      $ 174,373   

Affiliate investments (Cost of $325,171 and $310,628, respectively)

     282,392        271,050   

Control investments (Cost of $30,782 and $32,032 respectively)

     19,270        20,630   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $517,251 and $505,258, respectively)

     481,243        466,053   

Cash and cash equivalents

     6,082        4,921   

Restricted cash and cash equivalents

     955        260   

Interest receivable

     2,001        1,867   

Due from custodian

     3,968        4,512   

Deferred financing costs

     5,781        4,529   

Other assets, net

     1,744        1,379   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 501,774      $ 483,521   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Line of credit at fair value (Cost of $89,750 and $118,800, respectively)

   $ 89,750      $ 118,800   

Secured borrowing

     5,096        5,096   
  

 

 

   

 

 

 

Total borrowings

     94,846        123,896   

Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 5,310,000 and 3,610,000 shares authorized, respectively; 4,866,000 and 3,256,000 shares issued and outstanding, respectively

     121,650        81,400   

Accounts payable and accrued expenses

     2,113        1,271   

Fees due to Adviser(A)

     1,810        1,502   

Fee due to Administrator(A)

     355        262   

Other liabilities

     1,246        1,761   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 222,020      $ 210,092   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 279,754      $ 273,429   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 100,000,000 shares authorized, 30,270,958 and 29,775,958 shares issued and outstanding

   $ 30      $ 30   

Capital in excess of par value

     312,684        309,438   

Cumulative net unrealized depreciation of investments

     (36,007     (39,204

Cumulative net unrealized depreciation of other

     (75     (75

Net investment income in excess of distributions

     3,194        3,511   

Accumulated net realized loss

     (72     (271
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 279,754      $ 273,429   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 9.24      $ 9.18   
  

 

 

   

 

 

 

 

(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
June 30,
 
     2015     2014  

INVESTMENT INCOME

    

Interest income:

    

Non-Control/Non-Affiliate investments

   $ 3,802      $ 5,257   

Affiliate investments

     6,924        2,616   

Control investments

     659        530   

Cash and cash equivalents

     —          1   
  

 

 

   

 

 

 

Total interest income

     11,385        8,404   

Other income:

    

Non-Control/Non-Affiliate investments

     1,321        1,399   

Affiliate investments

     —          34   
  

 

 

   

 

 

 

Total other income

     1,321        1,433   
  

 

 

   

 

 

 

Total investment income

     12,706        9,837   
  

 

 

   

 

 

 

EXPENSES

    

Base management fee(A)

     2,453        1,666   

Loan servicing fee(A)

     1,559        1,135   

Incentive fee(A)

     1,291        1,215   

Administration fee(A)

     355        235   

Interest expense on borrowings

     1,064        738   

Dividends on mandatorily redeemable preferred stock

     1,767        713   

Amortization of deferred financing fees

     460        254   

Professional fees

     442        242   

Other general and administrative expenses

     556        297   
  

 

 

   

 

 

 

Expenses before credits from Adviser

     9,947        6,495   
  

 

 

   

 

 

 

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

     (1,559     (1,135

Credit to fees from Adviser - other(A)

     (845     (382
  

 

 

   

 

 

 

Total expenses, net of credits

     7,543        4,978   
  

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,163        4,859   
  

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

    

Net realized gain:

    

Control investments

     199        —     
  

 

 

   

 

 

 

Total net realized gain

     199        —     

Net unrealized appreciation (depreciation):

    

Non-Control/Non-Affiliate investments

     6,508        445   

Affiliate investments

     (3,201     1,342   

Control investments

     (110     3,673   

Other

     —          451   
  

 

 

   

 

 

 

Total net unrealized appreciation

     3,197        5,911   
  

 

 

   

 

 

 

Net realized and unrealized gain

     3,396        5,911   
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 8,559      $ 10,770   
  

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

    

Net investment income

   $ 0.17      $ 0.18   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.28      $ 0.41   
  

 

 

   

 

 

 

Distributions declared and paid

   $ 0.19      $ 0.18   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and diluted

     30,260,079        26,475,958   

 

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

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

 

3


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended June 30,  
     2015     2014  

OPERATIONS

    

Net investment income

   $ 5,163      $ 4,859   

Net realized gain on investments

     199        —     

Net unrealized appreciation of investments

     3,197        5,460   

Net unrealized depreciation of other

     —          451   
  

 

 

   

 

 

 

Net increase in net assets from operations

     8,559        10,770   
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (5,676     (4,766
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (5,676     (4,766
  

 

 

   

 

 

 

CAPITAL ACTIVITY

    

Issuance of common stock

     3,663        —     

Offering costs for issuance of common stock

     (221     —     
  

 

 

   

 

 

 

Net increase in net assets from capital activity

     3,442        —     
  

 

 

   

 

 

 

TOTAL INCREASE IN NET ASSETS

     6,325        6,004   

NET ASSETS, BEGINNING OF PERIOD

     273,429        220,837   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 279,754      $ 226,841   
  

 

 

   

 

 

 

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)

 

     Three Months Ended June 30,  
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 8,559      $ 10,770   

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

    

Purchase of investments

     (17,326     (2,010

Principal repayments of investments

     5,233        60   

Increase in investment balance due to paid in kind interest

     —          (29

Net proceeds from the sale of investments

     315        —     

Net realized gain on investments

     (215     —     

Net unrealized appreciation of investments

     (3,197     (5,460

Net unrealized depreciation of other

     —          (451

Amortization of deferred financing costs

     460        254   

Bad debt expense

     225        —     

Changes in assets and liabilities:

    

Increase in restricted cash and cash equivalents

     (695     (1

Increase in interest receivable

     (134     (362

Decrease in due from custodian

     544        612   

Increase in other assets

     (590     (1,078

Increase (decrease) in accounts payable and accrued expenses

     842        (48

Increase in fees due to Adviser(A)

     308        422   

Increase in fee due to Administrator(A)

     93        11   

Decrease in other liabilities

     (515     (49
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (6,093     2,641   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from issuance of common stock

     3,663        —     

Offering costs for issuance of common stock

     (221     —     

Proceeds from line of credit

     38,500        6,300   

Repayments on line of credit

     (67,550     (4,600

Proceeds from secured borrowing

     —          96   

Proceeds from issuance of mandatorily redeemable preferred stock

     40,250        —     

Deferred financing costs

     (1,712     (452

Distributions paid to common stockholders

     (5,676     (4,766
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     7,254        (3,422
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     1,161        (781

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     4,921        4,553   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 6,082      $ 3,772   
  

 

 

   

 

 

 

 

(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

JUNE 30, 2015

(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

  

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

   $ —         $ —         $ —     
     

Secured First Lien Term Debt (7.0%, Due 10/2019)(I)(K)

     5,000         5,000         4,956   
           

 

 

    

 

 

 
              5,000         4,956   

Cavert II Holding Corp.

  

Containers, Packaging, and Glass

  

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

        1,845         3,328   
           

 

 

    

 

 

 
              1,845         3,328   

Country Club Enterprises, LLC

  

Automobile

  

Secured Second Lien Term Debt (18.7%, Due 5/2017)(L)

     4,000         4,000         4,000   
     

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

        7,725         1,426   
     

Guaranty ($2,000)(D)

        
     

Guaranty ($533)(D)

        
           

 

 

    

 

 

 
              11,725         5,426   

Drew Foam Company, Inc.

  

Chemicals, Plastics, and Rubber

  

Secured First Lien Term Debt (13.5%, Due 8/2017)(L)

     10,913         10,913         10,913   
     

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

        3,375         3,375   
     

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

        63         2,647   
           

 

 

    

 

 

 
              14,351         16,935   

Frontier Packaging, Inc.

  

Containers, Packaging, and Glass

  

Secured First Lien Term Debt (12.0%, Due 12/2017)(L)

     11,500         11,500         11,500   
     

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

        1,373         1,437   
     

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

        152         6,228   
           

 

 

    

 

 

 
              13,025         19,165   

Funko, LLC(M)

  

Personal and Non-Durable Consumer Products (Manufacturing Only)

  

Secured First Lien Term Debt (9.3%, Due 5/2019)(I)(K)

     7,500         7,500         7,744   
     

Secured First Lien Term Debt (9.3%, Due 5/2019)(I)(K)

     2,000         2,000         2,065   
     

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

        1,305         21,412   
           

 

 

    

 

 

 
              10,805         31,221   

Ginsey Home Solutions, Inc.

  

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Secured Second Lien 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         6,208   
     

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

        8         —     
           

 

 

    

 

 

 
              22,891         19,508   

Jackrabbit, Inc.

  

Farming and Agriculture

  

Secured First Lien Term Debt (13.5%, Due 4/2018)(L)

     11,000         11,000         11,000   
     

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

        3,556         3,763   
     

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

        94         —     
           

 

 

    

 

 

 
              14,650         14,763   

Mathey Investments, Inc.

  

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

  

Secured First Lien Term Debt (10.0%, Due 3/2016)(L)

     1,375         1,375         1,375   
     

Secured First Lien Term Debt (12.0%, Due 3/2016)(L)

     3,727         3,727         3,727   
     

Secured First Lien 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         9,333   
           

 

 

    

 

 

 
              9,379         17,935   

Mitchell Rubber Products, Inc.

  

Chemicals, Plastics, and Rubber

  

Secured Second Lien Term Debt (13.0%, Due 10/2016)(I)(K)

     13,560         13,560         7,729   
     

Secured Second Lien Term Debt (13.0%, Due 12/2015)(I)(K)

     700         700         399   
     

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

        2,790         —     
     

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

        28         —     
           

 

 

    

 

 

 
              17,078         8,128   

Quench Holdings Corp.

  

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

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

        3,397         5,234   
           

 

 

    

 

 

 
              3,397         5,234   

SBS Industries, LLC

  

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

  

Secured First Lien Term Debt (14.0%, Due 8/2016)(L)

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

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

     11,355         11,355         11,355   
              1,994         2,677   
              222         963   
           

 

 

    

 

 

 
              13,571         14,995   

 

6


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

  

Principal

    

Cost

    

Fair Value

 

Schylling, Inc.

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Secured First Lien 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

  

Secured First Lien Term Debt (12.5%, Due 5/2018)(E)(K)

     5,000         5,000         4,906   
     

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

        1,499         —     
     

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

        1         —     
           

 

 

    

 

 

 
              6,500         4,906   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 37.3% of total investments at fair value)

      $ 161,298       $ 179,581   
           

 

 

    

 

 

 

AFFILIATE INVESTMENTS(O):

  

  

Acme Cryogenics, Inc.

  

Chemicals, Plastics, and Rubber

  

Secured Second Lien Term Debt (11.5%, Due 3/2020)(I)(L)

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

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

        7,956         11,069   
     

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

        1,197         —     
     

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

        25         —     
           

 

 

    

 

 

 
              23,678         25,569   

Alloy Die Casting Co.(M)

  

Diversified/Conglomerate Manufacturing

  

Secured First Lien Debt (13.5%, Due 10/2018)(K)

     12,215         12,215         12,062   
     

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

        4,064         2,854   
     

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

        41         —     
           

 

 

    

 

 

 
              16,320         14,916   

Behrens Manufacturing, LLC(M)

  

Diversified/Conglomerate Manufacturing

  

Secured First Lien Term Debt (13.0%, Due 12/2018)(L)

     9,975         9,975         9,975   
     

Preferred Stock (2,923 shares) (C)(F)(L)

        2,922         4,119   
           

 

 

    

 

 

 
              12,897         14,094   

Brunswick Bowling Products, Inc.

  

Home and Office Furnishings, Housewares and Durable Consumer Products

  

Secured First Lien Term Debt (16.3%, Due 5/2020)(J)

Preferred Stock (4,943 shares)(C)(F)(J)

     11,307         11,307         11,307   
              4,943         4,943   
           

 

 

    

 

 

 
              16,250         16,250   

B-Dry, LLC

  

Personal, Food and Miscellaneous Services

  

Secured First Lien Line of Credit, $100 available (6.5% (0.8% Unused Fee), Due 12/2016)(L)

     2,150         2,150         1,173   
     

Secured First Lien Term Debt (13.5%, Due 12/2019)(L)

     6,433         6,443         3,514   
     

Secured First Lien Term Debt (13.5%, Due 12/2019)(L)

     840         840         458   
     

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

        2,250         —     
     

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

        300         —     
           

 

 

    

 

 

 
              11,983         5,145   

B+T Group Acquisition Inc.(M)

  

Telecommunications

  

Secured First Lien Term Debt (13.0%, Due 12/2019)(L)

     14,000         14,000         14,000   
     

Preferred Stock (12,841 shares)(C)(F)(L)

        4,196         —     
           

 

 

    

 

 

 
              18,196         14,000   

Cambridge Sound Management, Inc.

  

Home and Office Furnishings, Housewares and Durable Consumer Products

  

Secured First Lien Term Debt (13.0%, Due 9/2019)(L)

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

     15,000         15,000         15,000   
              4,500         11,180   
           

 

 

    

 

 

 
              19,500         26,180   

Channel Technologies Group, LLC

  

Diversified/Conglomerate Manufacturing

  

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

        2,864         2,227   
     

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

        —           —     
           

 

 

    

 

 

 
              2,864         2,227   

Counsel Press, Inc.

  

Diversified/Conglomerate Services

  

Secured First Lien Line of Credit, $600 available (12.8% (1.0% Unused Fee), Due 3/2017)(L)

     400         400         400   
     

Secured First Lien Term Debt (12.8%, Due 3/2020)(L)

     18,000         18,000         18,000   
     

Secured First Lien Term Debt (14.0%, Due 3/2020)(L)

     5,500         5,500         5,500   
     

Preferred Stock (6,995 shares)(C)(F)(L)

        6,995         5,563   
           

 

 

    

 

 

 
              30,895         29,463   

D.P.M.S., Inc.

  

Diversified/Conglomerate Manufacturing

  

Secured First Lien Line of Credit, $550 available (4.0% (0.5% Unused Fee), Due 8/2016)(I)(L)

     4,000         4,000         1,360   
     

Secured First Lien Term Debt (4.0%, Due 8/2016)(I)(L)

     2,575         2,575         875   
     

Secured First Lien Term Debt (4.0%, Due 8/2016)(I)(L)

     8,795         8,795         2,989   
     

Secured First Lien Term Debt (5.0%, Due 8/2016)(E)(L)

     1,150         1,150         391   
     

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

        2,500         —     
     

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

        3         —     
           

 

 

    

 

 

 
              19,023         5,615   

 

7


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

  

Principal

    

Cost

    

Fair Value

 

Edge Adhesives Holdings, Inc.(M)

  

Diversified/Conglomerate Manufacturing

  

Secured First Lien Line of Credit, $10 available (12.5% (1.0% Unused Fee), Due 2/2016)(K)

   $ 1,490       $ 1,490       $ 1,481   
     

Secured First Lien Term Debt (12.5%, Due 2/2019)(K)

     9,300         9,300         9,253   
     

Secured First Lien Term Debt (13.8%, Due 2/2019)(K)

     2,400         2,400         2,391   
     

Preferred Stock (3,774 shares) (C)(F)(L)

        3,774         1,451   
           

 

 

    

 

 

 
              16,964         14,576   

Head Country, Inc.

  

Beverage, Food and Tobacco

  

Secured First Lien Term Debt (12.5%, Due 2/2019)(L)

     9,050         9,050         9,050   
     

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

        4,000         3,777   
           

 

 

    

 

 

 
              13,050         12,827   

Logo Sportswear, Inc.

  

Textiles and Leather

  

Secured First Lien Term Debt (12.5%, Due 3/2020) (L)

     9,200         9,200         9,200   
     

Preferred Stock (1,550 shares)(C)(F)(L)

        1,550         2,754   
           

 

 

    

 

 

 
              10,750         11,954   

Meridian Rack & Pinion, Inc. (M)

  

Automobile

  

Secured First Lien Term Debt (13.5%, Due 12/2018)(K)

     9,660         9,660         9,624   
     

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

        3,381         1,866   
           

 

 

    

 

 

 
              13,041         11,490   

NDLI, Inc.

  

Cargo Transport

  

Secured First Lien Line of Credit, $0 available (10.5% (0.5% Unused Fee), Due 1/2016)(L)

     2,925         2,925         2,342   
     

Secured First Lien Term Debt (11.0%, Due 1/2018)(L)

     7,227         7,227         5,786   
     

Secured First Lien Term Debt (10.5%, Due 1/2018)(L)

     3,650         3,650         2,922   
     

Secured First Lien Term Debt (10.5%, Due 1/2018)(E)(L)

     3,650         3,650         2,922   
     

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

        3,600         —     
     

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

        —           —     
           

 

 

    

 

 

 
              21,052         13,972   

Old World Christmas, Inc.

  

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Secured First Lien Term Debt (13.3%, Due 10/2019)(L)

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

     15,770         15,770         15,770   
              6,180         2,452   
           

 

 

    

 

 

 
              21,950         18,222   

Precision Southeast, Inc.

  

Diversified/Conglomerate Manufacturing

  

Secured Second Lien Term Debt (14.0%, Due 9/2020)(L)

     9,618         9,618         9,618   
     

Preferred Stock (37,391 shares)(C)(F)(L)

        3,739         3,498   
     

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

        91         —     
           

 

 

    

 

 

 
              13,448         13,116   

SOG Specialty Knives & Tools, LLC

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Secured First Lien Term Debt (13.3%, Due 10/2017) (L)

     6,200         6,200         6,200   
     

Secured First Lien Term Debt (14.8%, Due 10/2017) (L)

     12,200         12,200         12,200   
     

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

        9,749         11,366   
           

 

 

    

 

 

 
              28,149         29,766   

Tread Corporation

  

Oil and Gas

  

Secured First Lien Line of Credit, $1,186 available (12.5%, Due 2/2018)(G)(L)

     2,064         2,064         549   
     

Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L)

     5,000         5,000         1,329   
     

Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L)

     2,750         2,750         731   
     

Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L)

     1,000         1,000         266   
     

Secured First Lien Term Debt (12.5%, Due on Demand)(G)(I)(L)

     510         510         135   
     

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         —     
           

 

 

    

 

 

 
              15,161         3,010   
           

 

 

    

 

 

 

Total Affiliate Investments (represents 58.7% of total investments at fair value)

      $ 325,171       $ 282,392   
           

 

 

    

 

 

 

 

8


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

  

Principal

    

Cost

    

Fair Value

 

CONTROL INVESTMENTS(P):

        

Galaxy Tool Holding Corporation

  

Aerospace and Defense

  

Secured First Lien Line of Credit, $750 available (10.0% (1.0% Unused Fee), Due 9/2015)(L)

   $ 3,750       $ 3,750       $ 3,750   
     

Secured Second Lien Secured 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         —     
           

 

 

    

 

 

 
              30,782         19,270   
           

 

 

    

 

 

 

Total Control Investments (represents 4.0% of total investments at fair value)

      $ 30,782       $ 19,270   
           

 

 

    

 

 

 

TOTAL INVESTMENTS

      $ 517,251       $ 481,243   
           

 

 

    

 

 

 

 

(A)  Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $447.9 million at fair value, are pledged as collateral to our revolving line of credit as described further in Note 5—Borrowings. Additionally, all of our investments are considered qualifying assets under Section 55 of the Investment Company Act of 1940, as amended, (the “1940 Act”) as of June 30, 2015.
(B)  Percentages represent the weighted average cash interest rates in effect at June 30, 2015, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate. If applicable, paid-in-kind 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 secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT is generally paid after the other secured first lien debt but before the secured second lien 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 was participated to a third party but is accounted for as collateral for a secured borrowing under accounting principles generally accepted in the U.S. and presented as secured borrowing on our accompanying Condensed Consolidated Statement of Assets and Liabilities as of June 30, 2015.
(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 June 30, 2015 best represents fair value as of June 30, 2015.
(K)  Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc.
(L)  Fair value was based on the total enterprise value of the portfolio company, which is generally 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, co-invested with us in this portfolio company pursuant to an exemptive order granted by the Securities and Exchange Commission.
(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 that are not Control investments, and 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

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

  

Principal

    

Cost

    

Fair Value

 

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

     

Auto Safety House, LLC

  

Automobile

  

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

   $ —         $ —         $ —     
     

Secured First Lien Term Debt (7.0%, Due 10/2019)(I)(K)

     5,000         5,000         4,938   
           

 

 

    

 

 

 
              5,000         4,938   

Cavert II Holding Corp.

  

Containers, Packaging, and Glass

  

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

        1,845         3,265   
           

 

 

    

 

 

 
              1,845         3,265   

Country Club Enterprises, LLC

  

Automobile

  

Secured Second Lien Term Debt (18.7%, Due 5/2017)(L)

     4,000         4,000         4,000   
     

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

        7,725         2,863   
     

Guaranty ($2,000)(D)

        
     

Guaranty ($593)(D)

        
           

 

 

    

 

 

 
              11,725         6,863   

Drew Foam Company, Inc.

  

Chemicals, Plastics, and Rubber

  

Secured First Lien Term Debt (13.5%, Due 8/2017)(L)

     10,913         10,913         10,913   
     

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

        3,375         3,532   
     

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

        63         2,813   
           

 

 

    

 

 

 
              14,351         17,258   

Frontier Packaging, Inc.

  

Containers, Packaging, and Glass

  

Secured First Lien Term Debt (12.0%, Due 12/2017)(L)

     12,000         12,000         12,000   
     

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

        1,373         1,404   
     

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

        152         2,777   
           

 

 

    

 

 

 
              13,525         16,181   

Funko, LLC(M)

  

Personal and Non-Durable Consumer Products (Manufacturing Only)

  

Secured First Lien Term Debt (9.3%, Due 5/2019)(I)(K)

     7,500         7,500         7,734   
     

Secured First Lien Term Debt (9.3%, Due 5/2019)(I)(K)

     2,000         2,000         2,063   
     

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

        1,305         15,211   
           

 

 

    

 

 

 
              10,805         25,008   

Ginsey Home Solutions, Inc.

  

Home and Office Furnishings, Housewares and Durable Consumer Products

  

Secured Second Lien Term Debt (13.5%, Due 1/2018)(H)(L)

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

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

     13,300         13,300         13,300   
              9,583         7,176   
              8         —     
           

 

 

    

 

 

 
              22,891         20,476   

Jackrabbit, Inc.

  

Farming and Agriculture

  

Secured First Lien Debt (13.5%, Due 4/2018)(L)

     11,000         11,000         11,000   
     

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

        3,556         4,139   
     

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

        94         2,399   
           

 

 

    

 

 

 
              14,650         17,538   

Mathey Investments, Inc.

  

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

  

Secured First Lien Term Debt (10.0%, Due 3/2016)(L)

     1,375         1,375         1,375   
     

Secured First Lien Term Debt (12.0%, Due 3/2016)(L)

     3,727         3,727         3,727   
     

Secured First Lien 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         7,630   
           

 

 

    

 

 

 
              9,379         16,232   

Mitchell Rubber Products, Inc.

  

Chemicals, Plastics, and Rubber

  

Secured Second Lien Term Debt (13.0%, Due 10/2016)(I)(K)

     13,560         13,560         8,136   
     

Secured Second Lien Term Debt (13.0%, Due 12/2015)(I)(K)

     1,500         1,500         900   
     

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

        2,790         —     
     

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

        28         —     
           

 

 

    

 

 

 
              17,878         9,036   

Quench Holdings Corp.

  

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

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

        3,397         5,432   
           

 

 

    

 

 

 
              3,397         5,432   

SBS Industries, LLC

  

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

  

Secured First Lien Term Debt (14.0%, Due 8/2016)(L)

     11,355         11,355         11,355   
     

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

        1,994         2,627   
     

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

        222         183   
           

 

 

    

 

 

 
              13,571         14,165   

 

10


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

  

Principal

    

Cost

    

Fair Value

 

Schylling, Inc.

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Secured First Lien 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

  

Secured First Lien Term Debt (12.5%, Due 5/2018)(E)(K)

     5,000         5,000         4,900   
     

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

        1,499         —     
     

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

        1         —     
           

 

 

    

 

 

 
              6,500         4,900   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 37.4% of total investments at fair value)

      $ 162,598       $ 174,373   
           

 

 

    

 

 

 

AFFILIATE INVESTMENTS(O):

        

Acme Cryogenics, Inc.

  

Chemicals, Plastics, and Rubber

  

Secured Second Lien Term Debt (11.5%, Due 3/2020)(I)(L)

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

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

        7,956         8,519   
     

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

        1,197         —     
     

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

        25         —     
           

 

 

    

 

 

 
              23,678         23,019   

Alloy Die Casting Co.(M)

  

Diversified/Conglomerate Manufacturing

  

Secured First Lien Term Debt (13.5%, Due 10/2018)(K)

     12,215         12,215         12,154   
     

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

        4,064         4,122   
     

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

        41         —     
           

 

 

    

 

 

 
              16,320         16,276   

Behrens Manufacturing, LLC(M)

  

Diversified/Conglomerate Manufacturing

  

Secured First Lien Term Debt (13.0%, Due 12/2018)(L)

     9,975         9,975         9,975   
     

Preferred Stock (2,923 shares) (C)(F)(L)

        2,922         3,447   
           

 

 

    

 

 

 
              12,897         13,422   

B-Dry, LLC

  

Personal, Food and Miscellaneous Services

  

Secured First Lien Line of Credit, $175 available (6.5% (0.8% Unused Fee), Due 12/2016)(L)

     2,075         2,075         1,124   
     

Secured First Lien Term Debt (13.5%, Due 12/2019)(L)

     6,433         6,443         3,490   
     

Secured First Lien Term Debt (13.5%, Due 12/2019)(L)

     840         840         455   
     

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

        2,250         —     
     

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

        300         —     
           

 

 

    

 

 

 
              11,908         5,069   

B+T Group Acquisition Inc.(M)

  

Telecommunications

  

Secured First Lien Line of Credit, $700 available (10.0% (1.0% Unused Fee), Due 6/2015)(L)

     700         700         700   
     

Secured First Lien Term Debt (13.0%, Due 12/2019)(L)

     14,000         14,000         14,000   
     

Preferred Stock (12,841 shares)(C)(F)(L)

        4,196         4,541   
           

 

 

    

 

 

 
              18,896         19,241   

Cambridge Sound Management, Inc.

  

Home and Office Furnishing, Housewares and Durable Consumer Products

  

Secured First Lien Term Debt (13.0%, Due 9/2019)(L)

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

     15,000         15,000         15,000   
              4,500         7,198   
           

 

 

    

 

 

 
              19,500         22,198   

Channel Technologies Group, LLC

  

Diversified/Conglomerate Manufacturing

  

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

        2,864         2,315   
     

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

        —           —     
           

 

 

    

 

 

 
              2,864         2,315   

Counsel Press, Inc.

  

Diversified/Conglomerate Services

  

Secured First Lien Line of Credit, $500 available (12.8% (1.0% Unused Fee), Due 3/2017)(J)

     1,500         1,500         1,500   
     

Secured First Lien Term Debt (12.8%, Due 3/2020)(J)

     18,000         18,000         18,000   
     

Secured First Lien Term Debt (14.0%, Due 3/2020)(J)

     5,500         5,500         5,500   
     

Preferred Stock (6,995 shares)(C)(F)(J)

        6,995         6,995   
           

 

 

    

 

 

 
              31,995         31,995   

D.P.M.S., Inc.

  

Diversified/Conglomerate Manufacturing

  

Secured First Lien Line of Credit, $550 available (4.0% (0.5% Unused Fee), Due 8/2016)(I)(L)

     4,000         4,000         762   
     

Secured First Lien Term Debt (4.0%, Due 8/2016)(I)(L)

     2,575         2,575         490   
     

Secured First Lien Term Debt (4.0%, Due 8/2016)(I)(L)

     8,795         8,795         1,674   
     

Secured First Lien Term Debt (5.0%, Due 8/2016)(E)(L)

     1,150         1,150         219   
     

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

        2,500         —     
     

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

        3         —     
           

 

 

    

 

 

 
              19,023         3,145   

 

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GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

  

Principal

    

Cost

    

Fair Value

 

Edge Adhesives Holdings, Inc.(M)

  

Diversified/Conglomerate Manufacturing

  

Secured First Lien Line of Credit, $10 available (12.5% (1.0% Unused Fee), Due 8/2015)(K)

   $ 1,490       $ 1,490       $ 1,488   
     

Secured First Lien Term Debt (12.5%, Due 2/2019)(K)

     9,300         9,300         9,300   
     

Secured First Lien Term Debt (13.8%, Due 2/2019)(K)

     2,400         2,400         2,403   
     

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

        3,474         3,199   
           

 

 

    

 

 

 
              16,664         16,390   

Head Country, Inc.

  

Beverage, Food and Tobacco

  

Secured First Lien Term Debt (12.5%, Due 2/2019)(L)

     9,050         9,050         9,050   
     

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

        4,000         3,931   
           

 

 

    

 

 

 
              13,050         12,981   

Logo Sportswear, Inc.

  

Textiles and Leather

  

Secured First Lien Line of Credit, $500 available (10.0% (1.0% Unused Fee), Due 9/2015)(J)

     —           —           —     
     

Secured First Lien Term Debt (12.5%, Due 3/2020) (J)

     9,200         9,200         9,200   
     

Preferred Stock (1,550 shares)(C)(F)(J)

        1,550         1,550   
           

 

 

    

 

 

 
              10,750         10,750   

Meridian Rack & Pinion, Inc. (M)

  

Automobile

  

Secured First Lien Term Debt (13.5%, Due 12/2018)(K)

     9,660         9,660         9,612   
     

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

        3,381         3,117   
           

 

 

    

 

 

 
              13,041         12,729   

NDLI, Inc.

  

Cargo Transport

  

Secured First Lien Line of Credit, $50 available (10.5% (0.5% Unused Fee), Due 1/2016)(L)

     2,875         2,875         2,308   
     

Secured First Lien Term Debt (11.0%, Due 1/2018)(L)

     7,227         7,227         5,803   
     

Secured First Lien Term Debt (10.5%, Due 1/2018)(L)

     3,650         3,650         2,931   
     

Secured First Lien Term Debt (10.5%, Due 1/2018)(E)(L)

     3,650         3,650         2,930   
     

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

        3,600         —     
     

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

        —           —     
           

 

 

    

 

 

 
              21,002         13,972   

Old World Christmas, Inc.

  

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Secured First Lien Term Debt (13.3%, Due 10/2019)(L)

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

     15,770         15,770         15,770   
              6,180         6,657   
           

 

 

    

 

 

 
              21,950         22,427   

Precision Southeast, Inc.

  

Diversified/Conglomerate Manufacturing

  

Secured Second Lien Term Debt (14.0%, Due 9/2020)(L)

     9,617         9,617         9,617   
     

Preferred Stock (37,391 shares)(C)(F)(J)

        3,739         1,830   
     

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

        91         —     
           

 

 

    

 

 

 
              13,447         11,447   

SOG Specialty Knives & Tools LLC

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Secured First Lien Term Debt (13.3%, Due 10/2017)(L)

     6,200         6,200         6,200   
     

Secured First Lien Term Debt (14.8%, Due 10/2017)(L)

     12,200         12,200         12,200   
     

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

        9,749         13,451   
           

 

 

    

 

 

 
              28,149         31,851   

Tread Corporation

  

Oil and Gas

  

Secured First Lien Line of Credit, $853 available (12.5%, Due 2/2018)(G)(L)

     2,397         2,397         375   
     

Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L)

     5,000         5,000         782   
     

Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L)

     2,750         2,750         430   
     

Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L)

     1,000         1,000         156   
     

Secured First Lien Term Debt (12.5%, Due on Demand)(G)(I)(L)

     510         510         80   
     

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         —     
           

 

 

    

 

 

 
              15,494         1,823   
           

 

 

    

 

 

 

Total Affiliate Investments (represents 58.2% of total investments at fair value)

  

   $ 310,628       $ 271,050   
           

 

 

    

 

 

 

 

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GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

  

Principal

    

Cost

    

Fair Value

 
CONTROL INVESTMENTS(P):         

Galaxy Tool Holding Corporation

  

Aerospace and Defense

  

Secured First Lien Line of Credit, $1,250 available (10.0% (1.0% Unused Fee), Due 9/2015)(L)

   $ 3,250       $ 3,250       $ 3,250   
     

Secured Second Lien 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         —     
           

 

 

    

 

 

 
              30,282         18,770   

Roanoke Industries Corp.

  

Buildings and Real Estate

  

Secured First Lien Debt (10.0%, Due 11/2019)(I)(L)

     1,650         1,650         1,650   
     

Common Stock (57 shares)(C)(F)(L)

        100         210   
           

 

 

    

 

 

 
              1,750         1,860   
           

 

 

    

 

 

 

Total Control Investments (represents 4.4% of total investments at fair value)

  

   $ 32,032       $ 20,630   
           

 

 

    

 

 

 

TOTAL INVESTMENTS(Q)

      $ 505,258       $ 466,053   
           

 

 

    

 

 

 

 

(A)  Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $435.9 million at fair value, are pledged as collateral to our revolving line of credit as described further in Note 5—Borrowings. Additionally, all of our investments are considered qualifying assets under Section 55 of the Investment Company Act of 1940, as amended, (the “1940 Act”) as of March 31, 2015.
(B)  Percentages represent the weighted average cash interest rates in effect at March 31, 2015, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate. If applicable, paid-in-kind 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 secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT is generally paid after the other secured first lien debt but before the secured second lien 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 was participated to a third party but is accounted for as collateral for a secured borrowing under accounting principles generally accepted in the U.S. and presented as secured borrowing on our accompanying Condensed Consolidated Statement of Assets and Liabilities as of March 31, 2015.
(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, 2015 best represents fair value as of March 31, 2015.
(K)  Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc..
(L)  Fair value was based on the total enterprise value of the portfolio company, which is generally 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, co-invested with us in this portfolio company pursuant to an exemptive order granted by the Securities and Exchange Commission.
(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 that are not Control investments, and 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 $80.6 million; cumulative gross unrealized appreciation for federal income tax purposes is $41.4 million. Cumulative net unrealized depreciation is $39.2 million, based on a tax cost of $505.6 million.

 

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GLADSTONE INVESTMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

(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”), and is applying the guidance of FASB ASC Topic 946 Financial Services-Investment Companies. 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 two types of loans: secured first lien loans and secured second lien loans. 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 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 75.0% debt investments and 25.0% 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 line of credit. The financial statements of Business Investment are consolidated with those of Gladstone Investment. We also have significant subsidiaries (as defined under Rule 1-02(w) of the U.S. Securities and Exchange Commission’s (“SEC”) Regulation S-X) whose financial statements are not consolidated with ours. Refer to Note 12—Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of SEC Regulation S-X. Accordingly, we have omitted certain disclosures accompanying annual financial statements prepared in accordance with GAAP. The accompanying Condensed Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X, and the authoritative accounting guidance provided by the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any subsidiary or other entity that is not an investment company, 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 months ended June 30, 2015 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, 2015, as filed with the SEC on May 20, 2015.

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.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation in the condensed consolidated financial statements and related notes. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities or total net assets, or statement of changes in net assets and statement of cash flows classifications.

 

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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 has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our investment valuation policy (which has been approved by our Board of Directors) (the “Policy”). Our Board of Directors reviews valuation recommendations that are provided by professionals of the Adviser and Administrator with oversight and direction from the chief 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 chief 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 fair value of certain of our investments.

Standard & Poor’s Securities Evaluation, Inc. (“SPSE”) provides estimates of fair value on 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 estimate 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 fair value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.

We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review our valuation of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our total enterprise value, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value and whether it 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 fair value.

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 generally 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.

 

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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 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.

 

    Market Quotes — For our investments for which a limited market exists, we generally base fair on readily available and reliable market quotations, which are corroborated by the Valuation Team (generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (“IBP”) in the bid-to-ask price range obtained from the respective originating syndication agent’s trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy.

 

    Investments in Funds — For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our invested capital at the Net Asset Value (“NAV”) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.

In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value 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 current reporting quarter (the three months ended June 30, 2015) are generally valued at our original cost basis.

Fair value measurements of our investments may involve subjective judgments and estimates and, due to the uncertainty inherent in valuing these securities, the Adviser’s determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the Adviser’s determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.

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

Revenue Recognition Policy

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

 

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remain current, or due to a restructuring, the interest income is deemed to be collectible. As of June 30, 2015, our loans to Tread Corporation (“Tread”) were on non-accrual status, with an aggregate debt cost basis of $11.3 million, or 3.0% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $3.0 million, or 0.9% of the fair value of all debt investments in our portfolio. As of March 31, 2015, our loans to Tread were on non-accrual status, with an aggregate debt cost basis of $11.7 million, or 3.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $1.8 million, or 0.5% of the fair value of all debt investments in our portfolio.

Paid-in-kind (“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 June 30, 2015 and March 31, 2015, respectively, we did not have any loans with a PIK interest component. During the three months ended June 30, 2015 and June 30, 2014, we recorded PIK income of $0 and $29, respectively.

Other Income Recognition

We generally record success fees upon receipt of cash. Typically, success fees are contractually due upon a change of control in a portfolio company. During the three months ended June 30, 2015, we recorded success fees of $0.2 million, which resulted from prepayments from Drew Foam Company, Inc. (“Drew Foam”). We did not record any success fees during the three months ended June 30, 2014.

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 months ended June 30, 2015, we recorded $1.1 million of dividend income resulting from payments from Drew Foam and Funko, LLC (“Funko”). For the three months ended June 30, 2014, we recorded $1.4 million of dividend income primarily consisting of a receivable from Mathey Investments, Inc. (“Mathey”). We collected the Mathey dividend receivable on July 1, 2014.

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

Related Party Fees

We have entered into an investment advisory and management agreement (the “Advisory Agreement”) with the Adviser, which is controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. Additionally, we pay the Advisor a loan servicing fee as compensation for its services as servicer under the terms of our Fifth Amended and Restated Credit Agreement dated April 30, 2013, as amended (our “Credit Facility”).

We have entered into an administration agreement (the “Administration Agreement”) with the Administrator whereby we pay separately for administrative services. These fees are accrued when the services are performed and generally paid one month in arrears. Refer to Note 4—Related Party Transactions for additional information regarding these related party fees and agreements.

Recent Accounting Pronouncements

In May 2015, the FASB issued Accounting Standards Update 2015-07, “Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or its Equivalent)” (“ASU 2015-07”), which eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. We are currently assessing the impact of ASU 2015-07 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-07 is required to be adopted retrospectively and is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.

In April 2015, the FASB issued Accounting Standards Update 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which simplifies the presentation of debt issuance costs. We are currently assessing the impact of ASU 2015-03 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.

In February 2015, the FASB issued Accounting Standards Update 2015-02, “Amendments to the Consolidation Analysis” (“ASU 2015-02”), which amends or supersedes the scope and consolidation guidance under existing GAAP. The new standard changes the way a reporting entity evaluates whether a) limited partnerships and similar entities should be consolidated, b) fees paid to decision makers or service provides are variable interests in a variable interest entity (“VIE”), and c) variable interests in a VIE held by related parties require the reporting entity to consolidate the VIE. ASU 2015-02 also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. We do not anticipate ASU 2015-02 to have a material impact on our financial position, results of operations or cash flows. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.

 

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In August 2014, the FASB issued Accounting Standards Update 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”). 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 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 Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), 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 that begin after December 15, 2017 and interim periods within those years, with early adoption 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 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 June 30, 2015 and March 31, 2015, all of our investments were valued using Level 3 inputs. We transfer investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three months ended June 30, 2015 and 2014, there were no transfers in or out of Level 1, 2 and 3.

The following table presents our portfolio investments carried at fair value as of June 30, 2015 and March 31, 2015, 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:

 

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     Total Recurring Fair Value Measurement
Reported in 
Condensed Consolidated Statements
of Assets and Liabilities
 
     June 30, 2015      March 31, 2015  

Non-Control/Non-Affiliate Investments

     

Secured first lien debt

   $ 81,714       $ 86,586   

Secured second lien debt

     29,837         26,336   

Preferred equity

     43,626         40,217   

Common equity/equivalents

     24,404         21,234   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     179,581         174,373   

Affiliate Investments

     

Secured first lien debt

     193,563         176,059   

Secured second lien debt

     19,709         24,118   

Preferred equity

     69,120         70,873   
  

 

 

    

 

 

 

Total Affiliate Investments

     282,392         271,050   

Control Investments

     

Secured first lien debt

     3,750         4,900   

Secured second lien debt

     15,520         15,520   

Preferred equity

     —           —     

Common equity/equivalents

     —           210   
  

 

 

    

 

 

 

Total Control Investments

     19,270         20,630   
  

 

 

    

 

 

 

Total Investments at fair value using Level 3 inputs

   $ 481,243       $ 466,053   
  

 

 

    

 

 

 

In accordance with the FASB’s ASU No. 2011-04, “Fair Value Measurement (Topic 820): 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 investments valued using Level 3 fair value measurements as of June 30, 2015 and March 31, 2015. The table below 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 June 30,
2015
     Fair Value as
of March 31,
2015
     Valuation
Technique/

Methodology
  

Unobservable
Input

  

    Range / Weighted    
Average as of

June 30, 2015

  

    Range / Weighted    
Average as of

March 31, 2015

Secured first lien debt (A)

   $ 229,451       $ 212,954       TEV   

EBITDA

multiples

   3.7x – 15.9x / 6.7x    4.2x – 18.2x / 6.8x
            EBITDA   

$449 – $8,305 /

$3,228

  

$712 – $5,871 /

$3,185

            Discount Rate    20.0% –20.0% / 20.0%    —  
     49,576         54,591       Yield Analysis    Discount Rate    2.8% –14.0% / 10.8%    5.0% – 13.7% /11.3%

Secured second lien debt

     56,938         56,938       TEV    EBITDA multiples    5.7x – 6.2x / 4.4x    4.8x –7.0x / 6.2x
            EBITDA    $1,092 – $5,232 / $2,425    $1,135 – $5,462 / $3,677
     8,129         9,036       Yield Analysis    Discount Rate   

29.5% – 29.5% /

29.5%

  

20.5% – 20.5% /

20.5%

Preferred equity(B)

     112,745         111,090       TEV    EBITDA multiples    3.7x – 15.9x / 6.6x    3.6x – 18.2x / 6.6x
            EBITDA    $449 – $39,409 / $3,909    $712 – $29,235 / $3,749

Common equity/equivalents

     24,404         21,444       TEV    EBITDA multiples    3.7x – 15.9x / 8.6x    3.6x – 18.2x / 9.4x
            EBITDA    $449 – $17,444 / $10,619    $712 – $15,240 / $9,149
  

 

 

    

 

 

             

Total

   $ 481,243       $ 466,053      
  

 

 

    

 

 

             

 

(A)  June 30, 2015 includes one new proprietary debt investment with a fair value of $11.3 million, which was valued at cost. March 31, 2015 includes two new proprietary debt investments with a combined fair value of $34.2 million, which were valued at cost.
(B)  June 30, 2015 includes one new proprietary equity investments with a fair value of $4.9 million, which was valued at cost. March 31, 2015 includes two new proprietary equity investments with a combined fair value of $8.5 million, which were valued at cost.

 

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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/(decrease) in market yields, discount rates or leverage or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase in the fair value of certain of our investments.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three months ended June 30, 2015 and 2014 for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

FISCAL YEAR TO DATE 2016:   Secured
First Lien
Debt
    Secured
Second Lien
Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Three months ended June 30, 2015:

         

Fair value as of March 31, 2015

  $ 267,545      $ 65,974      $ 111,090      $ 21,444      $ 466,053   

Total gain (loss):

         

Net realized gain(A)

    —          —          —          215        215   

Net unrealized appreciation (depreciation)(B)

    3,833        (107     (3,589     3,170        3,307   

Reversal of previously recorded appreciation upon realization(B)

    —          —          —          (110     (110

New investments, repayments and settlements(C):

         

Issuances / Originations

    12,082        —          5,244        —          17,326   

Settlements / Repayments

    (4,433     (800     —          —          (5,233

Sales

    —          —          —          (315     (315

Transfers

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2015

  $ 279,027      $ 65,067      $ 112,745      $ 24,404      $ 481,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
FISCAL YEAR TO DATE 2015:   Secured
First Lien
Debt
    Secured
Second Lien
Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Three months ended June 30, 2014:

         

Fair value as of March 31, 2014

  $ 174,382      $ 66,315      $ 62,901      $ 10,795      $ 314,393   

Total gain (loss):

         

Net realized gain (loss) (A)

    —          —          —          —          —     

Net unrealized appreciation (depreciation)(B)

    6,241        (746     (2,157     2,122        5,460   

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

    —          —          —          —          —     

New investments, repayments and settlements(C):

         

Issuances / Originations

    1,539        250        250        —          2,039   

Settlements / Repayments

    —          —          (60     —          (60

Sales

    —          —          —          —          —     

Transfers

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2014

  $ 182,162      $ 65,819      $ 60,934      $ 12,917      $ 321,832   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)  Included in net realized gain (loss) on investments on our accompanying Condensed Consolidated Statements of Operations for the respective periods ended June 30, 2015 and 2014.
(B)  Included in net unrealized appreciation (depreciation) of investments on our accompanying Condensed Consolidated Statements of Operations for the periods ended June 30, 2015 and 2014.
(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.

 

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Table of Contents

Investment Activity

During the three months ended June 30, 2015, the following significant transactions occurred:

 

    In May 2015, we invested $16.3 million in Brunswick Bowling Products, Inc., (“Brunswick”) through a combination of secured first lien debt and equity. Brunswick, headquartered in Muskegon, Michigan, is a leader in the recreation industry and provides industry expertise, products, installation and maintenance for the development and renovation of new and existing centers as well as mixed-use facilities across the entertainment industry.

 

    In June 2015, we sold our investment in Roanoke Industries Corp. (“Roanoke”). As a result of the sale, we received net cash proceeds of $0.3 million, resulting in a net realized gain of $0.2 million. In addition, we received full repayment of our debt investment of $1.7 million.

Investment Concentrations

As of June 30, 2015, our investment portfolio consisted of investments in 34 portfolio companies located in 17 states across 17 different industries with an aggregate fair value of $481.2 million, of which our investments in Funko, SOG Specialty Knives & Tools, LLC (“SOG”), Counsel Press Inc. (“Counsel Press”), Cambridge Sound Management, Inc. (“Cambridge”), and Acme Cryogenics, Inc. (“Acme”), our five largest portfolio investments at fair value, collectively comprised $142.2 million, or 29.5%, of our total investment portfolio at fair value. The following table summarizes our investments by security type as of June 30, 2015 and March 31, 2015:

 

     June 30, 2015     March 31, 2015  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 306,097         59.2   $ 279,027         58.0   $ 298,448         59.1   $ 267,545         57.4

Secured second lien debt

     71,198         13.8        65,067         13.5        71,998         14.2        65,974         14.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

     377,295         73.0        344,094         71.5        370,446         73.3        333,519         71.6   

Preferred equity

     133,006         25.7        112,745         23.4        127,762         25.3        111,090         23.8   

Common equity/equivalents

     6,950         1.3        24,404         5.1        7,050         1.4        21,444         4.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity/equivalents

     139,956         27.0        137,149         28.5        134,812         26.7        132,534         28.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 517,251         100.0   $ 481,243         100.0   $ 505,258         100.0   $ 466,053         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications as of June 30, 2015 and March 31, 2015:

 

     June 30, 2015     March 31, 2015  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

Home and Office Furnishings, Housewares, and Durable Consumer Products

   $ 85,395         17.7   $ 70,533         15.1

Diversified/Conglomerate Manufacturing

     64,544         13.4        62,996         13.5   

Chemicals, Plastics, and Rubber

     50,631         10.5        49,312         10.6   

Leisure, Amusement, Motion Pictures, Entertainment

     42,846         8.9        44,931         9.6   

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

     32,930         6.8        30,397         6.5   

Personal and Non-Durable Consumer Products (Manufacturing Only)

     31,221         6.5        25,008         5.4   

Diversified/Conglomerate Service

     29,463         6.1        31,995         6.9   

Containers, Packaging, and Glass

     22,494         4.7        19,447         4.2   

Automobile

     21,872         4.5        24,530         5.3   

Farming and Agriculture

     19,669         4.1        22,438         4.8   

Aerospace and Defense

     19,270         4.0        18,770         4.0   

Telecommunications

     14,000         2.9        19,241         4.1   

Cargo Transport

     13,972         2.9        13,972         3.0   

Beverage, Food and Tobacco

     12,827         2.7        12,982         2.8   

Textiles and Leather

     11,954         2.5        10,750         2.3   

Other < 2.0%

     8,155         1.8        8,751         1.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 481,243         100.0   $ 466,053         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Investments at fair value were included in the following geographic regions of the U.S. as of June 30, 2015 and March 31, 2015:

 

     June 30, 2015     March 31, 2015  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

West

   $ 160,470         33.4   $ 161,444         34.6

Northeast

     136,415         28.3        133,814         28.7   

South

     129,837         27.0        133,703         28.7   

Midwest

     54,521         11.3        37,092         8.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 481,243         100.0   $ 466,053         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

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 June 30, 2015:

 

          Amount  

For the remaining nine months ending March 31:

   2016    $ 17,467   

For the fiscal year ending March 31:

   2017      43,986   
   2018      99,483   
   2019      81,681   
   2020      113,753   
   Thereafter      20,925   
     

 

 

 
  

Total contractual repayments

   $ 377,295   
   Investments in equity securities      139,956   
     

 

 

 
  

Total cost basis of investments held at June 30, 2015:

   $ 517,251   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies. Such receivables, net of any allowance for uncollectible receivables, 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. We charge the accounts receivable to the established allowance when collection efforts have been exhausted and the receivables are deemed uncollectible. As of June 30, 2015 and March 31, 2015, we had gross receivables from portfolio companies of $1.9 million and $1.5 million, respectively. The allowance for uncollectible receivables was $0.6 and $0.3 million as of June 30, 2015 and March 31, 2015.

NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with our Adviser

We pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee, as provided for in the Advisory Agreement, and of a loan servicing fee, for the Advisor’s role as servicer pursuant to our Credit Facility, each as described below. On July 14, 2015, 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, 2016.

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

 

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Table of Contents
     Three Months Ended June 30,  
     2015     2014  

Average total assets subject to base management fee(A)

   $ 490,600      $ 333,200   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee(B)

     2,453        1,666   

Credits to fees from Adviser - other(B)(C)

     (845     (382
  

 

 

   

 

 

 

Net base management fee

   $ 1,608      $ 1,284   
  

 

 

   

 

 

 

Loan servicing fee(B)

   $ 1,559      $ 1,135   

Credits to base management fee - loan servicing fee(B)

     (1,559     (1,135
  

 

 

   

 

 

 

Net loan servicing fee

   $ —        $ —     
  

 

 

   

 

 

 

Incentive fee(B)

   $ 1,291      $ 1,215   

Credits to fees from Adviser - other(B)

     —          —     
  

 

 

   

 

 

 

Net incentive fee

   $ 1,291      $ 1,215   
  

 

 

   

 

 

 

 

(A)  Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B)  Reflected as a line item on our accompanying Condensed Consolidated Statement of Operations.
(C)  Pursuant to the requirements of the 1940 Act, we make available significant managerial assistance to our portfolio companies through the personnel of 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. At the end of each quarter, the Adviser credits 100.0% of these fees 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.

Base Management Fee

The base management fee is payable quarterly to the Adviser and is assessed at an annual rate of 2.0%, computed on the basis of the value of our average gross assets at the end of the two most recently completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, and adjusted appropriately for any share issuances or repurchases during the period.

Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser voluntarily, unconditionally, and irrevocably credits 100% of these fees 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 the valuation of portfolio companies, is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser.

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”). The income-based incentive fee with respect to our pre-incentive fee net investment income is payable quarterly to the Adviser and is computed 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% of our net assets in any calendar quarter (8.75% annualized); and

 

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

The second part of the incentive fee is a capital gains-based incentive fee that is 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, less any realized capital losses and unrealized depreciation, calculated as of the end of the preceding calendar year. The capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital losses since our inception, less (iii) the entire portfolio’s aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, 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. For calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of the excess 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 deficit between the net sales price of each investment, when sold, and the original cost of such investment since our inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of deficit between the fair value of each investment security as of the applicable calculation date and the original cost of such investment security. We have not incurred capital gains-based incentive fees from inception through June 30, 2015, 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 reporting 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 any such unrealized capital appreciation will be realized in the future. There has been no GAAP accrual recorded for a capital gains-based incentive fee since our inception through June 30, 2015.

Loan Servicing Fee

The Adviser also services the loans held by our wholly-owned subsidiary, Business Investment (the borrower under our Credit Facility), in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under our Credit Facility. Since Business Investment is a consolidated subsidiary of ours, and the total base management fee paid to the Adviser pursuant to the Advisory Agreement, cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given calendar year, we treat payment of the loan servicing fee pursuant to our Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% voluntarily, unconditionally, and irrevocably credited back to us by the Adviser.

Administration Agreement

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

Effective July 1, 2014, our allocable 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. These administrative fees are accrued at the end of the quarter when the services are performed and recorded on our accompanying Condensed Consolidated Statements of Operations and generally paid the following quarter. On July 14, 2015, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2016.

Related Party Fees Due

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

 

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     As of June 30,      As of March 31  
     2015      2015  

Base management fee due to Adviser

   $ 453       $ 191   

Incentive fee due to Adviser

     1,291         1,249   

Other due to Adviser

     66         62   
  

 

 

    

 

 

 

Total fees due to Adviser

   $ 1,810       $ 1,502   

Fee due to Administrator

   $ 355       $ 262   
  

 

 

    

 

 

 

Total related party fees due

   $ 2,165       $ 1,764   
  

 

 

    

 

 

 

Net co-investment expense receivable from or payable to Gladstone Capital (for reimbursement purposes) and payables to other affiliates totaled a receivable of $0.2 million as of June 30, 2015 and a payable of $0.3 million as of March 31, 2015, respectively. These amounts were received or paid in full in the quarter subsequent to being incurred and have been included in other assets and other liabilities, as appropriate, on the accompanying Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2015 and March 31, 2015, 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. If not renewed or extended prior to June 26, 2017 (the “Revolving Period End Date”), all principal and interest will be due and payable on or before June 26, 2019. Subject to certain terms and conditions, our Credit Facility can be expanded up 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 London Interbank Offered Rate (“LIBOR”), plus 3.25% per annum, and our Credit Facility includes a fee of 0.50% on undrawn amounts. After the Revolving Period End Date, 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.

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

 

     As of June 30,     As of March 31,  
     2015     2015  

Commitment amount

   $ 185,000      $ 185,000   

Borrowings outstanding at cost

     89,750        118,800   

Availability

     95,250        66,200   
     For the Three Months Ended
June 30,
 
     2015     2014  

Weighted average borrowings outstanding

   $ 103,142      $ 60,423   

Effective interest rate(A)

     3.9     4.3

Commitment (unused) fees incurred

   $ 102      $ 56   

 

(A)  Excludes the impact of deferred financing fees and includes weighted average unused commitment fees.

Among other things, our Credit Facility includes a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatory redeemable term preferred stock) of $170 million plus 50% of all equity and subordinated debt raised minus any equity or subordinated debt redeemed or retired after June 26, 2014, which equates to $224.9 million as of June 30, 2015, (ii) “asset coverage” with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) its status as a BDC under the 1940 Act and as a RIC under the Code. As of June 30, 2015, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $395.6 million, an asset coverage of 226.4% 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 June 30, 2015, we had 28 obligors in its borrowing base. As of June 30, 2015, we were in compliance with all covenants under our Credit Facility.

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 June 30, 2015 and March 31, 2015, the fair value of our interest rate cap agreement was $0.

 

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Secured Borrowing

In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our secured second lien 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 secured second lien term debt investment in Ginsey and a corresponding $5.1 million secured borrowing liability. The secured borrowing has a stated interest rate of 7.0% and a maturity date of January 3, 2018.

Fair Value

We elected to apply the fair value option of ASC 825, “Financial Instruments,” specifically for our Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined 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. At each of June 30, 2015 and March 31, 2015, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.25% per annum, plus a 0.50% unused fee. 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. At each of June 30, 2015 and March 31, 2015, our Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying Condensed Consolidated Statements of Operations.

The following tables present our Credit Facility carried at fair value as of June 30, 2015 and March 31, 2015, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and a roll-forward of the changes in fair value during the three months ended June 30, 2015 and 2014:

 

     Level 3 –Borrowings  
     Recurring Fair Value Measurement
Reported in Condensed Consolidated
Statements of Assets and Liabilities Using Significant
Unobservable Inputs (Level 3)
 
     June 30, 2015      March 31, 2015  

Credit Facility

   $ 89,750       $ 118,800   
  

 

 

    

 

 

 

 

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Fair Value Measurements of Borrowings Using  

Significant Unobservable Inputs (Level 3)

Reported in

Consolidated Statements

of Assets and Liabilities

 
     Credit
Facility
 

Three months ended June 30, 2015:

  

Fair value at March 31, 2015

   $ 118,800   

Borrowings

     38,500   

Repayments

     (67,550

Net unrealized appreciation(A)

     —     
  

 

 

 

Fair value at June 30, 2015

   $ 89,750   
  

 

 

 

Three months ended June 30, 2014:

  

Fair value at March 31, 2014

   $ 61,701   

Borrowings

     6,300   

Repayments

     (4,600

Net unrealized depreciation(A)

     (451
  

 

 

 

Fair value at June 30, 2014

   $ 62,950   
  

 

 

 

 

(A)  Included in net unrealized (depreciation) appreciation of other on our accompanying Condensed Consolidated Statement of Operations for the periods ended June 30, 2015 and 2014.

The fair value of the collateral under our Credit Facility was $447.9 million and $435.9 million as of June 30, 2015 and March 31, 2015, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In May, 2015, we completed a public offering of 1,610,000 shares of 6.50% Series C Cumulative Term Preferred Stock (our “Series C Term Preferred Stock” or “Series C”) at a public offering price of $25.00 per share. Gross proceeds totaled $40.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $38.6 million. We incurred $1.6 million in total offering costs related this offering, 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 May 31, 2022, the mandatory redemption date.

The shares of Series C Term Preferred Stock are traded under the ticker symbol GAINN on the NASDAQ Global Select Market (“NASDAQ”). Our Series C Term Preferred Stock is not convertible into our common stock or any other security. Our Series C Term Preferred Stock provides for a fixed dividend equal to 6.50% per year, payable monthly. We are required to redeem all shares of our outstanding Series C Term Preferred Stock on May 31, 2022, 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 C Term Preferred Stock, and (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 C Term Preferred Stock or otherwise cure the ratio redemption trigger. We may also voluntarily redeem all or a portion of our Series C 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 May 31, 2018.

The following tables summarize our 7.125% Series A Cumulative Term Preferred Stock (our “Series A Term Preferred Stock” or “Series A”), 6.75% Series B Cumulative Term Preferred Stock (our “Series B Term Preferred Stock” or “Series B”), and Series C Term Preferred Stock outstanding as of June 30, 2015 and March 31, 2015:

 

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As of June 30, 2015:

 

Class of Term

Preferred Stock

  

Ticker Symbol

  

Date Issued

  

Redemption Date

   Interest Rate     Shares
Outstanding
     Liquidation
Preference
per Share
     Total
Liquidation
Preference
 

Series A

   GAINP    March 6, 2012    February 28, 2017      7.125     1,600,000       $ 25.00       $ 40,000   

Series B

   GAINO    November 13, 2014    December 31, 2021      6.750     1,656,000         25.00         41,400   

Series C

   GAINN    May 12, 2015    May 31, 2022      6.500     1,610,000         25.00         40,250   
             

 

 

    

 

 

    

 

 

 

Total as of June 30, 2015

          4,866,000       $ 25.00       $ 121,650   
             

 

 

    

 

 

    

 

 

 

As of March 31, 2015:

 

Class of Term
Preferred Stock

  

Ticker Symbol

  

Date Issued

  

Redemption Date

   Interest Rate     Shares
Outstanding
     Liquidation
Preference
per Share
     Total
Liquidation
Preference
 

Series A

   GAINP    March 6, 2012    February 28, 2017      7.125     1,600,000       $ 25.00       $ 40,000   

Series B

   GAINO    November 13, 2014    December 31, 2021      6.750     1,656,000         25.00         41,400   
             

 

 

    

 

 

    

 

 

 

Total as of March 31, 2015

          3,256,000       $ 25.00       $ 81,400   
             

 

 

    

 

 

    

 

 

 

The following tables summarize dividends declared by our Board of Directors and paid by us on each of our series of cumulative preferred stock during the three months ended of June 30, 2015 and 2014:

For the three months ended June 30, 2015:

 

Declaration Date

  

Record Date

  

Payment Date

   Dividend per
Series A
Term
Preferred
Share
     Dividend
per Series B
Term
Preferred
Share
     Dividend
per Series C
Term
Preferred
Share
 

April 14, 2015

   April 24, 2015    May 5, 2015    $ 0.1484375       $ 0.140625       $ —     

April 14, 2015

   May 19, 2015    May 29, 2015      0.1484375         0.140625         —     

April 14, 2015

   June 19, 2015    June 30, 2015      0.1484375         0.140625         —     

May 14, 2015(A)

   June 19, 2015    June 30, 2015      —           —           0.221181   
        

 

 

    

 

 

    

 

 

 
      Total    $ 0.4453125       $ 0.421875       $ 0.221181   
        

 

 

    

 

 

    

 

 

 

 

(A)  Represents a combined dividend for a prorated month of May 2015, based upon the issuance date of our Series C Term Preferred Stock, and a full month of June 2015.

For the three months ended June 30, 2014:

 

Declaration Date

  

Record Date

  

Payment Date

   Dividend per
Series A
Term
Preferred
Share
 

April 8, 2014

   April 21, 2014    April 30, 2014    $ 0.1484375   

April 8, 2014

   May 20, 2014    May 30, 2014      0.1484375   

April 8, 2014

   June 19, 2014    June 30, 2014      0.1484375   
        

 

 

 
      Total    $ 0.4453125   
        

 

 

 

The tax character of dividends paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.

 

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In accordance with ASC 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet and we have recorded our mandatorily redeemable term preferred stock at cost as of June 30, 2015 and March 31, 2015. The related dividend payments to preferred stockholders are treated as dividend expense on our accompanying Condensed Consolidated Statements of Operations at the ex-dividend date.

The following table summarizes the fair value of each of our series of cumulative preferred stock, each of which we consider to be a Level 1 liability within the fair value hierarchy, based on the last reported closing sale price as of June 30, 2015 and March 31, 2015:

 

     Level 1 – Borrowings  
     Recurring Fair Value Measurement
Reported in 
Condensed Consolidated
Statements of Assets and Liabilities
 
     June 30, 2015      March 31, 2015  

Series A Term Preferred Stock

   $ 41,568       $ 41,472   

Series B Term Preferred Stock

     42,145         42,228   

Series C Term Preferred Stock

     40,653         —     
  

 

 

    

 

 

 

Total

   $ 124,366       $ 83,700   
  

 

 

    

 

 

 

NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS

Registration Statement

On June 16, 2015, we filed a registration statement on Form N-2 (File No. 333-204996) with the SEC and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 28, 2015, which the SEC declared effective on July 29, 2015. 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 concurrent, separate offerings of such securities. We currently have the ability to issue up to $300.0 million in securities under the registration statement. No securities have been issued to date under the registration statement.

Common Equity Offerings

On March 13, 2015, we completed a public offering of 3.3 million shares of our common stock at a public offering price of $7.40 per share, which was below our then current NAV per share. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $23.0 million, which was used to repay borrowings under our Credit Facility. In April 2015, the underwriters exercised their option to purchase an additional 495,000 shares at the public offering price of $7.40 per share to cover over-allotments, which resulted in gross proceeds of $3.7 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, of approximately $3.4 million.

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

The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per weighted average common share for the three months ended June 30, 2015 and 2014:

 

     Three Months Ended June 30,  
     2015      2014  

Numerator: net increase in net assets resulting from operations

   $ 8,559       $ 10,770   

Denominator: basic and diluted weighted average common shares

     30,260,079         26,475,958   
  

 

 

    

 

 

 

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

   $ 0.28       $ 0.41   
  

 

 

    

 

 

 

 

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NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC, we are required to distribute to our common stockholders 90% of our investment company taxable income. The amount to be paid out as distributions to our common stockholders is determined by our Board of Directors quarterly and is based on management’s estimate of the investment company taxable income. Based on that estimate, our Board of Directors declares three monthly distributions to common stockholders each quarter.

The federal income tax characteristics of all distributions (including preferred stock dividends) will be reported to stockholders on the Internal Revenue Service Form 1099 at the end of each calendar year. For calendar years ended December 31, 2014 and 2013, 100% of our common distributions during these periods were deemed to be paid from ordinary income for 1099 stockholder reporting purposes.

We paid the following monthly distributions to our common stockholders for the three months ended June 30, 2015 and 2014:

 

Fiscal Year

  

Declaration Date

  

Record Date

  

Payment Date

   Distribution
per Common Share
 
2016    April 14, 2015    April 24, 2015    May 5, 2015    $ 0.0625   
   April 14, 2015    May 19, 2015    May 29, 2015      0.0625   
   April 14, 2015    June 19, 2015    June 30, 2015      0.0625   
           

 

 

 
     

Three months ended June 30, 2015:

   $ 0.1875   
           

 

 

 

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   
           

 

 

 
     

Three months ended June 30, 2014:

   $ 0.18   
           

 

 

 

Aggregate distributions to common stockholders declared quarterly and paid for the three months ended June 30, 2015 and 2014 were $5.7 million and $4.8 million, respectively, and were declared based on estimates of net investment income for the respective fiscal years. We determine the tax characterization of our distributions to common stockholders as of the end of our fiscal year based upon our taxable income for the full year and distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year. If we determined the tax attributes of our distributions as of June 30, 2015, 100% would be from ordinary income and 0% would be a return of capital. For the three months ended June 30, 2015, we recorded a $0.2 million adjustment for estimated book-tax differences which decreased Capital in excess of par value and increased Net investment income in excess of distributions. For the fiscal year ended March 31, 2015, 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 $4.0 million of the first common distributions paid in fiscal year 2016, as having been paid in the prior year.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of June 30, 2015, we have not established reserves for such loss contingencies.

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. We establish a contingent liability against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liability recorded against the escrow amounts was $0 as of both June 30, 2015 and March 31, 2015.

 

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Financial Commitments and Obligations

We have lines of credit and other uncalled capital commitments to certain of our portfolio companies that have not been fully drawn. Since these lines of credit and other uncalled capital commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and other uncalled capital commitment amounts do not necessarily represent future cash requirements. In February 2015, we executed a capital call commitment with Tread and its senior credit facility lender, which expires in February 2018. Under the terms of the agreement, we may be required to fund additional capital up to $10.0 million in Tread, but in all cases limited to the actual amount outstanding under Tread’s senior credit facility. The actual amount outstanding under Tread’s senior credit facility as of June 30, 2015 and March 31, 2015 was $4.3 million and $4.4 million, respectively. We estimate the fair value of the combined unused line of credit and other uncalled capital commitments as of June 30, 2015 and March 31, 2015 to be immaterial.

In addition to the lines of credit and other uncalled capital commitments to our portfolio companies, we have also extended certain guaranties on behalf of some our portfolio companies. During the three months ended June 30, 2015, we have not been required to make any payments on any of the guaranties, and we consider the credit risks to be remote and the fair value of the guaranties as of June 30, 2015 and March 31, 2015 to be immaterial.

As of June 30, 2015, the following guaranties were outstanding:

 

    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 of each subsequent year through February 2015 and expires in February 2016, unless it is renewed again by us, CCE and Agricredit.

 

    In April 2010, we executed a guarantee of vendor recourse for up to $0.5 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 $0.5 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 2015 to October 2016.

The following table summarizes the dollar balance of unused line of credit and other uncalled capital commitments and guaranties as of June 30 and March 31, 2015, which are not reflected as liabilities in the accompanying Condensed Consolidated Statements of Assets and Liabilities:

 

     June 30, 2015      March 31, 2015  

Unused line of credit and other uncalled capital commitments

   $ 8,544       $ 10,031   

Guarantees

     2,533         2,593   
  

 

 

    

 

 

 

Total

   $ 11,077       $ 12,624   
  

 

 

    

 

 

 

 

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NOTE 11. FINANCIAL HIGHLIGHTS

 

     Three Months Ended June 30,  
     2015     2014  

Per Common Share Data:

    

Net asset value at beginning of period(A)

   $ 9.18      $ 8.34   

Income from investment operations(B)

    

Net investment income

     0.17        0.18   

Realized gain on sale of investments and other

     0.01        —     

Net unrealized appreciation of investments and other

     0.11        0.23   
  

 

 

   

 

 

 

Total from investment operations

     0.29        0.41   

Effect of equity capital activity(B)

    

Cash distributions to common stockholders(C)

     (0.19     (0.18

Shelf registration offering costs

     (0.01     —     

Net dilutive effect of equity offering(D)

     (0.03     —     
  

 

 

   

 

 

 

Total from equity capital activity

     (0.23     (0.18
  

 

 

   

 

 

 

Net asset value at end of period(A)

   $ 9.24      $ 8.57   
  

 

 

   

 

 

 

Per common share market value at beginning of period

   $ 7.40      $ 8.27   

Per common share market value at end of period

     7.95        7.40   

Total return(E)

     10.07     (8.40 )% 

Common stock outstanding at end of period(A)

     30,270,958        26,475,958   

Statement of Assets and Liabilities Data:

    

Net assets at end of period

   $ 279,754      $ 226,841   

Average net assets(F)

     278,746        222,719   

Senior Securities Data:

    

Total borrowings, at cost

   $ 94,846      $ 68,046   

Mandatorily redeemable preferred stock

     121,650        40,000   

Asset coverage ratio(G)

     226     300

Average coverage per unit(H)

   $ 2,264      $ 2,995   

Ratios/Supplemental Data:

    

Ratio of expenses to average net assets - annualized(I)

     14.27     11.67

Ratio of net expenses to average net assets - annualized(J)(K)

     10.82        8.94   

Ratio of net investment income to average net assets - annualized(L)

     7.41        8.73   

 

(A)  Based on actual common shares outstanding at the end of the corresponding period.
(B)  Based on weighted average per basic common share data.
(C)  Distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP. For the three months ended June 30, 2015 and 2014, distributions were deemed to be made from net investment income.
(D)  In the period ended June 30, 2015, the dilution is the result of issuing common shares at a price below then current NAV.
(E)  Total return equals the change in the market value of our common stock from the beginning of the period, taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9—Distributions to Common Stockholders.
(F)  Calculated using the average balance of net assets at the end of each month of the reporting period.
(G)  As a BDC, we are generally required to maintain an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200% on our senior securities representing indebtedness and our senior securities that are stock. Our mandatorily redeemable preferred stock is a senior security that is stock.
(H)  Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness.
(I)  Ratio of expenses to average net assets is computed using expenses before any credits from the Adviser.
(J)  Ratio of net expenses to average net assets is computed using total expenses, net of credits to the base management fee for the loan servicing fee and other credits from the Adviser
(K)  Had we not received any voluntary, unconditional, and irrevocable credits of fees due to the Adviser, the ratio of expenses to average net assets would have been 14.27% and 11.67% for the three months ended June 30, 2015 and 2014, respectively.
(L)  Had we not received any voluntary, unconditional, and irrevocable credits of fees due to the Adviser, the ratio of net investment income to average net assets would have been 3.96% and 6.00% for the three months ended June 30, 2015 and 2014, respectively.

 

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NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES

In accordance with the SEC’s Regulation S-X and GAAP, we are not permitted to consolidate any subsidiary or other entity that is not an investment company, including those in which we have a controlling interest. We have one unconsolidated subsidiary, Galaxy Tool Holdings, Inc. (“Galaxy”), which met at least one of the significance conditions under Rule 1-02(w) of the SEC’s Regulation S-X as of June 30, 2015 and 2014 and for the three months ended June 30, 2015 and 2014. Accordingly, summarized, comparative financial information, is presented below for our significant unconsolidated subsidiary, Galaxy, which is a designer and manufacturer of precision tools for the business jet industry and of injection and blow molds for the plastics industry.

 

     For the Three Months Ended June 30,  

Income Statement

   2015      2014  

Net sales

   $ 6,066       $ 6,532   

Gross profit

     392         1,079   

Net loss

     (700      (337

NOTE 13. SUBSEQUENT EVENTS

The Company’s management has evaluated subsequent events through the date of issuance of the condensed consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the condensed consolidated financial statements as of and for the three months ended June 30, 2015, except as disclosed below:

Portfolio Activity

In July 2015, we invested $20.9 million in GI Plastek, Inc. (“GI Plastek”) through a combination of secured first lien debt and equity. GI Plastek, headquartered in Wolfeboro, New Hampshire, is a value-added provider of advanced manufacturing solutions for various non-automotive end markets.

Distributions

In July 2015, our Board of Directors declared the following monthly distributions to common stockholders and dividends to holders of our Series A, B and C Term Preferred Stock:

 

Record Date

   Payment Date    Distribution per
Common Share
     Dividend per
Series A Term
Preferred Share
     Dividend per
Series B Term
Preferred Share
     Dividend per
Series C Term
Preferred Share
 
July 24, 2015    August 4, 2015    $ 0.0625       $ 0.1484375       $ 0.140625       $ 0.135417   
August 20, 2015    August 31, 2015      0.0625         0.1484375         0.140625         0.135417   
September 21, 2015    September 30, 2015      0.0625         0.1484375         0.140625         0.135417   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Total for the Quarter:    $ 0.1875       $ 0.4453125       $ 0.421875       $ 0.406250   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

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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,” “project,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative or variations 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, but are not limited to: (1) the recurrence of adverse events 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 Dullum; 4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates, regulation or the general economy; (7) the degree and nature of our competition; (8) our ability to maintain our qualification as a regulated investment company and as a business development company; and (9) those factors described in Item 1A. “Risk Factors” herein and the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2015, filed with the Securities and Exchange Commission (“SEC”) on May 20, 2015. 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 Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise 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 subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

In this Quarterly Report on Form 10-Q, the “Company,” “we,” “us,” and “our” refer to Gladstone Investment Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. Dollar amounts are in thousands unless otherwise indicated.

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, 2015, filed with the SEC on May 20, 2015. 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 were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. On June 22, 2005, we completed our initial public offering and commenced operations. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). For 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”). In order to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”). Our investment objectives are to: (1) 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 grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, generally in combination with the aforementioned debt securities, of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment

 

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generally ranging from $5 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We seek to avoid investments in high-risk, early stage enterprises. We expect that our investment portfolio over time will consist of approximately 75.0% in debt securities and 25.0% in equity securities, at cost. As of June 30, 2015, our investment allocation was 72.9% in debt securities and 27.1% in equity securities, at cost.

We focus on investing in small and medium-sized private U.S. businesses that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to grow it over time, the adequacy of the portfolio company’s assets for loan collateral, experienced management teams with a significant ownership interest in the portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company’s stock or by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We generally invest in portfolio companies that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises.

We invest by ourselves or jointly with other funds 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 Securities and Exchange Commission (“SEC”) granted us an exemptive order that expanded our ability to co-invest with certain of our affiliates under certain circumstances and any future business development company or closed-end management investment company that is advised (or sub-advised if it controls the fund) by our external investment adviser, or any combination of the foregoing, subject to the conditions in the SEC’s order. We believe this ability to co-invest will continue to enhance our ability to further our investment objectives and strategies.

We are externally managed by our investment advisor, Gladstone Management Corporation (the “Adviser”), an SEC registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). The Adviser manages our investment activities. 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 shares of common stock, 7.125% Series A Cumulative Term Preferred Stock (“Series A Term Preferred Stock”), 6.75% Series B Cumulative Term Preferred Stock (“Series B Term Preferred Stock”) and 6.50% Series C Cumulative Term Preferred Stock (“Series C Term Preferred Stock”) are traded on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbols “GAIN,” “GAINP,” “GAINO,” and “GAINN,” respectively.

Business

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 June 30, 2015, we invested $16.3 million in one new deal and exited one existing deal with a fair value of $1.9 million as of March 31, 2015, resulting in no net change in the number of our portfolio companies, which was 34 at June 30, 2015, and a net increase quarter over quarter of 3.3% in our portfolio at fair value. This new investment, along with our capital raising efforts discussed below, have allowed us to invest $435.2 million in 26 new debt and equity deals since October 2010. For the three months ended June 30, 2015, our new investments consisted of approximately 69.6% secured first lien term loans and 30.4% equity investments, based on the originating principal balances.

Generally, the majority of the 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 June 30, 2015, we had unrecognized success fees of $27.4 million, or $0.90 per common share. Consistent with accounting principles generally accepted in the U.S. (“GAAP”), we generally have not recognized our success fee receivable and related income in our accompanying Condensed Consolidated Financial Statements.

The improved investing environment following the recent recession has presented us with an opportunity to realize gains and other income from five management-supported buyout liquidity events since June 2010, and in the aggregate, the five liquidity events have generated $54.6 million in realized gains and $13.1 million in other income, for a total increase to our net assets of $67.7 million. We

 

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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. With the five 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. These successful exits, in part, enabled us to increase the monthly distribution 56.3% since March 2011, and 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.

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 of and increases to our revolving line of credit (the “Credit Facility”) and by accessing the capital markets in the form of public offerings of common and preferred 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 (with a total commitment of $250.0 million through additional commitments of new or existing lenders). Additionally, we issued approximately 1.7 million shares of our Series B Term Preferred Stock for gross proceeds of $41.4 million in November 2014, approximately 3.8 million shares of common stock for gross proceeds of $28.1 million in March 2015, inclusive of the April 2015 overallotment, and approximately 1.6 million shares of our Series C Term Preferred Stock for gross proceeds of approximately $40.3 million in May 2015. Refer to “Liquidity and Capital Resources — Equity — Common Stock” and “Liquidity and Capital Resources — Equity — Term Preferred Stock” for further discussion of our common stock and mandatorily redeemable 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 and 2015, 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 additional equity. On August 3, 2015, the closing market price of our common stock was $7.84, which represented a 15.2% discount to our June 30, 2015 net asset value (“NAV”) per share of $9.24. When our common stock trades below NAV, our ability to issue additional 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. With our Board of Directors’ subsequent approval, we issued shares of our common stock in March and April 2015 at a price per share below the then current NAV per share. We sought and obtained stockholder approval concerning a similar proposal at the Annual Meeting of Stockholders held in August 2012, and with our Board of Directors’ subsequent approval, we issued shares of our common stock in October and November 2012 at a price per share below the then current NAV per share. The resulting proceeds, in part, have allowed us to grow the portfolio by making new investments, generate additional income through these new investments, provide us additional equity capital to help ensure continued compliance with regulatory tests and increase our debt capital while still complying with our applicable debt-to-equity ratios. 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 (collectively the “Senior Securities”). As of June 30, 2015, our asset coverage ratio was 226.4%.

Investment Highlights

During the three months ended June 30, 2015, we disbursed $16.3 million in new debt and equity investments and extended $1.0 million of investments to existing portfolio companies through revolver draws or additions to equity. From our initial public offering in June 2005 through June 30, 2015, we have made 240 investments in 114 companies for a total of approximately $1.1 billion, before giving effect to principal repayments and divestitures.

 

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Investment Activity

During the three months ended June 30, 2015, the following significant transactions occurred:

 

    In May 2015, we invested $16.3 in Brunswick Bowling Products, Inc., (“Brunswick”) through a combination of secured first lien debt and equity. Brunswick, headquartered in Muskegon, Michigan, is a leader in the recreation industry and provides industry expertise, products, installation and maintenance for the development and renovation of new and existing centers as well as mixed-use facilities across the entertainment industry.

 

    In June 2015, we sold our investment in Roanoke Industries Corp. (“Roanoke”). As a result of the sale, we received net cash proceeds of $0.3 million, resulting in a net realized gain of $0.2 million. In addition, we received full repayment of our debt investment of $1.7 million.

In July 2015, we invested $20.9 million in GI Plastek, Inc. (“GI Plastek”) through a combination of secured first lien debt and equity. GI Plastek, headquartered in Wolfeboro, New Hampshire, is a value-added provider of advanced manufacturing solutions for various non-automotive end markets.

Recent Developments

Registration Statement

On June 16, 2015, we filed a registration statement on Form N-2 with the SEC and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 28, 2015, which the SEC declared effective on July 29, 2015. 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 concurrent, separate offerings of such securities. We currently have the ability to issue up to $300.0 million in securities under the registration statement.

Term Preferred Stock Offerings

In May 2015, we completed a public offering of 1,610,000 shares of our Series C Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $38.6 million. Refer to “Liquidity and Capital Resources — Equity — Term Preferred Stock” for further discussion of our recently issued mandatorily redeemable preferred stock.

Common Stock Offering

In March 2015, we completed a public offering of 3.3 million shares of our common stock. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $23.0 million. In April 2015, the underwriters fully exercised their overallotment option to purchase 495,000 additional shares of our common stock, resulting in net proceeds, after deducting underwriting discounts and offering costs borne by us, of approximately $3.4 million.

Executive Officers

On July 14, 2015, our Board of Directors appointed Julia Ryan, formerly the Company’s chief accounting officer, as the Company’s chief financial officer and treasurer. Ms. Ryan replaced Melissa Morrison, Gladstone Capital Corporation’s chief financial officer and treasurer, who had also been acting as chief financial officer and treasurer of the Company since January 13, 2015.

 

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2015, to the Three Months Ended June 30, 2014

 

     For the Three Months Ended June 30,  
     2015     2014     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 11,385      $ 8,404      $ 2,981        35.5

Other income

     1,321        1,433        (112     (7.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     12,706        9,837        2,869        29.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     2,453        1,666        787        47.2   

Loan servicing fee

     1,559        1,135        424        37.4   

Incentive fee

     1,291        1,215        76        6.3   

Administration fee

     355        235        120        51.1   

Interest and dividend expense

     2,831        1,451        1,380        95.1   

Amortization of deferred financing costs

     460        254        206        81.1   

Other

     998        539        459        85.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     9,947        6,495        3,452        53.1   

Credits to fees from Adviser

     (2,404     (1,517     (887     (58.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits to fees

     7,543        4,978        2,565        51.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,163        4,859        304        6.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain on investments

     199        —          199        NM   

Net unrealized appreciation of investments

     3,197        5,460        (2,263     (41.4

Net unrealized depreciation of other

     —          451        (451     (100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain

     3,396        5,911        (2,515     (42.5
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 8,559      $ 10,770      $ (2,211     (20.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.17      $ 0.18      $ (0.01     (5.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.28      $ 0.41      $ (0.13     (31.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

NM = Not Meaningful

Investment Income

Total investment income increased by 29.2% for the three months ended June 30, 2015, as compared to the prior year period. This increase was due to an increase in interest income, which resulted from an increase in the size of our portfolio during the three months ended June 30, 2015, partially offset by a slight decline in other income for the same period.

Interest income from our investments in debt securities increased 35.5% for the three months ended June 30, 2015, 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 June 30, 2015, was approximately $362.6 million, compared to approximately $267.5 million for the prior year period. This increase was primarily due to approximately $96.0 million in new debt investments originated after June 30, 2014, including Roanoke, Cambridge Sound Management, Inc. (“Cambridge”), Old World Christmas, Inc. (“Old World”), B+T Group Acquisition, Inc. (“B+T”), Logo Sportswear, Inc. (“Logo”), Counsel Press, Inc. (“Counsel Press”), and Brunswick.

At June 30, 2015 and 2014, the loans of one portfolio company, Tread Corporation (“Tread”), were on non-accrual status, with an aggregate debt cost basis of $11.3 million and $12.5 million, respectively. The weighted average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as other income, was 12.6% for both the three months ended June 30, 2015 and 2014. The weighted average yield varies from period to period, based on the current stated interest rate on interest-bearing investments.

Other income for the three months ended June 30, 2015 decreased by 7.8% from the prior year period. During the three months ended June 30, 2015, other income consisted of $1.1 million of dividend income resulting from payments from Drew Foam Company, Inc.

 

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(“Drew Foam”) and Funko, LLC (“Funko”) and $0.2 million of prepaid exit fees from Drew Foam. For the three months ended June 30, 2014, we recorded $1.4 million of dividend income primarily consisting of a receivable from Mathey Investments, Inc. (“Mathey”). We collected the Mathey dividend receivable on July 1, 2014.

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

 

    As of June 30, 2015     Three months ended June 30, 2015  

Portfolio Company

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

Funko, LLC

  $ 31,221         6.5   $ 442         3.5

SOG Specialty Knives & Tools, LLC

    29,766         6.2        662         5.2   

Counsel Press, Inc.

    29,463         6.1        791         6.2   

Cambridge Sound Management, Inc.

    26,180         5.4        493         3.9   

Acme Cryogenics, Inc.

    25,569         5.3        422         3.3   
 

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

    142,199         29.5        2,810         22.1   

Other portfolio companies

    339,044         70.5        9,896         77.9   
 

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

  $ 481,243         100.0   $ 12,706         100.0
 

 

 

    

 

 

   

 

 

    

 

 

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

Portfolio Company

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

Acme Cryogenics, Inc.

  $ 27,322         8.5   $ 422         4.3

SOG Specialty Knives & Tools, LLC

    25,386         7.9        696         7.1   

Galaxy Tool Holding Corp.

    22,186         6.9        530         5.4   

Edge Adhesives Holdings, Inc.

    17,095         5.3        407         4.1   

Jackrabbit, Inc.

    16,962         5.3        375         3.8   
 

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

    108,951         33.9        2,430         24.7   

Other portfolio companies

    212,881         66.1        7,407         75.3   
 

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

  $ 321,832         100.0   $ 9,837         100.0
 

 

 

    

 

 

   

 

 

    

 

 

 

Expenses

Total expenses, net of any voluntary, unconditional, and irrevocable credits from the Adviser, increased 51.5% for the three months ended June 30, 2015, as compared to the prior year period, primarily due to an increase in interest and dividend expense, the net base management fee, amortization of deferred financing costs, and other expenses as compared to the prior year period.

The net base management fee increased for the three months ended June 30, 2015, as compared to the prior year period, as a result of the increased size of our portfolio over the respective periods.

The base management fee, loan servicing fee, incentive fee, and their related voluntary, unconditional, and irrevocable credits are computed quarterly, as described under “Transactions with our Adviser” in Note 4 –Related Party Transactions of the notes to our accompanying Condensed Consolidated Financial Statements and are summarized in the following table:

 

     Three Months Ended June 30,  
     2015     2014  

Average total assets subject to base management fee(A)

   $ 490,600      $ 333,200   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5

Base management fee(B)

     2,453        1,666   

Credits to fees from Adviser - other(B)(C)

     (845     (382
  

 

 

   

 

 

 

Net base management fee

   $ 1,608      $ 1,284   
  

 

 

   

 

 

 

Loan servicing fee(B)

   $ 1,559      $ 1,135   

Credits to base management fee - loan servicing fee(B)

     (1,559     (1,135
  

 

 

   

 

 

 

Net loan servicing fee

   $ —        $ —     
  

 

 

   

 

 

 

Incentive fee(B)

   $ 1,291      $ 1,215   

Credits to fees from Adviser - other(B)

     —          —     
  

 

 

   

 

 

 

Net incentive fee

   $ 1,291      $ 1,215   
  

 

 

   

 

 

 

 

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(A)  Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B)  Reflected as a line item on our accompanying Condensed Consolidated Statement of Operations.
(C)  Pursuant to the requirements of the 1940 Act, we make available significant managerial assistance to our portfolio companies through the personnel of 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. At the end of each quarter, the Advisor credits 100.0% of these fees 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.

Interest and dividend expense increased 95.1% for the three months ended June 30, 2015, as compared to the prior year period, primarily due to increased average borrowings under our Credit Facility and newly issued Series B Term Preferred Stock and Series C Term Preferred Stock. The weighted average balance outstanding on our Credit Facility during the three months ended June 30, 2015, was $103.1 million, as compared to $60.4 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. Dividend expense increased due to the offering of our Series B Term Preferred Stock in November 2014 and our Series C Term Preferred Stock in May 2015. We paid dividends on the Series B Term Preferred Stock for April, May and June 2015 and dividends on the Series C Term Preferred Stock for the pro-rated month of May 2015 and the full month of June 2015, which dividends represented a $1.1 million increase from the prior year period, when the Series B Term Preferred Stock and Series C Term Preferred Stock were not yet outstanding.

Amortization of deferred financing costs increased 81.1% for the three months ended June 30, 2015, as compared to the prior year period, due to the amendments of our Credit Facility in June and November 2014 and the issuance of our Series B Term Preferred Stock and C Term Preferred Stock in November 2014 and May 2015, respectively.

Other expenses increased 85.2% for the three months ended June 30, 2015, as compared to the prior year period, primarily due to higher professional fees, including legal fees, due to the increase in the size of our portfolio and related investing activities and due to approximately $0.2 million of bad debt expense principally related to our investment in Tread.

Realized and Unrealized Gain (Loss)

Realized Gain on Investments

During the three months ended June 30, 2015, we recorded realized gains of $0.2 million, primarily related to the sale of Roanoke, compared to no realized gains or losses during the prior year period.

 

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Unrealized Appreciation (Depreciation) of Investments

During the three months ended June 30, 2015, we recorded net unrealized appreciation of investments in the aggregate amount of $3.2 million. The realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2015, were as follows:

 

     Three Months Ended June 30, 2015  

Portfolio Company

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

Funko, LLC

   $ —         $ 6,213       $ —         $ 6,213   

Cambridge Sound Management, Inc.

     —           3,982         —           3,982   

Frontier Packaging, Inc

     —           3,484         —           3,484   

Acme Cryogenics, Inc.

     —           2,550         —           2,550   

D.P.M.S., Inc.

     —           2,470         —           2,470   

Mathey Investments, Inc.

     —           1,703         —           1,703   

Precision Southeast, Inc.

     —           1,668         —           1,668   

Tread Corporation

     —           1,520         —           1,520   

Logo Sportswear, Inc.

     —           1,204         —           1,204   

SBS, Industries, LLC

     —           829         —           829   

Behrens Manufacturing, LLC

     —           672         —           672   

Roanoke Industries Corp.

     215         —           (110      105   

Head Country, Inc.

     —           (155      —           (155

Quench Holdings Corp.

     —           (197      —           (197

Drew Foam Company, Inc.

     —           (323      —           (323

Ginsey Home Solutions, Inc.

     —           (968      —           (968

Meridian Rack & Pinion, Inc.

     —           (1,239      —           (1,239

Alloy Die Casting Co.

     —           (1,360      —           (1,360

Counsel Press, Inc.

     —           (1,432      —           (1,432

Country Club Enterprises, LLC

     —           (1,437      —           (1,437

SOG Specialty Knives & Tools, LLC

     —           (2,085      —           (2,085

Edge Adhesives Holdings, Inc.

     —           (2,114      —           (2,114

Jackrabbit, Inc.

     —           (2,776      —           (2,776

Old World Christmas, Inc.

     —           (4,205      —           (4,205

B+T Group Acquisition, Inc.

     —           (4,541      —           (4,541

Other, net (<$250 Net)

     (16      (156      —           (172
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 199       $ 3,307       $ (110    $ 3,396   
  

 

 

    

 

 

    

 

 

    

 

 

 

The primary driver of net unrealized appreciation of $3.2 million for the three months ended June 30, 2015, was an improvement in the performance of certain portfolio companies and an increase in comparable multiples used to estimate the fair value of our investments. This increase in fair value was partially offset by decreased performance of several of our portfolio companies.

During the three months ended June 30, 2014, we recorded net unrealized appreciation on investments in the aggregate amount of $5.5 million. The unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2014, were as follows:

 

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     Three months ended June 30, 2014  

Portfolio Company

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

NDLI, Inc.

   $ —         $ 5,762       $ —         $ 5,762   

Jackrabbit, Inc.

     —           3,999         —           3,999   

Galaxy Tool Holding Corp.

     —           3,673         —           3,673   

Acme Cryogenics, Inc.

     —           1,546         —           1,546   

Edge Adhesives Holdings, Inc.

     —           766         —           766   

Drew Foam Company, Inc.

     —           756         —           756   

Mathey Investments, Inc.

     —           681         —           681   

Behrens Manufacturing, LLC

     —           478         —           478   

Quench Holdings Corp.

     —           (303      —           (303

SBS, Industries, LLC

     —           (480      —           (480

Frontier Packaging, Inc.

     —           (706      —           (706

Tread Corporation

     —           (750      —           (750

Channel Technologies Group, LLC

     —           (769      —           (769

Alloy Die Casting Co.

     —           (1,072      —           (1,072

D.P.M.S., Inc.

     —           (1,144      —           (1,144

SOG Specialty Knives & Tools, LLC

     —           (1,252      —           (1,252

Mitchell Rubber Products, Inc.

     —           (1,832      —           (1,832

Head Country, Inc.

     —           (1,844      —           (1,844

Ginsey Home Solutions, Inc.

     —           (2,253      —           (2,253

Other, net (<$250 Net)

     —           204         —           204   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 5,460       $ —         $ 5,460   
  

 

 

    

 

 

    

 

 

    

 

 

 

The primary driver of net unrealized appreciation of $5.5 million for the three months ended June 30, 2014, was an improvement in the performance of certain portfolio companies and an increase in comparable multiples used to estimate the fair value of our investments. This increase in fair value was partially offset by decreased performance of several of our portfolio companies.

Over our entire investment portfolio, we recorded approximately $3.7 million of net unrealized appreciation on our debt positions and $0.5 million of net unrealized depreciation on our equity holdings for the three months ended June 30, 2015. At June 30, 2015, the fair value of our investment portfolio was less than our cost basis by approximately $36.0 million, as compared to $39.2 million at March 31, 2015, representing net unrealized appreciation of $3.2 million for the three months ended June 30, 2015. We believe that our aggregate investment portfolio is valued at a depreciated value due to the lingering effects of the recent recession on the performance of certain of our portfolio companies. Our entire portfolio had a fair value of 93.0% of cost as of June 30, 2015. The net unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution.

Net Unrealized Depreciation on Other

There was no net unrealized appreciation or depreciation on our Credit Facility for the three months ended June 30, 2015. During the three months ended June 30, 2014, there was net unrealized depreciation of $0.5 million on our Credit Facility.

 

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LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash used in operating activities for the three months ended June 30, 2015, was $6.1 million, as compared to net cash provided by operating activities of $2.6 million during the three months ended June 30, 2014. This change was primarily due to increased investment activity period over period. New investments totaled $16.3 million during the three months ended June 30, 2015, as compared to no new investments during the three months ended June 30, 2014.

As of June 30, 2015, we had equity investments in or loans to 34 private companies with an aggregate cost basis of approximately $517.3 million. As of June 30, 2014, we had equity investments in or loans to 28 private companies with an aggregate cost basis of approximately $385.5 million. The following table summarizes our total portfolio investment activity during the three months ended June 30, 2015 and 2014:

 

     Three Months Ended June 30,  
     2015      2014  

Beginning investment portfolio, at fair value

   $ 466,053       $ 314,393   

New investments

     16,251         —     

Disbursements to existing portfolio companies

     1,075         2,010   

Increase in investment balance due to PIK

     —           29   

Scheduled principal repayments

     (1,650      —     

Unscheduled principal repayments

     (3,583      (60

Net proceeds from sales

     (315      —     

Net realized gain

     215         —     

Net unrealized appreciation

     3,307         5,460   

Reversal of net unrealized appreciation

     (110      —     
  

 

 

    

 

 

 

Ending investment portfolio, at fair value

   $ 481,243       $ 321,832   
  

 

 

    

 

 

 

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2015:

 

          Amount  

For the remaining nine months ending March 31:

   2016    $ 17,467   

For the fiscal year ending March 31:

   2017      43,986   
   2018      99,483   
   2019      81,681   
   2020      113,753   
   Thereafter      20,925   
     

 

 

 
  

Total contractual repayments

   $ 377,295   
   Investments in equity securities      139,956   
     

 

 

 
  

Total cost basis of investments held at June 30, 2015:

   $ 517,251   
     

 

 

 

Financing Activities

Net cash provided by financing activities for the three months ended June 30, 2015, was approximately $7.3 million, which consisted primarily of $38.5 million of proceeds from the issuance of our Series C Term Preferred Stock in May 2015, net of total deferred financing costs, and $3.4 million of net proceeds from the issuance of common shares in April 2015, partially offset by $29.1 million of net repayments on our Credit Facility and $5.7 million in distributions to common stockholders. Net cash used in financing activities for the three months ended June 30, 2014, was approximately $3.4 million, which consisted primarily of $4.8 million in distributions to common stockholders, partially offset by $1.7 million of net borrowings on our Credit Facility.

Distributions and Dividends to Stockholders

Common Stock Distributions

To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our common stockholders on an annual basis at least 90% of our investment company taxable income. Additionally, our Credit Facility generally restricts the amount of distributions to stockholders that we can pay out to be no greater than the sum of certain amounts, including, but not limited to, our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. In accordance with these requirements, our Board of Directors declared and we paid monthly cash distributions of $0.0625 per common share for each of April, May, and June 2015. Our Board of Directors declared these distributions based on estimates of net taxable income for the fiscal year ending March 31, 2016.

 

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For federal income tax 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. The characterization of the common stockholder distributions declared and paid for the year ending March 31, 2016 will be determined after the 2016 fiscal year end based upon our taxable income for the full year and distributions paid during the full year. Such a characterization made on a quarterly basis may not be representative of the actual full year characterization.

For the year ended March 31, 2015, distributions to common stockholders totaled of $20.6 million and were less than our taxable income for the same year, when also considering prior year spillover amounts under Section 855(a) of the Code. In addition, we recorded a $0.6 million adjustment for estimated book-tax differences, which decreased capital in excess of par value and increased net investment income in excess of distributions. At March 31, 2015, we elected to treat $4.0 million of the first distribution paid after fiscal year-end as having been paid in the prior fiscal year, in accordance with Section 855(a) of the Code.

Preferred Stock Dividends

Our Board of Directors declared and we paid monthly cash dividends of $0.1484375 per share to holders of our Series A Term Preferred Stock and $0.140625 per share to holders of our Series B Term Preferred Stock for the three months from April 2015 to June 2015. In May 2015, our Board of Directors declared a combined dividend for a pro-rated portion of May 2015 and a dividend for the full month of June 2015, which totaled $0.221181 per share, to the holders of our Series C Term Preferred Stock. In July 2015, our Board of Directors also declared a monthly dividend of $0.1484375, $0.140625 and approximately $0.135417 per share for each of July, August and September 2015 to the holders of our Series A Term Preferred Stock, Series B Term Preferred Stock and Series C Term Preferred Stock, respectively. In accordance with GAAP, we treat these monthly dividends as an operating expense. For federal income tax purposes, the dividends paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.

Dividend Reinvestment Plan

We offer a dividend reinvestment plan for our common stockholders who hold their shares through our transfer agent, Computershare, Inc. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do not so elect will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder’s account. Our plan agent purchases shares in the open market in connection with the obligations under the plan. We do not have a dividend reinvestment plan for our preferred stock stockholders.

Equity

Registration Statement

On June 16, 2015, we filed a registration statement on Form N-2 (File No. 333-204996) with the SEC and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 28, 2015, which the SEC declared effective on July 29, 2015. 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 concurrent, separate offerings of such securities. No securities have been issued to date under the registration statement. Currently, we have the ability to issue up to $300.0 million in securities under the registration statement.

Common Stock

Pursuant to our previously effective registration statement on Form N-2 (Registration No. 333-181879), on March 13, 2015, we completed a public offering of 3.3 million shares of our common stock at a public offering price of $7.40 per share, which was below then current NAV of $8.55 per share. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $23.0 million, which were primarily used to repay borrowings under our Credit Facility. In connection with the offering, on April 2, 2015, the underwriters exercised their option to purchase an additional 495,000 shares at the public offering price to cover over-allotments, which resulted in gross proceeds of $3.7 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, of approximately $3.4 million.

 

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We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. When our common stock is trading at a price below NAV per share, as it has predominantly since September 30, 2008, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors. On August 3, 2015, the closing market price of our common stock was $7.84 per share, representing a 15.2% discount to our NAV of $9.24 as of June 30, 2015. To the extent that our common stock continues to trade at a market price below our NAV per common share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder approval or through a rights offering to existing common stockholders. 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 common share for a period of one year from the date of such approval, provided that our Board of Directors makes certain determinations prior to any such sale. At our 2015 Annual Meeting of Stockholders, scheduled to take place in August 2015, we will again ask our stockholders to vote in favor of a similar proposal so that it may be in effect for another year.

Term Preferred Stock

Pursuant to our prior registration statement on Form N-2 (File No. 333-160720), in March 2012, we completed an offering of 1,600,000 shares of 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 costs borne by us, were approximately $38.0 million, a portion of which was used to repay borrowings under our Credit Facility, with the remaining proceeds being held to make additional investments and for general corporate purposes. We incurred $2.0 million in total offering costs related to the offering, 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 date.

Our Series A Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates to $2.9 million per year). We are required to redeem all of the 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 the date of redemption. Our Series A Term Preferred Stock is not convertible into our common stock or any other security. 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 the outstanding Series A Term Preferred Stock; (2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of the outstanding 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.

Pursuant to our prior registration statement on Form N-2 (Registration No. 333-181879), 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 costs borne by us, were $39.7 million. We incurred $1.7 million in total offering costs related to this offering, 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.

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 (which equates to $2.8 million per year). 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, and (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.

Also pursuant to our prior regi