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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended December 31, 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: 814-00704

 

 

GLADSTONE INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   83-0423116
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

1521 WESTBRANCH DRIVE, SUITE 100

MCLEAN, VIRGINIA

  22102
(Address of principal executive offices)   (Zip Code)

(703) 287-5800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of February 2, 2016, 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 December 31 and March 31, 2015

     2   
  

Condensed Consolidated Statements of Operations for the three and nine months ended December  31, 2015 and 2014

     3   
  

Condensed Consolidated Statements of Changes in Net Assets for the nine months ended December  31, 2015 and 2014

     4   
  

Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2015 and 2014

     5   
  

Condensed Consolidated Schedules of Investments as of December 31 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

     37   
  

Overview

     37   
  

Results of Operations

     42   
  

Liquidity and Capital Resources

     52   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     58   

Item 4.

  

Controls and Procedures

     58   

PART II.

  

OTHER INFORMATION:

  

Item 1.

  

Legal Proceedings

     59   

Item 1A.

  

Risk Factors

     59   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     59   

Item 3.

  

Defaults Upon Senior Securities

     59   

Item 4.

  

Mine Safety Disclosures

     59   

Item 5.

  

Other Information

     59   

Item 6.

  

Exhibits

     59   

SIGNATURES

     60   


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,     March 31,  
     2015     2015  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $192,457 and $162,598, respectively)

   $ 178,662      $ 174,373   

Affiliate investments (Cost of $305,901 and $310,628, respectively)

     284,815        271,050   

Control investments (Cost of $21,512 and $32,032 respectively)

     8,225        20,630   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $519,870 and $505,258, respectively)

     471,702        466,053   

Cash and cash equivalents

     5,645        4,921   

Restricted cash and cash equivalents

     357        260   

Interest receivable

     2,451        1,867   

Due from custodian

     2,135        4,512   

Deferred financing costs

     4,813        4,529   

Other assets, net

     4,190        1,379   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 491,293      $ 483,521   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Line of credit at fair value (Cost of $89,200 and $118,800, respectively)

   $ 89,200      $ 118,800   

Secured borrowing

     5,096        5,096   
  

 

 

   

 

 

 

Total borrowings

     94,296        123,896   

Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 4,956,000 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

     883        1,271   

Fees due to Adviser(A)

     1,510        1,502   

Fee due to Administrator(A)

     254        262   

Other liabilities

     10,620        1,761   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 229,213      $ 210,092   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 262,080      $ 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

     312,102        309,438   

Cumulative net unrealized depreciation of investments

     (48,168     (39,204

Cumulative net unrealized depreciation of other

     (75     (75

Net investment income in excess of distributions

     3,638        3,511   

Accumulated net realized loss

     (5,447     (271
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 262,080      $ 273,429   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 8.66      $ 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
December 31,
    Nine Months Ended
December 31,
 
     2015     2014     2015     2014  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 4,243      $ 3,969      $ 12,015      $ 13,720   

Affiliate investments

     6,956        5,154        21,209        11,310   

Control investments

     208        608        1,512        1,673   

Cash and cash equivalents

     —          1        1        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     11,407        9,732        34,737        26,706   

Other income

        

Non-Control/Non-Affiliate investments

     469        1,330        3,585        3,230   

Affiliate investments

     192        500        192        534   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     661        1,830        3,777        3,764   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     12,068        11,562        38,514        30,470   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     2,485        1,927        7,448        5,337   

Loan servicing fee(A)

     1,756        1,295        5,022        3,588   

Incentive fee(A)

     1,159        1,460        3,955        3,726   

Administration fee(A)

     254        226        879        670   

Interest expense on borrowings

     974        1,042        3,119        2,500   

Dividends on mandatorily redeemable preferred stock

     2,066        1,085        5,898        2,510   

Amortization of deferred financing fees

     485        404        1,428        940   

Professional fees

     243        63        946        610   

Other general and administrative expenses

     606        383        1,565        1,130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     10,028        7,885        30,260        21,011   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1,756     (1,295     (5,022     (3,588

Credit to fees from Adviser—other(A)

     (835     (867     (2,541     (1,855
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits to fees

     7,437        5,723        22,697        15,568   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,631        5,839        15,817        14,902   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED (LOSS) GAIN

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     17,000        —          16,999        —     

Affiliate investments

     (8,679     —          (11,419     —     

Control investments

     (10,397     (209     (10,197     (221
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized loss

     (2,076     (209     (4,617     (221

Net unrealized (depreciation) appreciation:

        

Non-Control/Non-Affiliate investments

     (22,089     3,731        (25,571     13,630   

Affiliate investments

     9,841        (1,772     18,492        (4,713

Control investments

     3,480        —          (1,885     (2,993

Other

     —          —          —          451   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized (depreciation) appreciation

     (8,768     1,959        (8,964     6,375   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain

     (10,844     1,750        (13,581     6,154   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (6,213   $ 7,589      $ 2,236      $ 21,056   
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.15      $ 0.22      $ 0.52      $ 0.56   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

     (0.21     0.29        0.07        0.80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions

   $ 0.19        0.23        0.56        0.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

        

Basic and diluted

     30,270,958        26,475,958        30,267,358        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)

 

     Nine Months Ended
December 31,
 
     2015     2014  

OPERATIONS

    

Net investment income

   $ 15,817      $ 14,902   

Net realized loss on investments

     (4,617     (221

Net unrealized (depreciation) appreciation of investments

     (8,964     5,924   

Net unrealized depreciation of other

     —          451   
  

 

 

   

 

 

 

Net increase in net assets from operations

     2,236        21,056   
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (17,027     (15,621
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (17,027     (15,621
  

 

 

   

 

 

 

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 (DECREASE) INCREASE IN NET ASSETS

     (11,349     5,435   

NET ASSETS, BEGINNING OF PERIOD

     273,429        220,837   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 262,080      $ 226,272   
  

 

 

   

 

 

 

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

 

4


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended
December 31,
 
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 2,236      $ 21,056   

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

    

Purchase of investments

     (60,321     (79,329

Principal repayments of investments

     20,883        5,579   

Increase in investment balance due to paid in kind interest

     —          (78

Net proceeds from the sale of investments

     20,336        (221

Net realized loss on investments

     4,489        221   

Net unrealized depreciation (appreciation) of investments

     8,964        (5,924

Net unrealized depreciation of other

     —          (451

Amortization of deferred financing costs

     1,428        940   

Bad debt expense, net of recoveries

     358        79   

Changes in assets and liabilities:

    

(Increase) decrease in restricted cash and cash equivalents

     (97     2,209   

Increase in interest receivable

     (794     (401

Decrease (increase) in due from custodian

     2,377        (706

(Increase) decrease in other assets, net

     (2,959     161   

(Decrease) increase in accounts payable and accrued expenses

     (388     64   

Increase in fees due to Adviser(A)

     8        363   

(Decrease) increase in fee due to Administrator(A)

     (8     2   

Increase (decrease) in other liabilities

     8,859        (188
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     5,371        (56,624
  

 

 

   

 

 

 

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

     92,000        90,550   

Repayments on line of credit

     (121,600     (56,000

Proceeds from secured borrowing

     —          96   

Proceeds from issuance of mandatorily redeemable preferred stock

     40,250        41,400   

Deferred financing costs

     (1,712     (3,445

Distributions paid to common stockholders

     (17,027     (15,621
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (4,647     56,980   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     724        356   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     4,921        4,553   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 5,645      $ 4,909   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES(B)

   $ 13,944      $ —     
  

 

 

   

 

 

 

 

(A)  Refer to Note 4—Related Party Transactions for additional information.
(B)  2015: Significant non-cash operating activities consisted principally of the following transaction:

In August 2015, NDLI, Inc. (“NDLI”) was acquired by Diligent Delivery Systems (“Diligent”). As part of this acquisition, we restructured our investment in NDLI, which resulted in the termination of our debt investments in NDLI, which had a cost basis and fair value of $17.7 million and $14.2 million, respectively. We received cash proceeds of $1.9 million and a $13.0 million secured second lien debt investment in Diligent, which resulted in a net realized loss of $2.8 million. We recognized this net realized loss in our Condensed Consolidated Statements of Operations during the three months ended September 30, 2015.

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

 

5


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 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        4,900   
       

 

 

   

 

 

 
          5,000        4,900   

B-Dry, LLC

 

Personal, Food and Miscellaneous Services

 

Secured First Lien Line of Credit, $0 available (6.5% (0.8% Unused Fee), Due 12/2016)(L)

    2,500        2,500        2,500   
   

Secured First Lien Term Debt (12.0%, Due 12/2019)(L)

    6,433        6,443        2,189   
   

Secured First Lien Term Debt (12.0%, Due 12/2019)(L)

    840        840        —     
   

Preferred Stock (2,500 shares)(C)(F)(L)

      2,516        —     
   

Common Stock (2,500 shares)(C)(F)(L)

      300        —     
       

 

 

   

 

 

 
          12,599        4,689   

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        3,922   
   

Guaranty ($2,000)(D)

     
   

Guaranty ($284)(D)

     
       

 

 

   

 

 

 
          11,725        7,922   

Diligent Delivery Systems

 

Cargo Transport

 

Secured Second Lien Term Debt (10.0%, Due 8/2020)(K)

    13,000        13,000        12,968   
   

Common Stock Warrants (6% ownership)(C)(F)(L)

      —          —     
       

 

 

   

 

 

 
          13,000        12,968   

Drew Foam Company, Inc.

 

Chemicals, Plastics, and Rubber

 

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

    9,913        9,913        9,913   
   

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

      3,375        3,515   
   

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

      63        5,380   
       

 

 

   

 

 

 
          13,351        18,808   

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        1,506   
   

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

      152        8,450   
       

 

 

   

 

 

 
          13,025        21,456   

Funko Acquisition Holdings, LLC(M)

 

Personal and Non-Durable Consumer Products (Manufacturing Only)

 

Preferred Stock (260 units)(C)(F)(J)

      260        260   
   

Common Stock (975 units)(C)(F)(J)

      —          —     
       

 

 

   

 

 

 
          260        260   

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        4,438   
   

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

      8        —     
       

 

 

   

 

 

 
          22,891        17,738   

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        4,388   
   

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

      94        2,835   
       

 

 

   

 

 

 
          14,650        18,223   

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        3,346   
       

 

 

   

 

 

 
          9,379        11,948   

Mitchell Rubber Products, Inc.

 

Chemicals, Plastics, and Rubber

 

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

    13,560        13,560        4,929   
   

Secured Second Lien Term Debt (13.0%, Due 2/2016)(I)(K)

    700        700        —     
   

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

      2,790        —     
   

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

      28        —     
       

 

 

   

 

 

 
          17,078        4,929   

Nth Degree, Inc.

 

Diversified/Conglomerate Service

 

Secured First Lien Term Debt (12.5%, Due 12/2020)(E)(J)

    13,290        13,290        13,290   
   

Preferred Stock (5,660 units)(C)(F)(J)

      5,660        5,660   
       

 

 

   

 

 

 
          18,950        18,950   
       

 

 

   

 

 

 

 

6


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair
Value
 

Quench Holdings Corp.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

 

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

    $ 3,397      $ 5,019   
       

 

 

   

 

 

 
          3,397        5,019   

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        —     
   

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

      222        —     
       

 

 

   

 

 

 
          13,571        11,355   

Schylling, Inc.

 

Leisure, Amusement, Motion Picture, 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        1,691   
       

 

 

   

 

 

 
          17,081        14,772   

Star Seed, Inc.

 

Farming and Agriculture

 

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

    5,000        5,000        4,725   
   

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

      1,499        —     
   

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

      1        —     
       

 

 

   

 

 

 
          6,500        4,725   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 37.9% of total investments at fair value)

    $ 192,457      $ 178,662   
       

 

 

   

 

 

 

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        16,554   
   

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

      1,197        1,677   
   

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

      25        674   
       

 

 

   

 

 

 
          23,678        33,405   

Alloy Die Casting Co.(M)

 

Diversified/Conglomerate Manufacturing

 

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

    12,215        12,215        11,360   
   

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

      4,064        —     
   

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

      41        —     
       

 

 

   

 

 

 
          16,320        11,360   

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        6,249   
       

 

 

   

 

 

 
          12,897        16,224   

Brunswick Bowling Products, Inc.

 

Home and Office Furnishings, Housewares and Durable Consumer Products

 

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

    11,307        11,307        11,307   
   

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

      4,943        7,811   
       

 

 

   

 

 

 
          16,250        19,118   

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)

    15,000        15,000        15,000   
   

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

      4,500        11,817   
       

 

 

   

 

 

 
          19,500        26,817   

Channel Technologies Group, LLC

 

Diversified/Conglomerate Manufacturing

 

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

      2,864        2065   
   

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

      —          —     
       

 

 

   

 

 

 
          2,864        2,065   

Counsel Press, Inc.

 

Diversified/Conglomerate Services

 

Secured First Lien Line of Credit, $550 available (12.8% (1.0% Unused Fee), Due 3/2017)(L)

    450        450        450   
   

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        2,288   
       

 

 

   

 

 

 
          30,945        26,238   

 

7


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair
Value
 

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      $ 4,000   
   

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

    2,575        2,575        2,575   
   

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

    8,795        8,795        4,419   
   

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

    1,150        1,150        —     
   

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

      2,500        —     
   

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

      3        —     
       

 

 

   

 

 

 
          19,023        10,994   

Edge Adhesives Holdings, Inc. (M)

 

Diversified/Conglomerate Manufacturing

 

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

    9,300        9,300        9,068   
   

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

    2,400        2,400        2,346   
   

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

      3,774        —     
       

 

 

   

 

 

 
          15,474        11,414   

GI Plastek, Inc.

 

Chemicals, Plastics, and Rubber

 

Secured First Lien Line of Credit, $1,430 available (10.0% (1.0% Unused Fee), Due 7/2016)(L)

    570        570        570   
   

Secured First Lien Term Debt (13.3%, Due 7/2020)(L)

    15,000        15,000        15,000   
   

Preferred Stock (5,150 units)(C)(F)(L)

      5,150        4,611   
       

 

 

   

 

 

 
          20,720        20,181   

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        —     
       

 

 

   

 

 

 
          13,050        9,050   

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        1,795   
       

 

 

   

 

 

 
          10,750        10,995   

Meridian Rack & Pinion, Inc.(M)

 

Automobile

 

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

    9,660        9,660        9,056   
   

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

      3,381        —     
       

 

 

   

 

 

 
          13,041        9,056   

NDLI, Inc.

 

Cargo Transport

 

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

      3,600          
   

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

      —          —     
       

 

 

   

 

 

 
          3,600        —     

Old World Christmas, Inc.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

 

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

    15,770        15,770        15,770   
   

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

      6,180        4,371   
       

 

 

   

 

 

 
          21,950        20,141   

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        3,035   
   

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

      90        —     
       

 

 

   

 

 

 
          13,447        12,653   

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        10,743   
       

 

 

   

 

 

 
          28,149        29,143   

Tread Corporation

 

Oil and Gas

 

Secured First Lien Line of Credit, $2,324 available (12.5%, Due 2/2018)(G)(L)

    1,526        1,526        1,526   
   

Preferred Stock (12,998,639 shares)(C)(F)(L)

      3,768        435   
   

Common Stock (10,089,047 shares)(C)(F)(L)

      753        —     
       

 

 

   

 

 

 
          6,047        1,961   
       

 

 

   

 

 

 

Total Affiliate Investments (represents 60.4% of total investments at fair value)

  

  $ 305,901      $ 284,815   
       

 

 

   

 

 

 

 

8


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 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, $0 available (6.5% (1.0% Unused Fee), Due 9/2016)(L)

  $ 5,000      $ 5,000      $ 5,000   
   

Secured Second Lien Term Debt (10.0%, Due 8/2017)(L)

    5,000        5,000        3,225   
   

Preferred Stock (5,517,445 shares)(C)(F)(L)

      11,464        —     
   

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

      48        —     
       

 

 

   

 

 

 
          21,512        8,225   
       

 

 

   

 

 

 

Total Control Investments (represents 1.7% of total investments at fair value)

  

  $ 21,512      $ 8,225   
       

 

 

   

 

 

 

TOTAL INVESTMENTS

        $ 519,870      $ 471,702   
       

 

 

   

 

 

 

 

(A)  Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $424.2 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 December 31, 2015.
(B)  Percentages represent the weighted average cash interest rates in effect at December 31, 2015, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to the 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 December 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 December 31, 2015 best represents fair value as of December 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 U.S. 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 or 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)

    13,300        13,300        13,300   
   

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

      9,583        7,176   
   

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

      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)

    15,000        15,000        15,000   
   

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

      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 (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)

    15,770        15,770        15,770   
   

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

      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 the 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 U.S. 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 or 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.

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

 

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GLADSTONE INVESTMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 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 and nine months ended December 31, 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”). Such review occurs in three phases. First, prior to its quarterly meetings, the Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer (the “Valuation Team”). Second, the Valuation Committee of our Board of Directors (comprised entirely of independent directors) meets to review the valuation recommendations and supporting materials. Third, after the Valuation Committee concludes its meeting, it and the chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors so that the full Board of Directors may review and approve the fair value of our investments in accordance with the Policy.

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 the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and also review 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 Valuation Committee and Board of Directors review 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 Valuation Committee and 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.

 

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Table of Contents
 

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.

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 value 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 December 31, 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.

 

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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 remain current, or due to a restructuring, the interest income is deemed to be collectible. As of December 31, 2015, our loans to Tread Corporation (“Tread”) were on non-accrual status, with an aggregate debt cost basis of $1.5 million, or 0.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $1.5 million, or 0.4% 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 December 31, 2015 and March 31, 2015, respectively, we did not have any loans with a PIK interest component. During the three and nine months ended December 31, 2015, we did not record PIK income or collect any PIK interest in cash. During the three and nine months ended December 31, 2014, we recorded PIK income of $20 and $78, respectively, and collected $0.2 million PIK interest in cash.

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 and nine months ended December 31, 2015, we recorded success fees of $0.6 and $1.5 million, respectively, which resulted from prepaid success fees of $0.9 million and $0.2 million from Drew Foam Company, Inc. (“Drew Foam”) in June and December 2015, respectively, $0.2 million from Frontier Packaging, Inc. (“Frontier”) in December 2015, and $0.2 million from Logo Sportswear, Inc. (“Logo”) in December 2015. During the three and nine months ended December 31, 2014, we recorded $0.5 million and $1.0 million of success fees, respectively, which resulted from prepaid success fees of $0.5 million from SOG Specialty Knives & Tools, LLC (“SOG”) in December 2014, $0.2 million from Auto Safety House, LLC (“ASH”) in September 2014, $0.2 million from Frontier in September 2014, and $0.1 million from Mathey Investments, Inc. (“Mathey”) in September 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 and nine months ended December 31, 2015, we recorded dividend income of $8 and $2.3 million, respectively, which resulted from payments received from Cavert II Holding Corp. (“Cavert”), Drew Foam and Funko, LLC (“Funko”). For the three and nine months ended December 31, 2014, we recorded $1.4 million and $2.7 million of dividend income from Mathey, respectively.

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 January 2016, the FASB issued Accounting Standards Update 2016-01, “Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which changes how entities measure certain equity investments and how entities present changes in the fair value of financial liabilities measured under the fair value option that are attributable to instrument-specific credit risk. We are currently assessing the impact of ASU 2016-01 and do not anticipate a material impact on our financial position, results of operations or cash flows.

 

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ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for certain aspects of ASU 2016-01 relating to the recognition of changes in fair value of financial liabilities when the fair value option is elected.

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. In August 2015, the FASB issued Accounting Standards Update 2015-15, “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”), which codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line of credit arrangements as assets. We are currently assessing the impact of ASU 2015-03 and ASU 2015-15 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. ASU 2015-15 was effective immediately.

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. 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.

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 annual periods ending after December 31, 2016 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 do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. In July 2015, the FASB issued Accounting Standards Update 2015-14, “Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years, with early adoption permitted for annual reporting periods beginning after December 15, 2016 and interim periods within those years.

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;

 

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  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 December 31, 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 and nine months ended December 31, 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 December 31, 2015 and March 31, 2015, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities, and by security type. All investments are primarily valued using Level 3 inputs within the ASC 820 fair value hierarchy:

 

     Total Recurring Fair Value
Measurements

Reported in Condensed
Consolidated Statements of
Assets and Liabilities
 
     December 31,
2015
     March 31,
2015
 

Non-Control/Non-Affiliate Investments

     

Secured first lien debt

   $ 93,055       $ 86,586   

Secured second lien debt

     35,196         26,336   

Preferred equity

     25,381         40,217   

Common equity/equivalents

     25,030         21,234   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     178,662         174,373   

Affiliate Investments

     

Secured first lien debt

     186,572         176,059   

Secured second lien debt

     24,118         24,118   

Preferred equity

     71,774         70,873   

Common equity/equivalents

     2,351         —     
  

 

 

    

 

 

 

Total Affiliate Investments

     284,815         271,050   

Control Investments

     

Secured first lien debt

     5,000         4,900   

Secured second lien debt

     3,225         15,520   

Preferred equity

     —           —     

Common equity/equivalents

     —           210   
  

 

 

    

 

 

 

Total Control Investments

     8,225         20,630   
  

 

 

    

 

 

 

Total Investments at fair value using Level 3 inputs

   $ 471,702       $ 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 December 31, 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.

 

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     Quantitative Information about Level 3 Fair Value Measurements
     Fair Value
as of
December 31,
2015
     Fair Value
as of
March 31,
2015
     Valuation
Technique/

Methodology
   Unobservable Input   

Range / Weighted Average

as of

December 31, 2015

  

Range / Weighted Average

as of

March 31, 2015

Secured first lien debt (A)

   $ 238,483       $ 212,954       TEV    EBITDA multiples    4.4x – 8.3x / 6.3x    4.2x – 18.2x / 6.8x
            EBITDA    $1,041 – $9,471 / $4,012    $712 – $5,871 / $3,185
     9,414         —         DCF    Discount Rate    20.0% – 20.0% / 20.0%   
     36,730         54,591       Yield Analysis    Discount Rate    7.6% – 16.7% / 10.4%    5.0% – 13.7% /11.3%

Secured second lien debt

     44,643         56,938       TEV    EBITDA multiples    5.5x – 7.0x / 6.3x    4.8x – 7.0x / 6.2x
            EBITDA    $2,273 – $5,486 / $2,756    $1,135 – $5,462 / $3,677
     17,896         9,036       Yield Analysis    Discount Rate    10.1% – 25.0% / 23.6%    20.5% – 20.5% / 20.5%

Preferred equity(B)

     97,155         111,090       TEV    EBITDA multiples    4.4x – 15.9x /6.7x    3.6x – 18.2x / 6.6x
            EBITDA    $0 – $60,594 / $4,101    $712 – $29,235 / $3,749

Common equity/equivalents

     27,381         21,444       TEV    EBITDA multiples    4.4x – 15.9x / 8.5x    3.6x – 18.2x / 9.4x
            EBITDA    $0 –$17,361 / $10,337    $712 – $15,240 / $9,149
  

 

 

    

 

 

             

Total

   $ 471,702       $ 466,053               
  

 

 

    

 

 

             

 

(A)  December 31, 2015 includes one new proprietary secured first lien debt investment with a fair value of $13.3 million, which was valued at cost. March 31, 2015 includes two new proprietary secured first lien debt investments with a combined fair value of $34.2 million, which were valued at cost.
(B)  December 31, 2015 includes two new proprietary preferred equity investments with a combined fair value of $5.9 million, which were valued at cost. March 31, 2015 includes two new proprietary preferred equity investments with a combined fair value of $8.5 million, which were valued at cost.

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 and nine months ended December 31, 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)

 

     Secured
First Lien
Debt
    Secured
Second
Lien

Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Three months ended December 31, 2015:

          

Fair value as of September 30, 2015

   $ 280,938      $ 74,392      $ 108,432      $ 26,873      $ 490,635   

Total gain (loss):

          

Net realized (loss) gain(A)

     (8,576     (10,520     17,000        131        (1,965

Net unrealized appreciation (depreciation) (B)

     2,816        (4,094     (584     256        (1,606

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

     6,083        2,761        (16,009     3        (7,162

New investments, repayments and settlements(C):

          

Issuances / originations

     14,350        —          6,621        249        21,220   

Settlements / repayments

     (10,984     —          —          —          (10,984

Sales

     —          —          (18,305     (131     (18,436

Transfers

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2015

   $ 284,627      $ 62,539      $ 97,155      $ 27,381      $ 471,702   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Secured
First Lien
Debt
    Secured
Second
Lien

Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Nine months ended December 31, 2015:

          

Fair value as of March 31, 2015

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

Total (loss) gain:

          

Net realized (loss) gain(A)

     (11,316     (10,520     17,000        347        (4,489

Net unrealized appreciation (depreciation) appreciation(B)

     8,590        (7,876     (10,307     5,894        (3,699

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

     9,573        2,761        (17,492     (107     (5,265

New investments, repayments and settlements(C):

          

Issuances / originations

     44,002        13,000        17,014        249        74,265   

Settlements / repayments

     (33,767     (800     —          —          (34,567

Sales

     —          —          (20,150     (446     (20,596

Transfers

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2015

   $ 284,627      $ 62,539      $ 97,155      $ 27,381      $ 471,702   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Secured
First Lien
Debt
    Secured
Second
Lien

Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Three months ended December 31, 2014:

          

Fair value as of September 30, 2014

   $ 197,304      $ 66,868      $ 63,199      $ 19,530      $ 346,901   

Total gain (loss):

          

Net realized loss(A)

     —          —          (208     (1     (209

Net unrealized appreciation (depreciation)(B)

     107        (1,882     4,082        (348     1,959   

Reversal of previously recorded appreciation upon realization(B)

     —          —          —          —          —     

New investments, repayments and settlements(C):

          

Issuances / originations

     39,435        —          10,627        —          50,062   

Settlements / repayments

     (4,777     —          —          —          (4,777

Sales

     —          —          208        1        209   

Transfers(D)

     (350     —          2,000        (1,650     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2014

   $ 231,719      $ 64,986      $ 79,908      $ 17,532      $ 394,145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Secured
First Lien
Debt
    Secured
Second
Lien

Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Nine months ended December 31, 2014:

          

Fair value as of March 31, 2014

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

Total gain (loss):

          

Net realized loss(A)

     —          —          (220     (1     (221

Net unrealized appreciation (depreciation)(B)

     4,799        (3,079     (2,281     6,485        5,924   

Reversal of previously recorded appreciation upon realization(B)

     —          —          —          —          —     

New investments, repayments and settlements(C):

          

Issuances / originations

     58,406        1,750        17,349        1,902        79,407   

Settlements / repayments

     (5,518     —          (61     —          (5,579

Sales

     —          —          220        1        221   

Transfers(D)

     (350     —          2,000        (1,650     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2014

   $ 231,719      $ 64,986      $ 79,908      $ 17,532      $ 394,145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)  Included in net realized gain (loss) on investments on our accompanying Condensed Consolidated Statements of Operations for the respective periods ended December 31, 2015 and 2014.
(B)  Included in net unrealized appreciation (depreciation) of investments on our accompanying Condensed Consolidated Statements of Operations for the periods ended December 31, 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.
(D)  Transfers represent $2.0 million of secured first lien debt of B-Dry, LLC (“B-Dry”), which was converted into preferred equity, and $1.7 million of common equity of Roanoke Industries Corp. (“Roanoke”), which was converted into secured first lien debt during the quarter ended December 31, 2014.

 

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Investment Activity

During the nine months ended December 31, 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 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.

 

    In August 2015, NDLI, Inc. (“NDLI”) was acquired by Diligent Delivery Systems (“Diligent”). As part of this acquisition, we restructured our investment in NDLI, which resulted in the termination of our debt investments in NDLI. We received cash proceeds of $1.9 million and a $13.0 million secured second lien debt investment in Diligent, which resulted in a realized loss of $2.8 million. Diligent, headquartered in Houston, Texas, has provided professional delivery services since 1994.

 

    In September 2015, we sold our investment in Cavert. As a result of the sale, we received cash proceeds of $3.4 million, resulting in dividend income of $1.5 million and repayment of our equity investment at its cost basis of $1.8 million.

 

    In October 2015, we sold our investment in Funko, which resulted in dividend and other income of $0.3 million and a realized gain of $17.0 million. In connection with the sale, we received net cash proceeds of $14.8 million, full repayment of our debt investment of $9.5 million, receivables of $3.5 million, recorded within Other assets, net on the accompanying Condensed Consolidated Statement of Assets and Liabilities, and a continuing preferred and common equity investment in Funko with a combined cost basis and fair value of $0.3 million. Additionally, we recorded a tax liability for the net unrealized built-in gain that was realized upon the sale of $9.6 million within Other liabilities on the accompanying Condensed Consolidated Statement of Assets and Liabilities.

 

    In December 2015, we invested $19.0 million in Nth Degree, Inc. (“Nth Degree”) through a combination of secured first lien debt and preferred equity. Nth Degree, headquartered outside of Atlanta, Georgia, is a multifaceted face-to-face event marketing and management services organization.

 

    In December 2015, we restructured our investment in Galaxy Tool Holdings, Inc. (“Galaxy”). As a result of the restructure, we converted debt with a cost basis of $10.5 million into preferred equity with a new cost basis and fair value of $0, which resulted in a realized loss of $10.5 million.

 

    In December 2015, we restructured our investment in Tread. As a result of the restructure, we converted debt with a cost basis of $9.26 million into preferred equity with a new cost basis and fair value of $0.4 million. As part of the transaction, we also exercised our existing common stock warrants for an exercise price of $0.2 million. As a result of the transaction, we recognized a realized loss of $8.6 million.

 

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Investment Concentrations

As of December 31, 2015, our investment portfolio consisted of investments in 36 portfolio companies located in 18 states across 17 different industries with an aggregate fair value of $471.7 million, of which our investments in Acme Cryogenics, Inc. (“Acme”), SOG, Cambridge Sound Management, Inc. (“Cambridge”), Counsel Press Inc. (“Counsel Press”), and Frontier, our five largest portfolio investments at fair value, collectively comprised $137.1 million, or 29.1%, of our total investment portfolio at fair value. The following table summarizes our investments by security type as of December 31, 2015 and March 31, 2015:

 

     December 31, 2015     March 31, 2015  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 297,367         57.2   $ 284,627         60.3   $ 298,448         59.1   $ 267,545         57.4

Secured second lien debt

     73,678         14.2        62,539         13.3        71,998         14.2        65,974         14.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total debt

     371,045         71.4        347,166         73.6        370,446         73.3        333,519         71.6   

Preferred equity

     141,627         27.2        97,155         20.6        127,762         25.3        111,090         23.8   

Common equity/equivalents

     7,198         1.4        27,381         5.8        7,050         1.4        21,444         4.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity/equivalents

     148,825         28.6        124,536         26.4        134,812         26.7        132,534         28.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

   $ 519,870         100.0   $ 471,702         100.0   $ 505,258         100.0   $ 466,053         100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     December 31, 2015     March 31, 2015  
     Fair Value      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Home and Office Furnishings, House wares, and Durable Consumer Products

   $ 88,832         18.8   $ 70,533         15.1

Chemicals, Plastics, and Rubber

     77,322         16.4        49,312         10.6   

Diversified/Conglomerate Manufacturing

     64,711         13.7        62,996         13.5   

Diversified/Conglomerate Service

     45,187         9.6        31,995         6.9   

Leisure, Amusement, Motion Pictures, Entertainment

     43,915         9.3        44,931         9.6   

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

     23,304         5.0        30,397         6.5   

Farming and Agriculture

     22,948         4.9        22,438         4.8   

Automobile

     21,879         4.6        24,530         5.3   

Containers, Packaging, and Glass

     21,456         4.6        19,447         4.2   

Telecommunications

     14,000         3.0        19,241         4.1   

Cargo Transport

     12,968         2.7        13,972         3.0   

Textiles and Leather

     10,995         2.3        10,750         2.3   

Beverage, Food and Tobacco

     9,050         1.9        12,982         2.8   

Aerospace and Defense

     8,225         1.7        18,770         4.0   

Personal and Non-Durable Consumer Products (Manufacturing Only)

     260         0.1        25,008         5.4   

Other < 2.0%

     6,650         1.4        8,751         1.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 471,702         100.0   $ 466,053         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     December 31, 2015     March 31, 2015  
     Fair Value      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Northeast

   $ 163,087         34.6   $ 133,814         28.7

West

     132,527         28.1        161,444         34.6   

South

     127,795         27.1        133,703         28.7   

Midwest

     48,293         10.2        37,092         8.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 471,702         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.

 

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Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of December 31, 2015:

 

          Amount  

For the remaining three months ending March 31:

  

2016

   $ 9,302   

For the fiscal year ending March 31:

  

2017

     49,956   
  

2018

     63,638   
  

2019

     81,681   
  

2020

     104,253   
  

Thereafter

     62,215   
     

 

 

 
  

Total contractual repayments

   $ 371,045   
  

Investments in equity securities

     148,825   
     

 

 

 
  

Total cost basis of investments held at December 31, 2015:

   $ 519,870   
     

 

 

 

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 December 31, 2015 and March 31, 2015, we had gross receivables from portfolio companies of $0.9 million and $1.5 million, respectively. The allowance for uncollectible receivables was $0.5 million and $0.3 million as of December 31, 2015 and March 31, 2015, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with the 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.

Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of the Adviser and the Adviser is also 100% indirectly owned and controlled by Mr. Gladstone.

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

 

     Three Months Ended
December 31,
    Nine Months Ended
December 31,
 
     2015     2014     2015     2014  

Average total assets subject to base management fee(A)

   $ 497,000      $ 385,400      $ 496,500      $ 355,800   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.5     1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(B)

     2,485        1,927        7,448        5,337   

Credits to fees from Adviser—other(B)

     (835     (867     (2,541     (1,855
  

 

 

   

 

 

   

 

 

   

 

 

 

Net base management fee

   $ 1,650      $ 1,060      $ 4,907      $ 3,482   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee(B)

   $ 1,756      $ 1,295      $ 5,022      $ 3,588   

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

     (1,756     (1,295     (5,022     (3,588
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan servicing fee

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee(B)

   $ 1,159      $ 1,460      $ 3,955      $ 3,726   

Credits to fees from Adviser—other(B)

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net incentive fee

   $ 1,159      $ 1,460      $ 3,955      $ 3,726   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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.

Base Management Fee

The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement 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, totaling $56 and $165 and $36 and $81 for the three and nine month periods ended December 31, 2015 and 2014, respectively, is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser and primarily for the valuation of portfolio companies.

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, coupled with the fact that 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 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.

Incentive Fee

The incentive fee payable to the Adviser under our Advisory Agreement 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, adjusted appropriately for any share issuances or repurchases during the period (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, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized); and

 

    20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, 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

 

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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 December 31, 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 period. 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 December 31, 2015.

Transactions with the Administrator

We pay the Administrator pursuant to the Administration Agreement for 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 staffs. 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.

Other Transactions

Gladstone Securities, LLC (“Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Securities receives a fee. The fees received by Securities from portfolio companies during the three and nine month periods ended December 31, 2015 and 2014 totaled $0.2 million and $0.6 million and $0.4 million and $0.6 million, respectively.

 

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Table of Contents

Related Party Fees Due

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

 

     As of
December 31,
     As of
March 31
 
     2015      2015  

Base management and loan servicing fee due to Adviser, net of credits

   $ 309       $ 191   

Incentive fee due to Adviser

     1,159         1,249   

Other due to Adviser

     42         62   
  

 

 

    

 

 

 

Total fees due to Adviser

   $ 1,510       $ 1,502   

Fee due to Administrator

   $ 254       $ 262   
  

 

 

    

 

 

 

Total related party fees due

   $ 1,764       $ 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 $6 as of December 31, 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, net and Other liabilities, as appropriate, on the accompanying Condensed Consolidated Statements of Assets and Liabilities as of December 31, 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. As of December 31, 2015, we have retained a one-year extension option, to be agreed upon by all parties, which may be exercised on or before June 26, 2016, and upon exercise, the option would extend the revolving period to June 26, 2018 and the maturity date to June 26, 2020. 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
December 31,
     As of
March 31,
 
     2015      2015  

Commitment amount

   $ 185,000       $ 185,000   

Borrowings outstanding at cost

     89,200         118,800   

Availability(A)

     95,800         66,200   

 

     For the Three Months
Ended December 31,
    For the Nine Months
Ended December 31,
 
     2015     2014     2015     2014  

Weighted average borrowings outstanding

   $ 85,045      $ 97,614      $ 96,236      $ 74,374   

Effective interest rate(B)

     4.2     3.9     4.0     4.0

Commitment (unused) fees incurred

   $ 129      $ 113      $ 388      $ 234   

 

  (A)  Availability subject to various constraints imposed under our Credit Facility
  (B)  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 $170.0 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 December 31, 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 December 31, 2015, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $378.9 million, an asset coverage of 488.9%, calculated in compliance with the requirements of Section 18 of the 1940 Act, and an active status as a BDC and RIC. Our Credit Facility requires a minimum of 12 obligors in the borrowing base and, as of December 31, 2015, we had 28 obligors in the borrowing base. As of December 31, 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 December 31, 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 fixed 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 December 31, 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 decrease or increase, respectively, in the fair value of our Credit Facility. At each of December 31, 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 on our accompanying Condensed Consolidated Statements of Assets and Liabilities as of December 31, 2015 and March 31, 2015, using Level 3 inputs of the hierarchy established by ASC 820, and a roll-forward of the changes in fair value during the three and nine months ended December 31, 2015 and 2014:

 

     Level 3 – Borrowings  
     Recurring Fair Value
Measurements

Reported in Condensed
Consolidated

Statements of Assets and
Liabilities
Using Significant
Unobservable Inputs
(Level 3)
 
     December 31,
2015
     March 31,
2015
 

Credit Facility

   $ 89,200       $ 118,800   
  

 

 

    

 

 

 

 

Fair Value Measurements of Borrowings Using Significant Unobservable Inputs (Level 3) Reported in

Consolidated Statements of Assets and Liabilities

 
     Credit
Facility
 

Three months ended December 31, 2015:

  

Fair value at September 30, 2015

   $ 103,500   

Borrowings

     26,500   

Repayments

     (40,800
  

 

 

 

Fair value at December 31, 2015

   $ 89,200   
  

 

 

 

Nine months ended December 31, 2015:

  

Fair value at March 31, 2015

   $ 118,800   

Borrowings

     92,000   

Repayments

     (121,600
  

 

 

 

Fair value at December 31, 2015

   $ 89,200   
  

 

 

 

 

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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 December 31, 2014:

  

Fair value at September 30, 2014

   $ 87,750   

Borrowings

     53,750   

Repayments

     (45,700
  

 

 

 

Fair value at December 31, 2014

   $ 95,800   
  

 

 

 

Nine months ended December 31, 2014:

  

Fair value at March 31, 2014

   $ 61,701   

Borrowings

     90,550   

Repayments

     (56,000

Net unrealized depreciation(A)

     (451
  

 

 

 

Fair value at December 31, 2014

   $ 95,800   
  

 

 

 

 

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

The fair value of the collateral under our Credit Facility was $424.2 million and $435.9 million as of December 31, 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% and are unable to correct such failure within a specific amount of time, 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 asset coverage on our senior securities that are stock (our Series A, B, and C Term Preferred Stock) as of December 31, 2015 was 216.7%, calculated pursuant to Section 18 of the 1940 Act.

 

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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 December 31, 2015 and March 31, 2015:

As of December 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   

Series C

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

 

 

    

 

 

    

 

 

 

Total as of December 31, 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 mandatorily redeemable preferred stock during the nine months ended December 31, 2015 and 2014:

For the Nine Months Ended December 31, 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   

July 14, 2015

   July 24, 2015    August 4, 2015      0.1484375         0.140625         0.135417   

July 14, 2015

   August 20, 2015    August 31, 2015      0.1484375         0.140625         0.135417   

July 14, 2015

   September 21, 2015    September 30, 2015      0.1484375         0.140625         0.135417   

October 13, 2015

   October 26, 2015    November 4, 2015      0.1484375         0.140625         0.135417   

October 13, 2015

   November 17, 2015    November 30, 2015      0.1484375         0.140625         0.135417   

October 13, 2015

   December 18, 2015    December 31, 2015      0.1484375         0.140625         0.135417   
        

 

 

    

 

 

    

 

 

 
     

    Total

   $ 1.3359375       $ 1.265625       $ 1.033683   
        

 

 

    

 

 

    

 

 

 

 

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

 

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For the Nine Months Ended December 31, 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   

July 15, 2014

   July 25, 2014    August 5, 2014      0.1484375   

July 15, 2014

   August 20, 2014    August 29, 2014      0.1484375   

July 15, 2014

   September 19, 2014    September 30, 2014      0.1484375   

October 7, 2014

   October 22, 2014    October 31, 2014      0.1484375   

October 7, 2014

   November 17, 2014    November 26, 2014      0.1484375   

October 7, 2014

   December 19, 2014    December 31, 2014      0.1484375   
        

 

 

 
     

    Total

   $ 1.3359375   
        

 

 

 

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.

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 preferred stock at cost as of December 31, 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 mandatorily redeemable preferred stock based on the last reported closing sale price as of December 31, 2015 and March 31, 2015, each of which we consider to be a Level 1 input within the fair value hierarchy:

 

     Fair Value as of  
     December 31,
2015
     March 31,
2015
 

Series A Term Preferred Stock

   $ 40,800       $ 41,472   

Series B Term Preferred Stock

     41,847         42,228   

Series C Term Preferred Stock

     40,250         —     
  

 

 

    

 

 

 

Total

   $ 122,897       $ 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 Offering

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.

 

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

The following table sets forth the computation of basic and diluted net (decrease) increase in net assets resulting from operations per weighted average common share for the three and nine months ended December 31, 2015 and 2014:

 

     Three Months Ended
December 31,
     Nine Months Ended
December 31,
 
     2015      2014      2015      2014  

Numerator: net (decrease) increase in net assets resulting from operations

   $ (6,213    $ 7,589       $ 2,236       $ 21,056   

Denominator: basic and diluted weighted average common shares

     30,270,958         26,475,958         30,267,358         26,475,958   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ (0.21    $ 0.29       $ 0.07       $ 0.80   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2015 and 2014, 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 nine months ended December 31, 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   
   July 14, 2015    July 24, 2015    August 4, 2015      0.0625   
   July 14, 2015    August 20, 2015    August 31, 2015      0.0625   
   July 14, 2015    September 21, 2015    September 30, 2015      0.0625   
   October 13, 2015    October 26, 2015    November 4, 2015      0.0625   
   October 13, 2015    November 17, 2015    November 30, 2015      0.0625   
   October 13, 2015    December 18, 2015    December 31, 2015      0.0625   
           

 

 

 
  

    Nine months ended December 31, 2015:

   $ 0.5625   
           

 

 

 

 

Fiscal Year

   Declaration
Date
   Record Date    Payment Date    Distribution
per
Common
Share
 

2015

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

 

 

 
  

    Nine months ended December 31, 2014:

   $ 0.59   
           

 

 

 

 

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

Aggregate distributions to common stockholders declared quarterly and paid for the nine months ended December 31, 2015 and 2014 were approximately $17.0 million and $15.6 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

 

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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 December 31, 2015, 100% would be from ordinary income and 0% would be a return of capital. For the nine months ended December 31, 2015, we recorded $0.8 million of net estimated permanent book-tax differences which decreased Capital in excess of par value, increased Net investment income in excess of distributions by $1.3 million and increased Accumulated net realized loss by $0.5 million on our accompanying Condensed Consolidated Statement of Assets and Liabilities. 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 $3.9 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. 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 December 31, 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, if received in cash but subject to potential obligations, or in Other assets, net, if not yet received in cash, on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We establish a reserve against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not ultimately be released or received at the end of the escrow period. There were no aggregate reserves recorded against the escrow amounts as of December 31, 2015 and March 31, 2015.

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, with such commitment limited at all times to the actual amount outstanding under Tread’s senior credit facility. The actual amount outstanding under Tread’s senior credit facility as of December 31, 2015 and March 31, 2015 was $3.2 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 December 31, 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 one of our portfolio companies. During the three and nine months ended December 31, 2015 and 2014, 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 December 31, 2015 and March 31, 2015 to be immaterial.

As of December 31, 2015, the following guaranties were outstanding:

 

    In February 2010, we executed a guaranty 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 guaranty 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 guaranty of vendor recourse for up to $0.3 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 $0.3 million on transactions with long-time customers who lack the financial history to qualify for third-party financing. These individual transactions have terms to maturity that expire in October 2016.

 

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

 

     December 31,
2015
     March 31,
2015
 

Unused line of credit and other uncalled capital commitments

   $ 9,098       $ 10,031   

Guaranties

     2,284         2,593   
  

 

 

    

 

 

 

Total

   $ 11,382       $ 12,624   
  

 

 

    

 

 

 

 

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Table of Contents

NOTE 11. FINANCIAL HIGHLIGHTS

 

     Three Months Ended
December 31,
    Nine Months Ended
December 31,
 
     2015     2014     2015     2014  

Per Common Share Data:

        

Net asset value at beginning of period(A)

   $ 9.05      $ 8.49      $ 9.18      $ 8.34   

Income from investment operations(B)

        

Net investment income

     0.15        0.22        0.52        0.56   

Realized loss on sale of investments and other

     (0.07     (0.01     (0.15     (0.01

Net unrealized (depreciation) appreciation of investments and other

     (0.29     0.08        (0.30     0.25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total from investment operations

     (0.21     0.29        0.07        0.80   

Effect of equity capital activity(B)

        

Cash distributions to common stockholders(C)

     (0.19     (0.23     (0.56     (0.59

Shelf registration offering costs

     —          —          (0.01     —     

Net dilutive effect of equity offering(D)

     —          —          (0.03     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total from equity capital activity

     (0.19     (0.23     (0.60     (0.59

Other, net(B)(E)

     0.01        —          0.01        —     

Net asset value at end of period(A)

   $ 8.66      $ 8.55        8.66      $ 8.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per common share market value at beginning of period

   $ 7.04      $ 7.11      $ 7.40        8.27   

Per common share market value at end of period

     7.67        7.00        7.67        7.00   

Total return(F)

     11.61     1.64     11.54     (8.34 )% 

Common stock outstanding at end of period(A)

     30,270,958        26,475,958        30,270,958        26,475,958   

Statement of Assets and Liabilities Data:

        

Net assets at end of period

   $ 262,080      $ 226,272      $ 262,080      $ 226,272   

Average net assets(G)

     281,050        226,578        278,939        225,534   

Senior Securities Data:

        

Total borrowings, at cost

   $ 94,296      $ 100,896        94,296      $ 100,896   

Mandatorily redeemable preferred stock

     121,650        81,400        121,650        81,400   

Ratios/Supplemental Data:

        

Ratio of expenses to average net assets—annualized(H)

     14.27     13.92     14.46     12.42

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

     10.58        10.10        10.85        9.20   

Ratio of net investment income to average net assets—annualized(J)

     6.59        10.31        7.56        8.81   

 

(A)  Based on actual common shares outstanding at the end of the corresponding period.
(B)  Based on weighted average basic common share data for the corresponding period.
(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 and nine months ended December 31, 2015 and 2014, distributions were deemed to be made from net investment income.
(D)  During the nine months ended December 31, 2015, the dilution is the result of issuing common shares in April 2015 at a price below then current NAV.
(E)  Represents the impact of the different share amounts (weighted average basic common shares outstanding for the corresponding period and actual common shares outstanding at the end of the corresponding period) in the Per Common Share Data calculations and rounding impacts.
(F)  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.
(G)  Calculated using the average balance of net assets at the end of each month of the reporting period.
(H)  Ratio of expenses to average net assets is computed using expenses before any credits from the Adviser.
(I)  Ratio of net expenses to average net assets is computed using total expenses, net of any voluntary, unconditional, and irrevocable credits to the base management fee for the loan servicing fee and other credits from the Adviser.
(J)  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 2.90% and 1.62% for the three months ended December 31, 2015 and 2014, and 3.95% and 4.19% for the nine months ended December 31, 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, which met at least one of the significance conditions under Rule 1-02(w) of the SEC’s Regulation S-X as of December 31, 2015 and 2014 and for the nine months ended December 31, 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 Nine Months
Ended December 31,
 

Income Statement

   2015      2014  

Net sales

   $ 20,228       $ 18,499   

Gross profit

     274         1,045   

Net loss

     (4,013      (1,941

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 and nine months ended December 31, 2015, except as disclosed below:

Distributions

In January 2016, 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
 

January 22, 2016

   February 2, 2016    $ 0.0625       $ 0.1484375       $ 0.140625       $ 0.135417   

February 18, 2016

   February 29, 2016      0.0625         0.1484375         0.140625         0.135417   

March 21, 2016

   March 31, 2016      0.0625         0.1484375         0.140625         0.135417   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Total for the Quarter:    $ 0.1875       $ 0.4453125       $ 0.421875       $ 0.406251   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

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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.

 

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To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment 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 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 December 31, 2015, our investment allocation was 71.4% in debt securities and 28.6% 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 (the “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services.

Additionally, Gladstone Securities, LLC (“Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Securities receives a fee.

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 December 31, 2015, we invested approximately $19.0 million in one new deal and partially exited one existing deal with a fair value of $26.8 million as of September 30, 2015, resulting in a net increase of one in the number of portfolio companies, which was 36 at December 31, 2015, and a net decrease of 3.9% in our portfolio at fair value quarter over quarter. The new investment, along with our capital raising efforts discussed below, have allowed us to invest $489.3 million in 29 new debt and equity deals since October 2010. For the three months ended December 31, 2015, our new investments consisted of approximately 70.1% secured first lien loans and 29.9% 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 December 31, 2015, we had unrecognized success fees of $25.1 million, or $0.83 per

 

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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 six management-supported buyout liquidity events since June 2010, and in the aggregate, the six liquidity events have generated $71.7 million in net realized gains and $15.0 million in other income, for a total increase to our net assets of $86.7 million. We believe each of these transactions was an equity-oriented investment success and exemplifies our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. The six liquidity events that resulted in net realized gains since October 2010 have significantly offset our cumulative realized losses since inception, which 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 by 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 February 2, 2016, the closing market price of our common stock was $7.22 per share, which represented a 16.6% discount to our net asset value (“NAV”) of $8.66 per share as of December 31, 2015. 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 2015 Annual Meeting of Stockholders held on August 6, 2015, 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 2015 stockholder authorization is in effect for one year from the date of stockholder approval. We sought and obtained stockholder approval concerning a similar proposal at the Annual Meeting of Stockholders held in August 2014, and 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 also 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 of the 1940 Act), of at least 200.0% on our senior securities representing indebtedness and our senior securities that are stock (such as our series of term preferred stock).

 

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Investment Highlights

During the nine months ended December 31, 2015, we disbursed $55.4 million in new debt and equity investments, obtained $13.9 million of new debt and equity investments as part of restructurings, received $41.2 million in proceeds from repayments and sales, and extended $4.9 million of follow-on investments to existing portfolio companies through revolver draws or additions to equity. From our initial public offering in June 2005 through December 31, 2015, we have made 249 investments in 117 companies for a total of approximately $1.2 billion, before giving effect to principal repayments and divestitures.

Investment Activity

During the nine months ended December 31, 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 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.

 

    In August 2015, NDLI, Inc. (“NDLI”) was acquired by Diligent Delivery Systems (“Diligent”). As part of this acquisition, we restructured our investment in NDLI, which resulted in the termination of our debt investments in NDLI. We received cash proceeds of $1.9 million and a $13.0 million secured second lien debt investment in Diligent, which resulted in a realized loss of $2.8 million. Diligent, headquartered in Houston, Texas, has provided professional delivery services since 1994.

 

    In September 2015, we sold our investment in Cavert. As a result of the sale, we received cash proceeds of $3.4 million, resulting in dividend income of $1.5 million and repayment of our equity investment at its cost basis of $1.8 million.

 

    In October 2015, we sold our investment in Funko, which resulted in dividend and other income of $0.3 million and a realized gain of $17.0 million. In connection with the sale, we received net cash proceeds of $14.8 million, full repayment of our debt investment of $9.5 million, receivables of $3.5 million, recorded within Other assets, net on the accompanying Condensed Consolidated Statement of Assets and Liabilities, and a continuing preferred and common equity investment in Funko with a combined cost basis and fair value of $0.3 million. Additionally, we recorded a tax liability for the net unrealized built-in gain that was realized upon the sale of $9.6 million within Other liabilities on the accompanying Condensed Consolidated Statement of Assets and Liabilities.

 

    In December 2015, we invested $19.0 million in Nth Degree, Inc. (“Nth Degree”) through a combination of secured first lien debt and equity. Nth Degree, headquartered outside of Atlanta, Georgia, is a multifaceted face-to-face event marketing and management services organization.

 

    In December 2015, we restructured our investment in Galaxy Tool Holdings, Inc. (“Galaxy”). As a result of the restructure, we converted debt with a cost basis of $10.5 million into preferred equity with a new cost basis and fair value of $0, which resulted in a realized loss of $10.5 million.

 

    In December 2015, we restructured our investment in Tread. As a result of the restructure, we converted debt with a cost basis of $9.26 million into preferred equity with a new cost basis and fair value of $0.4 million. As part of the transaction, we also exercised our existing common stock warrants for an exercise price of $0.2 million. As a result of the transaction, we recognized a realized loss of $8.6 million.

 

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Recent Developments

Executive Officers

On October 13, 2015, our Board of Directors announced that Ms. Ryan had taken a temporary family medical leave of absence and that Ms. Morrison would serve as the Company’s acting principal financial officer during Ms. Ryan’s temporary family medical leave of absence. Ms. Ryan returned to her position as chief financial officer and treasurer of the Company in December 2015.

 

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended December 31, 2015 to the Three Months Ended December 31, 2014

 

     For the Three Months Ended December 31,  
     2015     2014     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 11,407      $ 9,732      $ 1,675        17.2

Other income

     661        1,830        (1,169     (63.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     12,068        11,562        506        4.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     2,485        1,927        558        29.0   

Loan servicing fee

     1,756        1,295        461        35.6   

Incentive fee

     1,159        1,460        (301     (20.6

Administration fee

     254        226        28        12.4   

Interest and dividend expense

     3,040        2,127        913        42.9   

Amortization of deferred financing fees

     485        404        81        20.0   

Other

     849        446        403        90.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     10,028        7,885        2,143        27.2   

Credits to fees from Adviser

     (2,591     (2,162     (429     19.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits to fees

     7,437        5,723        1,714        29.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,631        5,839        (1,208     (20.7
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized loss on investments

     (2,076     (209     (1,867     893.3   

Net unrealized (depreciation) appreciation of investments

     (8,768     1,959        (10,727     NM   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain

     (10,844     1,750        (12,594     NM   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (6,213   $ 7,589      $ (13,802     NM   
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.15      $ 0.22      $ (0.07     (31.8)
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

   $ (0.21   $ 0.29      $ (0.50     NM   
  

 

 

   

 

 

   

 

 

   

 

 

 

NM = Not Meaningful

Investment Income

Total investment income increased by 4.4% for the three months ended December 31, 2015, as compared to the prior year period. This increase was due to an increase in interest income which largely resulted from an increase in the size of our interest-bearing portfolio for the three months ended December 31, 2015 as compared to the prior year period.

Interest income from our investments in debt securities increased 17.2% for the three months ended December 31, 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 December 31, 2015, was approximately $363.4 million, compared to approximately $307.7 million for the prior year period. This increase was primarily due to approximately $87.8 million in new debt investments originated after December 31, 2014, including Logo Sportswear, Inc. (“Logo”), Counsel Press, Inc. (“Counsel Press”), Brunswick, GI Plastek, Diligent, and Nth Degree.

At December 31, 2015 and 2014, our loans to one portfolio company, Tread Corporation (“Tread”), were on non-accrual status, with an aggregate debt cost basis of $1.5 million and $10.7 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% and 12.5% for the three months ended December 31, 2015 and 2014, respectively. 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 December 31, 2015 decreased by 63.9% from the prior year period. During the three months ended December 31, 2015, other income primarily consisted of prepayment fees of $0.1 million from Funko and $0.6 million of prepayments of success fees of $0.2 million from each of Drew Foam Company, Inc. (“Drew Foam”), Frontier Packaging, Inc. (“Frontier”), and Logo. For the three months ended December 31, 2014, other income primarily consisted of $1.3 million of dividends

 

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received from Mathey Investments, Inc. (“Mathey”) and $0.5 million of prepayments of success fees received from Specialty Knives and Tools, LLC (“SOG”).

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

 

     As of
December 31, 2015
    Three months ended
December 31, 2015
 

Portfolio Company

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

Acme Cryogenics, Inc.

   $ 33,405         7.1   $ 426         3.5

SOG Specialty Knives & Tools, LLC.

     29,143         6.2        670         5.6   

Cambridge Sound Management, Inc.

     26,817         5.7        498         4.1   

Counsel Press, Inc.

     26,238         5.6        800         6.6   

Frontier Packaging, Inc.

     21,456         4.5        592         4.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     137,059         29.1        2,986         24.7   

Other portfolio companies

     334,643         70.9        9,082         75.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 471,702         100.0   $ 12,068         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

Portfolio Company

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

SOC Specialty Knives & Tools, LLC

   $ 24,940         6.4   $ 1,170         10.1

Old World Christmas, Inc.(A)

     24,380         6.2        513         4.4   

Acme Cryogenics, Inc.

     22,942         5.8        426         3.7   

Cambridge Sound Management, Inc.(A)

     22,556         5.7        511         4.4   

Funko, LLC

     19,011         4.8        249         2.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     113,829         28.9        2,869         24.8   

Other portfolio companies

     280,316         71.1        8,693         75.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 394,145         100.0   $ 11,562         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A)  New investment during the applicable period.

Expenses

Total expenses, net of any voluntary, unconditional, and irrevocable credits from the Adviser, increased 29.9% for the three months ended December 31, 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.

The net base management fee increased for the three months ended December 31, 2015, as compared to the prior year period, as a result of the increased size of our portfolio over the respective periods. The incentive fee decreased for the three months ended December 31, 2015, as compared to the prior year period, as net investment income decreased 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 the Adviser” in Note 4 –Related Party Transactions of the notes to our accompanying Condensed Consolidated Financial Statements and are summarized in the following table:

 

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     Three Months Ended
December 31,
 
     2015     2014  

Average total assets subject to base management fee(A)

   $ 497,000      $ 385,400   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee(B)

     2,485        1,927   

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

     (835     (867

Net base management fee

   $ 1,650      $ 1,060