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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2016

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 12b-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 July 29, 2016, was 30,270,958.

 

 

 


Table of Contents

GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

 

PART I.     FINANCIAL INFORMATION:   
  Item 1.   Financial Statements (Unaudited)   
    Consolidated Statements of Assets and Liabilities as of June 30 and March 31, 2016      2   
    Consolidated Statements of Operations for the three months ended June 30, 2016 and 2015      3   
    Consolidated Statements of Changes in Net Assets for the three months ended June 30, 2016 and 2015      4   
    Consolidated Statements of Cash Flows for the three months ended June 30, 2016 and 2015      5   
    Consolidated Schedules of Investments as of June 30 and March 31, 2016      6   
    Notes to Consolidated Financial Statements      14   
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   
    Overview      37   
    Results of Operations      41   
    Liquidity and Capital Resources      46   
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk      52   
  Item 4.   Controls and Procedures      52   
PART II.     OTHER INFORMATION:   
  Item 1.   Legal Proceedings      53   
  Item 1A.   Risk Factors      53   
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      53   
  Item 3.   Defaults Upon Senior Securities      53   
  Item 4.   Mine Safety Disclosures      53   
  Item 5.   Other Information      53   
  Item 6.   Exhibits      53   
SIGNATURES      54   


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,     March 31,  
     2016     2016  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $200,094 and $191,757, respectively)

   $ 196,486      $ 180,933   

Affiliate investments (Cost of $300,757 and $304,856, respectively)

     276,676        296,723   

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

     17,819        10,000   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $522,363 and $518,125, respectively)

     490,981        487,656   

Cash and cash equivalents

     5,233        4,481   

Restricted cash and cash equivalents

     1,384        1,107   

Interest receivable

     2,766        2,790   

Due from custodian

     1,149        1,638   

Deferred financing costs, net

     959        1,147   

Other assets, net

     4,567        4,256   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 507,039      $ 503,075   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Line of credit at fair value (Cost of $79,600 and $95,000, respectively)

   $ 79,600      $ 95,000   

Secured borrowing

     5,096        5,096   
  

 

 

   

 

 

 

Total borrowings

     84,696        100,096   

Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 4,956,000 shares authorized; 4,866,000 shares issued and outstanding, net

     118,683        118,465   

Accounts payable and accrued expenses

     828        1,054   

Fees due to Adviser(A)

     2,111        1,912   

Fee due to Administrator(A)

     299        311   

Other liabilities

     2,542        2,215   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 209,159      $ 224,053   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 297,880      $ 279,022   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

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

     30      $ 30   

Capital in excess of par value

     311,493        311,608   

Cumulative net unrealized depreciation of investments

     (31,382     (30,469

Cumulative net unrealized depreciation of other

     —          (75

Net investment income in excess of distributions

     7,603        6,426   

Accumulated net realized gain (loss)

     10,136        (8,498
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 297,880      $ 279,022   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 9.84      $ 9.22   
  

 

 

   

 

 

 

 

(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 CONSOLIDATED FINANCIAL STATEMENTS.

 

2


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
June 30,
 
     2016     2015  

INVESTMENT INCOME

    

Interest income:

    

Non-Control/Non-Affiliate investments

   $ 4,505      $ 3,802   

Affiliate investments

     6,914        6,924   

Control investments

     209        659   
  

 

 

   

 

 

 

Total interest income

     11,628        11,385   

Other income:

    

Non-Control/Non-Affiliate investments

     15        1,321   

Affiliate investments

     2,750        —     
  

 

 

   

 

 

 

Total other income

     2,765        1,321   
  

 

 

   

 

 

 

Total investment income

     14,393        12,706   
  

 

 

   

 

 

 

EXPENSES

    

Base management fee(A)

     2,509        2,453   

Loan servicing fee(A)

     1,681        1,559   

Incentive fee(A)

     1,700        1,291   

Administration fee(A)

     299        355   

Interest expense on borrowings

     971        1,064   

Dividends on mandatorily redeemable preferred stock

     2,065        1,767   

Amortization of deferred financing costs and discounts

     481        460   

Professional fees

     192        442   

Other general and administrative expenses

     201        556   
  

 

 

   

 

 

 

Expenses before credits from Adviser

     10,099        9,947   
  

 

 

   

 

 

 

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

     (1,681     (1,559

Credit to fees from Adviser — other(A)

     (837     (845
  

 

 

   

 

 

 

Total expenses, net of credits to fees

     7,581        7,543   
  

 

 

   

 

 

 

NET INVESTMENT INCOME

   $ 6,812      $ 5,163   
  

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

    

Net realized gain (loss):

    

Non-Control/Non-Affiliate investments

     (153     —     

Affiliate investments

     18,789        —     

Control investments

     (1     199   

Other

     (75     —     
  

 

 

   

 

 

 

Total net realized gain

     18,560        199   

Net unrealized appreciation (depreciation):

    

Non-Control/Non-Affiliate investments

     7,217        6,508   

Affiliate investments

     (15,949     (3,201

Control investments

     7,819        (110

Other

     75        —     
  

 

 

   

 

 

 

Total net unrealized (depreciation) appreciation

     (838     3,197   
  

 

 

   

 

 

 

Net realized and unrealized gain

     17,722        3,396   
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 24,534      $ 8,559   
  

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

    

Net investment income

   $ 0.23      $ 0.17   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.81      $ 0.28   
  

 

 

   

 

 

 

Distributions

   $ 0.19      $ 0.19   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

    

Basic and diluted

     30,270,958        30,260,079   

 

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

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

 

3


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended June 30,  
     2016     2015  

OPERATIONS

    

Net investment income

   $ 6,812      $ 5,163   

Net realized gain on investments

     18,635        199   

Net realized loss on other

     (75     —     

Net unrealized (depreciation) appreciation of investments

     (913     3,197   

Net unrealized appreciation of other

     75        —     
  

 

 

   

 

 

 

Net increase in net assets from operations

     24,534        8,559   
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (5,676     (5,676
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (5,676     (5,676
  

 

 

   

 

 

 

CAPITAL ACTIVITY

    

Issuance of common stock

     —          3,663   

Offering costs for issuance of common stock

     —          (221
  

 

 

   

 

 

 

Net increase in net assets from capital activity

     —          3,442   
  

 

 

   

 

 

 

TOTAL INCREASE IN NET ASSETS

     18,858        6,325   

NET ASSETS, BEGINNING OF PERIOD

     279,022        273,429   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 297,880      $ 279,754   
  

 

 

   

 

 

 

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

 

4


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended June 30,  
     2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 24,534      $ 8,559   

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

    

Purchase of investments

     (28,976     (17,326

Principal repayments of investments

     15,411        5,233   

Net proceeds from the sale of investments

     27,531        315   

Net realized gain on investments

     (18,654     (215

Net realized loss on other

     75        —     

Net unrealized depreciation (appreciation) of investments

     913        (3,197

Net unrealized appreciation of other

     (75     —     

Amortization of deferred financing costs and discounts

     481        460   

Bad debt expense, net of recoveries

     (18     225   

Changes in assets and liabilities:

    

Increase in restricted cash and cash equivalents

     (277     (695

Decrease (increase) in interest receivable

     24        (134

Decrease in due from custodian

     489        544   

Decrease (increase) in other assets, net

     157        (590

(Decrease) increase in accounts payable and accrued expenses

     (226     842   

Increase in fees due to Adviser(A)

     199        308   

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

     (12     93   

Increase (decrease) in other liabilities

     327        (515
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     21,903        (6,093
  

 

 

   

 

 

 

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

     31,100        38,500   

Repayments on line of credit

     (46,500     (67,550

Proceeds from issuance of mandatorily redeemable preferred stock

     —          40,250   

Deferred financing and offering costs

     (75     (1,712

Distributions paid to common stockholders

     (5,676     (5,676
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (21,151     7,254   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     752        1,161   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     4,481        4,921   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 5,233      $ 6,082   
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 913      $ 974   
  

 

 

   

 

 

 

 

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

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

 

5


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)(F)

   Principal      Cost      Fair Value  

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

     
Auto Safety House, LLC   

Automobile

  

Secured First Lien Line of Credit, $1,000 available (8.0%, Due 10/2019)(I)(Q)

   $ —         $ —         $ —     
     

Secured First Lien Term Debt (8.0%, Due 10/2019)(I)(Q)

     5,000         5,000         5,362   
           

 

 

    

 

 

 
              5,000         5,362   
B-Dry, LLC   

Personal, Food and Miscellaneous Services

  

Secured First Lien Line of Credit, $400 available (6.7% (0.8% Unused Fee), Due 12/2016)(L)

     3,600         3,600         3,600   
     

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

     6,433         6,443         2,378   
     

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

     840         840         —     
     

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

        2,516         —     
     

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

        300         —     
           

 

 

    

 

 

 
              13,699         5,978   

Country Club Enterprises,
LLC

  

Automobile

  

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

     4,000         4,000         4,000   
     

Preferred Stock (7,245,681 shares)(C)(L)

        7,725         6,719   
     

Guaranty ($2,000)(D)

        —           —     
     

Guaranty ($211)(D)

        —           —     
           

 

 

    

 

 

 
              11,725         10,719   
Diligent Delivery Systems   

Cargo Transport

  

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

     13,000         13,000         13,065   
     

Common Stock Warrants (8% ownership)(C)(L)

        500         2,000   
           

 

 

    

 

 

 
              13,500         15,065   
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)(L)

        3,375         3,654   
     

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

        63         7,627   
           

 

 

    

 

 

 
              13,351         21,194   
Frontier Packaging, Inc.   

Containers, Packaging, and Glass

  

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

     10,500         10,500         10,500   
     

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

        1,373         1,413   
     

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

        152         9,313   
           

 

 

    

 

 

 
              12,025         21,226   

Funko Acquisition Holdings,
LLC(M)

  

Personal and Non-Durable Consumer Products (Manufacturing Only)

  

Preferred Stock
(260 units)(C)(L)

        260         326   
     

Common Stock
(975 units)(C)(L)

        —           —     
           

 

 

    

 

 

 
              260         326   
Ginsey Home Solutions, Inc.   

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Secured Second Lien Term Debt (13.5%, Due 1/2021)(H)(L)

     13,300         13,300         13,300   
     

Preferred Stock (19,280 shares)(C)(L)

        9,583         5,816   
     

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

        8         —     
           

 

 

    

 

 

 
              22,891         19,116   
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)(L)

        3,556         4,560   
     

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

        94         3,736   
           

 

 

    

 

 

 
              14,650         19,296   
Mathey Investments, Inc.   

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

  

Secured First Lien Term Debt (10.0%, Due 3/2018)(L)

     1,375         1,375         1,375   
     

Secured First Lien Term Debt (12.0%, Due 3/2018)(L)

     3,727         3,727         3,727   
     

Secured First Lien Term Debt (12.5%, Due 3/2018)(E)(I)(L)

     3,500         3,500         3,500   
     

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

        777         —     
           

 

 

    

 

 

 
              9,379         8,602   
Mitchell Rubber Products, Inc.   

Chemicals, Plastics, and Rubber

  

Secured Second Lien Term Debt (13.0%, Due 3/2018)(I)(K)

     13,560         13,560         6,408   
     

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

        2,790         —     
     

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

        28         —     
           

 

 

    

 

 

 
              16,378         6,408   

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

 

6


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)(F)

   Principal      Cost      Fair Value  
Nth Degree, Inc.   

Diversified/Conglomerate Service

  

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

   $ 13,290       $ 13,290       $ 13,290   
     

Preferred Stock (5,660
units)(C)(L)

        5,660         9,115   
           

 

 

    

 

 

 
              18,950         22,405   
Quench Holdings Corp.   

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

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

        3,397         4,359   
           

 

 

    

 

 

 
              3,397         4,359   
SBS Industries, LLC   

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

  

Secured First Lien Term Debt (14.0%, Due 8/2019)(L)

     11,355         11,355         11,355   
     

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

        1,994         —     
     

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

        222         —     
           

 

 

    

 

 

 
              13,571         11,355   
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)(L)

        4,000         5,273   
           

 

 

    

 

 

 
              17,081         18,354   
Star Seed, Inc.   

Farming and Agriculture

  

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

     5,000         5,000         4,675   
     

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

        1,499         —     
     

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

        1         —     
           

 

 

    

 

 

 
              6,500         4,675   
Tread Corporation   

Oil and Gas

  

Secured First Lien Line of Credit, $634 available (12.5%, Due 2/2018)(G)(L)

     3,216         3,216         2,046   
     

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

        3,768         —     
     

Common Stock (10,089,048 shares)(C)(L)

        753         —     
           

 

 

    

 

 

 
              7,737         2,046   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 40.0% of total investments at fair value)

  

   $ 200,094       $ 196,486   
           

 

 

    

 

 

 

AFFILIATE INVESTMENTS(O):

        
Alloy Die Casting Co.(M)   

Diversified/Conglomerate Manufacturing

  

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

   $ 12,215       $ 12,215       $ 11,543   
     

Secured First Lien Term Debt (13.5%, Due 4/2017)(J)

     175         175         175   
     

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

        4,064         580   
     

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

        41         —     
           

 

 

    

 

 

 
              16,495         12,298   
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)(L)

        2,922         9,890   
           

 

 

    

 

 

 
              12,897         19,865   
Brunswick Bowling Products, Inc.   

Home and Office Furnishings, Housewares and Durable Consumer Products

  

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

     11,307         11,307         11,307   
     

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

        4,943         7,546   
           

 

 

    

 

 

 
              16,250         18,853   
B+T Group Acquisition Inc.(M)   

Telecommunications

  

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

     14,000         14,000         13,230   
     

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

        4,196         —     
           

 

 

    

 

 

 
              18,196         13,230   

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)(L)

        4,500         11,806   
           

 

 

    

 

 

 
              19,500         26,806   

Channel Technologies Group, LLC

  

Diversified/Conglomerate Manufacturing

  

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

        2,789         582   
     

Common Stock (2,319,184
shares)(C)(L)

        —           —     
           

 

 

    

 

 

 
              2,789         582   

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

 

7


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)(F)

   Principal      Cost      Fair Value  
Counsel Press, Inc.   

Diversified/Conglomerate Services

  

Secured First Lien Line of Credit, $1,000 available (12.8% (1.0% Unused Fee), Due 3/2017)(L)

   $ —         $ —         $ —     
     

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)(L)

        6,995         6,698   
           

 

 

    

 

 

 
              30,495         30,198   
D.P.M.S., Inc.   

Diversified/Conglomerate Manufacturing

  

Secured First Lien Line of Credit, $550 available (4.0% (0.5% Unused Fee), Due 8/2017)(I)(L)

     4,000         4,000         4,000   
     

Secured First Lien Term Debt (4.0%, Due
8/2017)(I)(L)

     2,575         2,575         2,575   
     

Secured First Lien Term Debt (4.0%, Due
8/2017)(I)(L)

     8,795         8,795         918   
     

Secured First Lien Term Debt (5.2%, Due
8/2017)(E)(L)

     1,150         1,150         —     
     

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

        2,500         —     
     

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

        3         —     
           

 

 

    

 

 

 
              19,023         7,493   

Edge Adhesives Holdings,
Inc. (M)

  

Diversified/Conglomerate Manufacturing

  

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

     9,300         9,300         8,975   
     

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

     2,400         2,400         2,322   
     

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

        3,774         —     
           

 

 

    

 

 

 
              15,474         11,297   
GI Plastek, Inc.   

Chemicals, Plastics, and Rubber

  

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

     15,000         15,000         15,000   
     

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

        5,150         5,919   
           

 

 

    

 

 

 
              20,150         20,919   
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)(L)

        4,000         5,082   
           

 

 

    

 

 

 
              13,050         14,132   
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)(L)

        1,550         4,704   
           

 

 

    

 

 

 
              10,750         13,904   

Meridian Rack & Pinion,
Inc.(M)

  

Automobile

  

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

     9,660         9,660         8,646   
     

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

        3,381         603   
           

 

 

    

 

 

 
              13,041         9,249   
The Mountain Corporation   

Personal and Non-Durable Consumer Products (Manufacturing Only)

  

Secured Second Lien Term Debt (13.5%, Due
8/2021)(J)

     18,600         18,600         18,600   
     

Preferred Stock (6,899
shares)(C)(J)

        6,899         6,899   
     

Common Stock (751
shares)(C)(J)

        1         1   
           

 

 

    

 

 

 
              25,500         25,500   
NDLI, Inc.   

Cargo Transport

  

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

        3,600         —     
     

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

        6,180         2,549   
           

 

 

    

 

 

 
              21,950         18,319   
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)(L)

        3,739         1,682   
     

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

        91         —     
           

 

 

    

 

 

 
              13,448         11,300   

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

 

8


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)(F)

   Principal      Cost      Fair Value  

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)(L)

        9,749         4,331   
           

 

 

    

 

 

 
              28,149         22,731   
           

 

 

    

 

 

 

Total Affiliate Investments (represents 56.4% of total investments at fair value)

  

   $ 300,757       $ 276,676   
           

 

 

    

 

 

 

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         5,000   
     

Preferred Stock (5,517,444 shares)(C)(L)

        11,464         7,819   
     

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

        48         —     
           

 

 

    

 

 

 
              21,512         17,819   
           

 

 

    

 

 

 

Total Control Investments (represents 3.6% of total investments at fair value)

  

   $ 21,512       $ 17,819   
           

 

 

    

 

 

 

TOTAL INVESTMENTS

            $ 522,363       $ 490,981   
           

 

 

    

 

 

 

 

(A)  Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $458.4 million at fair value, are pledged as collateral to our revolving line of credit as described further in Note 5 — Borrowings. Additionally, all of our investments are considered qualifying assets under Section 55 of the Investment Company Act of 1940, as amended, (the “1940 Act”) as of June 30, 2016. Under the 1940 Act, we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.
(B)  Percentages represent the weighted average cash interest rates in effect at June 30, 2016, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate. If applicable, paid-in-kind interest rates are noted separately from the cash interest rates.
(C)  Security is non-income producing.
(D)  Refer to Note 10 — Commitments and Contingencies for additional information regarding these guaranties.
(E)  Last Out Tranche (“LOT”) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT generally is paid after the other secured first lien debt but before the secured second lien debt.
(F)  Where applicable, aggregates all shares of a 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 a 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 Consolidated Statement of Assets and Liabilities as of June 30, 2016.
(I)  Debt security has a fixed interest rate.
(J)  New portfolio investment valued at cost, as it was determined that the price paid during the three months ended June 30, 2016 best represents fair value as of June 30, 2016.
(K)  Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. Refer to Note 3 — Investments for additional information.
(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. Refer to Note 3 — Investments for additional information.
(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 and in which we own less than 5.0% of the issued and outstanding voting securities.
(O)  Affiliate investments, as defined by the 1940 Act, are those that are not Control investments and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(P)  Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(Q)  Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.

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

 

9


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)(F)

   Principal      Cost      Fair Value  

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

  

     

Auto Safety House, LLC

  

Automobile

  

Secured First Lien Line of Credit, $1,000 available (8.0% , Due 10/2019)(I)(Q)

   $ —         $ —         $ —     
     

Secured First Lien Term Debt (8.0%, Due 10/2019)(I)(Q)

     5,000         5,000         5,311   
           

 

 

    

 

 

 
           5,000         5,311   

B-Dry, LLC

  

Personal, Food and Miscellaneous Services

  

Secured First Lien Line of Credit, $500 available (6.7% (0.8% Unused Fee), Due 12/2016)(L)

     3,500         3,500         3,500   
     

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

     6,433         6,443         1,191   
     

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

     840         840         —     
     

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

        2,516         —     
     

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

        300         —     
           

 

 

    

 

 

 
              13,599         4,691   

Country Club Enterprises, LLC

  

Automobile

  

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

     4,000         4,000         4,000   
     

Preferred Stock (7,245,681 shares)(C)(L)

        7,725         5,313   
     

Guaranty ($2,000)(D)

        —           —     
     

Guaranty ($279)(D)

        —           —     
           

 

 

    

 

 

 
           11,725         9,313   

Diligent Delivery Systems

  

Cargo Transport

  

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

     13,000         13,000         12,984   
     

Common Stock Warrants (6.0% ownership)(C)(L)

        —           1,500   
           

 

 

    

 

 

 
           13,000         14,484   

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)(L)

        3,375         3,583   
     

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

        63         6,459   
           

 

 

    

 

 

 
           13,351         19,955   

Frontier Packaging, Inc.

  

Containers, Packaging, and Glass

  

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

     10,500         10,500         10,500   
     

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

        1,373         1,386   
     

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

        152         8,222   
           

 

 

    

 

 

 
           12,025         20,108   

Funko Acquisition Holdings,

  

Personal and Non-Durable Consumer

  

Preferred Stock (260
units)(C)(L)

        260         315   

LLC(M)

  

Products (Manufacturing Only)

  

Common Stock (975
units)(C)(L)

        —           —     
           

 

 

    

 

 

 
           260         315   

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 (19,280 shares)(C)(L)

        9,583         4,813   
     

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

        8         —     
           

 

 

    

 

 

 
           22,891         18,113   

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)(L)

        3,556         4,471   
     

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

        94         934   
           

 

 

    

 

 

 
           14,650         16,405   

Mathey Investments, Inc.

  

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

  

Secured First Lien Term Debt (10.0%, Due 3/2018)(L)

     1,375         1,375         1,375   
     

Secured First Lien Term Debt (12.0%, Due 3/2018)(L)

     3,727         3,727         3,727   
     

Secured First Lien Term Debt (12.5%, Due 3/2018)(E)(I)(L)

     3,500         3,500         3,500   
     

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

        777         54   
           

 

 

    

 

 

 
           9,379         8,656   

Mitchell Rubber Products, Inc.

  

Chemicals, Plastics, and Rubber

  

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

     13,560         13,560         5,082   
     

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

        2,790         —     
     

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

        28         —     
           

 

 

    

 

 

 
           16,378         5,082   

Nth Degree, Inc.

  

Diversified/Conglomerate Service

  

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

     13,290         13,290         13,290   
     

Preferred Equity (5,660 units)(C)(L)

        5,660         7,712   
           

 

 

    

 

 

 
           18,950         21,002   

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

 

10


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)(F)

   Principal      Cost      Fair Value  

Quench Holdings Corp.

  

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

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

   $         $ 3,397       $ 4,359   
           

 

 

    

 

 

 
              3,397         4,359   

SBS Industries, LLC

  

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

  

Secured First Lien Term Debt (14.0%, Due 8/2019)(L)

     11,355         11,355         11,355   
     

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

        1,994         —     
     

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

        222         —     
           

 

 

    

 

 

 
              13,571         11,355   

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)(L)

        4,000         4,103   
           

 

 

    

 

 

 
              17,081         17,184   

Star Seed, Inc.

  

Farming and Agriculture

  

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

     5,000         5,000         4,600   
     

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

        1,499         —     
     

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

        1         —     
           

 

 

    

 

 

 
              6,500         4,600   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 37.1% of total investments at fair value)

  

   $ 191,757       $ 180,933   
           

 

 

    

 

 

 

AFFILIATE INVESTMENTS(O):

        

Acme Cryogenics, Inc.

  

Chemicals, Plastics, and Rubber

  

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

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

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

        7,956         22,337   
     

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

        1,197         4,201   
     

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

        25         3,856   
           

 

 

    

 

 

 
              23,678         44,894   

Alloy Die Casting Corp.(M)

  

Diversified/Conglomerate Manufacturing

  

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

     12,215         12,215         11,390   
     

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

        4,064         612   
     

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

        41         —     
           

 

 

    

 

 

 
              16,320         12,002   

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)(L)

        2,922         8,593   
           

 

 

    

 

 

 
              12,897         18,568   

Brunswick Bowling Products, Inc.

  

Home and Office Furnishings, Housewares and Durable Consumer Products

  

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

     11,307         11,307         11,307   
     

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

        4,943         5,267   
           

 

 

    

 

 

 
              16,250         16,574   

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)(L)

        4,196         —     
           

 

 

    

 

 

 
              18,196         14,000   

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)(L)

        4,500         12,835   
           

 

 

    

 

 

 
              19,500         27,835   

Channel Technologies Group, LLC

  

Diversified/Conglomerate Manufacturing

  

Preferred Stock (2,319
shares)(C)(L)

        2,938         989   
     

Common Stock (2,319,184
shares)(C)(L)

        —           —     
           

 

 

    

 

 

 
              2,938         989   

Counsel Press, Inc.

  

Diversified/Conglomerate Services

  

Secured First Lien Line of Credit, $1,000 available (12.8% (1% Unused Fee), Due 3/2017)(L)

     —           —           —     
     

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)(L)

        6,995         5,399   
           

 

 

    

 

 

 
              30,495         28,899   

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

 

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GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)(F)

   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 8/2017)(I)(L)

   $ 4,000       $ 4,000       $ 4,000   
     

Secured First Lien Term Debt (4.0%, Due
8/2017)(I)(L)

     2,575         2,575         2,575   
     

Secured First Lien Term Debt (4.0%, Due
8/2017)(I)(L)

     8,795         8,795         2,073   
     

Secured First Lien Term Debt (5.2%, Due
8/2017)(E)(L)

     1,150         1,150         —     
     

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

        2,500         —     
     

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

        3         —     
           

 

 

    

 

 

 
              19,023         8,648   

Edge Adhesives Holdings,
Inc.(M)

  

Diversified/Conglomerate Manufacturing

  

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

     9,300         9,300         8,928   
     

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

     2,400         2,400         2,310   
     

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

        3,774         —     
           

 

 

    

 

 

 
              15,474         11,238   

GI Plastek, Inc.

  

Chemicals, Plastics, and Rubber

  

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

     15,000         15,000         15,000   
     

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

        5,150         5,672   
           

 

 

    

 

 

 
              20,150         20,672   

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)(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)(L)

        1,550         2,795   
           

 

 

    

 

 

 
              10,750         11,995   

Meridian Rack & Pinion,
Inc. (M)

  

Automobile

  

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

     9,660         9,660         8,791   
     

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

        3,381         988   
           

 

 

    

 

 

 
              13,041         9,779   

NDLI, Inc.

  

Cargo Transport

  

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

        3,600         —     
     

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

        6,180         4,159   
           

 

 

    

 

 

 
              21,950         19,929   

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)(L)

        3,739         3,922   
     

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

        91           
           

 

 

    

 

 

 
              13,448         13,540   

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)(L)

        9,749         7,747   
           

 

 

    

 

 

 
              28,149         26,147   

Tread Corporation

  

Oil and Gas

  

Secured First Lien Line of Credit, $2,424 available (12.5%, Due 2/2018)(G)(L)

     1,426         1,426         1,426   
     

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

        3,768         538   
     

Common Stock (10,089,048 shares)(C)(L)

        753         —     
           

 

 

    

 

 

 
              5,947         1,964   
           

 

 

    

 

 

 

Total Affiliate Investments (represents 60.8% of total investments at fair value)

  

   $ 304,856       $ 296,723   
           

 

 

    

 

 

 

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

 

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GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)(F)

   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         5,000   
     

Preferred Stock (5,517,444 shares)(C)(L)

        11,464         —     
     

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

        48         —     
           

 

 

    

 

 

 
        21,512         10,000   
           

 

 

    

 

 

 

Total Control Investments (represents 2.1% of total investments at fair value)

  

   $ 21,512       $ 10,000   
           

 

 

    

 

 

 

TOTAL INVESTMENTS(R)

      $ 518,125       $ 487,656   
           

 

 

    

 

 

 

 

(A)  Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $461.4 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, 2016. Under the 1940 Act, we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.
(B)  Percentages represent the weighted average cash interest rates in effect at March 31, 2016, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate. If applicable, paid-in-kind interest rates are noted separately from the cash interest rates.
(C)  Security is non-income producing.
(D)  Refer to Note 10 — Commitments and Contingencies for additional information regarding these guaranties.
(E)  Last Out Tranche (“LOT”) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT generally is 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 Consolidated Statement of Assets and Liabilities as of March 31, 2016.
(I)  Debt security has a fixed interest rate.
(J)  Reserved.
(K)  Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. Refer to Note 3 — Investments for additional information.
(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. Refer to Note 3 — Investments for additional information.
(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 and in which we own less than 5.0% of the issued and outstanding voting securities.
(O)  Affiliate investments, as defined by the 1940 Act, are those that are not Control investments and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(P)  Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(Q)  Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.
(R)  Cumulative gross unrealized depreciation for federal income tax purposes is $86.2 million; cumulative gross unrealized appreciation for federal income tax purposes is $60.4 million. Cumulative net unrealized depreciation is $25.8 million, based on a tax cost of $513.5 million.

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

 

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GLADSTONE INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

(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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 Financial Services-Investment Companies (“ASC 946”). 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 take 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 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 our 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 of established businesses that we believe can grow in value 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 an 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. Refer to Note 4 — Related Transactions for more information regarding these arrangements.

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 under the Securities Exchange Act of 1934, as amended. Accordingly, we have not included in this quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In accordance with Article 6 of Regulation S-X, under the Securities Act of 1933, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three months ended June 30, 2016 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, 2016, as filed with the SEC on May 17, 2016.

 

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Use of Estimates

Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

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. ASU 2015-03 requires the presentation of debt issuance costs as a deduction from the carrying amount of the related debt liability instead of as a deferred financing cost asset on the balance sheet. 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. ASU 2015-03 was effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-03 during the three months ended June 30, 2016. ASU 2015-15 was effective immediately and we opted to continue to present debt issuance costs related to line of credit arrangements as assets.

As of June 30, 2016 and March 31, 2016, we had unamortized deferred financing costs related to our mandatorily redeemable preferred stock of $3.0 million and $3.2 million, respectively. These costs have been reclassified from Deferred financing costs, net, to Mandatorily redeemable preferred stock, net. All periods presented have been retrospectively adjusted.

The following table summarizes the retrospective adjustment and the overall impact on the previously reported consolidated financial statements:

 

     March 31, 2016  
    

As Previously

Reported

    

Retrospective

Application

 

Deferred financing costs, net

   $ 4,332       $ 1,147  

Mandatorily redeemable preferred stock, net

     121,650         118,465   

Investment Valuation Policy

Accounting Recognition

We record our investments at fair value in accordance with the FASB ASC 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 appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation 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 our 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.

 

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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”), a valuation specialist, 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, whether it is reasonable in light of the Policy, as well as other relevant facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.

Valuation Techniques

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

 

    Total Enterprise Value — In determining the fair value using a total enterprise value (“TEV”), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes, depreciation and amortization (“EBITDA”)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The Valuation Team generally reviews 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.

 

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    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 are generally valued at our original cost basis.

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

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

Revenue Recognition

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 June 30 and March 31, 2016 our loan to Tread Corporation (“Tread”) was on non-accrual status, with an aggregate debt cost basis of $3.2 million and $1.4 million, or 0.9% and 0.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $2.0 million and $1.4 million, or 0.6% and 0.4% of the fair value of all debt investments in our portfolio, respectively.

Paid-in-kind (“PIK”) interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income over the life of the obligation. As of June 30 and March 31, 2016, we did not have any loans with a PIK interest component. During the three months ended June 30, 2016 and 2015, we did not record any PIK income, nor did we collect any PIK interest in cash.

Other Income Recognition

We record success fee income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically from an exit or sale. We did not record any success fee income during the three months ended June 30, 2016. During the three months ended June 30, 2015, we recorded success fee income of $0.9 million.

We accrue dividend income on preferred and common equity securities of our portfolio companies to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration. During the three months ended June 30, 2016 and 2015, we recorded dividend income of $2.8 million and $0.4 million, respectively.

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

 

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Deferred Financing and Offering Costs

Deferred financing and offering costs consist of costs incurred to obtain financing, including lender fees and legal fees. Certain costs associated with our revolving line of credit are deferred and amortized using the straight-line method, which approximates the effective interest method, over the term of the revolving line of credit. Costs associated with the issuance of our mandatorily redeemable preferred stock are presented as discounts to the liquidation value of the mandatorily redeemable preferred stock and are amortized using the straight-line method, which approximates the effective interest method, over the terms of the respective financings. See Note 5 — Borrowings and Note 6 — Mandatorily Redeemable Preferred Stock for further discussion.

Related Party Fees

We have entered into an investment advisory and management agreement (the “Advisory Agreement”) with the Adviser, which is owned and 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 Adviser 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, which is owned and controlled by our chairman and chief executive officer, 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 March 2016, the FASB issued Accounting Standards Update 2016-06, “Contingent Put and Call Options in Debt Instruments” (“ASU 2016-06”), which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related. We are currently assessing the impact of ASU 2016-06 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-06 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted.

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. 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. The adoption of ASU 2015-07 did not have 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, and we adopted ASU 2015-07 effective April 1, 2016.

In February 2015, the FASB issued Accounting Standards Update 2015-02, “Amendments to the Consolidation Analysis” (“ASU 2015-02”), which amends or supersedes the scope and consolidation guidance under existing GAAP. The adoption of ASU-2015-02 did not 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, and we adopted ASU 2015-02 effective April 1, 2016.

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

 

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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”), as amended in March 2016 by FASB Accounting Standards Update 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”), in April 2016 by FASB Accounting Standards Update 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), and in May 2016 by FASB Accounting Standards Update 2016-12, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), 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, as amended, 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, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, and ASU 2016-12, 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;

 

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

 

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

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.

As of June 30, 2016 and March 31, 2016, all of our investments were valued using Level 3 inputs. We transfer investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three months ended June 30, 2016 and 2015, there were no transfers in or out of Level 1, 2 and 3.

 

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The following table presents our portfolio investments carried at fair value as of June 30, 2016 and March 31, 2016, by caption on our accompanying 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 Consolidated
Statements
of Assets and
Liabilities
 
     June 30, 2016      March 31, 2016  

Non-Control/Non-Affiliate Investments

     

Secured first lien debt

   $ 95,802       $ 92,343   

Secured second lien debt

     36,773         35,366   

Preferred equity

     36,875         31,696   

Common equity/equivalents

     27,036         21,528   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     196,486         180,933   

Affiliate Investments

     

Secured first lien debt

     179,586         182,694   

Secured second lien debt

     28,217         24,118   

Preferred equity

     68,872         81,854   

Common equity/equivalents

     1         8,057   
  

 

 

    

 

 

 

Total Affiliate Investments

     276,676         296,723   

Control Investments

     

Secured first lien debt

     5,000         5,000   

Secured second lien debt

     5,000         5,000   

Preferred equity

     7,819         —     

Common equity/equivalents

     —           —     
  

 

 

    

 

 

 

Total Control Investments

     17,819         10,000   
  

 

 

    

 

 

 

Total investments at fair value using Level 3 inputs

   $ 490,981       $ 487,656   
  

 

 

    

 

 

 

 

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In accordance with the FASB’s ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) (“ASU 2011-04”), the following table provides quantitative information about our investments valued using Level 3 fair value measurements as of June 30, 2016 and March 31, 2016. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations for the particular input.

 

     Quantitative Information about Level 3 Fair Value Measurements
     Fair Value as of
June 30, 2016
    Fair Value as
of March 31,

2016
    Valuation
Technique/

Methodology
    

Unobservable
Input

  

Range /  Weighted
Average as of

June 30, 2016

  

Range /  Weighted
Average as of

March 31, 2016

Secured first lien debt

   $ 225,461      $ 238,707        TEV       EBITDA multiple    4.3x – 8.0x / 6.2x    4.4x – 8.2x / 6.3x
          EBITDA   

$1,113 - $9,444 /

$4,116

  

$970 - $8,713 /

$3,374

          Discount Rate     —     20.0% - 20.0% / 20.0%
     54,927 (A)      41,330 (A)      Yield Analysis       Discount Rate    14.1% - 18.9% / 16.1%    14.2% - 17.7% / 16.4%

Secured second lien debt

     50,517 (B)      46,418 (B)      TEV       EBITDA multiple    5.3x – 6.1x / 5.8x    5.5x – 6.2x / 5.9x
          EBITDA    $2,767 - $5,131 / $4,564    $2,718 - $4,851 / $3,790
     19,473        18,066        Yield Analysis       Discount Rate   

9.9% - 19.5% /

14.8%

  

10.1% - 20.0% /

15.1%

Preferred equity(C)

     113,566        113,550        TEV       EBITDA multiple    4.3x – 8.0x / 6.2x    4.4x – 8.2x / 6.4x
          EBITDA    $1,113 - $79,086 / $4,371    $0 - $76,487 / $3,565
          Discount Rate    20.0% - 20.0% / 20.0%    20.0% - 20.0% / 20.0%
          Revenue multiple    0.2x – 0.3x / 0.3x    0.2x – 0.5x / 0.4x
          Revenue    $28,065 - $57,529 / $42,800    $29,300 - $56,937 / $42,761

Common equity/equivalents(D)

     27,037        29,585        TEV       EBITDA multiple    4.3x – 11.0x / 8.6x    4.4x – 11.0x / 8.7x
          EBITDA    $1,113 - $17,465 / $10,957    $0 - $76,487 / $820
          Discount Rate    20.0% - 20.0% / 20.0%    20.0% - 20.0% / 20.0%
          Revenue multiple    0.2x – 0.2x / 0.2x    0.2x – 0.5x / 0.2x
          Revenue    $57,529 - $57,529 / $57,529    $29,300 - $56,937 / $56,937
  

 

 

   

 

 

            

Total

   $     490,981      $     487,656              
  

 

 

   

 

 

            

 

(A)  Fair value as of June 30, 2016 includes one new proprietary debt investment for $0.2 million, which was valued at cost, and one proprietary debt investment for $5.3 million, which was valued at the expected payoff amount. Fair value as of March 31, 2016 includes one proprietary debt investment for $5.3 million which was valued at the expected payoff amount.
(B)  Fair value as of June 30, 2016 includes one new propriety debt investment for $18.6 million, which was valued at cost. Fair value as of March 31, 2016 includes one proprietary debt investment for $14.5 million, which was valued at the expected payoff amount.
(C)  Fair value as of June 30, 2016 includes one new proprietary equity investment for $6.9 million, which was valued at cost. Fair value as of March 31, 2016 includes one proprietary equity investment for $22.3 million, which was valued at the expected exit amount.
(D)  Fair value as of June 30, 2016 includes one new proprietary equity investment for $1, which was valued at cost. Fair value as of March 31, 2016 includes two proprietary equity investments for a combined $8.1 million, which were valued at the expected exit amount.

Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, 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 discount rates 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.

 

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Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value of our portfolio, broken out by security type, during the three months ended June 30, 2016 and 2015 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 June 30, 2016:           

Fair value as of March 31, 2016

   $ 280,037      $ 64,484      $ 113,550      $ 29,585      $ 487,656   

Total gain (loss):

          

Net realized gain(A)

     —          —          —          18,806        18,806   

Net unrealized appreciation (depreciation)(B)

     (1,714     1,406        15,604        5,007        20,303   

Reversal of previously recorded appreciation upon realization(B)

     —          —          (14,381     (6,835     (21,216

New investments, repayments and settlements(C):

          

Issuances / originations

     2,976        18,600        6,899        501        28,976   

Settlements / repayments

     (911     (14,500     —          —          (15,411

Sales

     —          —          (8,106     (20,027     (28,133

Transfers

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2016

   $ 280,388      $ 69,990      $ 113,566      $ 27,037      $ 490,981   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Secured
First Lien
    Debt    
    Secured
    Second    
Lien Debt
    Preferred
    Equity    
    Common
Equity/
Equivalents
        Total      
Three months ended June 30, 2015:           

Fair value as of March 31, 2015

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

Total gain (loss):

          

Net realized gain(A)

     —          —          —          215        215   

Net unrealized appreciation (depreciation)(B)

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

Reversal of previously recorded appreciation upon realization(B)

     —          —          —          (110     (110

New investments, repayments and settlements(C):

          

Issuances / originations

     12,082        —          5,244        —          17,326   

Settlements / repayments

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

Sales

     —          —          —          (315     (315

Transfers

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)  Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the respective periods ended June 30, 2016 and 2015.
(B)  Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the periods ended June 30, 2016 and 2015.
(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.

Investment Activity

During the three months ended June 30, 2016, the following significant transactions occurred:

 

    In April 2016, we sold our investment in Acme Cryogenics, Inc. (“Acme”), which resulted in dividend income of $2.8 million and a net realized gain of $18.8 million. In connection with the sale, we received net cash proceeds of $44.6 million, including the repayment of our debt investment of $14.5 million at par and net receivables of $0.6 million, which are recorded within Other assets, net on the accompanying Consolidated Statement of Assets and Liabilities.

 

    In May 2016, we invested $25.5 million in The Mountain Corporation (“The Mountain”) through a combination of secured second lien debt and preferred equity. The Mountain, headquartered in Keene, New Hampshire, is a designer and manufacturer of premium quality, bold artwear apparel serving a diverse global customer base.

 

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Investment Concentrations

As of June 30, 2016, our investment portfolio consisted of investments in 36 portfolio companies located in 19 states across 17 different industries with an aggregate fair value of $491.0 million, of which our investments in Counsel Press Inc. (“Counsel Press”), Cambridge Sound Management, Inc. (“Cambridge”), The Mountain, SOG Specialty Knives & Tools, LLC (“SOG”), and Nth Degree, Inc. (“Nth Degree”), our five largest portfolio investments at fair value, collectively comprised $127.6 million, or 26.1%, of our total investment portfolio at fair value. The following table summarizes our investments by security type as of June 30, 2016 and March 31, 2016:

 

     June 30, 2016     March 31, 2016  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 298,312         57.1   $ 280,388         57.1   $ 296,247         57.2   $ 280,037         57.4

Secured second lien debt

     77,078         14.8        69,990         14.3        72,978         14.1        64,484         13.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

     375,390         71.9        350,378         71.4        369,225         71.3        344,521         70.6   

Preferred equity

     140,496         26.9        113,566         23.1        141,702         27.3        113,550         23.3   

Common equity/equivalents

     6,477         1.2        27,037         5.5        7,198         1.4        29,585         6.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity/equivalents

     146,973         28.1        140,603         28.6        148,900         28.7        143,135         29.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 522,363         100.0   $ 490,981         100.0   $ 518,125         100.0   $ 487,656         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications as of June 30, 2016 and March 31, 2016:

 

     June 30, 2016     March 31, 2016  
     Fair Value      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Home and Office Furnishings, Housewares, and Durable Consumer Products

   $ 87,454         17.8   $ 86,811         17.8

Diversified/Conglomerate Manufacturing

     62,836         12.8        64,986         13.3   

Diversified/Conglomerate Service

     52,603         10.7        49,901         10.2   

Chemicals, Plastics, and Rubber

     48,520         9.9        90,602         18.6   

Leisure, Amusement, Motion Pictures, Entertainment

     41,084         8.4        43,330         8.9   

Personal and Non-Durable Consumer Products (Manufacturing Only)

     25,826         5.3        315         0.1   

Automobile

     25,329         5.2        24,402         5.0   

Farming and Agriculture

     23,971         4.9        21,005         4.3   

Containers, Packaging, and Glass

     21,227         4.3        20,108         4.1   

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

     19,957         4.1        20,011         4.1   

Aerospace and Defense

     17,819         3.6        10,000         2.1   

Cargo Transport

     15,065         3.1        14,484         3.0   

Beverage, Food and Tobacco

     14,132         2.9        9,050         1.8   

Textiles and Leather

     13,904         2.8        11,995         2.5   

Telecommunications

     13,230         2.6        14,000         2.9   

Other < 2.0%

     8,024         1.6        6,656         1.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 490,981         100.0   $ 487,656         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value were included in the following geographic regions of the U.S. as of June 30, 2016 and March 31, 2016:

 

     June 30, 2016     March 31, 2016  
     Fair Value      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Northeast

   $ 169,876         34.6   $ 183,265         37.6

South

     136,603         27.8        129,934         26.6   

West

     123,289         25.1        124,713         25.6   

Midwest

     61,213         12.5        49,744         10.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 490,981         100.0   $ 487,656         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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Table of Contents

Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2016:

 

          Amount  
For the remaining nine months ending March 31:    2017    $ 22,160   
For the fiscal years ending March 31:    2018      76,326   
   2019      81,681   
   2020      101,108   
   2021      75,515   
   Thereafter      18,600   
     

 

 

 
           Total contractual repayments    $ 375,390   
   Investments in equity securities      146,973   
     

 

 

 
  

        Total cost basis of investments held as of

                June 30, 2016:

   $ 522,363   
     

 

 

 

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 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 write off accounts receivable when collection efforts have been exhausted and the receivables are deemed uncollectible. As of June 30, 2016 and March 31, 2016, we had gross receivables from portfolio companies of $0.9 million and $1.0 million, respectively. The allowance for uncollectible receivables was $0.4 million as of both June 30, 2016 and March 31, 2016.

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 a loan servicing fee for the Adviser’s role as servicer pursuant to our Credit Facility, each as described below. On July 12, 2016, 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, 2017.

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, which is 100% indirectly owned and controlled by Mr. Gladstone. David Dullum (our president) is also an executive managing director of the Adviser.

 

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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 Consolidated Statements of Operations:

 

     Three Months Ended June 30,  
     2016     2015  

Average total assets subject to base management fee(A)

   $ 501,800      $ 490,600   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee(B)

     2,509        2,453   

Credits to fees from Adviser - other(B)

     (837     (845
  

 

 

   

 

 

 

Net base management fee

   $ 1,672      $ 1,608   
  

 

 

   

 

 

 

Loan servicing fee(B)

   $ 1,681      $ 1,559   

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

     (1,681     (1,559
  

 

 

   

 

 

 

Net loan servicing fee

   $ —        $ —     
  

 

 

   

 

 

 

Incentive fee(B)

   $ 1,700      $ 1,291   

Credits to fees from Adviser - other(B)

     —          —     
  

 

 

   

 

 

 

Net incentive fee

   $ 1,700      $ 1,291   
  

 

 

   

 

 

 

 

(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 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 $53 and $56 for the three month periods ended June 30, 2016 and 2015, respectively, was 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 fee pursuant to our Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% voluntarily, unconditionally, and irrevocably credited back to us by the Adviser.

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.

 

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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 capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the preceding calendar year. The capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital losses since our inception, less (iii) the entire portfolio’s aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit between the net sales price of each investment, when sold, and the original cost of such investment since our inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of deficit between the fair value of each investment security as of the applicable calculation date and the original cost of such investment security. We have not incurred capital gains-based incentive fees from inception through June 30, 2016, 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 June 30, 2016.

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 as well as 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 Consolidated Statements of Operations and generally paid the following quarter. On July 12, 2016, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2017.

 

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Other Transactions

Gladstone Securities, LLC (“Gladstone 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 Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the voluntary, unconditional, and irrevocable credits against the base management fee. The fees received by Gladstone Securities from portfolio companies during the three month periods ended June 30, 2016 and 2015 totaled $0.3 million and $0.2 million, respectively.

Related Party Fees Due

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

 

     As of June 30,      As of March 31  
         2016              2016      

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

   $ 395       $ 647   

Incentive fee due to Adviser

     1,700         1,224   

Other due to Adviser

     16         41   
  

 

 

    

 

 

 

Total fees due to Adviser

   $ 2,111       $ 1,912   

Fee due to Administrator

   $ 299       $ 311   
  

 

 

    

 

 

 

Total related party fees due

   $ 2,410       $ 2,223   
  

 

 

    

 

 

 

Net co-investment expenses payable to Gladstone Capital Corporation, one of our affiliated funds, (for reimbursement purposes) and payables to other affiliates totaled $56 and $19 as of June 30, 2016 and March 31, 2016, respectively. These amounts were paid in full in the quarter subsequent to being incurred and have been included in Other liabilities on the accompanying Consolidated Statements of Assets and Liabilities as of June 30, 2016 and March 31, 2016, 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. The revolving period was extended to June 26, 2017, and if not renewed or extended by June 26, 2017, all principal and interest will be due and payable on or before June 26, 2019 (two years after the revolving period end date). Subject to certain terms and conditions, our Credit Facility can be expanded to a total facility amount of $250.0 million, through additional commitments of existing or new committed lenders. On September 19, 2014, we further increased our borrowing capacity under our Credit Facility to $185.0 million by entering into Joinder Agreements pursuant to our Credit Facility. 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. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity.

 

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

 

     As of June 30,     As of March 31,  
         2016             2016      

Commitment amount

   $ 185,000      $ 185,000   

Borrowings outstanding at cost

     79,600        95,000   

Availability(A)

     105,400        90,000   
     For the Three Months Ended June 30,  
         2016             2015      

Weighted average borrowings outstanding

   $ 79,876      $ 103,142   

Effective interest rate(B)

     4.4     3.9

Commitment (unused) fees incurred

   $ 133      $ 102   

 

(A)  Availability is subject to various constraints imposed under our Credit Facility, which equated to an adjusted availability of $62.2 million and $47.1 million as of June 30, 2016 and March 31, 2016, respectively.
(B)  Excludes the impact of deferred financing fees and includes weighted average unused commitment fees.

Among other things, our Credit Facility contains a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatory redeemable term preferred stock) of $170 million plus 50% of all equity and subordinated debt raised minus any equity or subordinated debt redeemed or retired after June 26, 2014, which equates to $224.9 million as of June 30, 2016, (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) our status as a BDC under the 1940 Act and as a RIC under the Code. As of June 30, 2016, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $415.6 million, an asset coverage ratio on our senior securities representing indebtedness of 574.4%, 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 June 30, 2016, we had 29 obligors. As of June 30, 2016, 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 effective October 2013 for a notional amount of $45.0 million. The interest rate cap agreement expired in April 2016. Prior to its expiration in April 2016, the agreement effectively limited the interest rate on a portion of our borrowings under our Credit Facility. We incurred a premium fee of $75 in conjunction with this agreement, which was recorded in Realized loss on other on our accompanying Consolidated Statements of Operations during the three months ended June 30, 2016. As of March 31, 2016, the fair value of our interest rate cap agreement was $0.

Secured Borrowing

In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our 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. ASC Topic 860, “Transfers and Servicing” 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 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, 2021.

Fair Value

We elected to apply the fair value option of ASC Topic 825, “Financial Instruments,” to our Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and also takes into account the Valuation Team’s own assumptions, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At each of June 30, 2016 and March 31, 2016, 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 June 30, 2016 and March 31, 2016, 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 Consolidated Statements of Operations.

 

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The following tables present our Credit Facility carried at fair value as of June 30, 2016 and March 31, 2016, by caption on our accompanying Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and a roll-forward of the changes in fair value during the three months ended June 30, 2016 and 2015:

 

     Level 3 – Borrowings  
     Recurring Fair Value Measurements
Reported in Consolidated
Statements of Assets and Liabilities Using Significant
Unobservable Inputs (Level 3)
 
             June 30, 2016                      March 31, 2016          

Credit Facility

   $ 79,600       $ 95,000   
  

 

 

    

 

 

 

 

Fair Value Measurements of Borrowings Using

Significant Unobservable Inputs (Level 3)

 

Reported in

Consolidated Statements

of Assets and Liabilities

 
     Credit
Facility
 

Three months ended June 30, 2016:

  

Fair value at March 31, 2016

   $ 95,000   

Borrowings

     31,100   

Repayments

     (46,500
  

 

 

 

Fair value at June 30, 2016

   $ 79,600   
  

 

 

 

 

Fair Value Measurements of Borrowings Using

Significant Unobservable Inputs (Level 3)

 

Reported in

Consolidated Statements

of Assets and Liabilities

 
     Credit
Facility
 

Three months ended June 30, 2015:

  

Fair value at March 31, 2015

   $ 118,800   

Borrowings

     38,500   

Repayments

     (67,550
  

 

 

 

Fair value at June 30, 2015

   $ 89,750   
  

 

 

 

The fair value of the collateral under our Credit Facility was $458.4 million and $461.4 million as of June 30, 2016 and March 31, 2016, respectively.

 

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NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

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 our 6.50% Series C Cumulative Term Preferred Stock (our “Series C Term Preferred Stock” or “Series C”) outstanding as of June 30, 2016 and March 31, 2016:

As of June 30, 2016:

 

Class of
Term
Preferred
Stock

  Ticker
Symbol
  Date
Issued
  Redemption
Date(A)
  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
         

 

 

 

 

 

Term preferred stock, gross(B)

  4,866,000   $25.00   $121,650

Less: Discounts

    (2,967)
             

 

Term preferred stock, net(C)

    $118,683
             

 

As of March 31, 2016:

 

Class of
Term
Preferred
Stock

  Ticker
Symbol
  Date
Issued
  Redemption
Date(A)
  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
         

 

 

 

 

 

Term preferred stock, gross(B)

  4,866,000   $25.00   $121,650

Less: Discounts

    (3,185)
             

 

Term preferred stock, net(C)

    $118,465
             

 

 

(A) Represents the mandatory redemption date for each of our series of mandatorily redeemable preferred stock. The optional redemption dates for each of our series of mandatorily redeemable preferred stock are February 28, 2016 for our Series A Term Preferred Stock, December 31, 2017 for our Series B Term Preferred Stock, and May 31, 2018 for our Series C Term Preferred Stock.
(B) As of June 30, 2016 and March 31, 2016, the asset coverage on our senior securities that are stock calculated pursuant to Section 18 of the 1940 Act was 239.7% and 221.4%, respectively.
(C)  Reflected as a line item on our accompanying Consolidated Statement of Assets and Liabilities pursuant to the adoption of ASU 2015-03. Refer to Note 2 — Summary of Significant Accounting Policies – Reclassifications for additional information regarding the adoption of ASU 2015-03.

 

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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 three months ended June 30, 2016 and 2015:

For the Three Months Ended June 30, 2016:

 

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 12, 2016

   April 22, 2016    May 2, 2016    $ 0.1484375       $ 0.140625       $ 0.135417   

April 12, 2016

   May 19, 2016    May 31, 2016      0.1484375         0.140625         0.135417   

April 12, 2016

   June 17, 2016    June 30, 2016      0.1484375         0.140625         0.135417   
        

 

 

    

 

 

    

 

 

 
     

Total

   $ 0.4453125       $ 0.421875       $ 0.406251   
        

 

 

    

 

 

    

 

 

 

For the Three Months Ended June 30, 2015:

 

Declaration Date

  

Record Date

  

Payment Date

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

April 14, 2015

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

April 14, 2015

   May 19, 2015    May 29, 2015      0.1484375         0.140625         —     

April 14, 2015

   June 19, 2015    June 30, 2015      0.1484375         0.140625         —     

May 14, 2015(A)

   June 19, 2015    June 30, 2015      —           —           0.221181   
        

 

 

    

 

 

    

 

 

 
     

Total

   $ 0.4453125       $ 0.421875       $ 0.221181   
        

 

 

    

 

 

    

 

 

 

 

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

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

In accordance with ASC Topic 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 June 30, 2016 and March 31, 2016. The related dividend payments to preferred stockholders are treated as dividend expense on our accompanying 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 June 30, 2016 and March 31, 2016, each of which we consider to be a Level 1 input within the fair value hierarchy:

 

     Fair Value as of  
         June 30, 2016              March 31, 2016      

Series A Term Preferred Stock

   $ 40,656       $ 40,944   

Series B Term Preferred Stock

     41,963         40,738   

Series C Term Preferred Stock

     40,234         38,849   
  

 

 

    

 

 

 

Total

   $ 122,853       $ 120,531   
  

 

 

    

 

 

 

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. On June 8, 2016, we filed Post-Effective Amendment No. 1 to the registration statement, which the SEC declared effective on July 28, 2016. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through concurrent, separate offerings of such securities. No securities have been issued to date under the registration statement.

 

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

The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted average common share for the three months ended June 30, 2016 and 2015:

 

     Three Months Ended June 30,  
         2016              2015      

Numerator: net increase in net assets resulting from operations

   $ 24,534       $ 8,559   

Denominator: basic and diluted weighted average common shares

     30,270,958         30,260,079   
  

 

 

    

 

 

 

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

   $ 0.81       $ 0.28   
  

 

 

    

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify for treatment as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90% of our ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“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 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 Internal Revenue Service Form 1099 after the end of each calendar year.

We paid the following monthly distributions to our common stockholders for the three months ended June 30, 2016 and 2015:

 

Fiscal
Year

   Declaration Date      Record Date    Payment Date    Distribution
per

Common
Share
 

2017

     April 12, 2016       April 22, 2016    May 2, 2016    $ 0.0625   
     April 12, 2016       May 19, 2016    May 31, 2016      0.0625   
     April 12, 2016       June 17, 2016    June 30, 2016      0.0625   
           

 

 

 
      Three months ended June 30, 2016:    $ 0.1875   
           

 

 

 

Fiscal
Year

   Declaration Date      Record Date    Payment Date    Distribution
per

Common
Share
 

2016

     April 14, 2015       April 24, 2015    May 5, 2015    $ 0.0625   
     April 14, 2015       May 19, 2015    May 29, 2015      0.0625   
     April 14, 2015       June 19, 2015    June 30, 2015      0.0625   
           

 

 

 
      Three months ended June 30, 2015:    $ 0.1875   
           

 

 

 

Aggregate distributions to our common stockholders declared quarterly and paid were $5.7 million for both the three months ended June 30, 2016 and 2015 and were declared based on estimates of Investment Company Taxable Income for each respective fiscal year. We determine the tax characterization of distributions to our common stockholders as of the end of our fiscal year, based upon our taxable income for the full year and distributions paid during the full year. Therefore, a determination of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of distributions for the full year. If we determined the tax characterization of our distributions as of June 30, 2016, 100% would be from ordinary income and 0% would be a return of capital. For the three months ended June 30, 2016, we recorded $0.1 million of net estimated adjustments for permanent book-tax differences to reflect tax character which decreased Capital in excess of par value by $115, increased Accumulated net realized gain (loss) by $74 and increased Net investment income in excess of distributions by $40 on our accompanying Consolidated Statement of Assets and Liabilities. For the fiscal year ended March 31, 2016, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $6.9 million of the first distributions paid to common stockholders in fiscal year 2017, as having been paid in the prior year.

 

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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 June 30, 2016 and March 31, 2016, we had no 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 as escrow receivables in Other assets, net, if not yet received in cash, on our accompanying 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. Reserves against escrow amounts were $0.5 million as of June 30, 2016. There were no aggregate reserves recorded against escrow amounts as of March 31, 2016.

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 June 30, 2016 and March 31, 2016 was $3.3 million and $5.1 million, respectively. We estimate the fair value of the combined unused line of credit and other uncalled capital commitments as of June 30, 2016 and March 31, 2016 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 months ended June 30, 2016 and 2015, we have not been required to make any payments on any of the guaranties, and we consider the credit risks to be remote and the fair value of the guaranties as of June 30, 2016 and March 31, 2016 to be immaterial.

 

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As of June 30, 2016, 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 dates and delivery dates of golf carts to customers. The guaranty was renewed in February of each subsequent year through February 2016 and expires in February 2017, unless it is renewed again by us, CCE and Agricredit.

 

    In April 2010, we executed a guaranty of vendor recourse for 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 $0.2 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.

The following table summarizes the principal balances of unused line of credit and other uncalled capital commitments and guaranties as of June 30, 2016 and March 31, 2016, which are not reflected as liabilities in the accompanying Consolidated Statements of Assets and Liabilities:

 

     June 30, 2016      March 31, 2016  

Unused line of credit and other uncalled capital commitments

   $ 6,868       $ 10,564   

Guaranties

     2,211         2,279   
  

 

 

    

 

 

 

Total

   $ 9,079       $ 12,843   
  

 

 

    

 

 

 

 

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NOTE 11. FINANCIAL HIGHLIGHTS

 

     Three Months Ended June 30,  
     2016     2015  

Per Common Share Data:

    

Net asset value at beginning of period(A)

   $ 9.22      $ 9.18   

Income from investment operations(B)

    

Net investment income

     0.23        0.17   

Net realized gain on sale of investments and other

     0.61        0.01   

Net unrealized (depreciation) appreciation of investments and other

     (0.03     0.11   
  

 

 

   

 

 

 

Total from investment operations

     0.81        0.29   

Effect of equity capital activity(B)

    

Cash distributions to common stockholders(C)

     (0.19     (0.19

Shelf registration offering costs

     —          (0.01

Net dilutive effect of equity offering(D)

     —          (0.03
  

 

 

   

 

 

 

Total from equity capital activity

     (0.19     (0.23
  

 

 

   

 

 

 

Net asset value at end of period(A)

   $ 9.84      $ 9.24   
  

 

 

   

 

 

 

Per common share market value at beginning of period

   $ 7.02      $ 7.40   

Per common share market value at end of period

     7.16        7.95   

Total investment return(E)

     4.75     10.07

Common stock outstanding at end of period(A)

     30,270,958        30,270,958   

Statement of Assets and Liabilities Data:

    

Net assets at end of period

   $ 297,880      $ 279,754   

Average net assets(F)

     285,546        278,746   

Senior Securities Data:

    

Total borrowings, at cost

   $ 84,696      $ 94,846   

Mandatorily redeemable preferred stock

     121,650        121,650   

Ratios/Supplemental Data:

    

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

     10.62     10.82

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

     9.54        7.41   

 

(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)  The tax character of distributions is determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.
(D)  During the three months ended June 30, 2015, the dilution is the result of issuing common shares in April 2015 at a price below the then current NAV per share.
(E)  Total return equals the change in the market value of our common stock from the beginning of the period, taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9 — Distributions to Common Stockholders.
(F)  Calculated using the average balance of net assets at the end of each month of the reporting period.
(G)  Ratio of net expenses to average net assets is computed using total expenses, net of any voluntary, unconditional, and irrevocable credits of fees from the Adviser. Had we not received any voluntary, unconditional, and irrevocable credits of fees due to the Adviser, the ratio of expenses to average net assets – annualized would have been 14.15% and 14.27% for the three months ended June 30, 2016 and 2015, respectively.
(H)  Had we not received any voluntary, unconditional, and irrevocable credits of fees from the Adviser, the ratio of net investment income to average net assets — annualized would have been 6.02% and 3.96% for the three months ended June 30, 2016 and 2015, respectively

 

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NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES

In accordance with the SEC’s Regulation S-X, we do not consolidate portfolio company investments. Further, in accordance with ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries.

We have one unconsolidated subsidiary, Galaxy Tool Holding Corporation (“Galaxy”), which met at least one of the significance conditions under Rule 1-02(w) of the SEC’s Regulation S-X as of or during at least one of the three month periods ended June 30, 2016 and 2015. Accordingly, summarized, comparative financial information, pursuant to Rule 10-01(b) is presented below for Galaxy, which is a designer and manufacturer of precision tools for the business jet industry and of injection and blow molds for the plastics industry.

 

     For the Three Months Ended June 30,  

Income Statement

   2016      2015  

Net sales

   $ 6,148       $ 6,066   

Gross profit

     1,551         392   

Net profit (loss)

     604         (700

NOTE 13. SUBSEQUENT EVENTS

Distributions

In July 2016, our Board of Directors declared the following monthly distributions to common stockholders and dividends to holders of our Series A Term Preferred Stock, Series B Term Preferred Stock and Series C Term Preferred Stock:

 

Record Date

   Payment Date    Distribution
per
Common
Share
     Dividend per
Series A
Term

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

July 22, 2016

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

August 22, 2016

   August 31, 2016      0.0625         0.1484375         0.140625         0.135417   

September 21, 2016

   September 30, 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 (the “Adviser”) 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, 2016, filed with the U.S. Securities and Exchange Commission (“SEC”) on May 17, 2016. 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, except per share 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 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, 2016, filed with the SEC on May 17, 2016. 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 Laws 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 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 our stockholders that grow over time; and (2) provide our stockholders with long-term capital

 

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appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow in value over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $5 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We seek to avoid investments in high-risk, early stage enterprises. We expect that our investment portfolio over time will consist of approximately 75% in debt securities and 25% in equity securities, at cost. As of June 30, 2016, our investment portfolio was made up of 71.9% in debt securities and 28.1% in equity securities, at cost.

We focus on investing in small and medium-sized private businesses in the U.S. 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, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, 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 borrower, a public offering of the borrower’s stock or by exercising our right to require the borrower to repurchase our warrants, though there can be no assurance that we will always have these rights. We lend to borrowers that need funds 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 and/or management of the portfolio company, depending on the opportunity.

Additionally, in July 2012, the SEC granted us an exemptive order (the “Co-Investment 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 have opportunistically made several co-investments with our affiliate Gladstone Capital Corporation pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone

We are externally managed by our affiliated investment adviser, Gladstone Management Corporation, an SEC registered investment adviser, 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. Each of the Adviser and Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer.

Additionally, Gladstone Securities, LLC (“Gladstone 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 Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the voluntary, unconditional, and irrevocable credits against the base management fee. For additional information refer to Note 4 – Related Party Transactions of the notes to our accompanying Consolidated Financial Statements.

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 economic conditions remain challenging, we are seeing many new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and sponsor-led buyouts of small and medium-sized companies in the U.S. During the three months ended June 30, 2016, we invested $25.5 million in one new portfolio company and exited one existing portfolio company with a fair value of $44.9 million as of March 31, 2016; therefore, the number of portfolio companies was 36 as of both June 30, 2016 and March 31, 2016. From our initial public offering in June 2005 through June 30, 2016, we have made investments in 44 companies, excluding investments in syndicated loans, for a total of approximately $860 million before giving effect to principal repayments and divestitures. For the three months ended June 30, 2016, our new investments consisted of 72.9% secured second lien loans and 27.1% equity investments, based on the originating principal balances.

 

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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 the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of such collections. As a result, as of June 30, 2016, we had unrecognized success fees of $29.9 million, or $0.99 per common share. Consistent with accounting principles generally accepted in the U.S. (“GAAP”), we have not recognized success fee receivables and related income in our Consolidated Financial Statements until earned.

Since inception, we have closed eight buyout liquidity events, which, in the aggregate, have generated $88.4 million in net realized gains and $18.9 million in other income, for a total increase to our net assets of $107.3 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 eight liquidity events have offset our cumulative realized losses since inception, which were primarily incurred during the recession in connection with the sale of performing syndicated 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 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 potential total commitment of $250.0 million through additional commitments of new or existing lenders). Additionally, we issued 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 1.6 million shares of our Series C Term Preferred Stock for gross proceeds of $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 historically, 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 common equity. On July 29, 2016, the closing market price of our common stock was $7.61 per share, which represented a 22.7% discount to our net asset value (“NAV”) of $9.84 per share as of June 30, 2016. 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. At our 2016 Annual Meeting of Stockholders, scheduled to take place on August 4, 2016, we will again ask our stockholders to vote in favor of a similar proposal so that it may be in effect for another year. We sought and obtained stockholder approval concerning similar proposals at each Annual Meeting of Stockholders since 2008, and with our Board of Directors’ subsequent approval, we issued shares of our common stock in March and April 2015 and 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.

 

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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 each of our senior securities representing indebtedness and our senior securities that are stock (such as our three series of term preferred stock).

Investment Highlights

During the three months ended June 30, 2016, we disbursed $25.5 million in new debt and equity investments, received $43.5 million in proceeds from repayments and sales, and extended $3.5 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 June 30, 2016, we have made investments in 44 companies, excluding investments in syndicated loans, for a total of approximately $860 million before giving effect to principal repayments and divestitures.

Investment Activity

During the three months ended June 30, 2016, the following significant transactions occurred:

 

    In April 2016, we sold our investment in Acme Cryogenics, Inc. (“Acme”), which resulted in dividend income of $2.8 million and a net realized gain of $18.8 million. In connection with the sale, we received net cash proceeds of $44.6 million, including the repayment of our debt investment of $14.5 million at par and net receivables of $0.6 million, which are recorded within Other assets, net on the accompanying Consolidated Statement of Assets and Liabilities.

 

    In May 2016, we invested $25.5 million in The Mountain Corporation (“The Mountain”) through a combination of secured second lien debt and preferred equity. The Mountain, headquartered in Keene, New Hampshire, is a designer and manufacturer of premium quality, bold artwear apparel serving a diverse global customer base.

Recent Developments

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. On June 8, 2016, we filed Post-Effective Amendment No. 1 to the registration statement, which the SEC declared effective on July 28, 2016. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through concurrent, separate offerings of such securities. No securities have been issued to date under the registration statement.

Distributions and Dividends

In July 2016, our Board of Directors declared the following monthly distributions to common stockholders and dividends to holders of our Series A Term Preferred Stock, Series B Term Preferred Stock, and Series C Term Preferred Stock:

 

Record Date

 

Payment Date

 

Distribution per
Common Share

 

Dividend per Series A
Term Preferred Share

 

Dividend per Series B
Term Preferred Share

 

Dividend per Series C
Term Preferred Share

July 22, 2016

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

August 22, 2016

  August 31, 2016   0.0625   0.1484375   0.140625   0.135417

September 21, 2016

  September 30, 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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RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2016 to the Three Months Ended June 30, 2015

 

     For the Three Months Ended June 30,  
     2016      2015      $ Change      % Change  

INVESTMENT INCOME

           

Interest income

   $ 11,628       $ 11,385       $ 243         2.1

Other income

     2,765         1,321         1,444         109.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment income

     14,393         12,706         1,687         13.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

EXPENSES

           

Base management fee

     2,509         2,453         56         2.3   

Loan servicing fee

     1,681         1,559         122         7.8   

Incentive fee

     1,700         1,291         409         31.7   

Administration fee

     299         355         (56      (15.8

Interest and dividend expense

     3,036         2,831         205         7.2   

Amortization of deferred financing costs and discounts

     481         460         21         4.6   

Other

     393         998         (605      (60.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses before credits from Adviser

     10,099         9,947         152         1.5   

Credits to fees from Adviser

     (2,518      (2,404      (114      4.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses, net of credits to fees

     7,581         7,543         38         0.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INVESTMENT INCOME

     6,812         5,163         1,649         31.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

           

Net realized gain on investments

     18,635         199         18,436         NM   

Net realized loss on other

     (75      —           (75      NM   

Net unrealized (depreciation) appreciation of investments

     (913      3,197         (4,110      NM   

Net unrealized appreciation of other

     75         —           75         NM   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized and unrealized gain

     17,722         3,396         14,326         421.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 24,534       $ 8,559       $ 15,975         186.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

           

Net investment income

   $ 0.23       $ 0.17       $ 0.05         29.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 0.81       $ 0.28       $ 0.53         189.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

NM = Not Meaningful

Investment Income

Total investment income increased by 13.3% for the three months ended June 30, 2016, as compared to the prior year period. This increase was primarily due to an increase in other income as well as an increase in interest income, which resulted from an increase in the size of our interest-bearing portfolio for the three months ended June 30, 2016 as compared to the prior year period.

Interest income from our investments in debt securities increased 2.1% for the three months ended June 30, 2016, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended June 30, 2016, was $367.2 million, compared to $362.6 million for the prior year period. This increase was primarily due to $60.7 million in new debt investments originated after June 30, 2015, partially offset by the pay-off of $48.1 million of debt investments principally related to the exit of portfolio companies.

At June 30, 2016 and 2015, our loans to one portfolio company, Tread Corporation (“Tread”), were on non-accrual status, with an aggregate debt cost basis of $3.2 million and $11.3 million, respectively. The weighted average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as other income, was 12.7% and 12.6% for the three months ended June 30, 2016 and 2015, respectively. The weighted average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments.

Other income for the three months ended June 30, 2016 increased 109.3% from the prior year period. During the three months ended June 30, 2016, other income primarily consisted of $2.8 million of dividend income. For the three months ended June 30, 2015, other income primarily consisted of $0.4 million of dividend income and $0.9 million of success fee income.

 

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

 

     As of June 30, 2016     Three months ended June 30, 2016  

Portfolio Company

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

Counsel Press, Inc.

   $ 30,198         6.2   $ 777         5.4

Cambridge Sound Management, Inc.

     26,806         5.5        493         3.4   

The Mountain Corporation(A)

     25,500         5.2        370         2.6   

SOG Specialty Knives & Tools, LLC

     22,731         4.6        662         4.6   

Nth Degree, Inc.

     22,405         4.6        420         2.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal — five largest investments

     127,640         26.1        2,722         18.9   

Other portfolio companies

     363,341         73.9        11,671         81.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 490,981         100.0   $ 14,393         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

Portfolio Company

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

Funko, LLC(B)

   $ 31,221         6.5   $ 442         3.5

SOG Specialty Knives & Tools, LLC

     29,766         6.2        662         5.2   

Counsel Press, Inc.

     29,463         6.1        791         6.2   

Cambridge Sound Management, Inc.

     26,180         5.4        493         3.9   

Acme Cryogenics, Inc. (B)

     25,569         5.3        422         3.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal — five largest investments

     142,199         29.5        2,810         22.1   

Other portfolio companies

     339,044         70.5        9,896         77.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 481,243         100.0   $ 12,706         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A)  New investment during the applicable period.
(B)  We exited the investment subsequent to June 30, 2015.

Expenses

Total expenses, net of any voluntary, unconditional, and irrevocable credits from the Adviser, were relatively flat during the three months ended June 30, 2016, as compared to the prior year period, as the increase in interest and dividend expense and the incentive fee was offset by a decrease in other expenses.

The incentive fee increased for the three months ended June 30, 2016, as compared to the prior year period, as net investment income increased over the respective periods.

 

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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 Consolidated Financial Statements and are summarized in the following table:

 

     Three Months Ended June 30,  
     2016     2015  

Average total assets subject to base management fee(A)

   $ 501,800      $ 490,600   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee(B)

     2,509        2,453   

Credits to fees from Adviser — other(B)

     (837     (845
  

 

 

   

 

 

 

Net base management fee

   $ 1,672      $ 1,608   
  

 

 

   

 

 

 

Loan servicing fee(B)

   $ 1,681      $ 1,559   

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

     (1,681     (1,559
  

 

 

   

 

 

 

Net loan servicing fee

   $ —        $ —     
  

 

 

   

 

 

 

Incentive fee(B)

   $ 1,700      $ 1,291   

Credits to fees from Adviser — other(B)

     —          —     
  

 

 

   

 

 

 

Net incentive fee

   $ 1,700      $ 1,291   
  

 

 

   

 

 

 

 

(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 Consolidated Statement of Operations.

Interest and dividend expense increased 7.2% for the three months ended June 30, 2016, as compared to the prior year period, primarily due to dividends paid related to our Series C Term Preferred Stock issued in May 2015, partially offset by lower costs of borrowings on our Credit Facility, as the increase in the effective interest rate was more than offset by the decrease in average borrowings outstanding. The weighted average balance outstanding on our Credit Facility during the three months ended June 30, 2016, was $79.9 million, as compared to $103.1 million in the prior year period. The effective interest rate on our Credit Facility, excluding the impact of deferred financing costs, during the three months ended June 30, 2016 was 4.4% as compared to 3.9% in the prior year period. Dividends on mandatorily redeemable preferred stock increased $0.3 million from the prior year period, when the Series C Term Preferred Stock was newly issued and only outstanding for a portion of the period.

Other expenses decreased 60.6% for the three months ended June 30, 2016, as compared to the prior year period, primarily as a result of lower professional fees, including legal and diligence fees, as well as lower bad debt expense.

Realized and Unrealized Gain (Loss)

Net Realized Gain on Investments

During the three months ended June 30, 2016, we recorded net realized gains on investments of $18.6 million, primarily related to the $18.8 million realized gain from the exit of Acme, compared to net realized gains of $0.2 million during the prior year period related to exit of Roanoke Industries Corp.

Net Realized Loss on Other

During the three months ended June 30, 2016, we recorded a net realized loss on other of $75 due to the expiration of our interest rate cap agreement.

 

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Net Unrealized Appreciation (Depreciation) of Investments

During the three months ended June 30, 2016, we recorded net unrealized depreciation of investments of $0.9 million. The realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2016, were as follows:

 

     Three Months Ended June 30, 2016  

Portfolio Company

   Realized
Gain

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

Galaxy Tool Holding Corporation

   $ —         $ 7,819       $ —         $ 7,819   

Head Country, Inc.

     —           5,082         —           5,082   

Jackrabbit, Inc.

     —           2,891         —           2,891   

Brunswick Bowling Products, Inc.

     —           2,279         —           2,279 &nbs