497

Filed pursuant to Rule 497
Registration Statement No. 333-225447

PROSPECTUS SUPPLEMENT

(To Prospectus Dated July 13, 2018)

 

LOGO

Up to $35,000,000

Common Stock

 

 

We are an externally managed, 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”). 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”). Generally, our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, generally in combination with the aforementioned debt securities, of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

We previously entered into separate sales agreements, each dated February 22, 2018, each a “Sales Agreement” and collectively the “Sales Agreements,” with Cantor Fitzgerald & Co., Ladenburg Thalmann & Co. Inc. and Wedbush Securities Inc. (each a “Sales Agent” and collectively the “Sales Agents”), relating to the shares of our common stock, par value $0.001 per share, offered pursuant to this prospectus supplement and the accompanying prospectus. The Sales Agreements provide that we may offer and sell up to an aggregate offering price of $35,000,000 of our common stock from time to time through the Sales Agents. As of the date of this prospectus supplement, we have sold 296,236 shares of our common stock under the Sales Agreements and have the ability to sell an aggregate offering price of up to $31.8 million of our common stock under the Sales Agreements. Subject to the terms of the Sales Agreements, the Sales Agents are not required to sell any specific number or dollar amounts of securities but will act as our sales agents using commercially reasonable efforts consistent with their normal trading and sales practices, on mutually agreed terms between the Sales Agents and us.

The Sales Agents will be entitled to compensation under the terms of the Sales Agreements at a commission of up to 2.0% of the gross sales price per share of common stock sold pursuant to the Sales Agreements. In connection with the sale of our common stock on our behalf, the Sales Agents will be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), and the compensation of the Sales Agents will be deemed to be underwriting commissions or discounts. We have also agreed to provide indemnification and contribution to the Sales Agents against certain civil liabilities, including liabilities under the Securities Act.

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made by transactions that are deemed to be part of an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act, by means of ordinary brokers’ transactions that qualify for delivery of a prospectus to the Nasdaq Global Select Market (“Nasdaq”), in accordance with Rule 153 under the Securities Act, or such other sales as may be agreed by us and the Sales Agents, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices. The offering of shares of common stock pursuant to the Sales Agreements will terminate upon the earlier of (1) the sale of shares of common stock having an aggregate offering price of $35,000,000, (2) the termination of the Sales Agreements by us or the Sales Agents, or (3) the date six years from the date of the Sales Agreements. See “Plan of Distribution” beginning on page S-44 of this prospectus supplement.

Our common stock is traded on Nasdaq under the symbol “GAIN.” On August 28, 2018 the last reported sale price of our common stock on Nasdaq was $12.00 per share. The net asset value (“NAV”), per share of our common stock on June 30, 2018 (the last date prior to the date of this prospectus supplement as of which we determined NAV) was $11.57. You are urged to obtain current market quotations of our common stock.

Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their NAV. If our shares trade at a discount to our NAV, it will likely increase the risk of loss for purchasers in this offering. On August 9, 2018, our stockholders voted to allow us to issue common stock at a price below NAV per share for the period ending on the one year anniversary of the date of our 2018 Annual Meeting of Stockholders. Our stockholders did not specify a maximum discount below NAV at which we are able to issue our common stock, although the number of shares sold in each offering may not exceed 25% of our outstanding common stock immediately prior to such sale. In addition, we cannot issue shares of our common stock below NAV unless our board of directors (“Board of Directors”) determines that it would be in our and our stockholders’ best interests to do so. Sales of common stock at prices below NAV per share dilute the interests of existing stockholders, have the effect of reducing our NAV per share and may reduce our market price per share. In addition, continuous sales of common stock below NAV may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. See “Sales of Common Stock Below Net Asset Value” in this prospectus supplement and in the accompanying prospectus.

 

 

The securities in which we invest generally would be rated below investment grade if they were rated by rating agencies. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be difficult to value and are illiquid.

Investing in shares of our common stock involves a high degree of risk. Before investing, you should read the material risks described in the “Risk Factors” section beginning on page S-13 of this prospectus supplement and beginning on page 13 of the accompanying prospectus.

This prospectus supplement and the accompanying prospectus contain important information you should know before investing in our common stock, including information about risks. Please read it before you invest and retain it for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission (the “SEC”), and can be accessed at its website at www.sec.gov. This information is also available free of charge by calling us collect at (703) 287-5893 or on the investor relations section of our corporate website located at www.gladstoneinvestment.com. You may also call us collect at this number to request other information or to make a shareholder inquiry. See “Where You Can Find More Information” on page S-46 of this prospectus supplement. The SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.

 

 

 

Cantor                         Ladenburg Thalmann   Wedbush Securities

The date of this prospectus supplement is August 29, 2018 


ABOUT THIS PROSPECTUS SUPPLEMENT

This document is presented in two parts. The first part is comprised of this prospectus supplement, which describes the specific terms of this common stock at-the-market offering and certain other matters relating to us. The second part, the accompanying prospectus, contains a description of our common stock and provides more general information, some of which does not apply to this offering, regarding securities that we may offer from time to time. To the extent that the information contained in this prospectus supplement differs or varies from the information contained in the accompanying prospectus, the information in this prospectus supplement will supersede such information.

This prospectus supplement is part of a registration statement on Form N-2 (Registration No. 333-225447) that we have filed with the SEC relating to the securities offered hereby. This prospectus supplement does not contain all of the information that we have included in the registration statement and the accompanying exhibits and schedules thereto in accordance with the rules and regulations of the SEC, and we refer you to such omitted information. It is important for you to read and consider all of the information contained in this prospectus supplement and the accompanying prospectus before making your investment decision. You should also read and consider the additional information incorporated by reference into this prospectus supplement and the accompanying prospectus. See “Where You Can Find More Information” in this prospectus supplement.

The distribution of this prospectus supplement and the accompanying prospectus and this offering of the securities may be restricted by law in certain jurisdictions. This prospectus supplement and the accompanying prospectus are not an offer to sell or a solicitation of an offer to buy shares of our common stock in any jurisdiction where such offer or any sale would be unlawful. Persons who come into possession of this prospectus supplement and the accompanying prospectus should inform themselves of and observe any such restrictions.

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus in making an investment decision. We have not, and the Sales Agents have not, authorized any other person to provide you with information that is different or additional. If anyone provides you with different or additional information, you should not rely on it. We do not, and the Sales Agents and their affiliates do not, take any responsibility for, and can provide no assurances as to, the reliability of any information that others may provide to you. You should not assume that the information in this prospectus supplement or the accompanying prospectus is accurate as of any date other than their respective dates, regardless of the time of delivery of this prospectus supplement, the accompanying prospectus or any sales of our common stock. Our business, financial condition, liquidity, results of operations, funds from operations and prospects may have changed since those dates. To the extent required by law, we will amend or supplement the information contained in this prospectus supplement and the accompanying prospectus.

 

i


TABLE OF CONTENTS

 

     Page  
Prospectus Supplement   

About this Prospectus Supplement

     i  

Prospectus Supplement Summary

     S-1  

The Offering

     S-7  

Fees and Expenses

     S-9  

Risk Factors

     S-13  

Special Note Regarding Forward-Looking Statements

     S-17  

Use of Proceeds

     S-18  

Price Range of Common Stock and Distributions

     S-19  

Common Share Price Data

     S-19  

Consolidated Selected Financial Data

     S-21  

Selected Quarterly Financial Data

     S-23  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     S-24  

Sales of Common Stock Below Net Asset Value

     S-43  

Plan of Distribution

     S-44  

Custodian, Transfer Agent, Dividend Disbursing Agent and Paying Agent

     S-46  

Legal Matters

     S-46  

Experts

     S-46  

Where You Can Find More Information

     S-46  

Index to Interim Consolidated Financial Statements

     S-F-1  
Prospectus   

Prospectus Summary

     1  

The Offering

     6  

Fees and Expenses

     9  

Risk Factors

     13  

Special Note Regarding Forward-Looking Statements

     38  

Use of Proceeds

     39  

Price Range of Common Stock and Distributions

     40  

Ratio of Earnings to Combined Fixed Charges and Dividends on Mandatorily Redeemable Preferred Stock

     42  

Consolidated Selected Financial and Other Data

     43  

Selected Quarterly Financial Data

     45  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     46  

Sales of Common Stock Below Net Asset Value

     76  

Senior Securities

     81  

Business

     83  

Portfolio Companies

     97  

Management

     105  

Control Persons and Principal Stockholders

     121  

Dividend Reinvestment Plan

     124  

Material U.S. Federal Income Tax Considerations

     126  

Regulation as a Business Development Company

     129  

Description of Our Securities

     132  

Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws

     138  

Share Repurchases

     142  

Plan of Distribution

     143  

Brokerage Allocation and Other Practices

     145  

Proxy Voting Policies and Procedures

     146  

Custodian, Transfer and Dividend Paying Agent and Registrar

     147  

Legal Matters

     147  

Experts

     147  

Available Information

     148  

Financial Statements

     F-1  

 

ii


PROSPECTUS SUPPLEMENT SUMMARY

The following summary highlights some of the information included in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all the information that you may want to consider. You should review the more detailed information contained elsewhere in this prospectus supplement and in the accompanying prospectus prior to making an investment in our common stock, and especially the information set forth under the heading “Risk Factors” in this prospectus supplement and the accompanying prospectus.

In this prospectus supplement and the accompanying prospectus, except where the context suggests otherwise, the “Company,” “Gladstone Investment,” “GAIN,” “we,” “us” or “our” refer to Gladstone Investment Corporation; “Adviser” refers to Gladstone Management Corporation and “Administrator” refers to Gladstone Administration, LLC; and “Gladstone Companies” refers to our Adviser, the Administrator and its affiliated companies.

Gladstone Investment Corporation

We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. We operate as an externally managed closed-end, non-diversified management investment company and have elected to be treated as a BDC under the 1940 Act. For federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. 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. Since our initial public offering in 2005 and through June 30, 2018, we have made 156 consecutive monthly distributions to common stockholders.

As of August 28, 2018, we had 32,822,459 shares of common stock outstanding, 1,656,000 shares of 6.75% Series B Cumulative Term Preferred Stock due 2021 (the “Series B Term Preferred Stock”) outstanding, 1,610,000 shares of 6.50% Series C Cumulative Term Preferred Stock due 2023 (the “Series C Term Preferred Stock”) outstanding, 2,300,000 shares of 6.25% Series D Cumulative Term Preferred Stock (the “Series D Term Preferred Stock”) outstanding and 2,990,000 shares of 6.375% Series E Cumulative Term Preferred Stock due 2025 (the “Series E Term Preferred Stock” and, together with the Series B Term Preferred Stock, Series C Term Preferred Stock and Series D Term Preferred Stock, the “Term Preferred Stock”) outstanding. We are required to redeem all shares of our Series B Term Preferred Stock on December 31, 2021, all shares of our Series C Term Preferred Stock on May 31, 2022, all shares of our outstanding Series D Term Preferred Stock on September 30, 2023 and all shares of our outstanding Series E Term Preferred Stock on August 31, 2025. On August 15, 2018, we announced our plans to redeem all of our outstanding Series B Term Preferred Stock and our Series C Term Preferred Stock on August 31, 2018, contingent upon our successful completion of the public offering of our newly designated Series E Term Preferred Stock.

Our principal executive offices are located at 1521 Westbranch Drive, Suite 100, McLean, Virginia 22102, and our telephone number is (703) 287-5800. Our corporate website is located at www.GladstoneInvestment.com. Information on, or accessible through, our website is not incorporated into or a part of this prospectus supplement or the accompanying prospectus.

Investment Adviser and Administrator

We are externally managed by the Adviser, an affiliate of ours, under an investment advisory and management agreement (the “Advisory Agreement”) and another of our affiliates, the Administrator, provides administrative services to us pursuant to a contractual agreement (the “Administration Agreement”). Each of the Adviser and Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our



 

S-1


chairman and chief executive officer. Mr. Gladstone and Terry Lee Brubaker, our vice chairman and chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and as executive officers of the Adviser and the Administrator. The Administrator employs, among others, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president, general counsel and secretary of the Administrator) and their respective staffs. The Adviser and Administrator have extensive experience in our lines of business and also provide investment advisory and administrative services, respectively, to our affiliates, including, but not limited to: Gladstone Commercial Corporation (“Gladstone Commercial”), a publicly-traded real estate investment trust; Gladstone Capital Corporation (“Gladstone Capital”), a publicly-traded BDC and RIC; and Gladstone Land Corporation, a publicly-traded real estate investment trust (“Gladstone Land,” together with “Gladstone Commercial,” and “Gladstone Capital,” collectively the “Affiliated Public Funds”). In the future, the Adviser and Administrator may provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.

The Adviser was organized as a corporation under the laws of the State of Delaware on July 2, 2002, and is a registered investment adviser under the Investment Advisers Act of 1940, as amended. The Administrator was organized as a limited liability company under the laws of the State of Delaware on March 18, 2005. The Adviser and Administrator are headquartered in McLean, Virginia, a suburb of Washington, D.C. The Adviser also has offices in several other states.

Investment Objectives and Strategy

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”). Our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, generally in combination with the aforementioned debt securities, of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We intend 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, 2018, our investment portfolio was made up of 74.2% in debt securities and 25.8% in equity securities, at cost.

We focus on investing in lower middle market private businesses (which we generally define as private companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $20 million) (“Lower Middle Market”) 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 portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company’s stock or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We invest in portfolio companies that need funds for growth capital, to finance acquisitions, recapitalize or, to a lesser extent, refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises.



 

S-2


We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us an exemptive order (the “Co-Investment Order”) that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital and any future business development company or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. Since 2012, we have opportunistically made several co-investments with Gladstone Capital 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.

In general, our investments in debt securities have a term of five years, accrue interest at variable rates (based on the one-month London Interbank Offered Rate (“LIBOR”)) and, to a lesser extent, at fixed rates. As of June 30, 2018, our loan portfolio consisted of 97.2% variable rate loans with floors and 2.8% fixed rate loans based on the total principal balance of all outstanding debt investments. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, and which may include a yield enhancement such as a success fee or, to a lesser extent, deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of the business. Some debt securities may have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called “paid-in-kind” (“PIK”) interest. As of June 30, 2018, we did not have any securities with a PIK feature.

Typically, our investments in equity securities take the form of common stock, preferred stock, limited liability company interests, or warrants or options to purchase any of the foregoing. Often, these equity investments occur in connection with our original investment, buyouts and recapitalizations of a business, or refinancing existing debt. From our initial public offering in 2005 through June 30, 2018, we have made investments in 48 companies, excluding investments in syndicated loans, for a total of approximately $1 billion, before giving effect to principal repayments and divestitures.

We expect that our investment portfolio will continue to primarily include the following three categories of investments in private companies in the U.S.:

 

   

First Lien Secured Debt Securities: We seek to invest a portion of our assets in first lien secured debt securities also known as senior loans, senior term loans, lines of credit and senior notes. Using its assets as collateral, the borrower typically uses first lien secured debt to cover a substantial portion of the funding needs of the business. These debt securities usually take the form of first priority liens on all, or substantially all, of the assets of the business.

 

   

Second Lien Secured Debt Securities: We seek to invest a portion of our assets in second lien secured debt securities, which may also be referred to as subordinated loans, subordinated notes and mezzanine loans. These second lien secured debt securities rank junior to the borrower’s first lien secured debt securities and may be secured by second priority liens on all or a portion of the assets of the business. Additionally, we may receive other yield enhancements, such as warrants to buy common and preferred stock or limited liability interests, in connection with these second lien secured debt securities.

 

   

Preferred and Common Equity/Equivalents: We seek to invest a portion of our assets in equity securities, which consist of preferred and common equity, limited liability company interests, warrants or options to acquire such securities, and are generally in combination with our debt investment in a business. Additionally, we may receive equity investments derived from restructurings on some of our



 

S-3


 

existing debt investments. In many cases, we will own a significant portion of the equity of the businesses in which we invest.

Pursuant to Section 55(a) of the 1940 Act, we must maintain at least 70% of our total assets in qualifying assets, which generally include each of the investment types listed above. Therefore, the 1940 Act permits us to invest up to 30% of our assets in other non-qualifying assets. See “Regulation as a Business Development Company — Qualifying Assets” in the accompanying prospectus for a discussion of the types of qualifying assets in which we are permitted to invest pursuant to Section 55(a) of the 1940 Act.

Because the majority of the loans in our portfolio consist of term debt in private companies that typically cannot or will not expend the resources to have their debt securities rated by a credit rating agency, we expect that most, if not all, of the debt securities we acquire will be unrated. Investors should assume that these loans would be rated below what is today considered “investment grade” quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered higher risk as compared to investment grade debt instruments. With the exception of our policy to conduct our business as a BDC, these investment policies are not fundamental and may be changed without stockholder approval.

Recent Developments

Amendment to Revolving Line of Credit

On August 22, 2018, we, through our wholly-owned subsidiary Gladstone Business Investment, LLC, entered into Amendment No. 4 (the “Amendment”) to its Fifth Amended and Restated Credit Agreement (the “Credit Facility”) with KeyBank National Association (“KeyBank”), as administrative agent, swingline lender, managing agent and lead arranger, the Adviser, as servicer, and certain other lenders party thereto. Among other things, the Amendment:

 

   

Increases the facility size from $165.0 million to $200.0 million, which may be expanded to $300.0 million through additional commitments;

 

   

Extends the revolving period from November 15, 2019 to August 22, 2021;

 

   

Extends the maturity date from November 15, 2021 to August 22, 2023, at which time all principal and interest will be due and payable;

 

   

Reduces the interest rate margin by 30 basis points from 3.15% to 2.85% during the revolving period (ending August 21, 2021), after which the margin increases to 3.10% for a one year period, and to 3.35% for the remaining term of the Credit Facility thereafter;

 

   

Changes the unused commitment fee from 0.50% on the portion of the total unused commitment amount that is less than or equal to 45% of the total commitments and 0.80% on the total unused commitment amount that is greater than 45% to: 0.50% when the average unused commitment amount for the reporting period is equal to or less than 50%, 0.75% when the average unused commitment amount for the reporting period is greater than 50%, but less than or equal to 65%, and 1.00% when the average unused commitment amount for the reporting period is greater than 65%; and

 

   

Reduces the minimum asset coverage with respect to senior securities representing indebtedness from 200% to 150% (or such percentage as may be set forth in the 1940 Act).

Issuance of Series E Term Preferred Stock

On August 22, 2018, the Company closed its previously announced offering of 2,600,000 shares of its newly-designated Series E Term Preferred Stock at a public offering price of $25.00 per share. Simultaneously with the



 

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closing of the offering, the underwriters exercised in full their option to purchase an additional 390,000 Series E Term Preferred Stock on the same terms to cover over-allotments, resulting in a total issuance of 2,990,000 shares for gross proceeds of approximately $74.8 million and net proceeds of approximately $72.1 million, after payment of underwriting discounts and commissions and estimated offering expenses. The Series E Term Preferred Stock is expected to begin trading on the Nasdaq Global Select Market (“Nasdaq”) within 30 days of August 14, 2018 under the symbol “GAINL.” We expect to use the proceeds from the issuance of our Series E Term Preferred Stock, plus borrowings under our Credit Facility, to voluntarily redeem all outstanding shares of our Series B Term Preferred Stock and our Series C Term Preferred Stock on August 31, 2018, each of which had a liquidation preference of $25.00 per share.

Redemption of Series B Term Preferred Stock and Series C Term Preferred Stock

Pursuant to the Certificate of Designation of the Series B Term Preferred Stock, as amended, and the Certificate of Designation of the Series C Term Preferred Stock, the Company expects to voluntarily redeem all outstanding shares of its Series B Term Preferred Stock and its Series C Term Preferred Stock on August 31, 2018, at the liquidation preference of $25.00 per share, plus accrued and unpaid dividends through the end of August in the amount of $0.00 per share, for a payment per share of $25.00 and an aggregate redemption price of approximately $81.7 million. The Series B Term Preferred Stock and Series C Term Preferred Stock have a mandatory redemption date of December 31, 2021 and May 31, 2022, respectively.

Renewal of our Advisory Agreement

On July 10, 2018, our Board of Directors, including a majority of the directors who are not parties to the agreement or interested persons of any such party, approved the annual renewal of the Advisory Agreement with the Adviser through August 31, 2019. Mr. Gladstone, our chairman and chief executive officer, controls the Adviser. In reaching a decision to approve the Advisory Agreement, our Board of Directors reviewed a significant amount of information and considered, among other things:

 

   

the nature, quality and extent of the advisory and other services to be provided to us by the Adviser;

 

   

our investment performance and that of the Adviser;

 

   

the costs of the services to be provided and profits to be realized by the Adviser from the relationship with us;

 

   

the fee structures of comparable externally managed business development companies that engage in similar investing activities; and

 

   

various other matters.

Based on the information reviewed and the considerations detailed above, our Board of Directors, including all of the directors who are not “interested persons” as that term is defined in the 1940 Act, concluded that the investment advisory fee rates and terms are fair and reasonable in relation to the services provided and approved the Advisory Agreement, as being in the best interests of our stockholders.



 

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Distributions to Stockholders

In July 2018, our Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to holders of our Series B Term Preferred Stock, Series C Term Preferred Stock and Series D Term Preferred Stock:

 

Record Date

 

Payment Date

  Distribution per
Common Share
    Dividend per
Share of

Series B Term
Preferred Stock
    Dividend per
Share of
Series C Term
Preferred Stock
    Dividend per
Share of
Series D Term
Preferred Stock
 

July 20, 2018

  July 31, 2018   $ 0.067     $ 0.140625     $ 0.135417     $ 0.13020833  

August 21, 2018

  August 31, 2018     0.067       0.140625       0.135417       0.13020833  

September 19, 2018

  September 28, 2018     0.067       0.140625       0.135417       0.13020833  
   

 

 

   

 

 

   

 

 

   

 

 

 
  Total for the Quarter:   $ 0.201     $ 0.421875     $ 0.406251     $ 0.39062499  
   

 

 

   

 

 

   

 

 

   

 

 

 


 

S-6


THE OFFERING

 

Common stock offered

Shares with a maximum aggregate offering price of up to $35,000,000.

 

Common stock outstanding prior to

32,822,459 shares.

    this offering

 

Plan of Distribution

“At the market offering” that may be made from time to time through the Sales Agents. See “Plan of Distribution” beginning on page S-44 of this prospectus supplement.

 

  On February 22, 2018, we established the at-the-market program to which this prospectus supplement relates and entered into the Sales Agreements with the Sales Agents.

 

  Through the date of this prospectus supplement, 296,236 shares of common stock with an aggregate offering price of approximately $3.2 million were issued and sold pursuant to the Sales Agreement. An aggregate offering price of up to $31.8 million of our common stock remains available for sale under the Sales Agreements.

 

Use of Proceeds

If we sell shares of our common stock with an aggregate offering price of $35.0 million, of which $31.8 million is available under the Sales Agreements as of the date of this prospectus supplement, we anticipate that our net proceeds, after deducting the Sales Agents’ maximum commissions and estimated offering expenses payable by us, will be approximately $34.1 million. We intend to use the net proceeds from this offering first to repay outstanding indebtedness under the Credit Facility, with KeyBank, as administrative agent, lead arranger and a lender, then to fund new investment opportunities in accordance with our investment objectives, with any remaining proceeds to be used for other general corporate purposes. See “Use of Proceeds” on page S-18 of this prospectus supplement.

 

Nasdaq symbol

“GAIN”

 

Distributions on common stock

From our initial public offering in June 2005 through June 30, 2018, we have made 156 consecutive monthly distributions to common stockholders and generally intend to continue to do so. The amount of monthly distributions on our common stock is generally determined by our Board of Directors on a quarterly basis and is based on management’s estimate of our annual taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“Investment Company Taxable Income”), if any. See “Price Range of Common Stock and Distributions” beginning on page S-19 of this prospectus supplement. Because our distributions to common stockholders are based on estimates of Investment Company Taxable Income that may differ from actual results, future distributions payable to our common stockholders may also include a return of capital. Such return of capital distributions may increase an



 

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investor’s tax liability for capital gains upon the sale of our shares by reducing the investor’s tax basis for such shares. See “Risk Factors—Risks Related to an Investment in Our Securities—Distributions to our common stockholders have included and may in the future include a return of capital” in the accompanying prospectus. Certain additional amounts may be deemed as distributed to stockholders for income tax purposes or may be paid as supplemental distributions, as applicable. We expect other types of securities to pay distributions in accordance with their terms.

 

Tax matters

See “Material U.S. Federal Income Tax Considerations” beginning on page 126 of the accompanying prospectus for a discussion of material U.S. federal income tax considerations applicable to an investment in shares of our common stock.

 

Risk Factors

Investing in shares of our common stock involves substantial risks. Please carefully read and consider the information described under “Risk Factors” beginning on page S-13 of this prospectus supplement and beginning on page 13 of the accompanying prospectus before making an investment decision.


 

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FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus supplement contains a reference to fees or expenses paid by “us” or “Gladstone Investment,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Gladstone Investment. The following annualized percentages were calculated based on actual expenses incurred in the quarter ended June 30, 2018 and average net assets for the quarter ended June 30, 2018 and do not include events occurring subsequent thereto. The table and examples below include all fees and expenses of our consolidated subsidiaries.

 

Stockholder Transaction Expenses:

  

Sales load or other commission (as a percentage of offering price)(1)

     2.00

Offering expenses (as a percentage of offering price)(2)

     0.48

Dividend reinvestment plan expenses (per sales transaction fee)(3)

    
Up to $25
Transaction fee
 
 

Total stockholder transaction expenses (as a percentage of offering price)

     2.48

Annual expenses (as a percentage of net assets attributable to common stock)(4):

  

Base management fee(5)

     3.42

Loan Servicing fee(6)

     1.91

Incentive fees (20% of realized capital gains and 20% of pre-incentive fee net investment income)(7)

     1.18

Interest payments on borrowed funds(8)

     2.10

Dividend expense on mandatorily redeemable preferred stock(9)

     2.69

Other expenses(10)

     1.48
  

 

 

 

Total annual expenses(11)

     12.78

 

(1) 

Represents the maximum commission with respect to the shares of common stock being sold in this offering. The Sales Agents will be entitled to compensation of up to 2.00% of the gross proceeds of the sale of any shares of our common stock under the Sales Agreement, with the exact amount of such compensation to be mutually agreed upon by us and the Sales Agents from time to time. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus.

(2) 

The percentage reflects estimated offering expenses of approximately $0.2 million and assumes we sell all $35.0 million of common stock available under the Sales Agreement pursuant to this prospectus supplement and the accompanying prospectus.

(3) 

The expenses of the dividend reinvestment plan, if any, are included in stock record expenses, a component of “Other expenses.” If a participant elects by written notice to the plan agent prior to termination of his or her account to have the plan agent sell part or all of the shares held by the plan agent in the participant’s account and remit the proceeds to the participant, the plan agent is authorized to deduct a transaction fee, plus per share brokerage commissions, from the proceeds. The participants in the dividend reinvestment plan will also bear a transaction fee, plus per share brokerage commissions incurred with respect to open market purchases, if any. See “Dividend Reinvestment Plan” in the accompanying prospectus for information on the dividend reinvestment plan.

(4) 

The percentages presented in this table are gross of credits to any fees.

(5) 

In accordance with the Advisory Agreement, our annual base management fee is 2.00% (0.5% quarterly) of our average gross assets, which are defined as 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. In accordance with the requirements of the SEC, the table above shows our base management fee as a percentage of average net assets attributable to common shareholders. For purposes of the table, the annualized base management fee has been converted to 3.42% of the average net assets for the quarter ended June 30, 2018 by dividing the total annualized amount of the

 

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  base management fee by our average net assets. The base management fee for the quarter ended June 30, 2018 before application of any credits was $3.1 million.

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 non-contractually, 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, is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser and primarily for the valuation of portfolio companies. For the quarter ended June 30, 2018, $1.0 million of these fees were non-contractually, unconditionally and irrevocably credited against the base management fee. See “Business —Transactions with Related Parties—Investment Advisory and Management Agreement” and “Management—Certain Transactions—Investment Advisor and Administrator” in the accompanying prospectus.

(6) 

The Adviser services, administers and collects on the loans held by Gladstone Business Investment, LLC, our wholly-owned subsidiary (“Business Investment”), in return for which the Adviser receives a 2.00% annual loan servicing fee payable monthly by Business Investment based on the monthly aggregate balance of loans held by Business Investment in accordance with the 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 2.00% 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% non-contractually, unconditionally and irrevocably credited back to us by the Adviser. The loan servicing fee for the three months ended June 30, 2018 was $1.7 million. See “Business—Transactions with Related Parties—Loan Servicing Fee Pursuant to Credit Facility” and “Management—Certain Transactions—Loan Servicing Fee Pursuant to Credit Facility” in the accompanying prospectus and footnote 7 below.

(7) 

The incentive fee payable to the Adviser under the Advisory Agreement consists of two parts: an income-based fee and a capital gains-based fee. The income-based incentive fee is payable quarterly in arrears, and equals 20% of the excess, if any, of our pre-incentive fee net investment income that exceeds a 1.75% quarterly (7% annualized) hurdle rate of our net assets, adjusted appropriately for any share issuances or repurchases, subject to a “catch-up” provision measured as of the end of each calendar quarter. The “catch-up” provision requires us to pay 100% of our pre-incentive fee net investment income with respect to that portion of such income, if any, that exceeds the hurdle rate but is less than 125% of the quarterly hurdle rate (or 2.1875%) in any calendar quarter (8.75% annualized). The catch-up provision is meant to provide our Adviser with 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 125% of the quarterly hurdle rate in any calendar quarter (8.75% annualized). For the three months ended June 30, 2018, the income-based incentive fee was $1.1 million.

The capital gains-based incentive fee equals 20% of our net realized capital gains in excess of unrealized depreciation since our inception, if any, computed as all realized capital gains net of all realized capital losses and unrealized capital depreciation since our inception, less any prior payments, and is payable at the end of each fiscal year. During the three months ended June 30, 2018, we recorded a capital gains-based incentive fee of $6.5 million in accordance with the provisions of U.S. generally accepted accounting principles (“GAAP”), which is not contractually due under the terms of the Advisory Agreement. All capital gains-based incentive fees which are not contractually due under the terms of the Advisory Agreement were excluded for purposes of calculating the incentive fees included in the Fees and Expenses table above.

 

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No credits were applied to the incentive fee for the three months ended June 30, 2018; however, the Adviser may credit such fee in the future.

Examples of how the incentive fee would be calculated are as follows:

 

   

Assuming pre-incentive fee net investment income of 0.55%, there would be no income-based incentive fee because such income would not exceed the hurdle rate of 1.75%.

 

   

Assuming pre-incentive fee net investment income of 2.00%, the income-based incentive fee would be as follows:

= 100.0% × (2.00% - 1.75%)

= 0.25%

 

   

Assuming pre-incentive fee net investment income of 2.30%, the income-based incentive fee would be as follows:

= (100.0% × (“catch-up”: 2.1875% - 1.75%)) + (20.0% × (2.30% - 2.1875%))

= (100.0% × 0.4375%) + (20.0% × 0.1125%)

= 0.4375% + 0.0225%

= 0.46%

 

   

Assuming net realized capital gains of 6% and realized capital losses and unrealized capital depreciation of 1%, the capital gains-based incentive fee would be as follows:

= 20.0% × (6.0% - 1.0%)

= 20.0% × 5.0%

= 1.0%

For a more detailed discussion of the calculation of the two-part incentive fee, including the capital gains-based incentive fee calculation under GAAP, see “Business—Transactions with Related Parties—Investment Advisory and Management Agreement” in the accompanying prospectus.

 

(8) 

Includes amortization of deferred financing costs. As of June 30, 2018, we had $102.5 million in borrowings outstanding under our Credit Facility and $5.1 million of secured borrowings. See “Recent Developments” in this prospectus supplement for additional information regarding the most recent amendment to our Credit Facility.

(9) 

Includes dividends paid on our Series B Term Preferred Stock, Series C Term Preferred Stock and Series D Term Preferred Stock and amortization of deferred financing costs. See “Description of Our Securities—Preferred Stock” in the accompanying prospectus for additional information. See also “Recent Developments” in this prospectus supplement for additional information regarding the redemption of our Series B Term Preferred Stock and Series C Term Preferred Stock and our newly issued Series E Term Preferred Stock.

(10) 

Includes our overhead expenses, including payments under the Administration Agreement based on our projected allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations under the Administration Agreement. See “Business—Transactions with Related Parties—Administration Agreement” and “Management—Certain Transactions—Investment Advisor and Administrator” in the accompanying prospectus.

(11) 

Total annualized gross expenses, based on actual amounts incurred for the three months ended June 30, 2018, would be $72.6 million. After all non-contractual, unconditional, and irrevocable credits described in footnote 5, footnote 6, and footnote 7 above are applied to the base management fee and the loan servicing fee, total annualized expenses after fee credits, based on actual amounts incurred for the three months ended June 30, 2018, would be $61.8 million or 16.96% as a percentage of net assets.

 

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Example

The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our annual operating expenses would remain at the levels set forth in the table above. The example below and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. While the example assumes, as required by the SEC, a 5.00% annual return, our performance will vary and may result in a return greater or less than 5.00%.

 

     1 Year      3 Years      5 Years      10 Years  

You would pay the following expenses on a $1,000 investment:

           

assuming a 5% annual return consisting entirely of ordinary income(1)(2)

   $ 122      $ 340      $ 528      $ 891  

assuming a 5% annual return consisting entirely of capital gains(2)(3)

   $ 131      $ 361      $ 556      $ 921  

 

(1) 

For purposes of this example, we have assumed that the entire amount of the assumed 5.00% annual return would constitute ordinary income as we have not historically realized positive capital gains (computed net of all realized capital losses) in excess of unrealized depreciation on our investments through June 30, 2018. While we recorded a capital gains-based incentive fee of $6.5 million during the three months ended June 30, 2018 in accordance with GAAP, this amount is not contractually due under the terms of the Advisory Agreement. Because the assumed 5.00% annual return is significantly below the hurdle rate of 7.00% (annualized) that we must achieve under the investment advisory and management agreement to trigger the payment of an income-based incentive fee, we have assumed, for purposes of this example, that no income-based incentive fee would be payable if we realized a 5.00% annual return on our investments.

(2) 

While the example assumes reinvestment of all distributions at NAV per share, participants in the dividend reinvestment plan will receive a number of shares of our common stock determined by dividing the total dollar amount of the distribution payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the distribution, and this price per share may differ from NAV per share. See “Dividend Reinvestment Plan” in the accompanying prospectus for additional information regarding our dividend reinvestment plan.

(3) 

For purposes of this example, we have assumed that the entire amount of the assumed 5.00% annual return would constitute capital gains and that no accumulated capital losses or unrealized depreciation would have to be overcome first before a capital gains-based incentive fee is payable.

 

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RISK FACTORS

You should carefully consider the risks described below and all other information contained in this prospectus supplement and the accompanying prospectus before making a decision to purchase our shares. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our securities and NAV of our common stock could decline, and you may lose all or part of your investment.

Our management will have broad discretion in the use of the net proceeds from this offering and may allocate the net proceeds from this offering in ways that you and other stockholders may not approve of.

Our management will have broad discretion in the use of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used in ways with which you may not agree or may not otherwise be considered appropriate. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure of our management to use these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.

We may be unable to invest a significant portion of the net proceeds of this offering on acceptable terms.

Delays in investing the net proceeds raised in an offering or from exiting an investment, prepayment of an investment or other capital source may cause our performance to be worse than that of other fully invested BDCs or other lenders or investors pursuing comparable investment strategies. We cannot assure you that we will be able to identify any investments that meet our investment objective or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds from any offering, from exiting an investment, prepayment of an investment or other capital source on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.

Market interest rates may have an effect on the value of our common stock.

One of the factors that will influence the price of our common stock will be the distribution yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates, which, while currently at low levels relative to historical rates, although they have recently experienced gradual increases, may lead prospective purchasers of our common stock to expect a higher distribution yield and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decrease.

Our most recent NAV was calculated on June 30, 2018 and our NAV when calculated as of September 30, 2018 and subsequent periods may be higher or lower.

As of June 30, 2018, our NAV per share was $11.57, which was based on the fair value our investments that were reviewed and approved by our Board of Directors (and the valuation committee thereof). NAV per share as of September 30, 2018, and following quarters, may be higher or lower than $11.57 based on potential changes in valuations, issuances of securities, or distributions paid and earnings for the quarter then ended. Our Board of Directors determines the fair value of our portfolio investments on a quarterly basis, and if our September 30, 2018 fair value is less than the June 30, 2018 fair value, we will record an unrealized loss on our investment

 

S-13


portfolio. If the fair value is greater, we will record an unrealized gain on our investment portfolio. Upon publication of our next quarterly NAV per share determination (generally in our next Quarterly Report on Form 10-Q), the market price of our common stock may fluctuate materially.

Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their NAV per share, which may restrict our ability to grow and adversely impact our ability to increase or maintain our distributions.

Shares of closed-end investment companies, including BDCs, frequently trade at a discount from NAV per share. This characteristic of shares of closed-end investment companies is separate and distinct from the risk that our NAV per share will decline. As with any stock, the price of our shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Whether investors will realize gains or losses upon the sale of our shares will not depend directly upon our NAV, but will depend upon the market price of the shares at the time of sale. Since the market price of our shares will be affected by such factors as the relative demand for and supply of the shares in the market, general market and economic conditions and other factors beyond our control, we cannot predict whether the shares will trade at, below or above our NAV per share.

Under the 1940 Act, we are generally not able to issue additional shares of our common stock at a price below NAV per share to purchasers other than our existing common stockholders through a rights offering without first obtaining the approval of our stockholders, our directors who have no financial interest in the transaction, and our independent directors. Additionally, at times when our common stock is trading below its NAV per share, our dividend yield may exceed the weighted average returns that we would expect to realize on new investments that would be made with the proceeds from the sale of such stock, making it unlikely that we would determine to issue additional common shares in such circumstances. Thus, for as long as our common stock may trade below NAV per share we will be subject to significant constraints on our ability to raise capital through the issuance of common stock. Additionally, an extended period of time in which we are unable to raise capital may restrict our ability to grow and adversely impact our ability to increase or maintain our distributions.

If we sell shares of our common stock at a discount to our NAV per share, stockholders who do not participate in such sale will experience immediate dilution in an amount that may be material.

At our 2018 Annual Meeting of Stockholders our stockholders approved our ability, subject to the condition that the maximum number of shares salable below NAV pursuant to this authority in any particular offering that could result in such dilution is limited to 25% of our then outstanding common stock immediately prior to each such offering, to sell shares of our common stock at any level of discount from NAV per share for a period of 12 months. It should be noted that, theoretically, we may offer up to 25% of our then outstanding common stock each day. The issuance or sale by us of shares of our common stock at a discount to NAV poses a risk of dilution to our stockholders. In particular, stockholders who do not purchase additional shares of common stock at or below the discounted price in proportion to their current ownership will experience an immediate decrease in NAV per share (as well as in the aggregate NAV of their shares of common stock if they do not participate at all). These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we experience in our assets, potential earning power and voting interests from such issuance or sale. In addition, such sales may adversely affect the price at which our common stock trades. For additional information about possible sales below NAV per share, see “Sales of Common Stock Below Net Asset Value” in this prospectus supplement and in the accompanying prospectus.

 

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We may not be permitted to declare a dividend or make any distribution to stockholders or repurchase shares until such time as we satisfy the asset coverage tests under the provisions of the 1940 Act that apply to BDCs. As a BDC, we have the ability to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% (currently) (or 150%, effective April 10, 2019, unless earlier approved by our stockholders) after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our debt at a time when such sales and/or repayments may be disadvantageous.

Regulations governing our operation as a BDC and RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth. As a result of the annual distribution requirement to qualify as a RIC, we may need to periodically access the capital markets to raise cash to fund new investments. We may issue senior securities representing indebtedness, including borrowing money from banks or other financial institutions, or senior securities that are stock, such as our outstanding Term Preferred Stock, only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% (currently) or 150% (effective April 10, 2019, unless earlier approved by the Company’s stockholders) after each such incurrence or issuance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Recent Developments—Small Business Credit Availability Act.” Further, we may not be permitted to declare a dividend or make any distribution to our outstanding stockholders or repurchase shares until such time as we satisfy this test. Our ability to issue different types of securities is also limited. Compliance with these requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend. As a BDC, therefore, we intend to continuously issue equity at a rate more frequent than our privately owned competitors, which may lead to greater stockholder dilution. We have incurred leverage to generate capital to make additional investments. If the value of our assets declines, we may be unable to satisfy the asset coverage test under the 1940 Act, which could prohibit us from paying distributions and could prevent us from qualifying as a RIC. If we cannot satisfy the asset coverage test, we may be required to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at a time when such sales and repayments may be disadvantageous.

Recently-enacted legislation allows us to incur additional leverage under the 1940 Act, distinct from certain of our obligations under our Credit Facility and our Term Preferred Stock.

Historically, as a BDC, under the 1940 Act, we are generally required to maintain asset coverage of 200% for senior securities representing indebtedness (i.e., debt) or stock (i.e., preferred stock). On March 23, 2018, President Trump signed into legislation the Consolidated Appropriations Act of 2018, also known as the “omnibus spending package.” Included in Title VIII therein is the Small Business Credit Availability Act that includes certain regulations under the federal securities laws impacting BDCs. Among other items, the Small Business Credit Availability Act allows a BDC to increase the amount of debt it may incur or senior securities that are stock it may issue by modifying the asset coverage percentage from 200% to 150% (subject to specific approval and disclosure requirements).

On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act. As a result, the Company’s asset coverage requirements for senior securities will be changed from 200% to 150%, effective one year after the date of the Board of Director’s approval, on April 10, 2019, unless earlier approved by the Company’s stockholders. Under the current 200% asset coverage standard, we may borrow debt or issue senior securities in the amount of $1.00 for every $1.00 of equity in the Company. Starting from April 10, 2019, unless earlier approved by the Company’s stockholders, under the 150% asset coverage standard, we may borrow debt or issue senior securities in the amount of $2.00 for every $1.00 of equity in the Company. This reduction in the

 

S-15


asset coverage ratio will allow us to double the amount of debt that we may incur and, therefore, your risk of an investment in us may increase. In addition, our base management fee is based on our average gross assets, which include investments made with proceeds of borrowings, and, as a result, if we were to incur additional leverage, base management fees paid to the Adviser would increase.

Notwithstanding the modified asset coverage leverage ratio under the 1940 Act described above, we currently remain subject to a minimum asset coverage requirement of 200% with respect to certain provisions of our Credit Facility and our outstanding Term Preferred Stock. If we drop below the 200% minimum asset coverage requirement, we may under certain circumstances be required to repay all outstanding indebtedness under our Credit Facility and redeem our then-outstanding Term Preferred Stock. In addition, in the event we fall below the 200% minimum asset coverage requirement, we may need to renegotiate our Credit Facility and issue additional series of term preferred stock with a lower asset coverage requirement. Such events, if they were to occur, could have a significant adverse effect on our business, financial condition, results of operations and cash flows.

If we fail to pay dividends on our Term Preferred Stock for two years, the holders of our Term Preferred Stock will be entitled to elect a majority of our directors.

The terms of our series of Term Preferred Stock provide for annual dividends of $1.6875, $1.6250, $1.5625 and $1.5938 per outstanding share of our Series B Term Preferred Stock, Series C Term Preferred Stock, Series D Term Preferred Stock and Series E Term Preferred Stock, respectively. In accordance with the terms of both of our series of Term Preferred Stock, if dividends thereon are unpaid in an amount equal to at least two years of dividends, the holders of such series of stock will be entitled to elect a majority of our Board of Directors.

Holders of our preferred stock and future holders of any securities ranking senior to our common stock have dividend, distribution and liquidation rights that are senior to the rights of the holders of our common stock.

The shares of our series of Term Preferred Stock have dividend, distribution and liquidation rights that are senior to the rights of the holders of our common stock. Further, in the future, we may attempt to increase our capital resources by making additional offerings of preferred equity securities or issuing debt securities. Upon liquidation, holders of our Term Preferred Stock, holders of our debt securities, if any, and lenders with respect to other borrowings, including the Credit Facility, would receive a distribution of our available assets in full prior to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our common stockholders bear the risk of our future offerings reducing the per share trading price of our common stock and diluting their interest in us.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, future events or our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with 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 other 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:

 

   

the recurrence of adverse changes in the economy and the capital markets;

 

   

risks associated with negotiation and consummation of pending and future transactions;

 

   

the loss of one or more of our executive officers, in particular David Gladstone, David Dullum or Terry Lee Brubaker;

 

   

changes in our investment objectives and strategy;

 

   

availability, terms (including the possibility of interest rate volatility) and deployment of capital;

 

   

changes in our industry, interest rates, exchange rates, regulation or the general economy;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the degree and nature of our competition;

 

   

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

 

   

those factors described in the “Risk Factors” section of this prospectus supplement and the accompanying prospectus.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. 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 prospectus supplement. 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 prospectus supplement or the accompanying prospectus, except as otherwise required by applicable law. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.

 

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USE OF PROCEEDS

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be by transactions that are deemed to be part of an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act, by means of ordinary brokers’ transactions that qualify for delivery of a prospectus to Nasdaq in accordance with Rule 153 under the Securities Act or such other sales as may be agreed by us and the Sales Agents, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at other negotiated prices. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in this paragraph depending on, among other things, the market price of our common stock at the time of any such sale. As a result, the actual net proceeds we receive may be more or less than the amount of net proceeds estimated in this prospectus supplement. However, assuming the sale of all of the $35.0 million of common stock offered under this prospectus supplement and the accompanying prospectus, we anticipate that our net proceeds from this offering will be approximately $34.1 million, after deducting the maximum estimated sales commission payable to the Sales Agents and our estimated offering expenses of $0.2 million. As of the date of this prospectus supplement, we have sold 296,236 shares of common stock and have $31.8 million remaining availability under the Sales Agreements.

We intend to use the net proceeds from this offering first to pay down outstanding debt (which may include borrowings under the Credit Facility), if any, then to make investments in accordance with our investment objectives and strategy, with any remaining proceeds to be used for other general corporate purposes. As of the date of this prospectus supplement, we had $116.0 million outstanding under the Credit Facility, as amended in August 2018, and advances under the Credit Facility generally bear interest at 30-day LIBOR plus 2.85% per annum until August 22, 2021, with the margin then increasing to 3.10% for the period from August 23, 2021 to August 22, 2022, and increasing further to 3.35% thereafter through maturity. If not renewed or extended by August 22, 2021, all principal and interest will be due and payable on or before August 22, 2023. We intend to re-borrow under our Credit Facility to make investments in portfolio companies in accordance with our investment objectives depending on the availability of appropriate investment opportunities consistent with our investment objectives and market conditions.

We anticipate that substantially all of the net proceeds of this offering will be utilized in the manner described above within three months of receiving proceeds from this offering. Pending such utilization, we intend to invest the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities, and other high-quality debt investments that mature in one year or less from the date of investment, consistent with the requirements for continued qualification as a RIC for federal income tax purposes. These temporary investments may have lower yields than our other investments and, accordingly, may result in lower distributions, if any, during such period. Our ability to achieve our investment objective may be limited to the extent that the net proceeds from an offering, pending full investment, are held in lower yielding interest-bearing deposits or other short-term instruments.

 

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

We currently intend to distribute in the form of cash distributions, up to 100% of our Investment Company Taxable Income, if any, to our stockholders in the form of monthly distributions. We may retain net long-term capital gains in excess of net short-term capital losses, retain and treat them as deemed distributions for tax purposes, or may distribute such amounts as supplemental distributions. The tax characteristics of distributions are reported annually to each stockholder on IRS Form 1099-DIV. There is no assurance that we will achieve investment results or maintain a tax status that will permit any specified level of cash distributions or year-to-year increases in cash distributions. At the option of a holder of record of common stock, all cash distributions with respect to shares of our common stock can be reinvested automatically under the dividend reinvestment plan. A stockholder whose shares of our common stock are held in the name of a broker or other nominee should contact the broker or nominee regarding participation in the dividend reinvestment plan on the stockholder’s behalf. See “Risk Factors—Risks Related to Our Regulation and Structure—We will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification”; “Dividend Reinvestment Plan”; and “Material U.S. Federal Income Tax Considerations” in the accompanying prospectus.

Common shares of closed-end investment companies, including BDCs, frequently trade at a discount to their NAV per share. The possibility that our common shares may trade at such discount to our NAV per share is separate and distinct from the risk that our NAV per share may decline. We cannot predict whether our common shares will trade at prices above, at or below our NAV per share, although during the past two years, our common stock has frequently traded, and at times significantly, below NAV.

COMMON SHARE PRICE DATA

Our common stock is traded on Nasdaq under the symbol “GAIN.” The following table reflects, by quarter, the high and low intra-day sales prices per share of our common stock on Nasdaq, the intra-day sales prices as a percentage of NAV per share and distributions declared per share of our common stock for each fiscal quarter during the last two completed fiscal years and the current fiscal year through August 28, 2018.

 

     NAV
per
Share(1)
     Sales Price      Distribution
Declared
    Premium/
(Discount)
of High
Sales
Price to
NAV per
Share(2)
    Premium/
(Discount)
of Low
Sales
Price to
NAV per
Share(2)
 
   High      Low  

Fiscal Year ended March 31, 2017

               

First Quarter

   $ 9.84      $ 7.24      $ 6.65      $ 0.1875       (26 )%      (32 )% 

Second Quarter

     9.65        9.30        7.16        0.1875       (4     (26

Third Quarter

     9.82        9.15        7.16        0.1875       (7     (27

Fourth Quarter

     9.95        9.36        8.45        0.1875       (6     (15

Fiscal Year ended March 31, 2018

               

First Quarter

     9.88        9.84        8.90        0.2520 (3)       (0     (10

Second Quarter

     10.10        9.84        9.04        0.1920       (3     (10

Third Quarter

     10.37        11.50        9.48        0.2550 (3)       11       (9

Fourth Quarter

     10.85        11.42        9.00        0.1950       5       (17

Fiscal Year ending March 31, 2019

               

First Quarter

     11.57        12.26        9.81        0.2610 (3)       6       (15

Second Quarter (through August 28, 2018)

     *        12.15        10.95        0.2010       *       *  

 

(1) 

NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low intra-day sales prices. The NAVs per share shown are based on outstanding common shares at the end of each period.

 

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(2) 

The premiums/(discounts) set forth in these columns represent the high or low, as applicable, intra-day sale prices per share for the relevant quarter minus the NAV per share as of the end of such quarter, and therefore may not reflect the premium/(discount) to NAV per share on the date of the high and low intra-day sales prices.

(3) 

Includes a supplemental distribution of $0.06 per share of common stock in each of June 2017, December 2017 and June 2018.

*

Not yet available, as the NAV per share as of the end of this quarter cannot yet been finalized.

As of August 24, 2018, there were 22 record owners of our common stock.

 

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CONSOLIDATED SELECTED FINANCIAL DATA

The following consolidated selected financial data as of and for the fiscal years ended March 31, 2018, 2017, 2016, 2015 and 2014 are derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm. The consolidated selected financial data for the three months ended June 30, 2018 and 2017 are derived from our unaudited consolidated financial statements included in this prospectus supplement. The “other unaudited data” included following the table below is also unaudited. The data should be read in conjunction with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus supplement and the accompanying prospectus.

 

    Three Months Ended
June 30,
    Year Ended March 31,  
    2018     2017     2018     2017     2016     2015     2014  
    (dollar amounts in thousands, except per share data)  

Statement of Operations Data:

             

Total investment income

  $ 15,504     $ 13,620     $ 58,355     $ 51,875     $ 50,955     $ 41,643     $ 36,264  

Total expenses, net of credits from Adviser

    15,446       8,185       36,395       29,453       30,239       21,746       16,957  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    58       5,435       21,960       22,422       20,716       19,897       19,307  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

    32,269       2,706       38,727       22,341       4,138       30,317       (20,636
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ 32,327     $ 8,141     $ 60,687     $ 44,763     $ 24,854     $ 50,214     $ (1,329
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share Data:

             

Net increase (decrease) in net assets resulting from operations per common share – basic and diluted(A)

  $ 0.99     $ 0.26     $ 1.88     $ 1.48     $ 0.82     $ 1.88     $ (0.05

Net investment income before net gain (loss) per common share – basic and diluted(A)

    —         0.17       0.68       0.74       0.68       0.75       0.73  

Cash distributions declared per common share(B)

    0.26       0.25       0.89       0.75       0.75       0.77       0.71  

Statement of Assets and Liabilities Data:

             

Total assets

  $ 639,038     $ 500,348     $ 610,899     $ 515,195     $ 506,260     $ 483,521     $ 330,694  

Net assets

    379,808       321,235       354,200       301,082       279,022       273,429       220,837  

Net asset value per common share

    11.57       9.88       10.85       9.95       9.22       9.18       8.34  

Common shares outstanding

    32,822,459       32,526,223       32,653,635       30,270,958       30,270,958       29,775,958       26,475,958  

Weighted common shares outstanding – basic and diluted

    32,762,848       31,474,284       32,268,776       30,270,958       30,268,253       26,665,821       26,475,958  

Senior Securities Data:

             

Total borrowings, at cost(C)

  $ 107,596     $ 39,096     $ 112,096     $ 74,796     $ 100,096     $ 123,896     $ 66,250  

Mandatorily redeemable preferred stock(D)

    139,150       139,150       139,150       139,150       121,650       81,400       40,000  

 

(A) 

Per share data is based on the weighted average common stock outstanding for both basic and diluted.

 

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(B) 

The tax character of distributions is determined on an annual basis. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9—Distributions to Common Stockholders elsewhere in this prospectus supplement and the accompanying prospectus.

(C) 

Includes borrowings under our Credit Facility and other secured borrowings, as applicable.

(D) 

Represents the total liquidation preference of our Term Preferred Stock.

 

     Three Months Ended
June 30,
    Year Ended March 31,  
Other Unaudited Data:    2018     2017     2018     2017     2016     2015     2014  
     (dollar amounts in thousands, except per share data)  

Number of portfolio companies

     33       33       33       35       36       34       29  

Average size of portfolio company investment at cost

   $ 18,089     $ 15,419     $ 17,723     $ 15,005     $ 14,392     $ 14,861     $ 13,225  

Principal amount of new investments

     29,202       —         59,424       54,370       69,380       108,197       132,291  

Proceeds from loan repayments and investments sold

     32,062       19,457       39,859       68,825       44,582       11,260       83,415  

Weighted average yield on investments, excluding loans on non-accrual status(A)

     13.02     12.62     13.06     12.65     12.62     12.60     12.61

Weighted average yield on investments, including loans on non-accrual status(B)

     11.84       11.75       12.35       12.44       12.33       12.12       11.65  

Total return(C)

     19.19       6.44       21.82       41.58       4.82       11.96       24.26  

 

(A) 

Weighted average yield on investments, excluding loans on non-accrual status, equals interest income earned on investments divided by the weighted average interest-bearing principal balance throughout the period

(B) 

Weighted average yield on investments, including loans on non-accrual status, equals interest income earned on investments divided by the weighted average total principal balance throughout the period.

(C) 

Total return equals the change in the ending market value of our common stock from the beginning of the period, taking into account common dividends reinvested in accordance with the terms of the dividend reinvestment plan. Total return does not take into account common distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, refer to Note 9—Distributions to Common Stockholders in the accompanying Notes to Consolidated Financial Statements included elsewhere in this prospectus supplement and the accompanying prospectus.

 

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SELECTED QUARTERLY FINANCIAL DATA

(UNAUDITED)

The following tables set forth certain quarterly financial data for each of the eight quarters in the two years ended March 31, 2018 and the first quarter of the fiscal year ending March 31, 2019. The data was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the past fiscal year or for any future quarter.

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

 

     Quarter Ended  

Year ending March 31, 2019

   June 30, 2018  

Total investment income

   $ 15,504  

Net investment income

     58  

Net increase in net assets resulting from operations

     32,327  

Net increase in net assets resulting from operations per weighted average common share – basic & diluted

   $ 0.99  

 

     Quarter Ended  

Year ended March 31, 2018

   June 30, 2017      September 30, 2017      December 31, 2017      March 31, 2018  

Total investment income

   $ 13,620      $ 13,132      $ 16,184      $ 15,419  

Net investment income

     5,435        5,750        7,531        3,244  

Net increase in net assets resulting from operations

     8,141        13,556        17,144        21,846  

Net increase in net assets resulting from operations per weighted average common share – basic & diluted

   $ 0.26      $ 0.42      $ 0.53      $ 0.67  

 

     Quarter Ended  

Year ended March 31, 2017

   June 30, 2016      September 30, 2016     December 31, 2016      March 31, 2017  

Total investment income

   $ 14,393      $ 11,744     $ 13,374      $ 12,364  

Net investment income

     6,812        5,112       5,204        5,294  

Net increase (decrease) in net assets resulting from operations

     24,534        (102 )     10,955        9,376  

Net increase (decrease) in net assets resulting from operations per weighted average common share – basic & diluted

   $ 0.81      $ —     $ 0.36      $ 0.31  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the notes thereto contained elsewhere in this prospectus supplement and the accompanying prospectus. 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. Except per share amounts or unless otherwise indicated, dollar amounts in the tables included herein are in thousands.

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 BDC under the 1940 Act. For federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. 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. From our initial public offering in 2005 through June 30, 2018, we have made 156 consecutive monthly distributions to common stockholders.

We are externally managed by the Adviser, an affiliate of ours and an SEC registered investment adviser, pursuant to the Advisory Agreement. We have also entered into the Administration Agreement with the Administrator, an affiliate of ours and the Adviser. Each of the Adviser and the 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 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 non-contractual, unconditional, and irrevocable credits against the base management fee. For additional information refer to Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements.

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”). Our investment objectives are to: (i) 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 (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, generally in combination with the aforementioned debt securities, of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to $30 million, although investment size may vary depending upon our total assets or available capital at the time of investment. We intend 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, 2018, our investment portfolio was made up of 74.2% in debt securities and 25.8% in equity securities, at cost.

We focus on investing in Lower Middle Market private businesses (which we generally define as companies with annual EBITDA of $3 million to $20 million) in the U.S. that meet certain criteria, including, but not limited to,

 

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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 portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company’s stock, or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We invest in portfolio companies that need funds for growth capital or to finance acquisitions or recapitalize or, to a lesser extent, 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. In July 2012, the SEC granted us the Co-Investment Order that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital and any future business development company or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. Since 2012, we have opportunistically made several co-investments with Gladstone Capital 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.

Our shares of common stock, Series B Term Preferred Stock, Series C Term Preferred Stock, Series D Term Preferred Stock and Series E Term Preferred Stock are traded on Nasdaq under the trading symbols “GAIN,” “GAINO,” “GAINN” “GAINM” and “GAINL,” respectively.

Business

Portfolio Activity

While the business environment remains competitive, we continue to see new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and independent sponsor-led buyouts of Lower Middle Market companies in the U.S. During the three months ended June 30, 2018, we exited one portfolio company with a fair value prior to its sale of $28.1 million and invested $29.2 million in one new portfolio company, resulting in no net change in the number of companies in our portfolio, which was comprised of 33 companies as of June 30, 2018. From our initial public offering in June 2005 through June 30, 2018, we have made investments in 48 companies, excluding investments in syndicated loans, for a total of approximately $1 billion, before giving effect to principal repayments and divestitures.

The majority of the debt securities in our portfolio have a success fee component, which enhances the yield on our debt investments. Unlike PIK income, we generally do not recognize success fees as income until payment has been received. 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 any such collections. As a result, as of June 30, 2018, we had unrecognized, contractual success fees of $29.3 million, or $0.89 per common share. Consistent with GAAP, we generally have not recognized success fee receivables and related income in our Consolidated Financial Statements until earned.

From inception through June 30, 2018, we have completed 13 sales of portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated $99.8 million in net realized gains and $22.1 million in other income upon exit, for a total increase to our net assets of $121.9 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

 

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of our investments and capital gains from the equity portion. The 13 liquidity events have offset any 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 67.5% from March 2011 through June 30, 2018, and allowed us to declare and pay a $0.03 per common share supplemental distribution in fiscal year 2012, a $0.05 per common share supplemental distribution in November 2013, a $0.05 per common share supplemental distribution in December 2014, and a $0.06 per common share supplemental distribution in each of June 2017, December 2017, and June 2018.

Capital Raising Efforts

We have been able to meet our capital needs through extensions of and increases to the Credit Facility, and by accessing the capital markets in the form of public offerings of common and preferred stock. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to November 2019, and currently have a total commitment amount of $165.0 million (with a potential total commitment of $250.0 million through additional commitments of new or existing lenders). During the three months ended June 30, 2018, we sold 168,824 shares of our common stock under our at-the-market program for gross proceeds of approximately $1.9 million. During the year ended March 31, 2018, we sold 127,412 shares of our common stock under our at-the-market program for gross proceeds of approximately $1.3 million. Additionally, we issued approximately 2.3 million shares of common stock for gross proceeds of $21.2 million in May 2017, inclusive of the June 2017 over-allotment. Refer to “Liquidity and Capital Resources—Revolving Line of Credit” for further discussion of the Credit Facility, “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. See “Prospectus Supplement Summary—Recent Developments” of this prospectus supplement for a discussion of our recent capital raising activities completed subsequent to the quarter ended June 30, 2018.

Although we have been able to access the capital markets historically, market conditions may 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 31, 2018, the closing market price of our common stock was $11.30 per share, representing a 2.3% discount to our NAV of $11.57 per share as of June 30, 2018. When our common stock trades below NAV, our ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibits 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 2017 Annual Meeting of Stockholders held on August 24, 2017, 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 common 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 (“Board of Directors”) makes certain determinations prior to any such sale. At our 2018 Annual Meeting of Stockholders held on August 2, 2018, our stockholders voted to approve a similar proposal, which is effective for one year from such date of approval. 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 three offerings at a price below the then-current NAV per share, once in May 2017, once in March 2015, and once in October 2012. Certain sales of common stock under the at-the-market program in March and April 2018 were also below the then-current estimated NAV per share. The resulting proceeds, in part, have allowed us to (i) grow our portfolio by making new investments, (ii) generate additional income through these new investments, (iii) ensure continued compliance with regulatory tests and (iv) 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 asset coverage (as defined in Sections 18 and 61 of the 1940 Act, as amended), of at least 200% (currently) (or 150.0%, effective April 10, 2019, unless earlier approved by our stockholders) on each of our senior securities representing indebtedness and our senior securities that are stock (such as our Term Preferred Stock).

On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act. As a result, the Company’s asset coverage requirements for senior securities will be changed from 200% to 150%, effective one year after the date of the Board of Directors’ approval, or April 10, 2019. Under the current 200% asset coverage standard, we may borrow debt or issue senior securities that are stock in the amount of $1.00 for every $1.00 of equity in the Company. Starting from April 10, 2019, under the 150% asset coverage standard, we may borrow debt or issue senior securities that are stock in the amount of $2.00 for every $1.00 of equity in the Company. Notwithstanding the modified asset coverage requirement under the 1940 Act, as amended, described above, we are separately subject to a minimum asset coverage requirement of 200% with respect to certain provisions of our Credit Facility and our outstanding Term Preferred Stock.

As of June 30, 2018, our asset coverage on our senior securities representing indebtedness was 566.8% and our asset coverage on our senior securities that are stock was 250.2%.

Investment Highlights

During the three months ended June 30, 2018, and inclusive of non-cash transactions, we invested $29.2 million in one new portfolio company, received $32.1 million in proceeds from repayments and sales, and extended $0.9 million of follow-on investments to existing portfolio companies through revolver draws and term loans.

Investment Activity

During the three months ended June 30, 2018, the following significant transactions occurred:

 

   

In April 2018, we invested $29.2 million in Bassett Creek Restoration, Inc. (d/b/a J.R. Johnson, LLC) (“Bassett Creek”) through a combination of secured first lien debt and preferred equity. Bassett Creek, headquartered in Portland, Oregon, is a leading provider of commercial restoration and renovation services to the Oregon and Southwest Washington region.

 

   

In June 2018, we sold our investment in Drew Foam Companies, Inc. (“Drew Foam”), which resulted in dividend and success fee income of $0.2 million and a realized gain of $13.8 million. In connection with the sale, we received net cash proceeds of $27.3 million, including the repayment of our debt investment of $9.9 million at par.

The following significant investment activity occurred subsequent to June 30, 2018. Also refer to Note 13—Subsequent Events in the accompanying Notes to Consolidated Financial Statements included elsewhere in this prospectus supplement.

 

   

In July 2018, we exited our investment in NDLI, Inc. and recorded a realized loss of $3.6 million.

Recent Developments

Registration Statement

On June 5, 2018, we filed a registration statement on Form N-2 (File No. 333-225447), which the SEC declared effective on July 13, 2018. The registration statement permits us to issue, through one or more transactions, up to

 

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an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. As of July 31, 2018, we had the ability to issue up to $300.0 million in securities under the registration statement.

At-the-Market Program

In February 2018, we entered into sales agreements (commonly referred to as “at-the-market” (“ATM”) programs) with Cantor Fitzgerald & Co. (“Cantor”), Ladenburg Thalmann & Co., Inc., and Wedbush Securities Inc. (each a “Sales Agent”), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Sales Agents, up to an aggregate offering price of $35.0 million. Pursuant to our prior registration statement on Form N-2 (File No. 333-204996), during the three months ended June 30, 2018, we sold 168,824 shares of our common stock under the ATM program with Cantor at a weighted-average gross price of $11.09 per share and raised approximately $1.9 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $10.87 and resulted in total net proceeds of approximately $1.8 million. Certain of these sales were below our then-current estimated NAV per share during the sales period, with a discount of $0.002 per share, when comparing the sales price per share, after deducting commissions, to the then-current estimated NAV per share; however, the net dilutive effect (after commissions and offering costs borne by us) of these sales was $0.00 per common share as a result of the small number of shares sold at a slight discount to NAV per share and resulting rounding. In aggregate, the sales during the three months ended June 30, 2018 were above our then-current estimated NAV per share. As of June 30, 2018, we had remaining capacity to sell up to $31.8 million of common stock under the ATM program pursuant to this prospectus supplement and the accompanying prospectus.

Distributions and Dividends

In July 2018, our Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to holders of our Series B Term Preferred Stock, Series C Term Preferred Stock and Series D Term Preferred Stock:

 

Record Date

 

Payment Date

  Distribution per
Common Share
    Dividend per
Share of

Series B Term
Preferred Stock
    Dividend per
Share of
Series C Term
Preferred Stock
    Dividend per
Share of
Series D Term
Preferred Stock
 

July 20, 2018

  July 31, 2018   $ 0.067     $ 0.140625     $ 0.135417     $ 0.13020833  

August 21, 2018

  August 31, 2018     0.067       0.140625       0.135417       0.13020833  

September 19, 2018

  September 28, 2018     0.067       0.140625       0.135417       0.13020833  
   

 

 

   

 

 

   

 

 

   

 

 

 
  Total for the Quarter:   $ 0.201     $ 0.421875     $ 0.406251     $ 0.39062499  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2018 to the Three Months Ended June 30, 2017

 

     For the Three Months Ended June 30,  
     2018     2017     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 13,314     $ 10,746     $ 2,568       23.9

Dividend, success fee, and other income

     2,190       2,874       (684     (23.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     15,504       13,620       1,884       13.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     3,111       2,516       595       23.6  

Loan servicing fee

     1,740       1,564       176       11.3  

Incentive fee

     7,586       1,172       6,414       547.3  

Administration fee

     285       307       (22     (7.2

Interest and dividend expense

     3,993       2,980       1,013       34.0  

Amortization of deferred financing costs and discounts

     367       367       —         —    

Other

     1,064       1,391       (327     (23.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     18,146       10,297       7,849       76.2  

Credits to fees from Adviser

     (2,700     (2,112     (588     27.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits to fees

     15,446       8,185       7,261       88.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     58       5,435       (5,377     (98.9
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain on investments

     14,108       1,165       12,943       1,111.0  

Net unrealized appreciation of investments

     18,068       1,541       16,527       1,072.5  

Net unrealized depreciation of other

     93       —         93       NM  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain

     32,269       2,706       29,563       1,092.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 32,327     $ 8,141     $ 24,186       297.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ —       $ 0.17     $ (0.17     (100.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.99     $ 0.26     $ 0.73       280.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

NM = Not Meaningful

Investment Income

Total investment income increased by 13.8% for the three months ended June 30, 2018, as compared to the prior year period. This increase was primarily due to an increase in interest income, partially offset by a decline in dividend, success fee, and other income, for the three months ended June 30, 2018, as compared to the prior year period.

Interest income from our investments in debt securities increased 23.9% for the three months ended June 30, 2018, as compared to the prior year period. Generally, 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, 2018 was $409.9 million, compared to $340.5 million for the prior year period. This increase was primarily due to $71.4 million in new debt investments and

 

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$59.4 million in follow-on debt investments to existing portfolio companies originated after June 30, 2017 and $25.2 million of loans placed back on accrual status, partially offset by the pay-off or restructure of $57.7 million of debt investments and $55.1 million of loans placed on non-accrual status, and their respective impact on the weighted-average principal balance when considering timing of new investments, pay-offs, restructures, and non-accruals, as applicable. The weighted-average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as dividend, success fee, and other income, was 13.0% for the three months ended June 30, 2018, compared to 12.6% for the prior year period. The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments.

At June 30, 2018, certain of our loans to three portfolio companies, B-Dry, LLC, The Mountain Corporation, and PSI Molded Plastics, Inc., were on non-accrual status, with an aggregate debt cost basis of $55.1 million. At June 30, 2017, certain of our loans to three portfolio companies, Alloy Die Casting Co., Precision Southeast, Inc., and Tread Corporation, were on non-accrual status, with an aggregate debt cost basis of $25.2 million.

Dividend, success fee, and other income for the three months ended June 30, 2018 decreased 23.8% from the prior year period. During the three months ended June 30, 2018, dividend, success fee, and other income primarily consisted of $2.1 million of success fee income and $0.1 million of dividend income. During the three months ended June 30, 2017, dividend, success fee, and other income primarily consisted of $2.0 million of success fee income and $0.9 million of dividend income.

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

 

     As of June 30, 2018     Three months ended
June 30, 2018
 

Portfolio Company

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

Cambridge Sound Management, Inc.

   $ 54,732        8.7   $ 526        3.4

Nth Degree, Inc.

     44,306        7.0       451        2.9  

Brunswick Bowling Products, Inc.

     38,250        6.1       537        3.5  

J.R. Hobbs Co. – Atlanta, LLC

     36,031        5.7       713        4.6  

ImageWorks Display and Marketing Group, Inc.

     31,410        5.0       723        4.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal – five largest investments

     204,729        32.5       2,950        19.0  

Other portfolio companies

     424,589        67.5       12,544        81.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 629,318        100.0   $ 15,494        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     As of June 30, 2017     Three months ended
June 30, 2017
 

Portfolio Company

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

Cambridge Sound Management, Inc.

   $ 33,233        6.8   $ 526        3.9

J.R. Hobbs Co. – Atlanta, LLC

     31,305        6.4       787        5.8  

Nth Degree, Inc.

     29,560        6.1       421        3.1  

Counsel Press, Inc.

     28,434        5.8       778        5.7  

Old World Christmas, Inc.

     26,830        5.5       528        3.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal – five largest investments

     149,362        30.6       3,040        22.4  

Other portfolio companies

     337,408        69.4       10,578        77.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 486,770        100.0   $ 13,618        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

S-30


Expenses

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased 88.7% during the three months ended June 30, 2018, as compared to the prior year period, primarily as a result of an increase in the capital gains-based incentive fee, interest expense, and the base management fee, partially offset by an increase in non-contractual, unconditional, and irrevocable credits from the Adviser.

In accordance with GAAP, we recorded a capital gains-based incentive fee of $6.5 million during the three months ended June 30, 2018, which is not yet contractually due. There was no capital gains-based incentive fee during the prior year period.

The base management fee increased for the three months ended June 30, 2018, as compared to the prior year period, as average total assets increased over the respective periods as a result of an increase in investments.

The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under “Transactions with the Adviser” in Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table:

 

     Three Months Ended
June 30,
 
     2018     2017  

Average total assets subject to base management fee(A)

   $ 622,200     $ 503,200  

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee(B)

     3,111       2,516  

Credits to fees from Adviser – other(B)

     (960     (548
  

 

 

   

 

 

 

Net base management fee

   $ 2,151     $ 1,968  
  

 

 

   

 

 

 

Loan servicing fee(B)

   $ 1,740     $ 1,564  

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

     (1,740     (1,564
  

 

 

   

 

 

 

Net loan servicing fee

   $ —       $ —    
  

 

 

   

 

 

 

Incentive fee – income-based

   $ 1,078     $ 1,172  

Incentive fee – capital gains-based(C)

     6,508       —    
  

 

 

   

 

 

 

Total incentive fee(B)

     7,586       1,172  

Credits to fees from Adviser – other(B)

     —         —    
  

 

 

   

 

 

 

Net total incentive fee

   $ 7,586     $ 1,172  
  

 

 

   

 

 

 

 

(A) 

Average total assets subject to the base management fee is defined in the Advisory Agreement 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.

(C) 

The capital gains-based incentive fee is not yet contractually due under the terms of the Advisory Agreement.

Interest and dividend expense increased 34.0% during the three months ended June 30, 2018, as compared to the prior year period, due to a higher weighted-average balance outstanding on the Credit Facility, partially offset by a lower effective interest rate. The weighted-average balance outstanding on the Credit Facility during the three

 

S-31


months ended June 30, 2018 was $123.3 million, as compared to $42.1 million in the prior year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the three months ended June 30, 2018 was 5.4%, as compared to 6.1% in the prior year period.

Realized and Unrealized Gain (Loss)

Net Realized Gain on Investments

During the three months ended June 30, 2018, we recorded net realized gains on investments of $14.1 million, primarily related to a $13.8 million realized gain from the exit of Drew Foam, as compared to net realized gains on investments of $1.2 million during the prior year period, primarily related to a $1.0 million realized gain from the exit of Mitchell Rubber Products, Inc.

Net Unrealized Appreciation (Depreciation) of Investments

During the three months ended June 30, 2018, we recorded net unrealized appreciation of investments of $18.1 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2018, were as follows:

 

     Three Months Ended June 30, 2018  

Portfolio Company

   Realized
Gain

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

Cambridge Sound Management, Inc.

   $ —        $ 12,554      $ —        $ 12,554  

Nth Degree, Inc.

     —          4,592        —          4,592  

Brunswick Bowling Products, Inc.

     —          3,935        —          3,935  

Galaxy Tool Holding Corporation

     —          3,238        —          3,238  

Edge Adhesives Holdings, Inc.

     —          2,327        —          2,327  

Schylling, Inc.

     —          2,080        —          2,080  

Alloy Die Casting Co.

     —          1,995        —          1,995  

Pioneer Square Brands, Inc.

     —          1,809        —          1,809  

Star Seed, Inc.

     —          1,650        —          1,650  

Counsel Press, Inc.

     —          1,396        —          1,396  

Tread Corporation

     —          1,215        —          1,215  

Jackrabbit, Inc.

     —          886        —          886  

D.P.M.S., Inc.

     —          816        —          816  

Logo Sportswear, Inc.

     —          697        —          697  

Old World Christmas, Inc.

     —          565        —          565  

J.R. Hobbs Co. – Atlanta, LLC

     —          551        —          551  

Funko Acquisition Holdings, LLC

     —          518        —          518  

Behrens Manufacturing, LLC

     322        —          —          322  

Ginsey Home Solutions, Inc.

     —          289        —          289  

Country Club Enterprises, LLC

     —          (223      —          (223

Diligent Delivery Systems

     —          (437      —          (437

B-Dry, LLC

     —          (837      —          (837

Drew Foam Companies, Inc.

     13,786        —          (14,755      (969

Meridian Rack & Pinion, Inc.

     —          (1,092      —          (1,092

The Mountain Corporation

     —          (2,559      —          (2,559

PSI Molded Plastics, Inc.

     —          (3,016      —          (3,016

Other, net (<$250 Net)

     —          (126      —          (126
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,108      $ 32,823      $ (14,755    $ 32,176  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

S-32


The primary drivers of net unrealized appreciation of $18.1 million for the three months ended June 30, 2018, were increased performance of certain of our portfolio companies and an increase in comparable multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized appreciation upon the exit of our investment in Drew Foam and a decline in performance of certain of our other portfolio companies.

During the three months ended June 30, 2017, we recorded net unrealized appreciation of investments of $1.5 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2017, were as follows:

 

     Three Months Ended June 30, 2017  

Portfolio Company

   Realized
Gain

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

Cambridge Sound Management, Inc.

   $ —        $ 6,187      $ —        $ 6,187  

Old World Christmas, Inc.

     —          3,926        —          3,926  

Nth Degree, Inc.

     —          3,799        —          3,799  

B+T Group Acquisition, Inc.

     —          3,205        —          3,205  

Mathey Investments, Inc.

     —          —          2,658        2,658  

Precision Southeast, Inc.

     —          1,627        —          1,627  

SBS Industries, LLC

     —          1,466        —          1,466  

Tread Corporation

     —          1,199        —          1,199  

Logo Sportswear, Inc.

     —          867        —          867  

Star Seed, Inc.

     —          764        —          764  

Frontier Packaging, Inc.

     —          738        —          738  

J.R. Hobbs Co. – Atlanta, LLC

     —          435        —          435  

Drew Foam Company, Inc.

     —          370        —          370  

Diligent Delivery Systems

     —          314        —          314  

Ginsey Home Solutions, Inc.

     —          (185      —          (185

Schylling, Inc.

     —          (262      —          (262

D.P.M.S., Inc.

     —          (304      —          (304

B-Dry, LLC

     —          (434      —          (434

SOG Specialty Knives & Tools, LLC

     —          (711      —          (711

Counsel Press, Inc.

     —          (1,183      —          (1,183

Jackrabbit, Inc.

     —          (1,258      —          (1,258

Head Country, Inc.

     —          (1,498      —          (1,498

Alloy Die Casting Co.

     —          (1,540      —          (1,540

Mitchell Rubber Products, Inc.

     957        —          (2,783      (1,826

GI Plastek, Inc.

     —          (1,851      —          (1,851

Meridian Rack & Pinion, Inc.

     —          (1,902      —          (1,902

Edge Adhesives Holdings, Inc.

     —          (2,207      —          (2,207

Galaxy Tool Holding Corporation

     —          (2,625      —          (2,625

Country Club Enterprises, LLC

     —          (3,219      —          (3,219

Brunswick Bowling Products, Inc.

     —          (3,747      —          (3,747

Other, net (<$250 Net)

     208        (284      (21      (97
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,165      $ 1,687      $ (146    $ 2,706  
  

 

 

    

 

 

    

 

 

    

 

 

 

The primary drivers of net unrealized appreciation of $1.5 million for the three months ended June 30, 2017, were increased performance of certain of our portfolio companies and an increase in comparable multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by a decline in performance of certain of our other portfolio companies.

 

S-33


Across our entire investment portfolio, we recorded $0.5 million of net unrealized depreciation on our debt positions and $18.6 million of net unrealized appreciation on our equity positions for the three months ended June 30, 2018. At June 30, 2018, the fair value of our investment portfolio was greater than our cost basis by $32.4 million, as compared to $14.3 million at March 31, 2018, representing net unrealized appreciation of $18.1 million for the three months ended June 30, 2018. Our entire portfolio had a fair value of 105.4% of cost as of June 30, 2018.

Net Unrealized Depreciation on Other

During the three months ended June 30, 2018, we recorded net unrealized depreciation of other of $0.1 million related to the Credit Facility recorded at fair value. There was no unrealized appreciation or depreciation on other during the three months ended June 30, 2017.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash provided by operating activities for the three months ended June 30, 2018 was $10.7 million, as compared to $26.3 million for the three months ended June 30, 2017. This change was primarily due to an increase in the purchase of investments, partially offset by higher repayments and net proceeds from the sale of investments period over period.

Purchases of investments were $30.1 million during the three months ended June 30, 2018, compared to $2.1 million during the three months ended June 30, 2017. Repayments and net proceeds from the sale of investments totaled $32.1 million during the three months ended June 30, 2018, compared to $19.5 million during the three months ended June 30, 2017.

As of June 30, 2018, we had equity investments in or loans to 33 portfolio companies with an aggregate cost basis of $596.9 million. As of June 30, 2017, we had equity investments in or loans to 33 portfolio companies with an aggregate cost basis of $508.8 million. The following table summarizes our total portfolio investment activity during the three months ended June 30, 2018 and 2017:

 

     Three Months Ended
June 30,
 
     2018      2017  

Beginning investment portfolio, at fair value

   $ 599,147      $ 501,579  

New investments

     29,202        —    

Disbursements to existing portfolio companies

     850        2,148  

Unscheduled principal repayments

     (14,514      (13,660

Net proceeds from sales of investments

     (17,226      (5,797

Net realized gain on investments

     13,786        957  

Net unrealized appreciation of investments

     32,823        1,687  

Reversal of net unrealized appreciation of investments

     (14,755      (146

Amortization of premiums, discounts, and acquisition costs, net

     5        2  
  

 

 

    

 

 

 

Ending investment portfolio, at fair value

   $ 629,318      $ 486,770  
  

 

 

    

 

 

 

 

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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, 2018:

 

         Amount  

For the remaining nine months ending March 31:

 

2019

   $ 63,881  

For the fiscal years ending March 31:

 

2020

     102,913  
 

2021

     60,410  
 

2022

     80,696  
 

2023

     86,990  
 

Thereafter

     47,618  
    

 

 

 
 

Total contractual repayments

   $ 442,508  
 

Adjustments to cost basis of debt investments

     (80
 

Investments in equity securities

     154,521  
    

 

 

 
 

Total cost basis of investments held as of June 30, 2018:

   $ 596,949  
    

 

 

 

Financing Activities

Net cash used in financing activities for the three months ended June 30, 2018 was $11.3 million, which consisted primarily of $4.5 million of net repayments on the Credit Facility and $8.6 million in distributions to common stockholders, partially offset by $1.8 million of net proceeds from the issuance of common stock under the ATM program.

Net cash used in financing activities for the three months ended June 30, 2017 was $23.7 million, which consisted primarily of $35.7 million of net repayments on the Credit Facility and $8.0 million in distributions to common stockholders, partially offset by $20.1 million of net proceeds from the issuance of common stock in May 2017, including the partial exercise of the underwriters’ over-allotment option in June 2017.

Distributions and Dividends to Stockholders

Common Stock Distributions

To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90% of our taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“Investment Company Taxable Income”). Additionally, the Credit Facility generally restricts the amount of distributions to stockholders that we can pay out to be no greater than the sum of certain amounts, including, but not limited to, our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. In accordance with these requirements, our Board of Directors declared, and we paid, monthly cash distributions of $0.067 per common share for each of the three months from April through June 2018 and a supplemental distribution of $0.06 per common share for June 2018.

The federal income tax characteristics of distributions paid to our common stockholders is generally reported to stockholders on Internal Revenue Service Form 1099 after the end of the calendar year based on tax information for the full fiscal year. Any characterization made on an interim, quarterly basis may not be representative of the actual tax characterization for the full year.

For the year ended March 31, 2018, distributions to common stockholders totaled $28.9 million and were less than our taxable income for the same year, after also taking into account spillover amounts under Section 855(a) of the Code with respect to the prior year. At March 31, 2018, we elected to treat $8.4 million of the first

 

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distributions paid after fiscal year-end as having been paid in the prior fiscal year, in accordance with Section 855(a) of the Code. In addition, for the year ended March 31, 2018, we recorded $1.6 million of net estimated adjustments for permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Accumulated net realized gain in excess of distributions and increased Net investment income in excess of distributions on our accompanying Consolidated Statements of Assets and Liabilities. For the three months ended June 30, 2018, we recorded $0.7 million of net estimated adjustments for permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Accumulated net realized gain in excess of distributions and increased Overdistributed net investment income on our accompanying Consolidated Statements of Assets and Liabilities.

Preferred Stock Dividends

Our Board of Directors declared and we paid monthly cash dividends of (i) $0.140625 per share to holders of our Series B Term Preferred Stock, (ii) $0.135417 per share to holders of our Series C Term Preferred Stock, and (iii) $0.13020833 per share to holders of our Series D Term Preferred Stock for each of the three months from April through June 2018. In accordance with GAAP, we treat these monthly dividends as an operating expense. The federal income tax characteristics of dividends paid to our preferred stockholders generally constitute ordinary income or capital gains to the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year. Such a characterization made on an interim, quarterly basis may not be representative of the actual tax characterization for the full year.

Dividend Reinvestment Plan

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

Equity

Registration Statement

On June 5, 2018, we filed a registration statement on Form N-2 (File No. 333-225447), which the SEC declared effective on July 13, 2018. 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 stock, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. As of July 31, 2018, we had the ability to issue up to $300.0 million in securities under the registration statement.

Common Stock

In February 2018, we entered into equity distribution agreements with Sales Agents, under which we have the ability to issue and sell shares of our common stock, from time to time, through the Sales Agents, up to an aggregate offering price of $35.0 million. Pursuant to our prior registration statement on Form N-2 (File No. 333-204996), during the three months ended June 30, 2018, we sold 168,824 shares of our common

 

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stock under the ATM program with Cantor at a weighted-average gross price of $11.09 per share and raised approximately $1.9 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $10.87 and resulted in total net proceeds of approximately $1.8 million. Certain of these sales were below our then-current estimated NAV per share during the sales period, with a discount of $0.002 per share, when comparing the sales price per share, after deducting commissions, to the then-current estimated NAV per share; however, the net dilutive effect (after commissions and offering costs borne by us) of these sales was $0.00 per common share as a result of the small number of shares sold at a slight discount to NAV per share and resulting rounding. In aggregate, the sales during the three months ended June 30, 2018 were above our then-current estimated NAV per share. As of July 31, 2018, we had remaining capacity to sell up to $31.8 million of common stock under the ATM program.

Pursuant to our prior registration statement on Form N-2 (File No. 333-204996), in March 2018, we sold 127,412 shares of our common stock under the ATM program with Cantor at a weighted-average gross price of $10.45 per share and raised approximately $1.3 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $10.24 and resulted in total net proceeds of approximately $1.3 million. These sales were below our then-current estimated NAV per share during the sales period, with such discounts ranging from $0.01 per share to $0.07 per share, when comparing the sales price per share, after deducting commissions, to the then-current estimated NAV per share; however, the net dilutive effect (after commissions and offering costs borne by us) of these sales was $0.00 per common share as a result of the small number of shares sold at a slight discount to NAV per share and resulting rounding.

Also pursuant to our prior registration statement on Form N-2 (File No. 333-204996), in May 2017, we completed a public offering of 2.1 million shares of our common stock at a public offering price of $9.38 per share, which was below our then-current NAV of $9.95 per share. Gross proceeds totaled $19.7 million and net proceeds, after deducting underwriting discounts and commissions and offering costs borne by us, were $18.7 million, which were used to repay borrowings under the Credit Facility and for other general corporate purposes. In June 2017, the underwriters partially exercised their over-allotment option and purchased an additional 155,265 shares at the public offering price of $9.38 per share and on the same terms and conditions solely to cover over-allotments, which resulted in gross proceeds of $1.5 million and net proceeds, after deducting underwriting discounts and commissions and offering costs borne by us, of $1.4 million.

We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. When our common stock is trading at a price below NAV per share, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then-existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors and meeting other stated requirements. On July 31, 2018, the closing market price of our common stock was $11.30 per share, representing a 2.3% discount to our NAV per share of $11.57 as of June 30, 2018. At our 2017 Annual Meeting of Stockholders held on August 24, 2017, our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then-current NAV per common share for a period of one year from the date of such approval, provided that our Board of Directors makes certain determinations prior to any such sale. At our 2018 Annual Meeting of Stockholders held on August 2, 2018, our stockholders voted to approve a similar proposal, which is effective for one year from such date of approval.

Term Preferred Stock

Pursuant to an earlier registration statement on Form N-2 (Registration No. 333-181879), in November 2014, we completed a public offering of 1,656,000 shares of our Series B Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $41.4 million and net proceeds, after deducting underwriting

 

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discounts and offering costs borne by us, were $39.7 million. Total underwriting discounts and offering costs related to this offering were $1.7 million, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending December 31, 2021, the mandatory redemption date.

Our Series B Term Preferred Stock is not convertible into our common stock or any other security. Our Series B Term Preferred Stock provides for a fixed dividend equal to 6.75% per year, payable monthly (which equates to $2.8 million per year). We are required to redeem all shares of our outstanding Series B Term Preferred Stock on December 31, 2021, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series B Term Preferred Stock, and (2) if we fail to maintain asset coverage of at least 200%, we are required to redeem a portion of our outstanding Series B Term Preferred Stock or otherwise cure the asset coverage redemption trigger (and we may also redeem additional securities to cause the asset coverage to be 215%). We may also voluntarily redeem all or a portion of our Series B Term Preferred Stock at our sole option at the redemption price at any time.

Also, pursuant to an earlier registration statement on Form N-2 (Registration No. 333-181879), in May 2015, we completed a public offering of 1,610,000 shares of our Series C Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $38.6 million. Total underwriting discounts and offering costs related to this offering were $1.6 million, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending May 31, 2022, the mandatory redemption date.

Our Series C Term Preferred Stock is not convertible into our common stock or any other security. Our Series C Term Preferred Stock provides for a fixed dividend equal to 6.50% per year, payable monthly (which equates to $2.6 million per year). We are required to redeem all shares of our outstanding Series C Term Preferred Stock on May 31, 2022, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series C Term Preferred Stock, and (2) if we fail to maintain asset coverage of at least 200%, we are required to redeem a portion of our outstanding Series C Term Preferred Stock or otherwise cure the asset coverage redemption trigger (and we may also redeem additional securities to cause the asset coverage to be 215%). We may also voluntarily redeem all or a portion of our Series C Term Preferred Stock at our sole option at the redemption price at any time.

Pursuant to our prior registration statement on Form N-2 (Registration No. 333-204996), in September 2016, we completed a public offering of 2,300,000 shares of our Series D Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $57.5 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $55.4 million. Total underwriting discounts and offering costs related to this offering were $2.1 million, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending September 30, 2023, the mandatory redemption date.

Our Series D Term Preferred Stock is not convertible into our common stock or any other security. Our Series D Term Preferred Stock provides for a fixed dividend equal to 6.25% per year, payable monthly (which equates to $3.6 million per year). We are required to redeem all shares of our outstanding Series D Term Preferred Stock on September 30, 2023, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would

 

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constitute a change in control of us, we would be required to redeem all of our outstanding Series D Term Preferred Stock, and (2) if we fail to maintain asset coverage of at least 200% and are unable to correct such failure within a specific amount of time, we are required to redeem a portion of our outstanding Series D Term Preferred Stock or otherwise cure the asset coverage redemption trigger (and we may also redeem additional securities to cause the asset coverage to be 240%). We may also voluntarily redeem all or a portion of our Series D Term Preferred Stock at our sole option at the redemption price at any time on or after September 30, 2018.

Each series of our mandatorily redeemable preferred stock has a preference over our common stock with respect to dividends, whereby no distributions are payable on our common stock unless the stated dividends, including any accrued and unpaid dividends, on the mandatorily redeemable preferred stock have been paid in full. The Series B Term Preferred Stock, Series C Term Preferred Stock, and Series D Term Preferred Stock are considered liabilities in accordance with GAAP and, as such, affect our asset coverage, exposing us to additional leverage risks. The asset coverage on our senior securities that are stock (our Series B Term Preferred Stock, Series C Term Preferred Stock, and Series D Term Preferred Stock) as of June 30, 2018 was 250.2%, calculated pursuant to Sections 18 and 61 of the 1940 Act. See “Prospectus Supplement Summary—Recent Developments” of this prospectus supplement for a discussion of our recent capital raising activities completed subsequent to the quarter ended June 30, 2018.

Revolving Line of Credit

On November 16, 2016, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 2 to the Fifth Amended and Restated Credit Agreement, originally entered into on April 30, 2013 and as previously amended on June 26, 2014, with KeyBank, as administrative agent, lead arranger, managing agent and lender, the Adviser, as servicer, and certain other lenders party thereto. The revolving period was extended to November 15, 2019, and if not renewed or extended by such date, all principal and interest will be due and payable on or before November 15, 2021 (two years after the revolving period end date). The amended Credit Facility provides a one-year extension option that may be exercised on or before the second anniversary of the November 16, 2016 amendment date, subject to approval by all lenders. Additionally, the Credit Facility commitment amount was changed from $185.0 million to $165.0 million and, subject to certain terms and conditions, can be expanded to a total facility amount of $250.0 million through additional commitments of existing or new lenders. Advances under the Credit Facility generally bear interest at 30-day LIBOR plus 3.15% per annum until November 15, 2019, with the margin then increasing to 3.40% for the period from November 15, 2019 to November 15, 2020, and increasing further to 3.65% thereafter. The Credit Facility has an unused commitment fee of 0.50% per annum on the portion of the total unused commitment amount that is less than or equal to 45.0% of the total commitment amount and 0.80% per annum on the total unused commitment amount that is greater than 45.0%. We incurred fees of approximately $1.4 million in connection with this amendment.

On January 20, 2017, we entered into Amendment No. 3 to the Credit Facility, which clarified a definition in the Company’s performance guaranty under the Credit Facility. See “Prospectus Supplement Summary—Recent Developments” of this prospectus supplement for a discussion of the latest amendment to the Credit Facility entered into subsequent to the quarter ended June 30, 2018.

Interest is payable monthly during the term of the Credit Facility. Available borrowings are subject to various constraints and applicable advance rates, which are generally based on the size, characteristics, and quality of the collateral pledged by Business Investment. The Credit Facility also requires that any interest and principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once a month.

Among other things, the Credit Facility contains covenants that require Business Investment to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the

 

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lenders’ consent. The Credit Facility also generally seeks to restrict distributions to stockholders to the sum of (i) our net investment income, (ii) net capital gains, and (iii) amounts deemed by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. Loans eligible to be pledged as collateral are subject to certain limitations, including, among other things, restrictions on geographic concentrations, industry concentrations, loan size, payment frequency and status, average life, portfolio company leverage, and lien property. The Credit Facility also requires Business Investment to comply with other financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base. Additionally, the Credit Facility contains a performance guaranty that requires the Company to maintain (i) a minimum net worth (defined in the Credit Facility to include our mandatory redeemable term preferred stock) of the greater of $210.0 million or $210.0 million plus 50% of all equity and subordinated debt raised minus 50% of any equity or subordinated debt redeemed or retired after November 16, 2016, which equated to $222.2 million as of June 30, 2018, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200% (or such higher percentage as may be set forth in Section 61 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, 2018, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $514.7 million, asset coverage on our senior securities representing indebtedness of 566.8%, calculated in compliance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As of June 30, 2018, we had availability, after adjustments for various constraints based on collateral quality, of $59.5 million under the Credit Facility and were in compliance with all covenants under the Credit Facility. As of July 31, 2018, we had availability, before adjustments for various constraints based on collateral quality, of $62.0 million under the Credit Facility.

OFF-BALANCE SHEET ARRANGEMENTS

Unlike PIK income, we generally do not recognize success fees as income until payment has been received. 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 any such collections. As a result, as of June 30, 2018 and March 31, 2018, we had unrecognized, contractual off-balance sheet success fee receivables of $29.3 million and $28.3 million (or approximately $0.89 and $0.87 per common share), respectively, on our debt investments. Consistent with GAAP, we generally have not recognized success fee receivables and related income in our Consolidated Financial Statements until earned.

CONTRACTUAL OBLIGATIONS

We have line of credit and delayed draw term loan commitments to certain of our portfolio companies that have not been fully drawn. Since these line of credit and delayed draw term loan commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term loan commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused line of credit and delayed draw term loan commitments as of June 30, 2018 to be immaterial.

We have also extended a guaranty on behalf of one of our portfolio companies, whereby we have guaranteed $2.0 million of obligations of Country Club Enterprises, LLC. The guaranty expires in February 2019, unless renewed. As of June 30, 2018, we have not been required to make payments on this or any previous guaranties, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial.

 

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The following table shows our contractual obligations as of June 30, 2018, at cost:

 

     Payments Due by Period  

Contractual Obligations(A)

   Total      Less than
1 Year
     1-3 Years      3-5 Years      More than
5 Years
 

Credit Facility(B)

   $ 102,500      $ —        $ —        $ 102,500      $ —    

Mandatorily redeemable preferred stock

     139,150        —          —          81,650        57,500  

Secured borrowing

     5,096        —          5,096        —          —    

Interest payments on obligations(C)

     59,287        15,129        30,098        13,162        898  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 306,033      $ 15,129      $ 35,194      $ 197,312      $ 58,398  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) 

Excludes unused line of credit and delayed draw term loan commitments and guaranties to our portfolio companies in the aggregate principal amount of $6.2 million.

(B) 

Principal balance of borrowings outstanding under the Credit Facility, based on the maturity date following the current contractual revolving period end date.

(C) 

Includes interest payments due on the Credit Facility and secured borrowing and dividend obligations on each series of our mandatorily redeemable preferred stock. The amount of interest expense calculated for purposes of this table was based upon rates and outstanding balances as of June 30, 2018. Dividend obligations on our mandatorily redeemable preferred stock assume quarterly declarations and monthly dividend payments through the respective mandatory redemption dates of each series.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2—Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this prospectus supplement. Additionally, refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements included elsewhere in this prospectus supplement for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures.” We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2—Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this prospectus supplement and the accompanying prospectus.

Investment Valuation

Credit Monitoring and Risk Rating

The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, are used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics.

The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate equity securities. For loans that have been rated by an SEC-registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks

 

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to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss, if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of Lower Middle Market companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the Lower Middle Market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.

The following table reflects risk ratings for all loans in our portfolio as of June 30, 2018 and March 31, 2018:

 

Rating

   June 30,
2018
     March 31,
2018
 

Highest

     9.0        10.0  

Average

     6.9        6.4  

Weighted-Average

     7.2        6.5  

Lowest

     3.0        4.0  

Tax Status

We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes. As a RIC, we generally are not subject to federal income tax on the portion of our taxable income and gains distributed to our stockholders. To maintain our qualification as a RIC, we must maintain our status as a BDC and meet certain source-of-income and asset diversification requirements. In addition, in order to qualify to be taxed as a RIC, we must distribute to stockholders at least 90% of our Investment Company Taxable Income. Our policy generally is to make distributions to our stockholders in an amount up to 100% of our Investment Company Taxable Income. We may retain some or all of our net long-term capital gains, if any, retain and designate them as deemed distributions, or distribute such gains to stockholders in cash.

In an effort to limit federal excise taxes imposed on RICs, a RIC has to distribute to stockholders, during each calendar year, an amount close to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and (3) any ordinary income and capital gains in excess of capital losses from preceding years that were not distributed during such years. Under the RIC Modernization Act, we are permitted to carryforward any capital losses that we may incur for an unlimited period, and such capital loss carryforwards will retain their character as either short-term or long-term capital losses. Our capital loss carryforward balance was $0 as of both June 30, 2018 and March 31, 2018.

Recent Accounting Pronouncements

Refer to Note 2—Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this prospectus supplement for a description of recent accounting pronouncements.

 

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SALES OF COMMON STOCK BELOW NET ASSET VALUE

At our 2018 Annual Meeting of Stockholders, our stockholders approved our ability to sell or otherwise issue shares of our common stock at a price below the then-current NAV per common share (such approval, the “Stockholder Approval”), during a period beginning on August 9, 2018 and expiring on the first anniversary of such date. We intend to seek a similar approval at our 2019 annual meeting of stockholders in August 2019. To sell shares of common stock pursuant to this authorization, no further authorization from our stockholders will be solicited but a majority of our directors who have no financial interest in the sale and a majority of our independent directors must (i) find that the sale is in our best interests and in the best interests of our stockholders and (ii) in consultation with any underwriter or underwriters of the offering, make a good faith determination as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares of common stock, or immediately prior to the issuance of such common stock, that the price at which such shares of common stock are to be sold is not less than a price which closely approximates the market value of those shares of common stock, less any distributing commission or discount. Further, the total number of shares issued and sold pursuant to such Stockholder Approval may not exceed 25% of our then outstanding common stock immediately prior to each such sale, aggregated over a period of one year from the date of such Stockholder Approval. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business—Capital Raising Efforts” for details on prior stockholder approval for the issuance and sale of shares of our common stock at a price below NAV per share.

Any offering of common stock below its NAV per share will be designed to raise capital for investment in accordance with our investment objectives. In making a determination that an offering of common stock below its NAV per share is in our and our stockholders’ best interests, our Board of Directors will consider a variety of factors including:

 

   

the effect that an offering below NAV per common share would have on our common stockholders, including the potential dilution they would experience as a result of the offering;

 

   

the amount per common share by which the offering price per share and the net proceeds per share are less than our most recently determined NAV per common share;

 

   

the relationship of recent market prices of common stock to NAV per share and the potential impact of the offering on the market price per share of our common stock;

 

   

whether the estimated offering price would closely approximate the market value of shares of our common stock;

 

   

the potential market impact of being able to raise capital during financial market difficulties;

 

   

the nature of any new investors anticipated to acquire shares of our common stock in the offering;

 

   

the anticipated rate of return on and quality, type and availability of investments; and

 

   

the leverage available to us.

Our Board of Directors will also consider the fact that sales of shares of common stock at a discount will benefit the Adviser as the Adviser will earn additional investment management fees on the proceeds of such offerings, as it would from the offering of any other of our securities or from the offering of common stock at a premium to NAV per share. For additional information related to the sale of our common stock below NAV see also “Sales of Common Stock Below Net Asset Value” in the accompanying prospectus.

 

S-43


PLAN OF DISTRIBUTION

We previously entered into the Sales Agreements with the Sales Agents on February 22, 2018, pursuant to which we may issue and sell shares of our common stock, par value $0.001 per share, from time to time through the Sales Agents that have an aggregate offering price of up to $35.0 million. As of the date of this prospectus supplement, we have sold 296,236 shares of common stock and have $31.8 million remaining availability under the Sales Agreements.

Upon delivery of a placement notice and subject to the terms and conditions of the Sales Agreement, the Sales Agents will use its commercially reasonable efforts consistent with its sales and trading practices to sell by any method permitted by law deemed to be part of an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act, by means of ordinary brokers’ transactions that qualify for delivery of a prospectus to Nasdaq in accordance with Rule 153 under the Securities Act or such other sales as may be agreed by us and the Sales Agents, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices. We will instruct the Sales Agents as to the amount of common stock to be sold; provided, however, that, subject to the terms of the Sales Agreements, any sales of common stock pursuant to the Sales Agreements will only be effected by or through only one Sales Agent on any single given day, but in no event by more than one Sales Agent. We may instruct the Sales Agents not to sell common stock if the sales cannot be effected at or above the price designated by us in any instruction. We or the Sales Agents may suspend the offering of shares of common stock upon proper notice and subject to other conditions.

The Sales Agents will provide written confirmation of a sale to us no later than the opening of the trading day on Nasdaq following each trading day in which shares of our common stock are sold under the Sales Agreements. Each confirmation will include the number of shares of common stock sold on the preceding day, the net proceeds to us and the compensation payable by us to the Sales Agents in connection with the sales.

The Sales Agents will receive from us a commission to be negotiated from time to time but in no event in excess of 2.0% of the gross sales price of all shares of common stock sold through it as sales agent under the Sales Agreements. We estimate that the total expenses for the offering, excluding compensation payable to the Sales Agents under the terms of the Sales Agreements, will be approximately $0.2 million, which includes our legal, accounting and printing costs and various other fees associated with the offering, assuming all $35.0 million shares of common stock are sold pursuant to this prospectus supplement.

Settlement for sales of shares of common stock will occur on the second trading day following the date on which such sales are made, or on some other date that is agreed upon by the Company and the Sales Agents in connection with a particular transaction, in each case in accordance with applicable rules and regulations, in return for payment of the net proceeds to the Company. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.

In connection with the sale of the common stock on our behalf, the Sales Agents will be deemed to be “underwriters” within the meaning of the Securities Act, and the compensation of the Sales Agents will be deemed to be underwriting commissions or discounts. We have agreed to provide indemnification and contribution to the Sales Agents against certain civil liabilities, including liabilities under the Securities Act and the 1940 Act.

The offering of our shares of common stock pursuant to the Sales Agreements will terminate upon the earlier of (i) the sale of all common stock subject to the Sales Agreements, (ii) the termination of the Sales Agreements by us or the Sales Agents in accordance with their terms or (iii) the date six years from the date of the Sales Agreements. The Sales Agreements may be terminated by us in our sole discretion under the circumstances specified in the Sales Agreements by giving five days’ notice to the Sales Agents. In addition, each Sales Agent may terminate its Sales Agreement under the circumstances specified in such Sales Agreement by giving five days’ notice to us.

 

S-44


The Sales Agents and their affiliates may in the future provide various investment banking, commercial banking and other financial services for us and our affiliates, for which services they may in the future receive customary fees. In addition, in the ordinary course of their business activities, the Sales Agents and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers.

The principal business address of each of our Sales Agents are as follows: Cantor Fitzgerald & Co. is 499 Park Avenue, New York, New York 10022; Ladenburg Thalmann & Co. Inc. is 277 Park Avenue, 26th floor, New York, NY 10172; and Wedbush Securities Inc. is 1000 Wilshire Boulevard, Los Angeles, CA 90017.

 

S-45


CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PAYING AGENT

The custodian of our assets is The Bank of New York Mellon Corp. The custodian’s address is: 500 Ross Street, Suite 935, Pittsburgh, PA 15262. Our assets are held under bank custodianship in compliance with the 1940 Act. Securities held through our wholly owned subsidiary, Gladstone Business Investment, are held under a custodian agreement with The Bank of New York Mellon Corp., which acts as collateral custodian pursuant to the Credit Facility. The address of the collateral custodian is 500 Ross Street, Suite 935, Pittsburgh, PA 15262. Computershare, Inc. acts as our transfer and dividend paying agent and registrar. The principal business address of Computershare Inc. is 250 Royall Street, Canton, Massachusetts 02021, telephone number 781-575-2000. Computershare also maintains an internet website at www.computershare.com.

LEGAL MATTERS

Certain legal matters including, Delaware law and the validity of the common stock to be issued in connection with this offering, will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. The Sales Agents are being represented in connection with this offering by Cooley LLP, New York, New York.

EXPERTS

The financial statements as of March 31, 2018 and March 31, 2017 and for each of the three years in the period ended March 31, 2018 and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Annual Report on Internal Control over Financial Reporting) as of March 31, 2018, included in the accompanying prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are required to file reports, proxy statements and other information with the SEC. These documents may be inspected and copied for a fee at the SEC’s public reference room, 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SEC’s website is www.sec.gov. You may also obtain copies of such material from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates.

You may request a free copy of this prospectus supplement, the accompanying prospectus, our annual reports to stockholders, when available, and other information about us, and make stockholder inquiries by calling (866) 366-5745 or by writing to us at 1521 Westbranch Drive, Suite 100, McLean, Virginia 22102, or from our website (www.GladstoneInvestment.com). The information contained in, or that can be accessed through, our website is not part of this prospectus supplement or the accompanying prospectus. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. We also furnish to our stockholders annual reports, which include annual financial information that has been examined and reported on, with an opinion expressed, by our independent registered public accounting firm.

This prospectus supplement and the accompanying prospectus do not contain all of the information in our registration statement, including amendments, exhibits and schedules. Statements in this prospectus supplement

 

S-46


and in the accompanying prospectus about the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by this reference.

Additional information about the Company may be found in our registration statement on Form N-2 (including the related amendments, exhibits and schedules thereto) filed with the SEC. The SEC maintains a web site (www.sec.gov) that contains our registration statement, other documents incorporated by reference in the registration statement and other information that we have filed electronically with the SEC, including proxy statements and reports filed under the Exchange Act.

 

S-47


INDEX TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Consolidated Statements of Assets and Liabilities as of June  30, 2018 and March 31, 2018

     S-F-2  

Consolidated Statements of Operations for the three months ended June 30, 2018 and 2017

     S-F-3  

Consolidated Statements of Changes in Net Assets for the three months ended June 30, 2018 and 2017

     S-F-5  

Consolidated Statements of Cash Flows for the three months ended June 30, 2018 and 2017

     S-F-6  

Consolidated Schedules of Investments as of June  30, 2018 and March 31, 2018

     S-F-8  

Notes to Consolidated Financial Statements

     S-F-20  

 

S-F-1


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,     March 31,  
     2018     2018  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $234,640 and $220,087, respectively)

   $ 258,109     $ 247,297  

Affiliate investments (Cost of $340,797 and $343,247, respectively)

     355,514       339,393  

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

     15,695       12,457  

Cash and cash equivalents

     2,080       3,639  

Restricted cash and cash equivalents

     1,234       328  

Interest receivable

     3,134       3,532  

Due from administrative agent

     1,740       2,324  

Deferred financing costs, net

     879       976  

Other assets, net

     653       953  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 639,038     $ 610,899  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Line of credit at fair value (Cost of $102,500 and $107,000, respectively)

   $ 102,907     $ 107,500  

Secured borrowing

     5,096       5,096  
  

 

 

   

 

 

 

Total borrowings

     108,003       112,596  

Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 6,356,000 shares authorized; 5,566,000 shares issued and outstanding, net

     135,811       135,615  

Accounts payable and accrued expenses

     832       916  

Fees due to Adviser(A)

     12,786       6,671  

Fee due to Administrator(A)

     285       317  

Other liabilities

     1,513       584  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 259,230     $ 256,699  
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 379,808     $ 354,200  
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 100,000,000 shares authorized, 32,822,459 and 32,653,635 shares issued and outstanding, respectively

   $ 33     $ 33  

Capital in excess of par value

     332,301       330,661  

Cumulative net unrealized appreciation of investments

     32,369       14,301  

Cumulative net unrealized appreciation of other

     (407     (500

(Overdistributed) underdistributed net investment income

     (2,509     3,660  

Accumulated net realized gain in excess of distributions

     18,021       6,045  
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 379,808     $ 354,200  
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 11.57     $ 10.85  
  

 

 

   

 

 

 

 

(A)

Refer to Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

(B)

Refer to Note 10 — Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information.

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

 

S-F-2


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
June 30,
 
     2018     2017  

INVESTMENT INCOME

    

Interest income

    

Non-Control/Non-Affiliate investments

   $ 6,266     $ 4,466  

Affiliate investments

     6,829       6,072  

Control investments

     209       206  

Cash and cash equivalents

     10       2  
  

 

 

   

 

 

 

Total interest income

     13,314       10,746  

Dividend income

    

Non-Control/Non-Affiliate investments

     66       —    

Affiliate investments

     —         865  
  

 

 

   

 

 

 

Total dividend income

     66       865  

Success fee income

    

Non-Control/Non-Affiliate investments

     124       2,009  

Control investments

     2,000       —    
  

 

 

   

 

 

 

Total success fee income

     2,124       2,009  
  

 

 

   

 

 

 

Total investment income

     15,504       13,620  
  

 

 

   

 

 

 

EXPENSES

    

Base management fee(A)

     3,111       2,516  

Loan servicing fee(A)

     1,740       1,564  

Incentive fee(A)

     7,586       1,172  

Administration fee(A)

     285       307  

Interest expense on borrowings

     1,742       729  

Dividends on mandatorily redeemable preferred stock

     2,251       2,251  

Amortization of deferred financing costs and discounts

     367       367  

Professional fees

     411       319  

Other general and administrative expenses

     653       1,072  
  

 

 

   

 

 

 

Expenses before credits from Adviser

     18,146       10,297  
  

 

 

   

 

 

 

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

     (1,740     (1,564

Credits to fees from Adviser—other(A)

     (960     (548
  

 

 

   

 

 

 

Total expenses, net of credits to fees

     15,446       8,185  
  

 

 

   

 

 

 

NET INVESTMENT INCOME

   $ 58     $ 5,435  
  

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

    

Net realized gain (loss):

    

Non-Control/Non-Affiliate investments

     13,786       941  

Affiliate investments

     322       224  
  

 

 

   

 

 

 

Total net realized gain

     14,108       1,165  

Net unrealized appreciation (depreciation):

    

Non-Control/Non-Affiliate investments

     (3,741     1,831  

Affiliate investments

     18,571       2,335  

Control investments

     3,238       (2,625

Other

     93       —    
  

 

 

   

 

 

 

Total net unrealized appreciation

     18,161       1,541  
  

 

 

   

 

 

 

Net realized and unrealized gain

     32,269       2,706  
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 32,327     $ 8,141  
  

 

 

   

 

 

 

 

(A)

Refer to Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

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

 

S-F-3


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
June 30,
 
     2018      2017  

BASIC AND DILUTED PER COMMON SHARE:

     

Net investment income

   $ —        $ 0.17  
  

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 0.99      $ 0.26  
  

 

 

    

 

 

 

Distributions

   $ 0.26      $ 0.25  
  

 

 

    

 

 

 

WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

     

Basic and diluted

     32,762,848        31,474,284  

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

 

S-F-4


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

    

Three Months Ended June 30,

 
    

        2018         

   

        2017         

 

OPERATIONS

    

Net investment income

   $ 58     $ 5,435  

Net realized gain on investments

     14,108       1,165  

Net unrealized appreciation of investments

     18,068       1,541  

Net unrealized depreciation of other

     93       —    
  

 

 

   

 

 

 

Net increase in net assets from operations

     32,327       8,141  
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income

     (6,914     (6,091

Distributions to common stockholders from realized gains

     (1,641     (1,951
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (8,555     (8,042
  

 

 

   

 

 

 

CAPITAL ACTIVITY

    

Issuance of common stock

     1,873       21,154  

Discounts, commissions, and offering costs for issuance of common stock

     (37     (1,100
  

 

 

   

 

 

 

Net increase in net assets from capital activity

     1,836       20,054  
  

 

 

   

 

 

 

TOTAL INCREASE IN NET ASSETS

     25,608       20,153  

NET ASSETS, BEGINNING OF PERIOD

     354,200       301,082  
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 379,808     $ 321,235  
  

 

 

   

 

 

 

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

 

S-F-5


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

    

Three Months Ended June 30,

 
    

        2018         

   

        2017         

 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 32,327     $ 8,141  

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

    

Purchase of investments

     (30,052     (2,148

Principal repayments of investments

     14,514       13,660  

Net proceeds from the sale of investments

     17,548       5,797  

Net realized gain on investments

     (14,108     (1,176

Net unrealized appreciation of investments

     (18,068     (1,541

Net unrealized depreciation of other

     (93     —    

Amortization of premiums, discounts, and acquisition costs, net

     (5     (2

Amortization of deferred financing costs and discounts

     367       367  

Bad debt expense, net of recoveries

     251       539  

Changes in assets and liabilities:

    

Decrease in interest receivable

     367       235  

Decrease (increase) in due from administrative agent

     584       (435

Decrease in other assets, net

     166       2,292  

(Decrease) increase in accounts payable and accrued expenses

     (127     498  

Increase in fees due to Adviser(A)

     6,115       291  

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

     (32     11  

Increase (decrease) in other liabilities

     929       (185
  

 

 

   

 

 

 

Net cash provided by operating activities

     10,683       26,344  
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from issuance of common stock

     1,873       21,154  

Discounts, commissions, and offering costs for issuance of common stock

     (28     (1,084

Proceeds from line of credit

     37,900       9,400  

Repayments on line of credit

     (42,400     (45,100

Deferred financing and offering costs

     (126     (75

Distributions paid to common stockholders

     (8,555     (8,042
  

 

 

   

 

 

 

Net cash used in financing activities

     (11,336     (23,747
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS

     (653     2,597  
  

 

 

   

 

 

 

CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS AT BEGINNING OF PERIOD

     3,967       4,099  
  

 

 

   

 

 

 

CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS AT END OF PERIOD

   $ 3,314     $ 6,696  
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 1,743     $ 626  
  

 

 

   

 

 

 

NON-CASH ACTIVITIES(B)

   $ —       $ 9,379  
  

 

 

   

 

 

 

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

 

S-F-6


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

(A)     Refer to Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.
(B)     2017:   

Significant non-cash operating activities consisted principally of the following transaction:

 

In June 2017, one of our portfolio companies, Mathey Investments, Inc. (“Mathey”) merged with and into another one of our portfolio companies, SBS Industries, LLC (“SBS”). As a result of this transaction, our debt investments in Mathey, which totaled $8.6 million at principal and cost, were assumed by SBS and combined with our existing debt investment in SBS, which totaled $11.4 million at principal and cost, into a new secured first lien term loan totaling $20.0 million. Our common equity investment in Mathey, with a cost basis of $0.8 million, was converted into a preferred equity investment in SBS with the same cost basis.

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

 

S-F-7


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)

  Principal/Shares/
Units(F)(J)
    Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS(N) – 68.0%

     

Secured First Lien Debt – 36.7%

     

Containers, Packaging, and Glass – 2.5%

     

Frontier Packaging, Inc. – Term Debt (L+10.0%, 12.1% Cash, Due 12/2019)(L)

    9,500     $ 9,500     $ 9,500  

Diversified/Conglomerate Services – 15.8%

     

Bassett Creek Restoration, Inc. – Term Debt (L+10.0%, 12.1% Cash,
Due 4/2023)(T)

    23,000       23,000       23,000  

Counsel Press, Inc. – Term Debt (L+11.8%, 13.8% Cash, Due 3/2020)(L)

    18,000       18,000       18,000  

Counsel Press, Inc. – Term Debt (L+13.0%, 15.1% Cash, Due 3/2020)(L)

    5,500       5,500       5,500  

Nth Degree, Inc. – Term Debt (L+11.5%, 13.6% Cash, Due 3/2023)(L)

    13,290       13,290       13,290  
   

 

 

   

 

 

 
      59,790       59,790  

Farming and Agriculture – 4.2%

     

Jackrabbit, Inc. – Term Debt (L+10.0%, 13.5% Cash, Due 10/2018)(L)

    11,000       11,000       11,000  

Star Seed, Inc. – Term Debt (L+10.0%, 12.5% Cash, Due 5/2020)(L)

    5,000       5,000       5,000  
   

 

 

   

 

 

 
      16,000       16,000  

Leisure, Amusement, Motion Pictures, and Entertainment – 7.3%

     

Schylling, Inc. – Term Debt (L+11.0%, 13.1%, Due 11/2018)(L)

    13,081       13,081       13,081  

Schylling, Inc. – Term Debt (L+11.0%, 13.1%, Due 11/2018)(L)

    8,500       8,500       8,500  

Schylling, Inc. – Term Debt (L+11.0%, 13.1%, Due 11/2018)(L)

    6,000       6,000       6,000  
   

 

 

   

 

 

 
      27,581       27,581  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 5.3%

     

SBS Industries, LLC – Term Debt (L+12.0%, 14.1% Cash, Due 6/2020)(L)

    19,957       19,957       19,957  

Oil and Gas – 0.8%

     

Tread Corporation – Line of Credit, $634 available (L+10.0%, 12.5% Cash, Due 3/2021)(L)

    3,216       3,216       3,216  

Personal, Food, and Miscellaneous Services – 0.8%

     

B-Dry, LLC – Line of Credit, $100 available (L+0.3%, 2.3% Cash (0.8% Unused Fee), Due 12/2018)(G)(L)

    4,550       4,550       3,045  

B-Dry, LLC – Term Debt (L+0.3%, 2.3% Cash, Due 12/2019)(G)(L)

    6,443       6,443       —    

B-Dry, LLC – Term Debt (L+0.3%, 2.3% Cash, Due 12/2019)(G)(L)

    840       840       —    
   

 

 

   

 

 

 
      11,833       3,045  
   

 

 

   

 

 

 

Total Secured First Lien Debt

    $ 147,877     $ 139,089  
   

 

 

   

 

 

 

Secured Second Lien Debt – 8.0%

     

Automobile – 1.1%

     

Country Club Enterprises, LLC – Term Debt (L+11.0%, 18.7% Cash,
Due 5/2019)(L)

  $ 4,000     $ 4,000     $ 4,000  

Cargo Transport – 3.4%

     

Diligent Delivery Systems – Term Debt (L+9.0%, 11.1% Cash,
Due 11/2022)(Q)

    13,000       12,920       13,000  

Home and Office Furnishings, Housewares, and Durable Consumer
Products – 3.5%

     

Ginsey Home Solutions, Inc. – Term Debt (L+10.0%, 13.5% Cash,
Due 1/2021)(H)(L)

    13,300       13,300       13,300  
   

 

 

   

 

 

 

Total Secured Second Lien Debt

    $ 30,220     $ 30,300  
   

 

 

   

 

 

 

Preferred Equity – 19.2%

     

Automobile – 0.2%

     

Country Club Enterprises, LLC – Preferred Stock(C)(L)

    7,304,792     $ 7,725     $ 786  

Country Club Enterprises, LLC – Guaranty ($2,000)(U)

    —         —         —    
   

 

 

   

 

 

 
      7,725       786  

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

 

S-F-8


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)

  Principal/Shares/
Units(F)(J)
    Cost     Fair Value  

Containers, Packaging, and Glass – 0.4%

     

Frontier Packaging, Inc. – Preferred Stock(C)(L)

    1,373     $ 1,373     $ 1,456  

Diversified/Conglomerate Services – 11.5%

     

Bassett Creek Restoration, Inc. – Preferred Stock(C)(T)

    4,900       4,900       4,900  

Counsel Press, Inc. – Preferred Stock(C)(L)

    6,995       6,995       7,699  

Nth Degree, Inc. – Preferred Stock(C)(L)

    5,660       5,660       31,016  
   

 

 

   

 

 

 
      17,555       43,615  

Farming and Agriculture – 1.5%

     

Jackrabbit, Inc. – Preferred Stock(C)(L)

    3,556       3,556       3,404  

Star Seed, Inc. – Preferred Stock(C)(L)

    1,499       1,499       2,431  
   

 

 

   

 

 

 
      5,055       5,835  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 3.4%

     

Ginsey Home Solutions, Inc. – Preferred Stock(C)(L)

    19,280       9,583       12,845  

Leisure, Amusement, Motion Pictures, and Entertainment – 0.5%

     

Schylling, Inc. – Preferred Stock(C)(L)

    4,000       4,000       2,080  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 0.5%

 

   

SBS Industries, LLC – Preferred Stock(C)(L)

    27,705       2,771       1,838  

Oil and Gas – 1.2%

     

Tread Corporation – Preferred Stock(C)(L)

    12,998,639       3,768       4,550  

Personal, Food, and Miscellaneous Services – 0.0%

     

B-Dry, LLC – Preferred Stock(C)(L)

    2,500       2,516       —    
   

 

 

   

 

 

 

Total Preferred Equity

    $ 54,346     $ 73,005  
   

 

 

   

 

 

 

Common Equity – 4.1%

     

Cargo Transport – 0.6%

     

Diligent Delivery Systems – Common Stock Warrants(C)(Q)

    8   $ 500     $ 2,384  

Containers, Packaging, and Glass – 2.7%

     

Frontier Packaging, Inc. – Common Stock(C)(L)

    152       152       10,435  

Farming and Agriculture – 0.6%

     

Jackrabbit, Inc. – Common Stock(C)(L)

    548       94       —    

Star Seed, Inc. – Common Stock(C)(L)

    600       1       2,184  
   

 

 

   

 

 

 
      95       2,184  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 0.0%

 

   

Ginsey Home Solutions, Inc. – Common Stock(C)(L)

    63,747       8       —    

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 0.0%

 

   

SBS Industries, LLC – Common Stock(C)(L)

    221,500       222       —    

Oil and Gas – 0.0%

     

Tread Corporation – Common Stock(C)(L)

    10,089,048       753       —    

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.2%

 

   

Funko Acquisition Holdings, LLC(M) – Common Units(C)(S)

    67,873       167       712  

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

 

S-F-9


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)

  Principal/Shares/
Units(F)(J)
    Cost     Fair Value  

Personal, Food, and Miscellaneous Services – 0.0%

     

B-Dry, LLC – Common Stock(C)(L)

    2,500     $ 300     $ —    
   

 

 

   

 

 

 

Total Common Equity

    $ 2,197     $ 15,715  
   

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

    $ 234,640     $ 258,109  
   

 

 

   

 

 

 

AFFILIATE INVESTMENTS(O) – 93.6%

     

Secured First Lien Debt – 45.3%

     

Automobile – 2.0%

     

Meridian Rack & Pinion, Inc.(M) – Term Debt (L+11.5%, 13.6% Cash, Due 6/2019)(K)

  $ 9,660     $ 9,660     $ 7,728  

Beverage, Food, and Tobacco – 2.4%

     

Head Country, Inc. – Term Debt (L+10.5%, 12.6% Cash, Due 2/2019)(L)

    9,050       9,050       9,050  

Diversified/Conglomerate Manufacturing – 5.1%

     

D.P.M.S., Inc. – Term Debt (10.0% Cash, Due 10/2021)(I)(L)

    8,795       8,795       7,844  

Edge Adhesives Holdings, Inc.(M) – Term Debt (L+10.5%, 12.6% Cash, Due 2/2019)(K)

    9,300       9,300       9,068  

Edge Adhesives Holdings, Inc.(M) – Term Debt (L+11.8%, 13.8% Cash, Due 2/2019)(K)

    2,400       2,400       2,352  
   

 

 

   

 

 

 
      20,495       19,264  

Diversified/Conglomerate Services – 11.3%

     

ImageWorks Display and Marketing Group, Inc. – Line of Credit, $3,000 available (L+9.0%, 11.1% Cash, Due 8/2018)(L)

    —         —         —    

ImageWorks Display and Marketing Group, Inc. – Term Debt (L+11.0%, 13.1% Cash, Due 11/2022)(L)

    22,000       22,000       22,000  

J.R. Hobbs Co. – Atlanta, LLC – Term Debt (L+11.5%, 13.6% Cash, Due 2/2022)(L)

    21,000       21,000       21,000  
   

 

 

   

 

 

 
      43,000       43,000  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 8.9%

 

   

Brunswick Bowling Products, Inc. – Term Debt (L+10.0%, 12.1% Cash, Due 1/2023)(L)

    17,700       17,700       17,700  

Old World Christmas, Inc. – Term Debt (L+11.3%, 13.3% Cash, Due 10/2019)(L)

    15,770       15,770       15,770  
   

 

 

   

 

 

 
      33,470       33,470  

Leisure, Amusement, Motion Pictures, and Entertainment – 4.0%

     

SOG Specialty Knives & Tools, LLC – Term Debt (L+7.3%, 9.3% Cash, Due 8/2020)(L)

    6,200       6,200       6,200  

SOG Specialty Knives & Tools, LLC – Term Debt (L+8.3%, 10.3% Cash, Due 8/2020)(L)

    12,200       12,200       8,883  

SOG Specialty Knives & Tools, LLC – Term Debt (Due 8/2020)(L)(R)

    538       538       441  
   

 

 

   

 

 

 
      18,938       15,524  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 5.5%

     

Pioneer Square Brands, Inc. – Term Debt (L+12.0%, 14.1% Cash, Due 8/2022)(L)

    21,000       21,000       21,000  

Telecommunications – 3.7%

     

B+T Group Acquisition, Inc.(M) – Term Debt (L+11.0%, 13.1% Cash, Due 12/2019)(L)

    14,000       14,000       14,000  

Textiles and Leather – 2.4%

     

Logo Sportswear, Inc. – Term Debt (L+10.5%, 12.6% Cash, Due 3/2020)(L)

    9,200       9,200       9,200  
   

 

 

   

 

 

 

Total Secured First Lien Debt

    $ 178,813     $ 172,236  
   

 

 

   

 

 

 

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

 

S-F-10


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)

  Principal/Shares/
Units(F)(J)
    Cost     Fair Value  

Secured Second Lien Debt – 16.3%

     

Chemicals, Plastics, and Rubber – 6.5%

     

PSI Molded Plastics, Inc. – Term Debt (L+12.0%, 14.1% Cash, Due 1/2024)(G)(L)

  $ 24,618     $ 24,618     $ 24,618  

Diversified/Conglomerate Manufacturing – 3.2%

     

Alloy Die Casting Co.(M) – Term Debt (L+4.0%, 6.1% Cash, Due 4/2021)(K)

    12,215       12,215       10,993  

Alloy Die Casting Co.(M) – Term Debt (L+4.0%, 6.1% Cash, Due 4/2021)(K)

    175       175       158  

Alloy Die Casting Co.(M) – Term Debt (L+4.0%, 6.1% Cash, Due 4/2021)(K)

    910       910       824  
   

 

 

   

 

 

 
      13,300       11,975  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 4.2%

 

   

Cambridge Sound Management, Inc. – Term Debt (L+11.0%, 13.1% Cash, Due 8/2021)(L)

    16,000       16,000       16,000  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 2.4%

     

The Mountain Corporation – Term Debt (L+4.0%, 7.0% Cash, Due 8/2021)(G)(L)

    18,600       18,600       6,133  

The Mountain Corporation – Term Debt (Due 8/2021)(L)(R)

    1,000       1,000       1,000  

The Mountain Corporation – Term Debt (Due 8/2021)(L)(R)

    1,500       1,500       1,500  

The Mountain Corporation – Delayed Draw Term Debt, $500 available (Due 8/2021)(L)(R)

    500       500       500  
   

 

 

   

 

 

 
      21,600       9,133  
   

 

 

   

 

 

 

Total Secured Second Lien Debt

    $ 75,518     $ 61,726  
   

 

 

   

 

 

 

Preferred Equity – 32.0%

     

Automobile – 0.0%

     

Meridian Rack & Pinion, Inc.(M) – Preferred Stock(C)(L)

    3,381     $ 3,381     $ —    

Beverage, Food, and Tobacco – 0.7%

     

Head Country, Inc. – Preferred Stock(C)(L)

    4,000       4,000       2,499  

Cargo Transport – 0.0%

     

NDLI, Inc. – Preferred Stock(C)(L)(V)

    3,600       3,600       —    

Chemicals, Plastics, and Rubber – 0.0%

     

PSI Molded Plastics, Inc. – Preferred Stock(C)(L)

    51,098       8,980       —    

Diversified/Conglomerate Manufacturing – 1.0%

     

Alloy Die Casting Co.(M) – Preferred Stock(C)(L)

    5,114       5,114       —    

Channel Technologies Group, LLC – Preferred Stock(C)(L)

    2,279       1,841       —    

Edge Adhesives Holdings, Inc.(M) – Preferred Stock(C)(L)

    3,774       3,774       3,842  
   

 

 

   

 

 

 
      10,729       3,842  

Diversified/Conglomerate Services – 6.4%

     

ImageWorks Display and Marketing Group, Inc. – Preferred Stock(C)(L)

    67,490       6,750       9,410  

J.R. Hobbs Co. – Atlanta, LLC – Preferred Stock(C)(L)

    5,920       5,920       15,031  
   

 

 

   

 

 

 
      12,670       24,441  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 18.5%

 

   

Brunswick Bowling Products, Inc. – Preferred Stock(C)(L)

    4,943       4,943       20,550  

Cambridge Sound Management, Inc. – Preferred Stock(C)(L)

    4,500       4,500       38,732  

Old World Christmas, Inc. – Preferred Stock(C)(L)

    6,180       6,180       10,976  
   

 

 

   

 

 

 
      15,623       70,258  

Leisure, Amusement, Motion Pictures, and Entertainment – 0.0%

     

SOG Specialty Knives & Tools, LLC – Preferred Stock(C)(L)

    9,749       9,749       —    

Personal and Non-Durable Consumer Products (Manufacturing Only) – 2.5%

     

The Mountain Corporation – Preferred Stock(C)(L)

    6,899       6,899       —    

Pioneer Square Brands, Inc. – Preferred Stock(C)(L)

    5,502       5,500       9,609  
   

 

 

   

 

 

 
      12,399       9,609  

Telecommunications – 0.0%

     

B+T Group Acquisition, Inc.(M) – Preferred Stock(C)(L)

    12,841       4,196       —    

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

 

S-F-11


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)

  Principal/Shares/
Units(F)(J)
    Cost     Fair Value  

Textiles and Leather – 2.9%

     

Logo Sportswear, Inc. – Preferred Stock(C)(L)

    1,550     $ 1,096     $ 10,903  
   

 

 

   

 

 

 

Total Preferred Equity

    $ 86,423     $ 121,552  
   

 

 

   

 

 

 

Common Equity – 0.0%

     

Cargo Transport – 0.0%

     

NDLI, Inc. – Common Stock(C)(L)(V)

    545     $ —       $ —    

Diversified/Conglomerate Manufacturing – 0.0%

     

Alloy Die Casting Co.(M) – Common Stock(C)(L)

    630       41       —    

Channel Technologies Group, LLC – Common Stock(C)(L)

    2,319,184       —         —    

D.P.M.S., Inc. – Common Stock(C)(L)

    627       1       —    
   

 

 

   

 

 

 
      42       —    

Personal and Non-Durable Consumer Products (Manufacturing Only) –0.0%

     

The Mountain Corporation – Common Stock(C)(L)

    751       1       —    
   

 

 

   

 

 

 

Total Common Equity

    $ 43     $ —    
   

 

 

   

 

 

 

Total Affiliate Investments

    $ 340,797     $ 355,514  
   

 

 

   

 

 

 

CONTROL INVESTMENTS(P) – 4.1%:

     

Secured First Lien Debt – 1.3%

     

Aerospace and Defense – 1.3%

     

Galaxy Tool Holding Corporation – Line of Credit, $0 available (L+4.5%, 6.6% Cash (1.0% Unused Fee), Due 8/2019)(L)

  $ 5,000     $ 5,000     $ 5,000  

Secured Second Lien Debt – 1.3%

     

Aerospace and Defense – 1.3%

     

Galaxy Tool Holding Corporation – Term Debt (L+6.0%, 10.0% Cash, Due 8/2019)(L)

  $ 5,000     $ 5,000     $ 5,000  

Preferred Equity – 1.5%

     

Aerospace and Defense – 1.5%

     

Galaxy Tool Holding Corporation – Preferred Stock(C)(L)

    5,517,444     $ 11,464     $ 5,695  

Common Equity – 0.0%

     

Aerospace and Defense – 0.0%

     

Galaxy Tool Holding Corporation – Common Stock(C)(L)

    88,843     $ 48     $ —    
   

 

 

   

 

 

 

Total Control Investments

    $ 21,512     $ 15,695  
   

 

 

   

 

 

 

TOTAL INVESTMENTS – 165.7%

    $ 596,949     $ 629,318  
   

 

 

   

 

 

 

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

 

S-F-12


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

(A) 

Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $533.0 million at fair value, are pledged as collateral to our revolving line of credit, as described further in Note 5 — Borrowings in the accompanying Notes to Consolidated Financial Statements. Additionally, under Section 55 of the Investment Company Act of 1940, as amended (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. As of June 30, 2018, our investment in Funko Acquisition Holdings, LLC (“Funko”) is considered a non-qualifying asset under Section 55 of the 1940 Act and represents less than 0.2% of total investments, at fair value.

(B) 

Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 2.1% as of June 30, 2018. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or LIBOR plus a spread. Due dates represent the contractual maturity date.

(C) 

Security is non-income producing.

(D) 

Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of June 30, 2018.

(E) 

Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the FASB Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) fair value hierarchy. Refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(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 Statements of Assets and Liabilities as of June 30, 2018.

(I) 

Debt security has a fixed interest rate.

(J) 

Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.

(K) 

Fair value was based on internal yield analysis or on estimates of value submitted by ICE Data Pricing and Reference Data, LLC (formerly Standard and Poor’s Securities Evaluations, Inc.). Refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements 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 in the accompanying Notes to Consolidated Financial Statements 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 (“SEC”).

(N) 

Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.

(O) 

Affiliate investments, as defined by the 1940 Act, are those 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) 

Debt security does not have a stated current interest rate.

(S) 

Our investment in Funko was valued using Level 2 inputs within the ASC 820 fair value hierarchy. Our common units in Funko are convertible into class A common stock in Funko, Inc. upon meeting certain requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of marketability. Funko, Inc. is traded on the Nasdaq Stock Market under the trading symbol “FNKO.” Refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(T) 

New portfolio investment valued at cost, as it was determined that the price paid during the three months ended June 30, 2018 best represents fair value as of June 30, 2018.

(U) 

Refer to Note 11 — Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information regarding this guaranty.

(V)

Investment was exited subsequent to June 30, 2018. Refer to Note 13 — Subsequent Events in the accompanying Notes t

o

Consolidated Financial Statements for additional information

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

 

S-F-13


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(D)(E)

  Principal/Shares/
Units(F)(J)
    Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS(N) – 69.8%

     

Secured First Lien Debt – 35.8%

     

Chemicals, Plastics, and Rubber – 2.8%

     

Drew Foam Companies, Inc. – Term Debt (L+10.0%, 13.5% Cash, Due 7/2018)(Q)

  $ 9,913     $ 9,913     $ 9,987  

Containers, Packaging, and Glass – 2.7%

     

Frontier Packaging, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 12/2019)(L)

    9,500       9,500       9,500  

Diversified/Conglomerate Services – 10.4%

     

Counsel Press, Inc. – Term Debt (L+11.8%, 13.6% Cash, Due 3/2020)(L)

    18,000       18,000       18,000  

Counsel Press, Inc. – Term Debt (L+13.0%, 14.9% Cash, Due 3/2020)(L)

    5,500       5,500       5,500  

Nth Degree, Inc. – Term Debt (L+11.5%, 13.4% Cash, Due 12/2020)(L)

    13,290       13,290       13,290  
   

 

 

   

 

 

 
      36,790       36,790  

Farming and Agriculture – 4.5%

     

Jackrabbit, Inc. – Term Debt (L+10.0%, 13.5% Cash, Due 4/2018)(L)

    11,000       11,000       11,000  

Star Seed, Inc. – Term Debt (L+10.0%, 12.5% Cash, Due 5/2020)(L)

    5,000       5,000       5,000  
   

 

 

   

 

 

 
      16,000       16,000  

Leisure, Amusement, Motion Pictures, and Entertainment – 7.8%

     

Schylling, Inc. – Term Debt (L+11.0%, 13.0%, Due 11/2018)(L)

    13,081       13,081       13,081  

Schylling, Inc. – Term Debt (L+11.0%, 13.0%, Due 11/2018)(T)

    8,500       8,500       8,500  

Schylling, Inc. – Term Debt (L+11.0%, 13.0%, Due 11/2018)(T)

    6,000       6,000       6,000  
   

 

 

   

 

 

 
      27,581       27,581  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 5.6%

     

SBS Industries, LLC – Line of Credit, $1,500 available (L+8.5%, 10.4% Cash (1.0% Unused Fee), Due 6/2018)(L)

    —         —         —    

SBS Industries, LLC – Term Debt (L+12.0%, 14.0% Cash, Due 6/2020)(L)

    19,957       19,957       19,957  
   

 

 

   

 

 

 
      19,957       19,957  

Oil and Gas – 0.9%

     

Tread Corporation – Line of Credit, $634 available (L+10.0%, 12.5% Cash, Due 3/2021)(G)(L)

    3,216       3,216       3,216  

Personal, Food, and Miscellaneous Services – 1.1%

     

B-Dry, LLC – Line of Credit, $100 available (L+0.3%, 2.1% Cash (0.8% Unused Fee), Due 12/2018)(L)

    4,550       4,550       3,882  

B-Dry, LLC – Term Debt (L+0.3%, 2.1% Cash, Due 12/2019)(L)

    6,443       6,443       —    

B-Dry, LLC – Term Debt (L+0.3%, 2.1% Cash, Due 12/2019)(L)

    840       840       —    
   

 

 

   

 

 

 
      11,833       3,882  
   

 

 

   

 

 

 

Total Secured First Lien Debt

    $ 134,790     $ 126,913  
   

 

 

   

 

 

 

Secured Second Lien Debt – 8.6%

     

Automobile – 1.1%

     

Country Club Enterprises, LLC – Term Debt (L+11.0%, 18.7% Cash, Due 5/2018)(L)

  $ 4,000     $ 4,000     $ 4,000  

Cargo Transport – 3.7%

     

Diligent Delivery Systems – Term Debt (L+8.0%, 10.0% Cash, Due 11/2022)(Q)

    13,000       12,916       13,000  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 3.8%

     

Ginsey Home Solutions, Inc. – Term Debt (L+10.0%, 13.5% Cash, Due 1/2021)(H)(L)

    13,300       13,300       13,300  
   

 

 

   

 

 

 

Total Secured Second Lien Debt

    $ 30,216     $ 30,300  
   

 

 

   

 

 

 

Preferred Equity – 17.3%

     

Automobile – 0.3%

     

Country Club Enterprises, LLC – Preferred Stock(C)(L)

    7,304,792     $ 7,725     $ 1,010  

Country Club Enterprises, LLC – Guaranty ($2,000)(U)

    —         —         —    
   

 

 

   

 

 

 
      7,725       1,010  

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

 

S-F-14


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(D)(E)

  Principal/Shares/
Units(F)(J)
    Cost     Fair Value  

Chemicals, Plastics, and Rubber – 1.0%

     

Drew Foam Companies, Inc. – Preferred Stock(C)(Q)

    34,045     $ 3,375     $ 3,375  

Containers, Packaging, and Glass – 0.4%

     

Frontier Packaging, Inc. – Preferred Stock(C)(L)

    1,373       1,373       1,428  

Diversified/Conglomerate Services – 9.2%

     

Counsel Press, Inc. – Preferred Stock(C)(L)

    6,995       6,995       6,303  

Nth Degree, Inc. – Preferred Stock(C)(L)

    5,660       5,660       26,424  
   

 

 

   

 

 

 
      12,655       32,727  

Farming and Agriculture – 1.4%

     

Jackrabbit, Inc. – Preferred Stock(C)(L)

    3,556       3,556       2,518  

Star Seed, Inc. – Preferred Stock(C)(L)

    1,499       1,499       2,376  
   

 

 

   

 

 

 
      5,055       4,894  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 3.5%

     

Ginsey Home Solutions, Inc. – Preferred Stock(C)(L)

    19,280       9,583       12,555  

Leisure, Amusement, Motion Pictures, and Entertainment – 0.0%

     

Schylling, Inc. – Preferred Stock(C)(L)

    4,000       4,000       —    

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) –0.6%

     

SBS Industries, LLC – Preferred Stock(C)(L)

    27,705       2,771       1,958  

Oil and Gas – 0.9%

     

Tread Corporation – Preferred Stock(C)(L)

    12,998,639       3,768       3,335  

Personal, Food, and Miscellaneous Services – 0.0%

     

B-Dry, LLC – Preferred Stock(C)(L)

    2,500       2,516       —    
     
   

 

 

   

 

 

 

Total Preferred Equity

    $ 52,821     $ 61,282  
   

 

 

   

 

 

 

Common Equity – 8.1%

     

Cargo Transport – 0.7%

     

Diligent Delivery Systems – Common Stock Warrants(C)(Q)

    8   $ 500     $ 2,816  

Chemicals, Plastics, and Rubber – 4.1%

     

Drew Foam Companies, Inc. – Common Stock(C)(Q)

    5,372       63       14,744  

Containers, Packaging, and Glass – 3.0%

     

Frontier Packaging, Inc. – Common Stock(C)(L)

    152       152       10,459  

Farming and Agriculture – 0.2%

     

Jackrabbit, Inc. – Common Stock(C)(L)

    548       94       —    

Star Seed, Inc. – Common Stock(C)(L)

    600       1       589  
   

 

 

   

 

 

 
      95       589  

Home and Office Furnishings, Housewares, and Durable Consumer Products –0.0%

     

Ginsey Home Solutions, Inc. – Common Stock(C)(L)

    63,747       8       —    

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) –0.0%

     

SBS Industries, LLC – Common Stock(C)(L)

    221,500       222       —    

Oil and Gas – 0.0%

     

Tread Corporation – Common Stock(C)(L)

    10,089,048       753       —    

Personal and Non-Durable Consumer Products (Manufacturing Only) –0.1%

     

Funko Acquisition Holdings, LLC(M) – Common Units(C)(S)

    67,873       167       194  

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

 

S-F-15


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(D)(E)

  Principal/Shares/
Units(F)(J)
    Cost     Fair Value  

Personal, Food, and Miscellaneous Services – 0.0%

     

B-Dry, LLC – Common Stock(C)(L)

    2,500     $ 300     $ —    
   

 

 

   

 

 

 

Total Common Equity

    $ 2,260     $ 28,802  
   

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

    $ 220,087     $ 247,297  
   

 

 

   

 

 

 

AFFILIATE INVESTMENTS(O) – 95.8%

     

Secured First Lien Debt – 49.1%

     

Automobile – 2.3%

     

Meridian Rack & Pinion, Inc.(M) – Term Debt (L+11.5%, 13.5% Cash,
Due 4/2019)(K)

  $ 9,660     $ 9,660     $ 8,018  

Beverage, Food, and Tobacco – 2.6%

     

Head Country, Inc. – Term Debt (L+10.5%, 12.5% Cash, Due 2/2019)(L)

    9,050       9,050       9,050  

Diversified/Conglomerate Manufacturing – 5.0%

     

D.P.M.S., Inc. – Term Debt (10.0% Cash, Due 10/2021)(I)(L)

    8,795       8,795       7,028  

Edge Adhesives Holdings, Inc.(M) – Term Debt (L+10.5%, 12.5% Cash,
Due 2/2019)(K)

    9,300       9,300       8,742  

Edge Adhesives Holdings, Inc.(M) – Term Debt (L+11.8%, 13.8% Cash,
Due 2/2019)(K)

    2,400       2,400       2,268  
   

 

 

   

 

 

 
      20,495       18,038  

Diversified/Conglomerate Services – 12.2%

     

ImageWorks Display and Marketing Group, Inc. – Line of Credit, $2,700 available (L+9.0%, 10.9% Cash, Due 5/2018)(L)

    300       300       300  

ImageWorks Display and Marketing Group, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 11/2022)(L)

    22,000       22,000       22,000  

J.R. Hobbs Co. – Atlanta, LLC – Term Debt (L+11.5%, 13.4% Cash, Due 2/2022)(L)

    21,000       21,000       21,000  
   

 

 

   

 

 

 
      43,300       43,300  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 9.4%

     

Brunswick Bowling Products, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 1/2023)(L)

    17,700       17,700       17,700  

Old World Christmas, Inc. – Term Debt (L+11.3%, 13.3% Cash, Due 10/2019)(L)

    15,770       15,770       15,770  
   

 

 

   

 

 

 
      33,470       33,470  

Leisure, Amusement, Motion Pictures, and Entertainment – 4.4%

     

SOG Specialty Knives & Tools, LLC – Term Debt (L+7.3%, 9.3% Cash,
Due 8/2020)(L)

    6,200       6,200       6,200  

SOG Specialty Knives & Tools, LLC – Term Debt (L+8.3%, 10.3% Cash,
Due 8/2020)(L)

    12,200       12,200       8,827  

SOG Specialty Knives & Tools, LLC – Term Debt (Due 8/2020)(L)(R)

    538       538       440  
   

 

 

   

 

 

 
      18,938       15,467  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 6.6%

     

Pioneer Square Brands, Inc. – Line of Credit, $600 available (L+9.0%, 10.9% Cash (1.0% Unused Fee), Due 4/2018)(L)

    2,400       2,400       2,400  

Pioneer Square Brands, Inc. – Term Debt (L+12.0%, 13.9% Cash, Due 8/2022)(L)

    21,000       21,000       21,000  
   

 

 

   

 

 

 
      23,400       23,400  

Telecommunications – 4.0%

     

B+T Group Acquisition, Inc.(M) – Term Debt (L+11.0%, 13.0% Cash,
Due 12/2019)(L)

    14,000       14,000       14,000  

Textiles and Leather – 2.6%

     

Logo Sportswear, Inc. – Term Debt (L+10.5%, 12.5% Cash, Due 3/2020)(L)

    9,200       9,200       9,200  
   

 

 

   

 

 

 

Total Secured First Lien Debt

    $ 181,513     $ 173,943  
   

 

 

   

 

 

 

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

 

S-F-16


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(D)(E)

  Principal/Shares/
Units(F)(J)
    Cost     Fair Value  

Secured Second Lien Debt – 17.5%

     

Chemicals, Plastics, and Rubber – 7.0%

     

PSI Molded Plastics, Inc. – Term Debt (L+12.0%, 13.9% Cash, Due 1/2024)(L)

  $ 24,618     $ 24,618     $ 24,618  

Diversified/Conglomerate Manufacturing – 2.8%

     

Alloy Die Casting Co.(M) – Term Debt (L+11.5%, 13.5% Cash, Due 4/2021)(G)(K)

    12,215       12,215       9,161  

Alloy Die Casting Co.(M) – Term Debt (L+11.5%, 13.5% Cash, Due 4/2021)(G)(K)

    175       175       131  

Alloy Die Casting Co.(M) – Term Debt (Due 4/2021)(K)(R)

    910       910       687  
   

 

 

   

 

 

 
      13,300       9,979  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 4.5%

     

Cambridge Sound Management, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 8/2021)(L)

    16,000       16,000       16,000  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 3.2%

     

The Mountain Corporation – Term Debt (L+4.0%, 7.0% Cash, Due 8/2021)(L)

    18,600       18,600       8,692  

The Mountain Corporation – Term Debt (Due 8/2021)(L)(R)

    1,000       1,000       1,000  

The Mountain Corporation – Term Debt (Due 8/2021)(L)(R)

    1,500       1,500       1,500  

The Mountain Corporation – Delayed Draw Term Debt, $750 available
(Due 8/2021)(L)(R)