Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2018

OR

 

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

For the transition period from                      to                     

Commission file number: 814-00704

 

 

GLADSTONE INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE     83-0423116

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification No.)

 

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

(703) 287-5800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☐    No  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of November 2, 2018, was 32,822,459.

 

 

 


GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

 

PART I.

   FINANCIAL INFORMATION:   

Item 1.

   Financial Statements (Unaudited)   
  

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

     2  
  

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

     3  
  

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

     5  
  

Consolidated Statements of Cash Flows for the six months ended September  30, 2018 and 2017

     6  
  

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

     8  
  

Notes to Consolidated Financial Statements

     20  

Item 2.

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

Overview

     46  
  

Results of Operations

     52  
  

Liquidity and Capital Resources

     62  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      69  

Item 4.

   Controls and Procedures      69  

PART II.

   OTHER INFORMATION:   

Item 1.

   Legal Proceedings      70  

Item 1A.

   Risk Factors      70  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      71  

Item 3.

   Defaults Upon Senior Securities      71  

Item 4.

   Mine Safety Disclosures      71  

Item 5.

   Other Information      71  

Item 6.

   Exhibits      72  

SIGNATURES

     73  


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     September 30,     March 31,  
     2018     2018  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $234,695 and $220,087, respectively)

   $ 277,968     $ 247,297  

Affiliate investments (Cost of $338,047 and $343,247, respectively)

     370,415       339,393  

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

     16,734       12,457  

Cash and cash equivalents

     2,168       3,639  

Restricted cash and cash equivalents

     1,133       328  

Interest receivable

     2,088       3,532  

Due from administrative agent

     1,915       2,324  

Deferred financing costs, net

     2,137       976  

Other assets, net

     840       953  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 675,398     $ 610,899  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Line of credit at fair value (Cost of $115,700 and $107,000, respectively)

   $ 115,700     $ 107,500  

Secured borrowing

     5,096       5,096  
  

 

 

   

 

 

 

Total borrowings

     120,796       112,596  

Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 9,856,000 and 6,356,000 shares authorized; 5,290,000 and 5,566,000 shares issued and outstanding, respectively, net

     128,144       135,615  

Accounts payable and accrued expenses

     1,619       916  

Fees due to Adviser(A)

     19,517       6,671  

Fee due to Administrator(A)

     337       317  

Other liabilities

     1,411       584  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 271,824     $ 256,699  
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 403,574     $ 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

     329,782       330,661  

Cumulative net unrealized appreciation of investments

     70,863       14,301  

Cumulative net unrealized appreciation of other

     —         (500

(Overdistributed) underdistributed net investment income

     (12,263     3,660  

Accumulated net realized gain in excess of distributions

     15,159       6,045  
  

 

 

   

 

 

 

Total distributable earnings

     73,759       23,506  
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 403,574     $ 354,200  
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 12.30     $ 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.

 

2


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended September 30,     Six Months Ended September 30,  
     2018     2017     2018     2017  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 5,622     $ 4,587     $ 11,888     $ 9,053  

Affiliate investments

     6,051       6,408       12,880       12,480  

Control investments

     212       210       421       416  

Cash and cash equivalents

     10       8       20       10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     11,895       11,213       25,209       21,959  

Dividend income

        

Non-Control/Non-Affiliate investments

     1,196       1,770       1,262       1,770  

Affiliate investments

     —         —         —         865  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend income

     1,196       1,770       1,262       2,635  

Success fee income

        

Non-Control/Non-Affiliate investments

     —         149       124       2,158  

Control investments

     —         —         2,000       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total success fee income

     —         149       2,124       2,158  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     13,091       13,132       28,595       26,752  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     3,275       2,554       6,386       5,070  

Loan servicing fee(A)

     1,674       1,485       3,414       3,049  

Incentive fee(A)

     7,125       1,295       14,711       2,467  

Administration fee(A)

     344       201       629       508  

Interest expense on borrowings

     1,526       754       3,268       1,483  

Dividends on mandatorily redeemable preferred stock

     2,317       2,251       4,568       4,502  

Amortization of deferred financing costs and discounts

     497       367       864       734  

Professional fees

     247       260       658       579  

Other general and administrative expenses

     2,319       626       2,972       1,698  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     19,324       9,793       37,470       20,090  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1,674     (1,485     (3,414     (3,049

Credits to fees from Adviser—other(A)

     (565     (926     (1,525     (1,474
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits to fees

     17,085       7,382       32,531       15,567  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT (LOSS) INCOME

     (3,994     5,750       (3,936     11,185  
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     745       37       14,531       978  

Affiliate investments

     (3,601     (80     (3,279     144  

Other

     (1,687     —         (1,687     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     (4,543     (43     9,565       1,122  

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     19,805       14,293       16,064       16,124  

Affiliate investments

     17,650       (4,945     36,221       (2,610

Control investments

     1,039       (1,499     4,277       (4,124

Other

     407       —         500       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation

     38,901       7,849       57,062       9,390  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain

     34,358       7,806       66,627       10,512  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 30,364     $ 13,556     $ 62,691     $ 21,697  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

 

3


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended September 30,      Six Months Ended September 30,  
     2018     2017      2018     2017  

BASIC AND DILUTED PER COMMON SHARE:

         

Net investment (loss) income

   $ (0.12   $ 0.18      $ (0.12   $ 0.35  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.93     $ 0.42      $ 1.91     $ 0.68  
  

 

 

   

 

 

    

 

 

   

 

 

 

WEIGHTED-AVERAGE SHARES OF COMMON STOCK

         

OUTSTANDING:

         

Basic and diluted

     32,822,459       32,526,223        32,792,816       32,003,128  

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

 

4


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

 

     Six Months Ended September 30,  
     2018     2017  

OPERATIONS

    

Net investment (loss) income

   $ (3,936   $ 11,185  

Net realized gain on investments

     11,252       1,122  

Net realized loss on other

     (1,687     —    

Net unrealized appreciation of investments

     56,562       9,390  

Net unrealized depreciation of other

     500       —    
  

 

 

   

 

 

 

Net increase in net assets from operations

     62,691       21,697  
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income

     (13,512     (12,336

Distributions to common stockholders from realized gains

     (1,641     (1,951
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (15,153     (14,287
  

 

 

   

 

 

 

CAPITAL ACTIVITY

    

Issuance of common stock

     1,873       21,154  

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

     (37     (1,098
  

 

 

   

 

 

 

Net increase in net assets from capital activity

     1,836       20,056  
  

 

 

   

 

 

 

TOTAL INCREASE IN NET ASSETS

     49,374       27,466  

NET ASSETS, BEGINNING OF PERIOD

     354,200       301,082  
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 403,574     $ 328,548  
  

 

 

   

 

 

 

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

 

5


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

     Six Months Ended September 30,  
     2018     2017  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 62,691     $ 21,697  

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

    

Purchase of investments

     (30,952     (31,648

Principal repayments of investments

     14,514       17,610  

Net proceeds from the sale of investments

     18,291       5,796  

Net realized gain on investments

     (11,252     (1,214

Net realized loss on other

     1,670        

Net unrealized appreciation of investments

     (56,562     (9,390

Net unrealized depreciation of other

     (500      

Amortization of premiums, discounts, and acquisition costs, net

     (9     (6

Amortization of deferred financing costs and discounts

     864       734  

Bad debt expense, net of recoveries

     1,374       575  

Changes in assets and liabilities:

    

Decrease (increase) in interest receivable

     434       (524

Decrease in due from administrative agent

     409       195  

(Increase) decrease in other assets, net

     (142     2,469  

Increase in accounts payable and accrued expenses

     602       378  

Increase in fees due to Adviser(A)

     12,846       115  

Increase (decrease) in fee due to Administrator(A)

     20       (95

Increase (decrease) in other liabilities

     827       (638
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,125       6,054  
  

 

 

   

 

 

 

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     (1,090

Proceeds from line of credit

     129,200       49,600  

Repayments on line of credit

     (120,500     (62,600

Proceeds from issuance of mandatorily redeemable preferred stock

     74,750        

Redemption of mandatorily redeemable preferred stock

     (81,650      

Deferred financing and offering costs

     (4,283     (75

Distributions paid to common stockholders

     (15,153     (14,287
  

 

 

   

 

 

 

Net cash used in financing activities

     (15,791     (7,298
  

 

 

   

 

 

 

NET DECREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS

     (666     (1,244
  

 

 

   

 

 

 

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

   $ 3,301     $ 2,855  
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 3,114     $ 1,135  
  

 

 

   

 

 

 

NON-CASH ACTIVITIES(B)

   $ —       $ 9,379  
  

 

 

   

 

 

 

 

(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:

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

 

6


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

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.

 

7


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

    Principal/Shares/              

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

  Units(F)(J)     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS(N) – 68.9%

     

Secured First Lien Debt – 34.6%

     

Containers, Packaging, and Glass – 2.4%

     

Frontier Packaging, Inc. – Term Debt (L+10.0%, 12.3% Cash, Due 3/2021)(L)

  $ 9,500     $ 9,500     $ 9,500  

Diversified/Conglomerate Services – 14.8%

     

Bassett Creek Restoration, Inc. – Term Debt (L+10.0%, 12.3% Cash, Due 4/2023)(L)

    23,000       23,000       23,000  

Counsel Press, Inc. – Term Debt (L+11.8%, 14.0% Cash, Due 3/2020)(L)

    18,000       18,000       18,000  

Counsel Press, Inc. – Term Debt (L+13.0%, 15.3% Cash, Due 3/2020)(L)

    5,500       5,500       5,500  

Nth Degree, Inc. – Term Debt (L+11.5%, 13.8% Cash, Due 3/2023)(L)

    13,290       13,290       13,290  
   

 

 

   

 

 

 
      59,790       59,790  

Farming and Agriculture – 4.1%

     

Jackrabbit, Inc. – Term Debt (L+10.0%, 13.5% Cash, Due 9/2019)(L)

    11,000       11,000       11,000  

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

    5,000       5,000       5,490  
   

 

 

   

 

 

 
      16,000       16,490  

Leisure, Amusement, Motion Pictures, and Entertainment – 6.8%

     

Schylling, Inc. – Term Debt (L+11.0%, 13.3%, Due 11/2018)(L)

    13,081       13,081       13,081  

Schylling, Inc. – Term Debt (L+11.0%, 13.3%, Due 11/2018)(L)

    8,500       8,500       8,500  

Schylling, Inc. – Term Debt (L+11.0%, 13.3%, Due 11/2018)(L)

    6,000       6,000       6,000  
   

 

 

   

 

 

 
      27,581       27,581  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 4.9%

     

SBS Industries, LLC – Term Debt (L+12.0%, 14.3% 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, $50 available (L+0.3%, 2.5% Cash (0.8% Unused Fee), Due 12/2018)(G)(L)

    4,600       4,600       3,080  

B-Dry, LLC – Term Debt (L+0.3%, 2.5% Cash, Due 12/2019)(G)(L)

    6,443       6,443       —    

B-Dry, LLC – Term Debt (L+0.3%, 2.5% Cash, Due 12/2019)(G)(L)

    840       840       —    
   

 

 

   

 

 

 
      11,883       3,080  
   

 

 

   

 

 

 

Total Secured First Lien Debt

    $ 147,927     $ 139,614  
   

 

 

   

 

 

 

Secured Second Lien Debt – 7.5%

     

Automobile – 1.0%

     

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

  $ 4,000     $ 4,000     $ 4,000  

Cargo Transport – 3.2%

     

Diligent Delivery Systems – Term Debt (L+9.0%, 11.3% Cash, Due 11/2022)(K)

    13,000       12,925       13,130  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 3.3%

     

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

    $ 30,225     $ 30,430  
   

 

 

   

 

 

 

Preferred Equity – 22.0%

     

Automobile – 0.2%

     

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

    7,304,792     $ 7,725     $ 998  

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

    —         —         —    
   

 

 

   

 

 

 
      7,725       998  

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

8


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Principal/Shares/               

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

   Units(F)(J)     Cost      Fair Value  

Containers, Packaging, and Glass – 0.3%

       

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

     1,373     $ 1,373      $ 1,373  

Diversified/Conglomerate Services – 13.2%

       

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

     4,900       4,900        4,900  

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

     6,995       6,995        8,415  

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

     5,660       5,660        40,029  
    

 

 

    

 

 

 
       17,555        53,344  

Farming and Agriculture – 1.9%

       

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

     3,556       3,556        4,844  

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

     1,499       1,499        2,493  
    

 

 

    

 

 

 
       5,055        7,337  

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

       

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

     19,280       9,583        14,102  

Leisure, Amusement, Motion Pictures, and Entertainment – 0.6%

       

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

     4,000       4,000        2,317  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 1.1%

       

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

     27,705       2,771        4,291  

Oil and Gas – 1.2%

       

Tread Corporation – Preferred Stock(C)(L)

     12,998,639       3,768        4,826  

Personal, Food, and Miscellaneous Services – 0.0%

       

B-Dry, LLC – Preferred Stock(C)(L)

     2,500       2,516        —    
    

 

 

    

 

 

 

Total Preferred Equity

     $ 54,346      $ 88,588  
    

 

 

    

 

 

 

Common Equity – 4.8%

       

Cargo Transport – 0.5%

       

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

     8   $ 500      $ 2,063  

Containers, Packaging, and Glass – 2.6%

       

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

     152       152        10,680  

Farming and Agriculture – 1.4%

       

Jackrabbit, Inc. – Common Stock(C)(L)

     548       94         

Star Seed, Inc. – Common Stock(C)(Q)

     600       1        5,381  
    

 

 

    

 

 

 
       95        5,381  

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) – 0.1%

       

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

     221,500       222        540  

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)

     39,483       167        672  

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

 

9


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

 

    Principal/Shares/              

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

  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     $ 19,336  
   

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

    $ 234,695     $ 277,968  
   

 

 

   

 

 

 

AFFILIATE INVESTMENTS(O) – 91.8%

     

Secured First Lien Debt – 42.4%

     

Automobile – 1.8%

     

Meridian Rack & Pinion, Inc.(M) – Term Debt (L+11.5%, 13.8% Cash, Due 6/2019)(K)

  $ 9,660     $ 9,660     $ 7,245  

Beverage, Food, and Tobacco – 2.2%

     

Head Country, Inc. – Term Debt (L+10.5%, 12.8% Cash, Due 2/2019)(L)

    9,050       9,050       9,050  

Diversified/Conglomerate Manufacturing – 4.7%

     

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

    8,795       8,795       7,414  

Edge Adhesives Holdings, Inc.(M) – Term Debt (L+10.5%, 12.8% Cash, Due 2/2019)(K)

    9,300       9,300       9,091  

Edge Adhesives Holdings, Inc.(M) – Term Debt (L+11.8%, 14.0% Cash, Due 2/2019)(K)

    2,400       2,400       2,358  
   

 

 

   

 

 

 
      20,495       18,863  

Diversified/Conglomerate Services – 10.7%

     

ImageWorks Display and Marketing Group, Inc. – Term Debt (L+11.0%, 13.3% Cash, Due 11/2022)(L)

    22,000       22,000       22,000  

J.R. Hobbs Co. – Atlanta, LLC – Term Debt (L+11.5%, 13.8% Cash, Due 2/2022)(L)

    21,000       21,000       21,000  
   

 

 

   

 

 

 
      43,000       43,000  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 8.3%

     

Brunswick Bowling Products, Inc. – Term Debt (L+10.0%, 12.3% Cash, Due 1/2023)(L)

    17,700       17,700       17,700  

Old World Christmas, Inc. – Term Debt (L+11.3%, 13.5% Cash, Due 10/2019)(L)

    15,770       15,770       15,770  
   

 

 

   

 

 

 
      33,470       33,470  

Leisure, Amusement, Motion Pictures, and Entertainment – 3.7%

     

SOG Specialty Knives & Tools, LLC – Term Debt (L+7.3%, 9.5% Cash, Due 8/2020)(G)(L)

    6,200       6,200       6,200  

SOG Specialty Knives & Tools, LLC – Term Debt (L+8.3%, 10.5% Cash, Due 8/2020)(G)(L)

    12,200       12,200       8,617  

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

    538       538       433  
   

 

 

   

 

 

 
      18,938       15,250  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 5.2%

     

Pioneer Square Brands, Inc. – Term Debt (L+12.0%, 14.3% Cash, Due 8/2022)(L)

    21,000       21,000       21,000  

Telecommunications – 3.5%

     

B+T Group Acquisition, Inc.(M) – Term Debt (L+11.0%, 13.3% Cash, Due 12/2019)(L)

    14,000       14,000       14,000  

Textiles and Leather – 2.3%

     

Logo Sportswear, Inc. – Term Debt (L+10.5%, 12.8% Cash, Due 3/2020)(Q)(V)

    9,200       9,200       9,374  
   

 

 

   

 

 

 

Total Secured First Lien Debt

    $ 178,813     $ 171,252  

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

 

 

10


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Principal/Shares/                

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

   Units(F)(J)      Cost      Fair Value  

Secured Second Lien Debt – 14.8%

        

Chemicals, Plastics, and Rubber – 6.1%

        

PSI Molded Plastics, Inc. – Term Debt (L+12.0%, 14.3% Cash, Due 1/2024)(G)(L)

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

Diversified/Conglomerate Manufacturing – 3.1%

        

Alloy Die Casting Co.(M) – Term Debt (L+4.0%, 6.3% Cash, Due 4/2021)(K)

     12,215        12,215        11,512  

Alloy Die Casting Co.(M) – Term Debt (L+4.0%, 6.3% Cash, Due 4/2021)(K)

     175        175        165  

Alloy Die Casting Co.(M) – Term Debt (L+4.0%, 6.3% Cash, Due 4/2021)(K)

     910        910        858  
     

 

 

    

 

 

 
        13,300        12,535  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 4.0%

        

Cambridge Sound Management, Inc. – Term Debt (L+11.0%, 13.3% Cash, Due 8/2021)(L)

     16,000        16,000        16,000  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 1.6%

        

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

     18,600        18,600        3,355  

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, $400 available (Due 8/2021)(L)(R)

     600        600        600  
     

 

 

    

 

 

 
        21,700        6,455  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 75,618      $ 59,608  
     

 

 

    

 

 

 

Preferred Equity – 34.6%

        

Automobile – 0.0%

        

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

     3,381      $ 3,381      $ —    

Beverage, Food, and Tobacco – 0.6%

        

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

     4,000        4,000        2,246  

Chemicals, Plastics, and Rubber – 0.0%

        

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

     58,598        9,730        —    

Diversified/Conglomerate Manufacturing – 1.2%

        

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

     5,114        5,114        1,243  

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        3,570  
     

 

 

    

 

 

 
        10,729        4,813  

Diversified/Conglomerate Services – 5.9%

        

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

     67,490        6,750        12,189  

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

     5,920        5,920        11,727  
     

 

 

    

 

 

 
        12,670        23,916  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 21.2%

        

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

     4,943        4,943        22,248  

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

     4,500        4,500        51,711  

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

     6,180        6,180        11,832  
     

 

 

    

 

 

 
        15,623        85,791  

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        9,962  
     

 

 

    

 

 

 
        12,399        9,962  

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.

 

 

11


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

    Principal/Shares/              

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

  Units(F)(J)     Cost     Fair Value  

Textiles and Leather – 3.2%

     

Logo Sportswear, Inc. – Preferred Stock(C)(Q)(V)

    1,550     $ 1,096     $ 12,827  
   

 

 

   

 

 

 

Total Preferred Equity

    $ 83,573     $ 139,555  
   

 

 

   

 

 

 

Common Equity – 0.0%

     

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

    $ 338,047     $ 370,415  
   

 

 

   

 

 

 

CONTROL INVESTMENTS(P) – 4.1%:

     

Secured First Lien Debt – 1.2%

     

Aerospace and Defense – 1.2%

     

Galaxy Tool Holding Corporation – Line of Credit, $0 available (L+4.5%, 6.8% Cash (1.0% Unused Fee), Due 8/2019)(L)

  $ 5,000     $ 5,000     $ 5,000  

Secured Second Lien Debt – 1.2%

     

Aerospace and Defense – 1.2%

     

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

  $ 5,000     $ 5,000     $ 5,000  

Preferred Equity – 1.7%

     

Aerospace and Defense – 1.7%

     

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

    5,517,444     $ 11,464     $ 6,734  

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     $ 16,734  
   

 

 

   

 

 

 

TOTAL INVESTMENTS – 164.8%

    $ 594,254     $ 665,117  
   

 

 

   

 

 

 

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

 

 

12


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 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 $569.1 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 September 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 2.3% as of September 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 30-day 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 September 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 September 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)

Reserved

(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 and/or amended subsequent to September 30, 2018. Refer to Note 13 — Subsequent Events in the accompanying Notes to Consolidated Financial Statements for additional information.

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

 

13


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

    Principal/
Shares/
             

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

  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.

 

14


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

     Principal/Shares/               

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

   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.

 

 

15


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

    Principal/Shares/              

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

  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.

 

 

16


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

     Principal/Shares/                

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

   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)

     250        250        250  
     

 

 

    

 

 

 
        21,350        11,442  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 75,268      $ 62,039  
     

 

 

    

 

 

 

Preferred Equity – 29.2%

        

Automobile – 0.2%

        

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

     3,381      $ 3,381      $ 802  

Beverage, Food, and Tobacco – 0.7%

        

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

     4,000        4,000        2,555  

Cargo Transport – 0.0%

        

NDLI, Inc. – Preferred Stock(C)(L)

     3,600        3,600        —    

Chemicals, Plastics, and Rubber – 0.9%

        

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

     51,098        8,980        3,016  

Diversified/Conglomerate Manufacturing – 0.5%

        

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        1,925  
     

 

 

    

 

 

 
        10,729        1,925  

Diversified/Conglomerate Services – 6.8%

        

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

     67,490        6,750        9,422  

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

     5,920        5,920        14,480  
     

 

 

    

 

 

 
        12,670        23,902  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 15.0%

        

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

     4,943        4,943        16,615  

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

     4,500        4,500        26,178  

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

     6,180        6,180        10,411  
     

 

 

    

 

 

 
        15,623        53,204  

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) – 2.2%

        

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

     6,899        6,899        —    

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

     5,502        5,500        7,800  
     

 

 

    

 

 

 
        12,399        7,800  

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.

 

 

17


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

     Principal/Shares/                

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

   Units(F)(J)      Cost      Fair Value  

Textiles and Leather – 2.9%

        

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

     1,550      $ 1,096      $ 10,207  
     

 

 

    

 

 

 

Total Preferred Equity

      $ 86,423      $ 103,411  
     

 

 

    

 

 

 

Common Equity – 0.0%

        

Cargo Transport – 0.0%

        

NDLI, Inc. – Common Stock(C)(L)

     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

      $ 343,247      $ 339,393  
     

 

 

    

 

 

 

CONTROL INVESTMENTS(P) – 3.5%:

        

Secured First Lien Debt – 1.4%

        

Aerospace and Defense – 1.4%

        

Galaxy Tool Holding Corporation – Line of Credit, $0 available (L+4.5%, 6.5% Cash (1.0% Unused Fee), Due 8/2019)(L)

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

Secured Second Lien Debt – 1.4%

        

Aerospace and Defense – 1.4%

        

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

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

Preferred Equity – 0.7%

        

Aerospace and Defense – 0.7%

        

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

     5,517,444      $ 11,464      $ 2,457  

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      $ 12,457  
     

 

 

    

 

 

 

TOTAL INVESTMENTS – 169.2%(V)

        
     

 

 

    

 

 

 
      $ 584,846      $ 599,147  
     

 

 

    

 

 

 

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

 

 

18


GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

 

(A)

Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $504.0 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 March 31, 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 0.1% 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 1.9% as of March 31, 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 March 31, 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 March 31, 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 the expiration of a lock-up agreement and meeting certain other 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 March 31, 2018 best represents fair value as of March 31, 2018.

(U)

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

(V)

Cumulative gross unrealized depreciation for federal income tax purposes is $95.2 million; cumulative gross unrealized appreciation for federal income tax purposes is $113.6 million. Cumulative net unrealized appreciation is $18.4 million, based on a tax cost of $580.8 million.

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

 

 

19


GLADSTONE INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

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

(UNAUDITED)

NOTE 1. ORGANIZATION

Gladstone Investment Corporation (“Gladstone Investment”) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005, and completed an initial public offering on June 22, 2005. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Investment and its consolidated subsidiaries. We are an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and is applying the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 Financial Services-Investment Companies (“ASC 946”). In addition, we have elected to be treated for tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Debt investments primarily take the form of two types of loans: secured first lien loans and secured second lien loans. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. Our investment objectives are to: (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 of established businesses, generally in combination with the aforementioned debt securities, that we believe can grow over time to permit us to sell our equity investments for capital gains. We intend that our investment portfolio over time will consist of approximately 75.0% in debt investments and 25.0% in equity investments, at cost.

Gladstone Business Investment, LLC (“Business Investment”), a wholly-owned subsidiary of ours, was established on August 11, 2006 for the sole purpose of owning our portfolio of investments in connection with our line of credit. The financial statements of Business Investment are consolidated with those of Gladstone Investment. We also have significant subsidiaries (as defined under Rule 1-02(w) of the U.S. Securities and Exchange Commission’s (“SEC”) Regulation S-X) whose financial statements are not consolidated with ours. Refer to Note 12 — Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

We are externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of ours and an SEC registered investment adviser, pursuant to an investment advisory agreement and management agreement (the “Advisory Agreement”). Administrative services are provided by Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, pursuant to an administration agreement (the “Administration Agreement”). Refer to Note 4 — Related Party Transactions for more information regarding these arrangements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of SEC Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, we have not included in this quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In accordance with Article 6 of Regulation S-X, under the Securities Act of 1933, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended September 30, 2018 are not necessarily indicative of results that ultimately may be achieved for the fiscal year ending March 31, 2019 or any future interim period. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended March 31, 2018, as filed with the SEC on May 15, 2018.

 

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Use of Estimates

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

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation in the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities, or total net assets, or Consolidated Statements of Changes in Net Assets and Consolidated Statements of Cash Flows classifications.

Investment Valuation Policy

Accounting Recognition

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

Board Responsibility

In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our investment valuation policy (which has been approved by our Board of Directors) (the “Policy”). Such review occurs in three phases. First, prior to its quarterly meetings, the Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer (the “Valuation Team”). Second, the Valuation Committee of our Board of Directors (comprised entirely of independent directors) meets to review the valuation recommendations and supporting materials, presented by the chief valuation officer. Third, after the Valuation Committee concludes its meeting, it and the chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors so that the full Board of Directors may review and approve the fair value of our investments in accordance with the Policy.

There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy and each quarter the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and also review whether the Valuation Team has applied the Policy consistently.

Use of Third Party Valuation Firms

The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.

ICE Data Pricing and Reference Data, LLC (“ICE”) (formerly Standard and Poor’s Securities Evaluations, Inc.), a valuation specialist, generally provides estimates of fair value on our debt investments. The Valuation Team generally assigns ICE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates ICE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimate of value on a specific debt investment may significantly differ from ICE’s. When this occurs, our Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended fair value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.

We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value (“TEV”) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the valuation of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value and whether it is reasonable in light of the Policy and other relevant facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.

 

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Valuation Techniques

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

 

   

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

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

 

   

Yield Analysis The Valuation Team generally determines the fair value of our debt investments (where we do not have the ability to effectuate a sale of a portfolio company) using the yield analysis, which includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, including, but not limited to: estimated remaining life; current market yield; current leverage; and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by ICE and market quotes.

 

   

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

 

   

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

In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments, including but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; timing of expected loan repayments; and the markets in which the portfolio company operates. New and follow-on debt and equity investments made during the current reporting quarter are generally valued at our original cost basis, as appropriate, as near-measurement date transaction value generally is a reasonable indicator of fair value.

 

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

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

Revenue Recognition

Interest Income Recognition

Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid and, in management’s judgment, are likely to remain current, or, due to a restructuring, the interest income is deemed to be collectible. As of September 30, 2018, certain of our loans to B-Dry, LLC, The Mountain Corporation, PSI Molded Plastics, Inc., and SOG Specialty Knives & Tools, LLC were on non-accrual status, with an aggregate debt cost basis of $73.5 million, or 16.6% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $45.9 million, or 11.2% of the fair value of all debt investments in our portfolio. As of March 31, 2018, certain of our loans to Alloy Die Casting Co. and Tread Corporation were on non-accrual status, with an aggregate debt cost basis of $15.6 million, or 3.6% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $12.5 million, or 3.1% of the fair value of all debt investments in our portfolio.

Paid-in-kind (“PIK”) interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income. As of September 30, 2018 and March 31, 2018, we did not have any loans with a PIK interest component.

Success Fee Income Recognition

We record success fees as income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically resulting from an exit or sale.

Dividend Income Recognition

We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration.

Restricted Cash and Cash Equivalents

Restricted cash is generally cash held in escrow received as part of an investment exit. Restricted cash is carried at cost, which approximates fair value.

Deferred Financing and Offering Costs

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

 

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Related Party Fees

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

We are also party to the Administration Agreement with the Administrator, which is owned and controlled by our chairman and chief executive officer, whereby we pay separately for administrative services.

Refer to Note 4 — Related Party Transactions for additional information regarding these related party fees and agreements.

Recent Accounting Pronouncements

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. We are in the process of evaluating the impact of the final rule, but do not anticipate a material impact on our consolidated financial statements.

In August 2018, the FASB issued Accounting Standards Update 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value” (“ASU 2018-13”), which modifies the disclosure requirements in ASC 820. We are currently assessing the impact of ASU 2018-13 and do not anticipate a material impact on our disclosures. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.

In November 2016, the FASB issued Accounting Standards Update 2016-18,Restricted Cash (a consensus of the Emerging Issues Task Force)” (“ASU 2016-18”), which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted, and we adopted ASU 2016-18 effective April 1, 2018. The adoption of ASU 2016-18 did not have a material impact on our financial position, results of operations, or cash flows.

In August 2016, the FASB issued Accounting Standards Update 2016-15,Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU 2016-15”), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted, and we adopted ASU 2016-15 effective April 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our financial position, results of operations, or cash flows.

In January 2016, the FASB issued Accounting Standards Update 2016-01,Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which changes how entities measure certain equity investments and how entities present changes in the fair value of financial liabilities measured under the fair value option that are attributable to instrument-specific credit risk. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for certain aspects of ASU 2016-01 relating to the recognition of changes in fair value of financial liabilities when the fair value option is elected, and we adopted ASU 2016-01 effective April 1, 2018. The adoption of ASU 2016-01 did not have a material impact on our financial position, results of operations, or cash flows.

In May 2014, the FASB issued Accounting Standards Update 2014-09,Revenue from Contracts with Customers” (“ASU 2014-09”), which was amended in March 2016 by FASB Accounting Standards Update 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”), in April 2016 by FASB Accounting Standards Update 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), in May 2016 by FASB Accounting Standards Update 2016-12, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), and in December 2016 by FASB

 

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Accounting Standards Update 2016-20, “Technical Corrections and Improvements to Topic 606” (“ASU 2016-20”). ASU 2014-09, as amended, supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, and will expand disclosures about revenue. In July 2015, the FASB issued Accounting Standards Update 2015-14,Deferral of the Effective Date,” which deferred the effective date of ASU 2014-9. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20, is now effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years, with early adoption permitted for annual reporting periods beginning after December 15, 2016 and interim periods within those years. We adopted ASU 2014-09, as amended, effective April 1, 2018. The adoption of ASU 2014-09, as amended, did not result in a material change in the timing of revenue recognition or a material impact on our financial position, results of operations, or cash flows from adopting this standard.

NOTE 3. INVESTMENTS

Fair Value

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

 

   

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

 

   

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

 

   

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

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

As of September 30, 2018 and March 31, 2018, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko Acquisition Holdings, LLC (“Funko”), which was valued using Level 2 inputs.

We transfer investments in and out of Level 1, 2 and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. There were no transfers in or out of Level 1, 2 and 3 during the six months ended September 30, 2018. During the six months ended September 30, 2017, we transferred our investment in AquaVenture Holdings Limited, f/k/a Quench Holdings Corp., (“AquaVenture”) from Level 2 to Level 1 as a result of the expiration of the lock-up period from the initial public offering in October 2016 and subsequently sold our investment.

 

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As of September 30, 2018 and March 31, 2018, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:

 

     Fair Value Measurements  
            Quoted Prices in      Significant        
            Active Markets      Other     Significant  
            for Identical      Observable     Unobservable  
            Assets      Inputs     Inputs  
     Fair Value      (Level 1)      (Level 2)     (Level 3)  

As of September 30, 2018:

          

Secured first lien debt

   $ 315,866      $ —        $ —       $ 315,866  

Secured second lien debt

     95,038        —          —         95,038  

Preferred equity

     234,877        —          —         234,877  

Common equity/equivalents

     19,336        —          672 (A)       18,664  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Investments at September 30, 2018

   $ 665,117      $ —        $ 672     $ 664,445  
  

 

 

    

 

 

    

 

 

   

 

 

 
     Fair Value Measurements  
            Quoted Prices in      Significant        
            Active Markets      Other     Significant  
            for Identical      Observable     Unobservable  
            Assets      Inputs     Inputs  
     Fair Value      (Level 1)      (Level 2)     (Level 3)  

As of March 31, 2018:

          

Secured first lien debt

   $ 305,856      $ —        $ —       $ 305,856  

Secured second lien debt

     97,339        —          —         97,339  

Preferred equity

     167,150        —          —         167,150  

Common equity/equivalents

     28,802        —          194 (B)       28,608  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Investments at March 31, 2018

   $     599,147      $ —        $ 194     $ 598,953  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(A)

Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into shares of Funko, Inc.) at the reporting date less a discount for lack of marketability, as our investment was subject to certain restrictions.

(B)

Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into shares of Funko, Inc.) at the reporting date less a discount for lack of marketability, as our investment was subject to a 180-day lock-up period, which expired in May 2018, and other restrictions.

 

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The following table presents our investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy, and carried at fair value as of September 30, 2018 and March 31, 2018, by caption on our accompanying Consolidated Statements of Assets and Liabilities, and by security type:

 

     Total Recurring Fair Value Measurements  
     Reported in Consolidated Statements  
     of Assets and Liabilities  
     Valued Using Level 3 Inputs  
     September 30, 2018      March 31, 2018  

Non-Control/Non-Affiliate Investments

     

Secured first lien debt

   $ 139,614      $ 126,913  

Secured second lien debt

     30,430        30,300  

Preferred equity

     88,588        61,282  

Common equity/equivalents(A)

     18,664        28,608  
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     277,296        247,103  

Affiliate Investments

     

Secured first lien debt

     171,252        173,943  

Secured second lien debt

     59,608        62,039  

Preferred equity

     139,555        103,411  

Common equity/equivalents

     —          —    
  

 

 

    

 

 

 

Total Affiliate Investments

     370,415        339,393  

Control Investments

     

Secured first lien debt

     5,000        5,000  

Secured second lien debt

     5,000        5,000  

Preferred equity

     6,734        2,457  

Common equity/equivalents

     —          —    
  

 

 

    

 

 

 

Total Control Investments

     16,734        12,457  
  

 

 

    

 

 

 

Total investments at fair value using Level 3 inputs

   $ 664,445      $ 598,953  
  

 

 

    

 

 

 

 

(A)

Excludes our investment in Funko with a fair value of $0.7 million and $0.2 million as of September 30, 2018 and March 31, 2018, respectively, which was valued using Level 2 inputs.

 

 

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In accordance with ASC 820, the following table provides quantitative information about our investments valued using Level 3 fair value measurements as of September 30, 2018 and March 31, 2018. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted-average calculations in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations for the particular input.

 

     Quantitative Information about Level 3 Fair Value Measurements
     Fair Value     Fair
Value
                     
     as of     as of     Valuation           Range / Weighted-   Range / Weighted-
     September 30,     March 31,     Technique/    Unobservable      Average as of   Average as of
     2018     2018    

Methodology

   Input      September 30, 2018  

March 31, 2018

Secured first lien debt

   $ 297,172 (A)     $ 286,828 (A)     TEV     
EBITDA
multiple
 
 
   4.9x – 8.1x / 6.2x  

4.7x – 8.3x /

6.1x

            EBITDA      $1,377 – $18,882 /
$6,205
  $1,298 – $14,085 / $5,575
           
Revenue
multiple
 
 
   0.2x – 0.7x / 0.5x   0.3x – 0.7x / 0.6x
            Revenue      $15,399 – $29,903 /
$24,311
  $15,528 – $30,561 / $24,780
     18,694       19,028     Yield Analysis      Discount Rate      13.6% – 24.3% /
18.5%
  19.8% – 21.3% / 20.6%

Secured second lien debt

     69,373       87,360 (B)     TEV     
EBITDA
multiple
 
 
   3.0x – 10.0x /
7.2x
  3.3x – 6.8x / 6.2x
            EBITDA      $2,647 – $9,823 /
$6,466
  $2,683 – $8,795 / $6,827
           
Revenue
multiple
 
 
   0.8x – 0.8x / 0.8x   0.9x – 0.9x / 0.9x
            Revenue      $18,950 – $18,950 /
$18,950
  $21,439 – $21,439 / $21,439
     25,665       9,979     Yield Analysis      Discount Rate      11.0% – 13.3% /
12.1%
  19.4% – 20.9% / 19.5%

Preferred equity(C)

     234,877       167,150     TEV     
EBITDA
multiple
 
 
   3.0x –10.0x / 6.3x   3.3x – 8.3x / 6.0x
            EBITDA      $1,459 – $18,882 /
$5,848
  $1,298 – $14,085 / $5,344
           
Revenue
multiple
 
 
   0.2x – 0.8x / 0.7x   0.3x – 0.9x / 0.7x
            Revenue      $15,399 – $29,903 /
$24,055
  $15,528 – $30,561 / $25,303

Common equity/equivalents(D)(E)

     18,664       28,608     TEV     
EBITDA
multiple
 
 
   5.4x – 8.0x / 6.4x   4.9x – 6.2x / 5.6x
            EBITDA      $1,377 – $16,089 /
$6,449
  $1,298 – $5,842 / $2,491
           
Revenue
multiple
 
 
   0.2x – 0.8x / 0.2x   0.3x – 0.9x / 0.3x
            Revenue      $15,399 – $18,950 /       $15,528 – $21,439 /    
             $15,408   $15,543
  

 

 

   

 

 

           

Total

     $664,445       $598,953            
  

 

 

   

 

 

           

 

(A)

Fair value as of September 30, 2018 includes two proprietary debt investments for a combined $14.9 million, which were valued using the expected payoff amounts as the unobservable inputs. Fair value as of March 31, 2018 includes two new proprietary debt investments for a combined $14.5 million, which were valued at cost using the transaction price as the unobservable input, and one proprietary debt investment of $10.0 million, which was valued at the expected payoff amount as the unobservable input.

(B)

Fair value as of March 31, 2018 includes one proprietary debt investment of $13.0 million, which was valued at the expected payoff amount as the unobservable input.

(C)

Fair value as of September 30, 2018 includes two proprietary equity investments for a combined $15.3 million, which were valued using the expected payoff amounts as the unobservable inputs. Fair value as of March 31, 2018 includes one proprietary equity investment of $3.4 million, which was valued using the expected payoff amount as the unobservable input.

(D)

Fair value as of September 30, 2018 includes one proprietary equity investment of $5.4 million, which was valued using the expected payoff amount as the unobservable input. Fair value as of March 31, 2018 includes two proprietary equity investments for a combined $17.6 million, which were valued using the expected payoff amounts as the unobservable inputs.

(E)

Fair value as of both September 30, 2018 and March 31, 2018 excludes our investment in Funko with a fair value of $0.7 million and $0.2 million, respectively, which was valued using Level 2 inputs.


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

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide our portfolio’s changes in fair value, broken out by security type, during the three months and six months ended September 30, 2018 and 2017 for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

     Secured     Secured           Common        
     First Lien     Second Lien     Preferred     Equity/        
     Debt     Debt     Equity     Equivalents     Total  

Three months ended September 30, 2018:

          

Fair value as of June 30, 2018

   $ 316,325     $ 97,026     $ 200,252     $ 15,003     $ 628,606  

Total gain (loss):

          

Net realized (loss)(A)

     —         —         (3,600     —         (3,600

Net unrealized appreciation (depreciation)(B)

     (509     (2,093     33,875       3,661       34,934  

Reversal of previously recorded depreciation upon realization(B)

     —         —         3,600       —         3,600  

New investments, repayments and settlements(C):

          

Issuances / originations

     50       105       750       —         905  

Settlements / repayments

     —         —         —         —         —    

Sales

     —         —         —         —         —    

Transfers

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2018

   $ 315,866     $ 95,038     $ 234,877     $ 18,664     $ 664,445  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Secured     Secured           Common        
     First Lien     Second Lien     Preferred     Equity/        
     Debt     Debt     Equity     Equivalents     Total  

Six months ended September 30, 2018:

          

Fair value as of March 31, 2018

   $ 305,856     $ 97,339     $ 167,150     $ 28,608     $ 598,953  

Total gain (loss):

          

Net realized gain (loss)(A)

     —         —         (3,600     13,786       10,186  

Net unrealized appreciation (depreciation)(B)

     (354     (2,661     65,453       4,801       67,239  

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

     (74     —         3,600       (14,681     (11,155

New investments, repayments and settlements(C):

          

Issuances / originations

     24,952       360       5,650       —         30,962  

Settlements / repayments

     (14,514     —         —         —         (14,514

Sales

     —         —         (3,376     (13,850     (17,226

Transfers

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2018

   $ 315,866     $ 95,038     $ 234,877     $ 18,664     $ 664,445  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

29


     Secured     Secured           Common        
     First Lien     Second Lien     Preferred     Equity/        
     Debt     Debt     Equity     Equivalents     Total  

Three months ended September 30, 2017:

          

Fair value as of June 30, 2017

   $ 271,331     $ 79,924     $ 111,726     $ 22,518     $ 485,499  

Total gain (loss):

          

Net realized gain (loss)(A)

     —         —         —         —         —    

Net unrealized appreciation (depreciation)(B)

     (1,855     (6,753     8,669       7,933       7,994  

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

     —         —         —         —         —    

New investments, repayments and settlements(C):

          

Issuances / originations

     23,000       1,004       5,500       —         29,504  

Settlements / repayments

     (3,950     —         —         —         (3,950

Sales

     —         —         —         —         —    

Transfers

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2017

   $ 288,526     $ 74,175     $ 125,895     $ 30,451     $ 519,047  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Secured     Secured           Common        
     First Lien     Second Lien     Preferred     Equity/        
     Debt     Debt     Equity     Equivalents     Total  

Six months ended September 30, 2017:

          

Fair value as of March 31, 2017

   $ 268,150     $ 95,040     $ 113,515     $ 21,441     $ 498,146  

Total gain (loss):

          

Net realized gain (loss)(A)

     —         —         957       —         957  

Net unrealized appreciation (depreciation)(B)

     (2,493     (6,541     9,797       9,038       9,801  

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

     1,881       (1,670     (1,113     777       (125

New investments, repayments and settlements(C):

          

Issuances / originations

     33,540       1,006       6,487       —         41,033  

Settlements / repayments

     (12,552     (13,660     —         —         (26,212

Sales

     —         —         (3,748     (805     (4,553

Transfers

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2017

   $ 288,526     $ 74,175     $ 125,895     $ 30,451     $ 519,047  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)

Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the respective periods ended September 30, 2018 and 2017.

(B)

Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the periods ended September 30, 2018 and 2017.

(C)

Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, PIK and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments.

Investment Activity

During the six months ended September 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., 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.

 

   

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

Investment Concentrations

As of September 30, 2018, our investment portfolio consisted of investments in 32 portfolio companies located in 16 states across 17 different industries with an aggregate fair value of $665.1 million. Our investments in Cambridge Sound Management, Inc., Nth Degree, Inc., Brunswick Bowling Products, Inc., ImageWorks Display and Marketing Group, Inc., and J.R. Hobbs Co. – Atlanta, LLC (“J.R. Hobbs”) represented our five largest portfolio investments at fair value, and collectively comprised $227.9 million, or 34.2%, of our total investment portfolio at fair value.

 

30


The following table summarizes our investments by security type as of September 30, 2018 and March 31, 2018:

 

     September 30, 2018     March 31, 2018  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 331,740        55.8   $ 315,866        47.5   $ 321,303        54.9   $ 305,856        51.0

Secured second lien debt

     110,843        18.7       95,038        14.3       110,484        18.9       97,339        16.2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

     442,583        74.5       410,904        61.8       431,787        73.8       403,195        67.2  

Preferred equity

     149,383        25.1       234,877        35.3       150,708        25.8       167,150        28.0  

Common equity/equivalents

     2,288        0.4       19,336        2.9       2,351        0.4       28,802        4.8  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity/equivalents

     151,671        25.5       254,213        38.2       153,059        26.2       195,952        32.8  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 594,254        100.0   $ 665,117        100.0   $ 584,846        100.0   $ 599,147        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications as of September 30, 2018 and March 31, 2018:

 

     September 30, 2018     March 31, 2018  
            Percentage of            Percentage of  
     Fair Value      Total Investments     Fair Value      Total Investments  

Diversified/Conglomerate Services

   $ 180,050        27.1   $ 136,719        22.8

Home and Office Furnishings, Housewares, and Durable Consumer Products

     162,663        24.5       128,529        21.5  

Leisure, Amusement, Motion Pictures, and Entertainment

     45,148        6.8       43,048        7.2  

Personal and Non-Durable Consumer Products (Manufacturing Only)

     38,089        5.7       42,836        7.1  

Diversified/Conglomerate Manufacturing

     36,211        5.4       29,942        5.0  

Farming and Agriculture

     29,208        4.4       21,483        3.6  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic)

     24,788        3.7       21,915        3.7  

Chemicals, Plastics, and Rubber

     24,618        3.7       55,740        9.3  

Textiles and Leather

     22,201        3.3       19,407        3.2  

Containers, Packaging, and Glass

     21,553        3.2       21,387        3.6  

Aerospace and Defense

     16,734        2.5       12,457        2.1  

Cargo Transport

     15,193        2.3       15,816        2.6  

Telecommunications

     14,000        2.1       14,000        2.3  

Automobile

     12,243        1.8       13,830        2.3  

Beverage, Food, and Tobacco

     11,296        1.7       11,605        1.9  

Other < 2.0%

     11,122        1.8       10,433        1.8  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 665,117        100.0   $ 599,147        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value were included in the following geographic regions of the U.S. as of September 30, 2018 and March 31, 2018:

 

     September 30, 2018     March 31, 2018  
            Percentage of            Percentage of  
     Fair Value      Total Investments     Fair Value      Total Investments  

Northeast

   $ 215,199        32.4   $ 188,911        31.5

South

     211,652        31.8       221,725        37.0  

West

     168,219        25.3       133,774        22.3  

Midwest

     70,047        10.5       54,737        9.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 665,117        100.0   $ 599,147        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

31


Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of September 30, 2018:

 

         Amount(A)  

For the remaining six months ending March 31:

 

2019

   $ 52,931  

For the fiscal years ending March 31:

 

2020

     104,413  
 

2021

     69,910  
 

2022

     80,796  
 

2023

     86,990  
 

Thereafter

     47,618  
    

 

 

 
 

Total contractual repayments

   $ 442,658  
  Adjustments to cost basis of debt investments      (75
  Investments in equity securities      151,671  
    

 

 

 
 

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

   $ 594,254  
    

 

 

 

 

(A)

Subsequent to September 30, 2018, one debt investment with a principal balance of $9.2 million maturing during the fiscal year ended March 31, 2020 was repaid at par and debt investments in three portfolio companies with combined principal balances of $11.7 million, $4.0 million, and $21.0 million, respectively, which previously had maturity dates during the fiscal years ending March 31, 2019, March 31, 2020, and March 31, 2022, respectively, were extended to mature during the fiscal years ending March 31, 2022, March 31, 2022, and March 31, 2024, respectively.

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies. Such receivables, net of any allowance for uncollectible receivables, are included in Other assets, net on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write-off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of September 30, 2018 and March 31, 2018, we had gross receivables from portfolio companies of $0.9 million and $0.7 million, respectively. The allowance for uncollectible receivables was $0.5 million and $0.2 million as of September 30, 2018 and March 31, 2018, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with the Adviser

We pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee, as provided for in the Advisory Agreement, and a loan servicing fee for the Adviser’s role as servicer pursuant to the Credit Facility, each as described below. On July 10, 2018, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of either party, approved the annual renewal of the Advisory Agreement through August 31, 2019.

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

 

32


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

 

     Three Months Ended September 30,     Six Months Ended September 30,  
     2018     2017     2018     2017  

Average total assets subject to base management fee(A)

   $ 655,000     $ 510,800     $ 638,600     $ 507,000  

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.0     1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(B)

     3,275       2,554       6,386       5,070  

Credits to fees from Adviser—  other(B)

     (565     (926     (1,525     (1,474
  

 

 

   

 

 

   

 

 

   

 

 

 

Net base management fee

   $ 2,710     $ 1,628     $ 4,861     $ 3,596  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee(B)

     1,674       1,485       3,414       3,049  

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

     (1,674     (1,485     (3,414     (3,049
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan servicing fee

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee – income-based

   $ —       $ 1,295     $ 1,078     $ 2,467  

Incentive fee – capital gains-based(C)

     7,125       —         13,633       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total incentive fee(B)

   $ 7,125     $ 1,295     $ 14,711     $ 2,467  

Credits to fees from Adviser—  other(B)

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net incentive fee

   $ 7,125     $ 1,295     $ 14,711     $ 2,467  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

Base Management Fee

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

Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser 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, totaling $47 and $57 for the three month periods ended September 30, 2018 and 2017, respectively, and $118 and $113 for the six month periods ended September 30, 2018 and 2017, respectively was retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser, primarily related to the valuation of portfolio companies.

Loan Servicing Fee

The Adviser also services the loans held by our wholly-owned subsidiary, Business Investment (the borrower under the Credit Facility), in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under 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 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given calendar year, we treat payment of the loan servicing fee pursuant to the 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.

 

33


Incentive Fee

The incentive fee payable to the Adviser under our Advisory Agreement consists of two parts: an income-based incentive fee and a capital gains-based incentive fee.

The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets, which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted appropriately for any share issuances or repurchases during the period (the “Hurdle Rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is payable quarterly to the Adviser and is computed as follows:

 

   

No incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the Hurdle Rate (7.0% annualized);

 

   

100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the Hurdle Rate but is less than 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized); and

 

   

20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized).

The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the preceding calendar year. The capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital losses since our inception, less (iii) the entire portfolio’s aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit between the net sales price of each investment, when sold, and the original cost of such investment since our inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the deficit between the fair value of each investment security as of the applicable calculation date and the original cost of such investment security. We have not incurred capital gains-based incentive fees from inception through September 30, 2018, as aggregate unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

In accordance with GAAP, accrual of the capital gains-based incentive fee is determined as if our investments had been liquidated at their fair values as of the end of the reporting period. Therefore, GAAP requires that the capital gains-based incentive fee accrual consider the aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that any such unrealized capital appreciation will be realized in the future. Accordingly, a GAAP accrual is calculated at the end of the reporting period based on (i) cumulative aggregate realized capital gains since our inception, plus (ii) the entire portfolio’s aggregate unrealized capital appreciation, if any, less (iii) cumulative aggregate realized capital losses since our inception, less (iv) the entire portfolio’s aggregate unrealized capital depreciation, if any. If such amount is positive at the end of a reporting period, a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years, is recorded, regardless of whether such amount is contractually due under the terms of the Advisory Agreement. If such amount is negative, then there is no accrual for such period. During the three months and six months ended September 30, 2018, we recorded capital gains-based incentive fees of $7.1 million and $13.6 million, respectively, which are not contractually due under the terms of the Advisory Agreement. We did not record any capital gains-based incentive fees during the three and six months ended September 30, 2017.

Transactions with the Administrator

We pay the Administrator pursuant to the Administration Agreement for our allocable portion of the Administrator’s expenses incurred while performing services to us, which are primarily rent and salaries and benefits expenses of the Administrator’s employees, including, but not limited to, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, and general counsel and secretary (who also serves as the Administrator’s president, general counsel, and secretary), and their respective staffs.

 

34


Our allocable portion of the Administrator’s expenses is generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. On July 10, 2018, our Board of Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of either party, approved the annual renewal of the Administration Agreement through August 31, 2019.

Other Transactions

Gladstone Securities, LLC (“Gladstone Securities”), which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, is a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. From time to time, Gladstone Securities provides other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which it receives fees. 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. The fees received by Gladstone Securities from portfolio companies totaled $0 and $0.3 million during each of the three months ended September 30, 2018 and 2017, respectively, and $0.3 million during both of the six months ended September 30, 2018 and 2017.

Related Party Fees Due

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

 

     As of September 30,      As of March 31  
     2018      2018  

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

   $ 1,416      $ 540  

Incentive fee due to Adviser(A)

     18,032        6,122  

Other due to Adviser

     69        9  
  

 

 

    

 

 

 

Total fees due to Adviser

   $ 19,517      $ 6,671  

Fee due to Administrator

   $ 337      $ 317  
  

 

 

    

 

 

 

Total related party fees due

   $ 19,854      $ 6,988  
  

 

 

    

 

 

 

 

(A)

Includes a capital gains-based incentive fee of $18.0 million and $4.4 million as of September 30, 2018 and March 31, 2018, respectively, recorded in accordance with GAAP requirements and which is not contractually due under the terms of the Advisory Agreement. Refer to Note 4 — Related Party TransactionsTransactions with the Adviser Incentive Fee for additional information.

Net expenses receivable from Gladstone Capital Corporation, one of our affiliated funds, for reimbursement purposes, which includes certain co-investment expenses, totaled $0 and $16 as of September 30, 2018 and March 31, 2018, respectively. These amounts are generally settled in the quarter subsequent to being incurred and have been included in Other Assets, net on the accompanying Consolidated Statements of Assets and Liabilities as of September 30, 2018 and March 31, 2018.

NOTE 5. BORROWINGS

Revolving Line of Credit

On August 22, 2018, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 4 to the Fifth Amended and Restated Credit Agreement, originally entered into on April 30, 2013 and as previously amended, with KeyBank National Association (“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 August 22, 2021, and if not renewed or extended by such date, all principal and interest will be due and payable on or before August 22, 2023 (two years after the revolving period end date). The amended Credit Facility provides two one-year extension options that may be exercised on or before the first and second anniversary of the August 22, 2018 amendment date, subject to approval by all lenders. Additionally, the Credit Facility commitment amount was increased from $165.0 million to $200.0 million and, subject to certain terms and conditions, can be expanded to a total facility amount of $300.0 million through additional commitments from existing or new lenders.

The amendment also reduced the Company’s minimum asset coverage with respect to senior securities representing indebtedness from 200% to 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act).

 

35


Advances under the Credit Facility generally bear interest at 30-day London Interbank Offered Rate (“LIBOR”) plus 2.85% per annum until August 21, 2021, with the margin then increasing to 3.10% for the period from August 22, 2021 to August 21, 2022, and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee on the daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount.

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

 

     As of September 30,      As of March 31,  
     2018      2018  

Commitment amount

   $ 200,000      $ 165,000  

Borrowings outstanding at cost

     115,700        107,000  

Availability(A)

     84,300        58,000  

 

     For the Three Months Ended     For the Six Months Ended  
     September 30,     September 30,  
     2018     2017     2018     2017  

Weighted-average borrowings outstanding

   $ 100,960     $ 42,037     $ 112,056     $ 42,092  

Effective interest rate(B)

     5.7     6.3     5.5     6.2

Commitment (unused) fees incurred

   $ 116     $ 195$        170     $ 386  

 

(A)

Availability is subject to various constraints, characteristics and applicable advance rates based on collateral quality under the Credit Facility, which equated to an adjusted availability of $80.2 million and $53.8 million as of September 30, 2018 and March 31, 2018, respectively.

(B)

Excludes the impact of deferred financing costs and includes unused commitment fees.

Among other things, the Credit Facility contains a performance guaranty that requires us 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 $218.7 million as of September 30, 2018, (ii) asset coverage with respect to senior securities representing indebtedness of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by 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 September 30, 2018, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $529.6 million, asset coverage on our senior securities representing indebtedness of 528.4%, 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 September 30, 2018, we were in compliance with all covenants under the Credit Facility.

Secured Borrowing

In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our secured second lien term debt investment in Ginsey Home Solutions, Inc. (“Ginsey”). In May 2014, we amended the agreement with the third-party to include an additional $0.1 million. ASC Topic 860, “Transfers and Servicing” requires us to treat the participation as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual rate established at origination. Therefore, our accompanying Consolidated Statements of Assets and Liabilities reflects the entire secured second lien term debt investment in Ginsey and a corresponding $5.1 million secured borrowing liability. The secured borrowing has a stated fixed interest rate of 7.0% and a maturity date of January 3, 2021.

Fair Value

We elected to apply the fair value option of ASC Topic 825, “Financial Instruments,” to the Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of the Credit Facility is determined using a yield analysis, which includes a DCF calculation and also takes into account the assumptions the Valuation Team believes market participants would use, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At both September 30, 2018 and March 31, 2018, the discount rate used to determine the fair value of the Credit Facility was 30-day LIBOR, plus 2.85% per annum, plus an unused fee of 0.5%. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding decrease or increase, respectively, in the fair value of the Credit Facility. At each of September 30, 2018 and March 31, 2018, the Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in Net unrealized depreciation of other on our accompanying Consolidated Statements of Operations.

 

36


The following tables provide relevant information and disclosures about the Credit Facility as of September 30, 2018 and March 31, 2018, and for the three and six months ended September 30, 2018 and 2017, as required by ASC 820:

 

     Level 3 – Borrowings  
     Recurring Fair Value Measurements  
     Reported in Consolidated  
     Statements of Assets and Liabilities
Using Significant
 
     Unobservable Inputs (Level 3)  
     September 30, 2018      March 31, 2018  

Credit Facility

   $ 115,700      $ 107,500  
  

 

 

    

 

 

 

Fair Value Measurements of Borrowings Using Significant

Unobservable Inputs (Level 3) Reported in

Consolidated Statements of Assets and Liabilities

 

     Credit  
     Facility  

Three months ended September 30, 2018:

  

Fair value at June 30, 2018

   $ 102,907  

Borrowings

     91,300  

Repayments

     (78,100

Unrealized depreciation

     (407
  

 

 

 

Fair value at September 30, 2018

   $ 115,700  
  

 

 

 

Six months ended September 30, 2018:

  

Fair value at March 31, 2018

   $ 107,500  

Borrowings

     129,200  

Repayments

     (120,500

Unrealized depreciation

     (500
  

 

 

 

Fair value at September 30, 2018

   $ 115,700  
  

 

 

 

Fair Value Measurements of Borrowings Using Significant

Unobservable Inputs (Level 3) Reported in

Consolidated Statements of Assets and Liabilities

 

     Credit  
     Facility  

Three months ended September 30, 2017:

  

Fair value at June 30, 2017

   $ 34,000  

Borrowings

     40,200  

Repayments

     (17,500
  

 

 

 

Fair value at September 30, 2017

   $ 56,700  
  

 

 

 

Six months ended September 30, 2017:

  

Fair value at March 31, 2017

   $ 69,700  

Borrowings

     49,600  

Repayments

     (62,600
  

 

 

 

Fair value at September 30, 2017

   $ 56,700  
  

 

 

 

The fair value of the collateral under the Credit Facility was $569.1 million and $504.0 million as of September 30, 2018 and March 31, 2018, respectively.

 

37


NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In August 2018, we completed a public offering of 2,990,000 shares of 6.375% Series E Cumulative Term Preferred Stock (our “Series E Term Preferred Stock” or “Series E”) at a public offering price of $25.00 per share. Gross proceeds totaled $74.8 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $72.1 million. Total underwriting discounts and offering costs related to this offering were $2.7 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 August 31, 2025, the mandatory redemption date.

The shares of Series E Term Preferred Stock are traded under the ticker symbol GAINL on the Nasdaq Global Select Market. Our Series E Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.375% per year, payable monthly. We are required to redeem all shares of our outstanding Series E Term Preferred Stock on August 31, 2025, 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 E Term Preferred Stock, and (2) if we fail to maintain asset coverage as required by Sections 18 and 61 of the 1940 Act (which, for the Company, is currently 200% and will be 150% effective April 10, 2019, unless earlier approved by the Company’s stockholders) and are unable to correct such failure within a specific amount of time, we are required to redeem a portion of our outstanding Series E Term Preferred Stock or otherwise cure the asset coverage redemption trigger (we may also redeem additional securities to cause asset coverage to be up to 250% currently and 200% effective April 10, 2019). We may also voluntarily redeem all or a portion of our Series E Term Preferred Stock at our sole option at the redemption price at any time on or after August 31, 2020.

In August 2018, we used the proceeds from the issuance of our Series E Term Preferred Stock, along with borrowings under the Credit Facility, to voluntarily redeem all outstanding shares of our 6.750% Series B Cumulative Term Preferred Stock (our “Series B Term Preferred Stock” or “Series B”) and 6.500% Series C Cumulative Term Preferred Stock (our “Series C Term Preferred Stock” or “Series C”), each of which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption of our Series B Term Preferred Stock and Series C Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.7 million, which was recorded in Realized loss on other in our accompanying Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption.

The following tables summarize our Series B Term Preferred Stock, our Series C Term Preferred Stock, our 6.250% Series D Cumulative Term Preferred Stock (our “Series D Term Preferred Stock” or “Series D”), and our Series E Term Preferred Stock outstanding as of September 30, 2018 and March 31, 2018:

As of September 30, 2018:

 

Class of Term                  Mandatory                   Liquidation      Total  
Preferred    Ticker             Redemption      Interest     Shares      Preference      Liquidation  

Stock

   Symbol      Date Issued      Date(A)      Rate     Outstanding      per Share      Preference  

Series D

     GAINM       

September 26,

2016

 

 

    
September 30,
2023
 
 
     6.250     2,300,000        25.00        57,500  

Series E

     GAINL       

August 22,

2018

 

 

    
August 31,
2025
 
 
     6.375     2,990,000        25.00        74,750  
             

 

 

    

 

 

    

 

 

 

Term preferred stock, gross(B)

 

             5,290,000      $ 25.00      $ 132,250  

Less: Discounts

 

                   (4,106
                   

 

 

 

Term preferred stock, net(C)

 

                 $ 128,144  
                   

 

 

 

 

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As of March 31, 2018:

 

Class of Term                  Mandatory                   Liquidation      Total  
Preferred    Ticker             Redemption      Interest     Shares      Preference      Liquidation  

Stock

   Symbol      Date Issued      Date(A)      Rate     Outstanding      per Share      Preference  

Series B

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

Series C

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

Series D

     GAINM       
September 26,
2016
 
 
    
September 30,
2023
 
 
     6.250     2,300,000        25.00        57,500  
             

 

 

    

 

 

    

 

 

 

Term preferred stock, gross(B)

 

             5,566,000      $ 25.00      $ 139,150  

Less: Discounts

 

                   (3,535
                   

 

 

 

Term preferred stock, net(C)

 

                 $ 135,615  
                   

 

 

 

 

(A)

The optional redemption dates for each of our series of mandatorily redeemable preferred stock are: any time on or after December 31, 2017 for our Series B Term Preferred Stock (and we redeemed all outstanding shares on August 31, 2018), any time on or after May 31, 2018 for our Series C Term Preferred Stock (and we redeemed all outstanding shares on August 31, 2018), any time on or after September 30, 2018 for our Series D Term Preferred Stock, and any time after August 31, 2020 for our Series E Term Preferred Stock.

(B)

As of September 30, 2018 and March 31, 2018, asset coverage on our senior securities that are stock, calculated pursuant to Sections 18 and 61 of the 1940 Act, was 254.8% and 237.3%, respectively.

(C)

Reflected as a line item on our accompanying Consolidated Statement of Assets and Liabilities pursuant to the adoption of Accounting Standard Update 2015-03,Simplifying the Presentation of Debt Issuance Costs.

The following tables summarize dividends declared by our Board of Directors and paid by us on our Series B Term Preferred Stock, Series C Term Preferred Stock, Series D Term Preferred Stock, and Series E Term Preferred Stock during the six months ended September 30, 2018 and 2017:

For the Six Months Ended September 30, 2018:

 

               Dividend per      Dividend per      Dividend per      Dividend per  
               Share of      Share of      Share of      Share of  
               Series B Term      Series C Term      Series D Term      Series E Term  
Declaration    Record    Payment    Preferred      Preferred      Preferred      Preferred  

Date

   Date    Date    Stock(A)      Stock(A)      Stock      Stock(B)  

April 10, 2018

   April 20, 2018    April 30, 2018    $ 0.140625      $ 0.135417      $ 0.13020833      $ —    

April 10, 2018

   May 22, 2018    May 31, 2018      0.140625        0.135417        0.13020833        —    

April 10, 2018

   June 20, 2018    June 29, 2018      0.140625        0.135417        0.13020833        —    

July 10, 2018

   July 20, 2018    July 31, 2018      0.140625        0.135417        0.13020833        —    

July 10, 2018

   August 21, 2018    August 31, 2018      0.140625        0.135417        0.13020833        —    

July 10, 2018

   September 19, 2018    September 28, 2018      —          —          0.13020833        —    

September 6, 2018

   September 19, 2018    September 28, 2018      —          —          —          0.17265625 (C)  
  

 

 

    

 

 

    

 

 

    

 

 

 
      Total    $ 0.703125      $ 0.677085      $ 0.78124998      $ 0.17265625  
        

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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For the Six Months Ended September 30, 2017:

 

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

Declaration Date

  

Record Date

  

Payment Date

   Stock