10-Q
Table of Contents

 

 

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 December 31, 2017

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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   ☐  (Do not check if a smaller reporting company)   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 February 5, 2018, was 32,526,223.

 

 

 


Table of Contents

GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION:

  
Item 1.  

Financial Statements (Unaudited)

  
 

Consolidated Statements of Assets and Liabilities as of December  31, 2017 and March 31, 2017

     2  
 

Consolidated Statements of Operations for the three and nine months ended December 31, 2017 and 2016

     3  
 

Consolidated Statements of Changes in Net Assets for the nine months ended December 31, 2017 and 2016

     5  
 

Consolidated Statements of Cash Flows for the nine months ended December 31, 2017 and 2016

     6  
 

Consolidated Schedules of Investments as of December  31, 2017 and March 31, 2017

     8  
 

Notes to Consolidated Financial Statements

     20  
Item 2.  

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

     45  
 

Overview

     45  
 

Results of Operations

     50  
 

Liquidity and Capital Resources

     60  
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     67  
Item 4.  

Controls and Procedures

     67  
PART II.  

OTHER INFORMATION:

     68  
Item 1.  

Legal Proceedings

     68  
Item 1A.  

Risk Factors

     68  
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     68  
Item 3.  

Defaults Upon Senior Securities

     68  
Item 4.  

Mine Safety Disclosures

     68  
Item 5.  

Other Information

     68  
Item 6.  

Exhibits

     69  
SIGNATURES      70  


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,     March 31,  
     2017     2017  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $205,771 and $225,046, respectively)

   $ 227,631     $ 223,451  

Affiliate investments (Cost of $343,450 and $278,811, respectively)

     327,887       262,086  

Control investments (Cost of $21,512 and $21,312 respectively)

     10,861       16,042  

Cash and cash equivalents

     2,733       2,868  

Restricted cash and cash equivalents

     428       1,231  

Interest receivable

     2,902       2,305  

Due from custodian

     5,937       2,238  

Deferred financing costs, net

     1,148       1,588  

Other assets, net

     1,088       3,386  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 580,615     $ 515,195  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Line of credit at fair value (Cost of $96,600 and $69,700, respectively)

   $ 96,858     $ 69,700  

Secured borrowing

     5,096       5,096  
  

 

 

   

 

 

 

Total borrowings

     101,954       74,796  

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

6,356,000 shares authorized; 5,566,000 shares issued and outstanding, net

     135,420       134,835  

Accounts payable and accrued expenses

     1,233       578  

Fees due to Adviser(A)

     3,391       1,671  

Fee due to Administrator(A)

     261       296  

Other liabilities

     959       1,937  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 243,218     $ 214,113  
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 337,397     $ 301,082  
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 100,000,000 shares authorized, 32,526,223 and 30,270,958 shares issued and outstanding, respectively

   $ 33     $ 30  

Capital in excess of par value

     329,548       310,332  

Cumulative net unrealized depreciation of investments

     (4,354     (23,590

Cumulative net unrealized appreciation of other

     (258     —    

Net investment income in excess of distributions

     6,570       7,283  

Accumulated net realized gain

     5,858       7,027  
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 337,397     $ 301,082  
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 10.37     $ 9.95  
  

 

 

   

 

 

 

 

(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.

 

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GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
December 31,
    Nine Months Ended
December 31,
 
     2017     2016     2017     2016  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 4,593     $ 4,334     $ 13,646     $ 13,196  

Affiliate investments

     8,780       7,169       21,260       21,251  

Control investments

     211       204       627       617  

Cash and cash equivalents

     4       —         14       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     13,588       11,707       35,547       35,065  

Dividend income

        

Non-Control/Non-Affiliate investments

     152       4       1,922       20  

Affiliate investments

     —         440       865       3,190  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend income

     152       444       2,787       3,210  

Success fee income

        

Non-Control/Non-Affiliate investments

     706       309       2,864       309  

Affiliate investments

     1,738       914       1,738       914  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total success fee income

     2,444       1,223       4,602       1,223  

Other income

     —         —         —         13  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     16,184       13,374       42,936       39,511  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     2,769       2,441       7,839       7,439  

Loan servicing fee(A)

     1,567       1,678       4,616       5,081  

Incentive fee(A)

     2,822       1,178       5,289       3,427  

Administration fee(A)

     261       251       769       825  

Interest expense on borrowings

     1,035       825       2,518       2,749  

Dividends on mandatorily redeemable preferred stock

     2,251       2,251       6,753       6,431  

Amortization of deferred financing costs and discounts

     366       546       1,100       1,508  

Professional fees

     231       142       810       528  

Other general and administrative expenses

     (16     1,071       1,682       1,962  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     11,286       10,383       31,376       29,950  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1,567     (1,678     (4,616     (5,081

Credits to fees from Adviser - other(A)

     (1,066     (535     (2,540     (2,486
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits to fees

     8,653       8,170       24,220       22,383  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     7,531       5,204       18,716       17,128  
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     25       1,251       1,003       1,086  

Affiliate investments

     —         (4,391     144       14,401  

Control investments

     —         —         —         (3

Other

     —         3       —         (254
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     25       (3,137     1,147       15,230  

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     7,330       6,905       23,454       5,986  

Affiliate investments

     3,773       1,702       1,163       (12,270

Control investments

     (1,257     281       (5,381     9,238  

Other

     (258     —         (258     75  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation

     9,588       8,888       18,978       3,029  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain

     9,613       5,751       20,125       18,259  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 17,144     $ 10,955     $ 38,841     $ 35,387  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

 

BASIC AND DILUTED PER COMMON SHARE:

           

Net investment income

   $ 0.23      $ 0.17      $ 0.58      $ 0.57  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations

     0.53        0.36        1.21        1.17  
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributions

     0.26        0.19        0.70        0.56  
  

 

 

    

 

 

    

 

 

    

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

           

Basic and diluted

     32,526,223        30,270,958        32,178,127        30,270,958  

 

(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.

 

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Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended
December 31,
 
     2017     2016  

OPERATIONS

    

Net investment income

   $ 18,716     $ 17,128  

Net realized gain on investments

     1,147       15,484  

Net realized loss on other

     —         (254

Net unrealized appreciation of investments

     19,236       2,954  

Net unrealized appreciation of other

     (258     75  
  

 

 

   

 

 

 

Net increase in net assets from operations

     38,841       35,387  
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income

     (20,826     (17,027

Distributions to common stockholders from realized gains

     (1,756     —    
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (22,582     (17,027
  

 

 

   

 

 

 

CAPITAL ACTIVITY

    

Issuance of common stock

     21,154       —    

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

     (1,098     —    
  

 

 

   

 

 

 

Net increase in net assets from capital activity

     20,056       —    
  

 

 

   

 

 

 

TOTAL INCREASE IN NET ASSETS

     36,315       18,360  

NET ASSETS, BEGINNING OF PERIOD

     301,082       279,022  
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 337,397     $ 297,382  
  

 

 

   

 

 

 

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

 

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Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended
December 31,
 
     2017     2016  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 38,841     $ 35,387  

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

    

Purchase of investments

     (71,188     (31,186

Principal repayments of investments

     19,610       26,886  

Net proceeds from the sale of investments

     7,007       36,788  

Net realized gain on investments

     (1,239     (15,028

Net realized loss on other

     —         239  

Net unrealized appreciation of investments

     (19,236     (2,954

Net unrealized appreciation of other

     258       (75

Amortization of premiums, discounts, and acquisition costs, net

     (11     —    

Amortization of deferred financing costs and discounts

     1,100       1,508  

Bad debt expense, net of recoveries

     302       460  

Changes in assets and liabilities:

    

Decrease in restricted cash and cash equivalents

     803       449  

(Increase) decrease in interest receivable

     (1,051     44  

Increase in due from custodian

     (3,699     (520

Decrease in other assets, net

     2,606       2,230  

Increase (decrease) in accounts payable and accrued expenses

     655       (65

Increase (decrease) in fees due to Adviser(A)

     1,720       (51

Decrease in fee due to Administrator(A)

     (35     (60

Decrease in other liabilities

     (885     (124
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (24,442     53,928  
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from issuance of common stock

     21,154       —    

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

     (1,090     —    

Proceeds from line of credit

     96,300       45,200  

Repayments on line of credit

     (69,400     (96,500

Proceeds from issuance of mandatorily redeemable preferred stock

     —         57,500  

Redemption of mandatorily redeemable preferred stock

     —         (40,000

Deferred financing and offering costs

     (75     (3,589

Distributions paid to common stockholders

     (22,582     (17,027
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     24,307       (54,416
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (135     (488

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     2,868       4,481  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 2,733     $ 3,993  
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 1,928     $ 2,433  
  

 

 

   

 

 

 

NON-CASH ACTIVITIES(B)

   $ 42,977     $ 8,796  
  

 

 

   

 

 

 

 

(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 transactions:

In November 2017, one of our portfolio companies, GI Plastek, Inc. (“GI Plastek”) merged with another one of our portfolio companies, Precision Southeast, Inc. (“Precision”), into a new company, PSI Molded Plastics, Inc. (“PSI Molded”). As a result of this transaction, our debt investments in GI Plastek and Precision, which totaled $15.0 million and $9.6 million, respectively, at principal and cost, were assumed by PSI Molded and combined into a new secured second lien term loan totaling $24.6 million. Our preferred equity investment in GI Plastek, with a cost basis of $5.2 million, and our preferred and common equity investments in Precision, with a combined cost basis of $3.8 million, were converted into a preferred equity investment in PSI Molded with the same cost basis.

 

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Table of Contents

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.

2016: Significant non-cash operating activities consisted principally of the following transaction:

In October 2016, we restructured our investment in D.P.M.S., Inc. (“Danco”), which resulted in the exchange of our existing debt investments with a total cost basis and fair value of $16.5 million and $6.4 million, respectively, for a new $8.8 million secured first lien term loan. We also relinquished our preferred equity investment and a portion of our common equity investment, which had an aggregate cost basis and fair value of $2.5 million and $0 million, respectively. The transaction resulted in a net realized loss of $10.2 million, which was recorded in our Consolidated Statements of Operations during the three months ended December 31, 2016.

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

 

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Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

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

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

NON-CONTROL/NON-AFFILIATE INVESTMENTS(N) – 67.5%

     

Secured First Lien Debt – 33.3%

     

Chemicals, Plastics, and Rubber – 2.9%

     

Drew Foam Companies, Inc. – Term Debt (L+10.0%, 13.5% Cash, Due 1/2018)(Q)

  $ 9,913     $ 9,913     $ 9,913   

Containers, Packaging, and Glass – 2.8%

     

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

    9,500       9,500       9,500   

Diversified/Conglomerate Services – 10.9%

     

Counsel Press, Inc. – Line of Credit, $500 available (L+11.8%, 13.3% Cash (1.0% Unused Fee), Due 3/2018)(L)

                —   

Counsel Press, Inc. – Term Debt (L+11.8%, 13.3% Cash, Due 3/2020)(L)

    18,000       18,000       18,000   

Counsel Press, Inc. – Term Debt (L+13.0%, 14.6% Cash, Due 3/2020)(L)

    5,500       5,500       5,500   

Nth Degree, Inc. – Term Debt (L+11.5%, 13.1% Cash, Due 12/2020)(L)

    13,290       13,290       13,290   
   

 

 

   

 

 

 
      36,790       36,790   

Farming and Agriculture – 4.7%

     

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 5/2018)(L)

    5,000       5,000       5,000   
   

 

 

   

 

 

 
      16,000       16,000   

Leisure, Amusement, Motion Pictures, and Entertainment – 3.9%

     

Schylling, Inc. – Term Debt (L+11.0%, 13.0%, Due 8/2018)(L)

    13,081       13,081       13,081   

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 5.9%

     

SBS Industries, LLC – Line of Credit, $1,500 available (L+8.5%, 10.1% 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 – 1.0%

     

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 – 1.2%

     

B-Dry, LLC – Line of Credit, $100 available (L+0.3%, 1.8% Cash (0.8% Unused Fee), Due 12/2018)(L)

    4,550       4,550       3,908   

B-Dry, LLC – Term Debt (L+0.3%, 1.8% Cash, Due 12/2019)(L)

    6,443       6,443       —   

B-Dry, LLC – Term Debt (L+0.3%, 1.8% Cash, Due 12/2019)(L)

    840       840       —   
   

 

 

   

 

 

 
      11,833       3,908   
     
   

 

 

   

 

 

 

Total Secured First Lien Debt

    $ 120,290     $ 112,365   
   

 

 

   

 

 

 

Secured Second Lien Debt – 9.0%

     

Automobile – 1.2%

     

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

  $ 4,000     $ 4,000     $ 4,000   

Cargo Transport – 3.9%

     

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

    13,000       12,911       13,000   

Home and Office Furnishings, Housewares, and Durable Consumer Products – 3.9%

     

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

    $ 30,211     $ 30,300   
   

 

 

   

 

 

 

Preferred Equity – 16.8%

     

Automobile – 0.6%

     

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

    7,304,792     $ 7,725     $ 2,122   

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

                —   
   

 

 

   

 

 

 
      7,725       2,122   

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

 

8


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

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

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

Chemicals, Plastics, and Rubber – 1.0%

     

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

    34,045     $ 3,375     $ 3,375   

Containers, Packaging, and Glass – 0.4%

     

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

    1,373       1,373       1,400   

Diversified/Conglomerate Services – 9.0%

     

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

    6,995       6,995       5,916   

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

    5,660       5,660       24,431   
   

 

 

   

 

 

 
      12,655       30,347   

Farming and Agriculture – 1.1%

     

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

    3,556       3,556       1,581   

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

    1,499       1,499       2,000   
   

 

 

   

 

 

 
      5,055       3,581   

Home and Office Furnishings, Housewares, and Durable Consumer Products – 3.6%

     

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

    19,280       9,583       11,713   

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) – 0.5%

     

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

    27,705       2,771       1,842   

Oil and Gas – 0.6%

     

Tread Corporation – Preferred Stock(C)(L)

    12,998,639       3,768       2,175   

Personal, Food, and Miscellaneous Services – 0.0%

     

B-Dry, LLC – Preferred Stock(C)(L)

    2,500       2,516       —   
     
   

 

 

   

 

 

 

Total Preferred Equity

    $ 52,821     $ 56,555   
   

 

 

   

 

 

 

Common Equity – 8.4%

     

Cargo Transport – 0.9%

     

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

    8   $ 500     $ 2,832   

Chemicals, Plastics, and Rubber – 4.4%

     

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

    5,372       63       14,951   

Containers, Packaging, and Glass – 3.0%

     

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

    152       152       10,244   

Farming and Agriculture – 0.0%

     

Jackrabbit, Inc. – Common Stock(C)(L)

    548       94       —   

Star Seed, Inc. – Common Stock(C)(L)

    600       1       —   
   

 

 

   

 

 

 
      95       —   

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) – 0.0%

     

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

    67,873       167       157   

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

 

9


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

                                                  

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

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

Personal, Food, and Miscellaneous Services – 0.0%

        

B-Dry, LLC – Common Stock(C)(L)

     2,500      $ 300      $ —   

Utilities – 0.1%

        

AquaVenture Holdings Limited – Common Stock(C)(S)

     14,889        189        227   
        
     

 

 

    

 

 

 

Total Common Equity

      $ 2,449      $ 28,411   
     

 

 

    

 

 

 
        
     

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

      $ 205,771      $ 227,631   
     

 

 

    

 

 

 

AFFILIATE INVESTMENTS(O) – 97.2%

        

Secured First Lien Debt – 52.1%

        

Automobile – 2.3%

        

Meridian Rack & Pinion, Inc.(M) – Term Debt (L+11.5%, 13.5% Cash, Due 12/2018)(K)

   $ 9,660      $ 9,660      $ 7,728   

Beverage, Food, and Tobacco – 2.7%

        

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

     9,050        9,050        9,050   

Diversified/Conglomerate Manufacturing – 5.4%

        

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

     8,795        8,795        7,172   

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

     9,300        9,300        8,672   

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

     2,400        2,400        2,250   
     

 

 

    

 

 

 
        20,495        18,094   

Diversified/Conglomerate Services – 12.9%

        

ImageWorks Display and Marketing Group, Inc. – Line of Credit, $2,625 available (L+9.0%, 10.6% Cash, Due 5/2018)(T)

     375        375        375   

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

     22,000        22,000        22,000   

JR Hobbs Co. – Atlanta, LLC – Term Debt (L+11.5%, 13.1% Cash, Due 2/2022)(L)

     21,000        21,000        21,000   
     

 

 

    

 

 

 
        43,375        43,375   

Home and Office Furnishings, Housewares, and Durable Consumer Products – 10.1%

        

Brunswick Bowling Products, Inc. – Term Debt (L+14.3%, 16.3% Cash, Due 5/2020)(L)

     11,307        11,307        11,307   

Brunswick Bowling Products, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 12/2022)(T)

     6,917        6,917        6,917   

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

     15,770        15,770        15,770   
     

 

 

    

 

 

 
        33,994        33,994   

Leisure, Amusement, Motion Pictures, and Entertainment – 5.1%

        

SOG Specialty Knives & Tools, LLC – Term Debt (L+11.3%, 13.3% Cash, Due 8/2020)(L)

     6,200        6,200        6,200   

SOG Specialty Knives & Tools, LLC – Term Debt (L+12.8%, 14.8% Cash, Due 8/2020)(L)

     12,200        12,200        10,611   

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

     538        538        492   
     

 

 

    

 

 

 
        18,938        17,303   

Personal and Non-Durable Consumer Products (Manufacturing Only) – 6.8%

        

Pioneer Square Brands, Inc. – Line of Credit, $1,200 available (L+9.0%, 10.6% Cash
(1.0% Unused Fee), Due 2/2018)(L)

     1,800        1,800        1,800   

Pioneer Square Brands, Inc. – Term Debt (L+12.0%, 13.6% Cash, Due 8/2022)(L)

     21,000        21,000        21,000   
     

 

 

    

 

 

 
        22,800        22,800  

Telecommunications – 4.1%

        

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 – 2.7%

        

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

      $ 181,512      $ 175,544   
     

 

 

    

 

 

 

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

 

10


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)     Principal/Shares/  
Units(F)(J)
               Cost                      Fair Value        

Secured Second Lien Debt – 18.5%

     

Chemicals, Plastics, and Rubber – 7.3%

     

PSI Molded Plastics, Inc. – Term Debt (L+12.0%, 13.6% Cash, Due 1/2024)(L)

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

Diversified/Conglomerate Manufacturing – 2.5%

     

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

    12,215       12,215       7,818  

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

    175       175       112  

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

    910       910       587  
   

 

 

   

 

 

 
      13,300       8,517  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 4.7%

     

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) – 4.0%

     

The Mountain Corporation – Term Debt (L+12.5%, 14.1% Cash, Due 8/2021)(L)

    18,600       18,600       13,428  

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

    1,000       1,000        

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

    1,500       1,500        
   

 

 

   

 

 

 
      21,100       13,428  
   

 

 

   

 

 

 
     
   

 

 

   

 

 

 

Total Secured Second Lien Debt

    $ 75,018     $ 62,563  
   

 

 

   

 

 

 

 

Preferred Equity – 26.6%

     

Automobile – 0.1%

     

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

    3,381     $ 3,381     $ 376  

Beverage, Food, and Tobacco – 1.2%

     

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

    4,000       4,000       3,910  

Cargo Transport – 0.0%

     

NDLI, Inc. – Preferred Stock(C)(L)

    3,600       3,600        

Chemicals, Plastics, and Rubber – 2.0%

     

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

    51,098       8,980       6,714  

Diversified/Conglomerate Manufacturing – 0.2%

     

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       577  
   

 

 

   

 

 

 
      10,729       577  

Diversified/Conglomerate Services – 5.5%

     

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

    67,490       6,750       6,750  

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

    5,920       5,920       11,710  
   

 

 

   

 

 

 
      12,670       18,460  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 12.9%

     

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

    4,943       4,943       8,688  

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

    4,500       4,500       23,977  

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

    6,180       6,180       10,963  
   

 

 

   

 

 

 
      15,623       43,628  

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) – 1.8%

     

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

    6,899       6,899        

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

    5,502       5,500       6,232  
   

 

 

   

 

 

 
      12,399       6,232  

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


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)     Principal/Shares/  
Units(F)(J)
               Cost                      Fair Value        

Textiles and Leather – 2.9%

     

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

    1,550     $ 1,550     $ 9,883   
   

 

 

   

 

 

 

Total Preferred Equity

    $ 86,877     $ 89,780   
   

 

 

   

 

 

 

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

    $ 343,450     $ 327,887   
   

 

 

   

 

 

 

CONTROL INVESTMENTS(P) – 3.2%:

     

Secured First Lien Debt – 1.5%

     

Aerospace and Defense – 1.5%

     

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 – 1.5%

     

Aerospace and Defense – 1.5%

     

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

  $ 5,000     $ 5,000     $ 5,000   

Preferred Equity – 0.2%

     

Aerospace and Defense – 0.2%

     

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

    5,517,444     $ 11,464     $ 861   

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     $ 10,861   
   

 

 

   

 

 

 
     
   

 

 

   

 

 

 

TOTAL INVESTMENTS – 167.9%

    $ 570,733     $ 566,379   
   

 

 

   

 

 

 

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

 

12


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2017

(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 $484.6 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 December 31, 2017, our investments in AquaVenture Holdings Limited (“AquaVenture”) and Funko Acquisition Holdings, LLC (“Funko”) are considered non-qualifying assets under Section 55 of the 1940 Act and represent a combined 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 1.6% as of December 31, 2017. 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 December 31, 2017.
(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 December 31, 2017.
(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 Standard & 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.
(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 AquaVenture was valued using Level 1 inputs within the ASC 820 fair value hierarchy. Fair value was based on the closing market price of our shares as of the reporting date. AquaVenture is traded on the New York Stock Exchange under the trading symbol “WAAS.” 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 December 31, 2017 best represents fair value as of December 31, 2017.
(U)  Our investment in Funko was valued using Level 2 inputs within the ASC 820 fair value hierarchy. Our common units in Funko are convertible to 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.
(V)  Refer to Note 10—Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information regarding this guaranty.

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

 

13


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

NON-CONTROL/NON-AFFILIATE INVESTMENTS(N) – 74.2%

     

Secured First Lien Debt – 36.1%

     

Chemicals, Plastics, and Rubber – 3.3%

     

Drew Foam Companies, Inc. – Term Debt (L+10.0%, 13.5% Cash, Due 8/2017)(L)

  $ 9,913     $ 9,913     $ 9,913  

Containers, Packaging, and Glass – 3.2%

     

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

    9,500       9,500       9,500   

Diversified/Conglomerate Services – 12.2%

     

Counsel Press, Inc. – Line of Credit, $500 available (L+11.8%, 12.8% Cash (1.0% Unused Fee), Due 3/2018)(L)

                —   

Counsel Press, Inc. – Term Debt (L+11.8%, 12.8% Cash, Due 3/2020)(L)

    18,000       18,000       18,000   

Counsel Press, Inc. – Term Debt (L+13.0%, 14.0% Cash, Due 3/2020)(L)

    5,500       5,500       5,500   

Nth Degree, Inc. – Term Debt (L+11.5%, 12.5% Cash, Due 12/2020)(L)

    13,290       13,290       13,290   
   

 

 

   

 

 

 
      36,790       36,790   

Farming and Agriculture – 5.2%

     

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 5/2018)(K)

    5,000       5,000       4,675   
   

 

 

   

 

 

 
      16,000       15,675   

Leisure, Amusement, Motion Pictures, and Entertainment – 4.3%

     

Schylling, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 8/2018)(L)

    13,081       13,081       13,081   

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 5.7%

     

Mathey Investments, Inc. – Term Debt (L+5.5%, 10.0% Cash, Due 3/2018)(L)

    1,375       1,375       1,375   

Mathey Investments, Inc. – Term Debt (L+7.5%, 12.0% Cash, Due 3/2018)(L)

    3,727       3,727       3,727   

Mathey Investments, Inc. – Term Debt (12.5% Cash, Due 3/2018)(I)(L)

    3,500       3,500       1,619   

SBS Industries, LLC – Term Debt (L+12.0%, 14.0% Cash, Due 8/2019)(L)

    11,355       11,355       10,561   
   

 

 

   

 

 

 
      19,957       17,282   

Oil and Gas – 0.7%

     

Tread Corporation – Line of Credit, $634 available (L+10.0%, 12.5% Cash, Due 2/2018)(G)(L)

    3,216       3,216       2,017   

Personal, Food, and Miscellaneous Services – 1.5%

     

B-Dry, LLC – Line of Credit, $500 available (L+6.3%, 7.3% Cash (0.8% Unused Fee), Due 12/2018)(L)

    4,150       4,150       4,150   

B-Dry, LLC – Term Debt (L+0.3%, 1.5% Cash, Due 12/2019)(L)

    6,443       6,443       205   

B-Dry, LLC – Term Debt (L+0.3%, 1.5% Cash, Due 12/2019)(L)

    840       840       —   
   

 

 

   

 

 

 
      11,433       4,355   
   

 

 

   

 

 

 
     
   

 

 

   

 

 

 

Total Secured First Lien Debt

    $ 119,890     $ 108,613   
   

 

 

   

 

 

 

Secured Second Lien Debt – 15.2%

     

Automobile – 1.3%

     

Country Club Enterprises, LLC – Term Debt (L+11.0%, 18.7% Cash, Due 5/2017)(L)

  $ 4,000     $ 4,000     $ 4,000   

Cargo Transport – 4.4%

     

Diligent Delivery Systems – Term Debt (L+8.0%, 10.0% Cash, Due 8/2020)(K)

    13,000       13,000       13,292   

Chemicals, Plastics, and Rubber – 5.1%

     

Mitchell Rubber Products, Inc. – Term Debt (13.0% Cash, Due 3/2018)(I)(Q)

    13,560       13,560       15,230   

Home and Office Furnishings, Housewares, and Durable Consumer Products – 4.4%

     

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

    $ 43,860     $ 45,822   
   

 

 

   

 

 

 

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

 

14


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

Preferred Equity – 14.7%

       

Automobile – 1.7%

       

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

     7,245,681     $ 7,725      $ 5,256   

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

                  —   
    

 

 

    

 

 

 
       7,725        5,256   

Chemicals, Plastics, and Rubber – 2.6%

       

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

     34,045       3,375        3,878   

Mitchell Rubber Products, Inc. – Preferred Stock(C)(Q)

     27,900       2,790        3,903   
    

 

 

    

 

 

 
       6,165        7,781  

Containers, Packaging, and Glass – 0.5%

       

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

     1,373       1,373        1,401   

Diversified/Conglomerate Services – 6.2%

       

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

     6,995       6,995        6,117   

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

     5,660       5,660        12,471   
    

 

 

    

 

 

 
       12,655        18,588   

Farming and Agriculture – 1.1%

       

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

     3,556       3,556        3,421   

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

     1,499       1,499        —   
    

 

 

    

 

 

 
       5,055        3,421   

Home and Office Furnishings, Housewares, and Durable Consumer Products – 2.4%

       

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

     19,280       9,583        7,176   

Leisure, Amusement, Motion Pictures, and Entertainment – 0.1%

       

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

     4,000       4,000        262   

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

       

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

     19,935       1,994        —   

Oil and Gas – 0.0%

       

Tread Corporation – Preferred Stock(C)(L)

     12,998,639       3,768        —   

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

       

Funko Acquisition Holdings, LLC(M) – Preferred Stock(C)(L)

     260       167        257   

Personal, Food, and Miscellaneous Services – 0.0%

       

B-Dry, LLC – Preferred Stock(C)(L)

     2,500       2,516        —   
       
    

 

 

    

 

 

 

Total Preferred Equity

     $ 55,001      $ 44,142   
    

 

 

    

 

 

 

Common Equity – 8.2%

       

Cargo Transport – 0.9%

       

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

     8   $ 500      $ 2,598   

Chemicals, Plastics, and Rubber – 3.8%

       

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

     5,372       63        11,451   

Mitchell Rubber Products, Inc. – Common Stock(C)(Q)

     27,900       28        28   
    

 

 

    

 

 

 
       91        11,479   

Containers, Packaging, and Glass – 2.4%

       

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

     152       152        7,364   

Farming and Agriculture – 0.0%

       

Jackrabbit, Inc. – Common Stock(C)(L)

     548       94        —   

Star Seed, Inc. – Common Stock(C)(L)

     600       1        —   
    

 

 

    

 

 

 
       95        —   

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

 

15


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

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

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

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%

        

Mathey Investments, Inc. – Common Stock(C)(L)

     29,102         777        —    

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

     221,500         222        —    
     

 

 

    

 

 

 
        999        —   

Oil and Gas – 0.0%

        

Tread Corporation – Common Stock(C)(L)

     10,089,048         753        —    

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

        

Funko Acquisition Holdings, LLC(M) – Common Stock(C)(L)

     975         —          —    

Personal, Food, and Miscellaneous Services – 0.0%

        

B-Dry, LLC – Common Stock(C)(L)

     2,500         300        —    

Utilities – 1.1%

        

AquaVenture Holdings Limited – Common Stock(C)(S)(U)

     201,586         3,397        3,433   
        
     

 

 

    

 

 

 

Total Common Equity

      $ 6,295      $ 24,874   
     

 

 

    

 

 

 
        
     

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

      $ 225,046      $ 223,451   
     

 

 

    

 

 

 

AFFILIATE INVESTMENTS(O) – 87.1%

        

Secured First Lien Debt – 51.4%

        

Automobile – 2.9%

        

Meridian Rack & Pinion, Inc.(M) – Term Debt (L+11.5%, 13.5% Cash, Due 12/2018)(K)

   $ 9,660       $ 9,660      $ 8,646   

Beverage, Food, and Tobacco – 3.0%

        

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

     9,050         9,050        9,050   

Chemicals, Plastics, and Rubber – 5.0%

        

GI Plastek, Inc. – Term Debt (L+11.3%, 13.3% Cash, Due 7/2020)(L)

     15,000         15,000        15,000   

Diversified/Conglomerate Manufacturing – 9.7%

        

Alloy Die Casting Co.(M) – Term Debt (L+11.5%, 13.5% Cash, Due 10/2018)(G)(K)

     12,215         12,215        9,772   

Alloy Die Casting Co.(M) – Term Debt (L+11.5%, 13.5% Cash, Due 10/2018)(G)(K)

     175         175        140   

Alloy Die Casting Co.(M) – Term Debt (Due 10/2018)(K)(R)

     910         910        732   

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

     8,796         8,796        7,175   

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

     9,300         9,300        9,207   

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

     2,400         2,400        2,388   
     

 

 

    

 

 

 
        33,796        29,414   

Diversified/Conglomerate Services – 8.0%

        

JR Hobbs Co. – Atlanta, LLC – Line of Credit, $1,050 available (L+8.5%, 10.0% Cash (1.0% Unused Fee), Due 2/2018)(T)

     2,950        2,950        2,950   

JR Hobbs Co. – Atlanta, LLC – Term Debt (L+11.5%, 13.0% Cash, Due 2/2022)(T)

     21,000        21,000        21,000   
     

 

 

    

 

 

 
        23,950        23,950   

Home and Office Furnishings, Housewares, and Durable Consumer Products – 9.0%

        

Brunswick Bowling Products, Inc. – Term Debt (L+14.3%, 16.3% Cash, Due 5/2020)(L)

     11,307         11,307        11,307   

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

     15,770         15,770        15,770   
     

 

 

    

 

 

 
        27,077        27,077   

Leisure, Amusement, Motion Pictures, and Entertainment – 6.1%

        

SOG Specialty Knives & Tools, LLC – Term Debt (L+11.3%, 13.3% Cash, Due 10/2017)(L)

     6,200         6,200        6,200   

SOG Specialty Knives & Tools, LLC – Term Debt (L+12.8%, 14.8% Cash, Due 10/2017)(L)

     12,200         12,200        12,200   
     

 

 

    

 

 

 
        18,400        18,400   

Telecommunications – 4.6%

        

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

     14,000        14,000        14,000   

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

 

16


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

 

Company and Investment(A)(B)(D)(E)      Principal/Shares/  
Units(F)(J)
                Cost                       Fair Value        

Textiles and Leather – 3.1%

        

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

      $ 160,133      $ 154,737  
     

 

 

    

 

 

 

Secured Second Lien Debt – 14.7%

        

Diversified/Conglomerate Manufacturing – 3.2%

        

Precision Southeast, Inc. – Term Debt (L+12.0%, 14.0% Cash, Due 9/2020)(L)

   $ 9,618       $ 9,618      $ 9,618  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 5.3%

        

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) – 6.2%

        

The Mountain Corporation – Term Debt (L+12.5%, 13.5% Cash, Due 8/2021)(L)

     18,600         18,600        18,600  
        
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 44,218      $ 44,218  
     

 

 

    

 

 

 

 

Preferred Equity – 21.0%

        

Automobile – 1.0%

        

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

     3,381       $ 3,381      $ 2,890  

Beverage, Food, and Tobacco – 1.9%

        

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

     4,000         4,000        5,752  

Cargo Transport – 0.0%

        

NDLI, Inc. – Preferred Stock(C)(L)

     3,600         3,600         

Chemicals, Plastics, and Rubber – 1.9%

        

GI Plastek, Inc. – Preferred Stock(C)(L)

     5,150         5,150        5,754  

Diversified/Conglomerate Manufacturing – 0.4%

        

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

     4,904         4,904         

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        1,271  

Precision Southeast, Inc. – Preferred Stock(C)(L)

     37,391         3,739         
     

 

 

    

 

 

 
        14,258        1,271  

Diversified/Conglomerate Services – 2.0%

        

JR Hobbs Co. – Atlanta, LLC – Preferred Stock(C)(T)

     5,920         5,920        5,920  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 9.8%

        

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

     4,943         4,943        11,329  

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

     4,500         4,500        11,046  

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

     6,180         6,180        7,135  
     

 

 

    

 

 

 
        15,623        29,510  

Leisure, Amusement, Motion Pictures, and Entertainment – 0.2%

        

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

     9,749         9,749        711  

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

        

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

     6,899         6,899        153  

Telecommunications – 0.0%

        

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

     12,841         4,196         

Textiles and Leather – 3.7%

        

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

     1,550         1,550        11,170  
        
     

 

 

    

 

 

 

Total Preferred Equity

      $ 74,326      $ 63,131  
     

 

 

    

 

 

 

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

 

17


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(D)(E)      Principal/Shares/  
Units(F)(J)
                Cost                       Fair Value        

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        —   

Precision Southeast, Inc. – Common Stock(C)(L)

     90,909         91        —   
     

 

 

    

 

 

 
        133        —   

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

        

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

     751         1        —   
        
     

 

 

    

 

 

 

Total Common Equity

      $ 134      $ —   
     

 

 

    

 

 

 
        
     

 

 

    

 

 

 

Total Affiliate Investments

      $ 278,811      $ 262,086   
     

 

 

    

 

 

 

CONTROL INVESTMENTS(P) – 5.3%:

        

Secured First Lien Debt – 1.6%

        

Aerospace and Defense – 1.6%

        

Galaxy Tool Holding Corporation – Line of Credit, $200 available (L+4.5%, 6.5% Cash (1.0% Unused Fee), Due 8/2019)(L)

   $ 4,800       $ 4,800      $ 4,800   

Secured Second Lien Debt – 1.7%

        

Aerospace and Defense – 1.7%

        

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

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

Preferred Equity – 2.0%

        

Aerospace and Defense – 2.0%

        

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

     5,517,444       $ 11,464      $ 6,242   

Common Equity – 0.0%

        

Aerospace and Defense – 0.0%

        

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

     88,843       $ 48      $ —   
        
     

 

 

    

 

 

 

Total Control Investments

      $ 21,312      $ 16,042   
     

 

 

    

 

 

 
        
     

 

 

    

 

 

 

TOTAL INVESTMENTS(W) – 166.6%

      $ 525,169      $ 501,579   
     

 

 

    

 

 

 

 

 

 

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

 

18


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2017

(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 $448.0 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, 2017, our investment in AquaVenture Holdings Limited (“AquaVenture”) is considered a non-qualifying asset under Section 55 of the 1940 Act and represents 0.7% 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 1.0% as of March 31, 2017. 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, 2017.
(E)  Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the FASB 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, 2017.
(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 Standard & 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.
(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)  Fair value was based on the closing market price of our shares as of the reporting date less a discount for lack of marketability.
(T)  New portfolio investment valued at cost, as it was determined that the price paid during the three months ended March 31, 2017 best represents fair value as of March 31, 2017.
(U)  As of March 31, 2017, our investment in AquaVenture was valued using Level 2 inputs within the ASC 820 fair value hierarchy. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(V)  Refer to Note 10—Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information regarding this guaranty.
(W)  Cumulative gross unrealized depreciation for federal income tax purposes is $77.9 million; cumulative gross unrealized appreciation for federal income tax purposes is $58.3 million. Cumulative net unrealized depreciation is $19.5 million, based on a tax cost of $521.1 million.

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

 

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GLADSTONE INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(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 nine months ended December 31, 2017 are not necessarily indicative of results that ultimately may be achieved for the fiscal year ending March 31, 2018 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, 2017, as filed with the SEC on May 15, 2017.

 

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Use of Estimates

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

Reclassifications

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

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.

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

We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value (“TEV”) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review our valuation of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our 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 or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team 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 or revenue multiples; however, TEV may also be calculated using a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses the DCF to calculate TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit impaired portfolio companies.

 

    Yield Analysis — The Valuation Team generally determines the fair value of our debt investments (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 the 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 SPSE and market quotes.

 

    Market Quotes — For our investments for which a limited market exists, we generally base fair value on readily available and reliable market quotations, which are corroborated by the Valuation Team (generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (“IBP”) in the bid-to-ask price range obtained from the respective originating syndication agent’s trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy. 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. If applicable, new and follow-on debt and equity investments made during the current reporting quarter are generally valued at our original cost basis, as near-measurement date transaction value 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 December 31, 2017, certain of our loans to Alloy Die Casting Co. (“Alloy Die Casting”) and Tread Corporation (“Tread”) were on non-accrual status, with an aggregate debt cost basis of $15.6 million, or 3.7% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $11.1 million, or 2.9% of the fair value of all debt investments in our portfolio. As of March 31, 2017, certain of our loans to Alloy Die Casting and Tread were on non-accrual status, with an aggregate debt cost basis of $15.6 million, or 4.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $11.9 million, or 3.3% 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 December 31, 2017 and March 31, 2017, we did not have any loans with a PIK interest component. During the three and nine months ended December 31, 2017 and 2016, we did not record any PIK income, nor did we collect any PIK interest in cash.

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.

Deferred Financing and Offering Costs

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

Related Party Fees

We 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”).

 

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We are also party to the Administration Agreement with the Administrator, which is also owned and controlled by our chairman and chief executive officer, whereby we pay separately for administrative services. These fees are accrued when the services are performed and generally paid one month in arrears.

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

Recent Accounting Pronouncements

In 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. We are currently assessing the impact of ASU 2016-18 and do not anticipate a material impact on our financial position, results of operations or cash flows. 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.

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. We are currently assessing the impact of ASU 2016-15 and do not anticipate a material impact on our financial position, results of operations or 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.

In March 2016, the FASB issued Accounting Standards Update 2016-06,Contingent Put and Call Options in Debt Instruments” (“ASU 2016-06”), which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related. The adoption of ASU 2016-06 did not have a material impact on our financial position, results of operations or cash flows. ASU 2016-06 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years, and we adopted ASU 2016-06 effective April 1, 2017.

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

In February 2015, the FASB issued Accounting Standards Update 2015-02,Amendments to the Consolidation Analysis” (“ASU 2015-02”), which amends or supersedes the scope and consolidation guidance under existing GAAP. The adoption of ASU 2015-02 did not have a material impact on our financial position, results of operations or cash flows. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-02 effective April 1, 2016. In October 2016, the FASB issued Accounting Standards Update 2016-17,Interests Held through Related Parties That Are under Common Control” (“ASU 2016-17”), which amends the consolidation guidance in ASU 2015-02 regarding the treatment of indirect interests held through related parties that are under common control. The adoption of ASU 2016-17 did not have a material impact on our financial position, results of operations or cash flows. ASU 2016-17 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those years, and we adopted ASU 2016-17 effective April 1, 2017.

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 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 2014-09.

 

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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 continue to assess the impact of ASU 2014-09, as amended, and expect to identify similar performance obligations as compared to existing guidance. As a result, we do not anticipate 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, our investments’ fair value is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.

 

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

 

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

 

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

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

As of December 31, 2017, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investments in AquaVenture Holdings Limited, f/k/a Quench Holdings Corp., (“AquaVenture”) and Funko Acquisition Holdings, LLC. (“Funko”), which were valued using Level 1 inputs and Level 2 inputs, respectively. As of March 31, 2017, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in AquaVenture, 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. During the three months ended December 31, 2017, we transferred our investment in Funko from Level 3 to Level 2 as a result of the initial public offering of Funko, Inc. in November 2017 due to the convertibility of our investment into shares of Funko, Inc. In April 2017, we transferred our investment in 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. During the three and nine months ended December 31, 2016, we transferred our investment in AquaVenture from Level 3 to Level 2 as a result of its initial public offering in October 2016.

 

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As of December 31, 2017 and March 31, 2017, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:

 

            Fair Value Measurements  
     Fair Value      Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
    Significant Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

As of December 31, 2017:

         

Secured first lien debt

   $ 292,909      $ —       $ —       $ 292,909  

Secured second lien debt

     97,863        —         —         97,863  

Preferred equity

     147,196        —         —         147,196  

Common equity/equivalents

     28,411        227 (A)      157 (B)      28,027  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Investments at December 31, 2017

   $ 566,379      $ 227     $ 157     $ 565,995  
  

 

 

    

 

 

   

 

 

   

 

 

 
            Fair Value Measurements  
     Fair Value      Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
    Significant Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

As of March 31, 2017:

         

Secured first lien debt

   $ 268,150      $ —       $ —       $ 268,150  

Secured second lien debt

     95,040        —         —         95,040  

Preferred equity

     113,515        —         —         113,515  

Common equity/equivalents

     24,874        —         3,433 (C)      21,441  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Investments at March 31, 2017

   $ 501,579      $ —       $ 3,433     $ 498,146  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(A) Fair value was determined based on the closing market price of our shares of AquaVenture at the reporting date.
(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 expires in May 2018, and other restrictions.
(C) Fair value was determined based on the closing market price of our shares of AquaVenture 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 April 2017.

 

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The following table presents our portfolio investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy, and carried at fair value as of December 31, 2017 and March 31, 2017, 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
 
     December 31, 2017     March 31, 2017  

Non-Control/Non-Affiliate Investments

    

Secured first lien debt

   $ 112,365     $ 108,613  

Secured second lien debt

     30,300       45,822  

Preferred equity

     56,555       44,142  

Common equity/equivalents

     28,027 (A)      21,441 (B) 
  

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

     227,247       220,018  

Affiliate Investments

    

Secured first lien debt

     175,544       154,737  

Secured second lien debt

     62,563       44,218  

Preferred equity

     89,780       63,131  

Common equity/equivalents

     —         —    
  

 

 

   

 

 

 

Total Affiliate Investments

     327,887       262,086  

Control Investments

    

Secured first lien debt

     5,000       4,800  

Secured second lien debt

     5,000       5,000  

Preferred equity

     861       6,242  

Common equity/equivalents

     —         —    
  

 

 

   

 

 

 

Total Control Investments

     10,861       16,042  
  

 

 

   

 

 

 

Total investments at fair value using Level 3 inputs

   $ 565,995     $ 498,146  
  

 

 

   

 

 

 

 

(A) Excludes our investments in AquaVenture and Funko, each with a fair value of $0.2 million as of December 31, 2017, which were valued using Level 1 inputs and Level 2 inputs, respectively.
(B) Excludes our investment in AquaVenture with a fair value of $3.4 million as of March 31, 2017, 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 December 31, 2017 and March 31, 2017. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations for the particular input.

 

    Quantitative Information about Level 3 Fair Value Measurements
    Fair Value as of
December 31, 2017
    Fair Value as
of March 31,
2017
    Valuation
Technique/

Methodology
   Unobservable
Input
   Range / Weighted
Average as of

December 31, 2017
  Range / Weighted
Average as of

March 31, 2017

Secured first lien debt

  $ 274,259 (A)    $ 232,590 (A)    TEV    EBITDA
multiple
   4.8x – 8.0x / 6.0x   4.3x – 7.9x / 6.2x
         EBITDA    $1,169 – $14,024 /

$5,129

  $897 – $10,887 /

$4,093

         Revenue
multiple
   0.3x – 0.8x / 0.6x   —  
         Revenue    $15,633 – $31,414 /
$25,346
  —  
    18,650       35,560     Yield Analysis    Discount Rate    19.1% – 22.9% /

20.9%

  13.1% – 30.3% /
19.7%

Secured second lien debt

    89,346 (B)      81,747 (B)    TEV    EBITDA
multiple
   4.2x – 6.5x / 6.2x   5.3x – 7.4x / 6.4x
         EBITDA    $2,387 – $8,539 /
$7,003
  $2,357 – $5,824 /
$4,588
         Revenue
multiple
   0.9x – 0.9x / 0.9x   —  
         Revenue    $23,326 – $23,326 /
$23,326
  —  
    8,517       13,293     Yield Analysis    Discount Rate    22.4% – 23.9% /

22.5%

  9.2% – 9.2% /

9.2%

Preferred equity(C)

    147,196       113,515     TEV    EBITDA
multiple
   4.2x – 8.0x / 6.0x   4.8x – 7.9x / 6.3x
         EBITDA    $1,169 – $14,024 /
$5,227
  $897 – $97,366 /
$4,415
         Revenue
multiple
   0.3x – 0.9x / 0.7x   0.5x – 0.5x / 0.5x
         Revenue    $15,633 – $31,414 /
$25,095
  $21,662 – $21,662 /
$21,662

Common equity/equivalents(D)

    28,027 (E)      21,441 (F)    TEV    EBITDA
multiple
   4.8x – 6.0x / 5.4x   4.3x – 9.8x / 6.0x
         EBITDA    $1,169 – $5,831 /
$2,394
  $897 – $13,378 /
$3,687
         Revenue
multiple
   0.3x – 0.9x / 0.3x   0.5x – 0.5x / 0.5x
         Revenue    $15,633 – $23,326 /
$16,186
  $21,662 – $21,662 /
$21,662
 

 

 

   

 

 

           

Total

  $     565,995     $     498,146    
 

 

 

   

 

 

           

 

(A) Fair value as of December 31, 2017 includes three new proprietary debt investments for a combined $29.3 million, which were valued at cost using the transaction price as the unobservable input, and one proprietary debt investment for $9.9 million, which was valued at the expected payoff amount as the unobservable input. Fair value as of March 31, 2017 includes two new proprietary debt investments for a combined $24.0 million, which were valued at cost using the transaction price as the unobservable input.
(B) Fair value as of December 31, 2017 includes one proprietary debt investment for $13.0 million, which was valued at the expected payoff amount as the unobservable input. Fair value as of March 31, 2017 includes one proprietary debt investment for $15.2 million, which was valued at the expected payoff amount as the unobservable input.
(C) Fair value as of December 31, 2017 includes one new proprietary equity investment for $6.8 million, which was valued at cost using the transaction price as the unobservable input, and one proprietary equity investment for $3.4 million, which was valued at the expected payoff amount as the unobservable input. Fair value as of March 31, 2017 includes one new proprietary equity investment for $5.9 million, which was valued at cost using the transaction price as the unobservable input, and one proprietary equity investment for $3.9 million, which was valued at the expected payoff amount as the unobservable input.
(D) Fair value as of December 31, 2017 includes two proprietary equity investments for a combined $17.8 million, which were valued at the expected payoff amount as the unobservable input. Fair value as of March 31, 2017 includes one proprietary equity investment for $28, which was valued at the expected payoff amount as the unobservable input.
(E) Fair value as of December 31, 2017 excludes our investments in AquaVenture and Funko, each with a fair value of $0.2 million, which were valued using Level 1 inputs and Level 2 inputs, respectively.
(F) Fair value as of March 31, 2017 excludes our investment in AquaVenture with a fair value of $3.4 million, which was valued using Level 2 inputs.

 

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Table of Contents

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 and nine months ended December 31, 2017 and 2016 for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

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

Three months ended December 31, 2017:

          

Fair value as of September 30, 2017

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

Total gain (loss):

          

Net realized gain (loss)(A)

     —         —         25       —         25  

Net unrealized appreciation (depreciation)(B)

     (1,592     (1,133     12,405       (2,424     7,256  

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

     —         —         2,215       91       2,306  

New investments, repayments and settlements(C):

          

Issuances / originations

     31,292       26,122       15,729       —         73,143  

Settlements / repayments

     (17,000     (9,618     —         —         (26,618

Sales

     —         —         (8,914     (91     (9,005

Transfers(D)

     (8,317     8,317       (159     —         (159
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2017

   $ 292,909     $ 97,863     $ 147,196     $ 28,027     $ 565,995  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Nine months ended December 31, 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)

     —         —         982       —         982  

Net unrealized appreciation (depreciation)(B)

     (4,085     (7,674     22,202       6,614       17,057  

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

     1,881       (1,670     1,102       868       2,181  

New investments, repayments and settlements(C):

          

Issuances / originations

     64,832       27,128       22,216       —         114,176  

Settlements / repayments

     (29,552     (23,278     —         —         (52,830

Sales

     —         —         (12,662     (896     (13,558

Transfers(D)

     (8,317     8,317       (159     —         (159
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2017

   $   292,909     $   97,863     $   147,196     $   28,027     $   565,995  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Three months ended December 31, 2016:

           

Fair value as of September 30, 2016

   $ 262,108     $ 90,496      $ 111,109     $ 22,259     $ 485,972  

Total gain (loss):

           

Net realized gain (loss)(A)

     (7,725     —          3,345       (1     (4,381

Net unrealized appreciation (depreciation)(B)

     (1,353     4,361        (789     1,878       4,097  

Reversal of previously recorded appreciation upon realization(B)

     9,253       —          (4,144     1       5,110  

New investments, repayments and settlements(C):

           

Issuances / originations

     8,796       —          —         —         8,796  

Settlements / repayments

     (19,021     —          —         —         (19,021

Sales

     —         —          (8,814     —         (8,814

Transfers(D)

     —         —          —         (4,359     (4,359
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2016

   $   252,058     $   94,857      $   100,707     $   19,778     $   467,400  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Secured
First Lien
Debt
    Secured
Second
Lien Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Nine months ended December 31, 2016:

          

Fair value as of March 31, 2016

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

Total gain (loss):

          

Net realized gain (loss)(A)

     (7,725     —         3,345       18,825       14,445  

Net unrealized appreciation (depreciation)(B)

     (6,307     10,273       13,306       2,107       19,379  

Reversal of previously recorded appreciation upon realization(B)

     9,253       —         (18,525     (6,834     (16,106

New investments, repayments and settlements(C):

          

Issuances / originations

     12,982       19,600       6,899       501       39,982  

Settlements / repayments

     (21,182     (14,500     —         —         (35,682

Sales

     —         —         (17,868     (20,047     (37,915

Transfers(D)

     (15,000     15,000       —         (4,359     (4,359
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2016

   $ 252,058     $ 94,857     $ 100,707     $ 19,778     $ 467,400  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)  Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the respective periods ended December 31, 2017 and 2016.
(B) Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the periods ended December 31, 2017 and 2016.
(C) Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, PIK and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments.
(D)  2017: Transfers represent $8.3 million of secured first lien debt of Alloy Die Casting, which was converted into secured second lien debt during the three months ended December 31, 2017 and $0.2 million of preferred equity of Funko, which was transferred from Level 3 to Level 2 during the three months ended December 31, 2017 as a result of the initial public offering of Funko, Inc. (our units in Funko can be converted into shares of Funko, Inc. after the expiration of the lock-up period in May 2018 and certain other restrictions are met).

2016: Transfers represent $15.0 million of secured first lien debt of Cambridge Sound Management, Inc. (“Cambridge”), which was converted into secured second lien debt during the three months ended September 30, 2016, and $4.4 million of common equity of AquaVenture, which was transferred from Level 3 to Level 2 during the three months ended December 31, 2016 as a result of its initial public offering.

Investment Activity

During the nine months ended December 31, 2017, the following significant transactions occurred:

 

    In April 2017, we sold our investment in Mitchell Rubber Products, Inc. (“Mitchell”), which resulted in success fee income of $1.7 million and a realized gain of $1.0 million. In connection with the sale, we received net cash proceeds of $19.0 million, including the repayment of our debt investment of $13.6 million at par.

 

    In May and June 2017, we sold a portion of our common stock investment in AquaVenture resulting in net cash proceeds of $2.0 million, which represented a return of capital. In December 2017, we sold another portion of our common stock investment in AquaVenture resulting in net cash proceeds of $1.2 million, which also represented a return of capital.

 

    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, we received success fee income of $0.3 million from Mathey. 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. In connection with the merger, we also extended a secured first lien revolving line of credit to SBS with a total facility amount of $1.5 million, which was undrawn at the time of the transaction.

 

    In August 2017, we invested $28.3 million in Pioneer Square Brands, Inc. (“Pioneer”) through a combination of secured first lien debt and preferred equity. Pioneer, headquartered in Seattle, Washington, is a designer, manufacturer, and marketer of premium mobile technology bags and cases serving a diverse customer base, primarily in the education and corporate sectors.

 

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Table of Contents
    In November 2017, one of our portfolio companies, GI Plastek, Inc. (“GI Plastek”) merged with another one of our portfolio companies, Precision Southeast, Inc. (“Precision”), into a new company, PSI Molded Plastics, Inc. (“PSI Molded”). As a result of this transaction, our debt investments in GI Plastek and Precision, which totaled $15.0 million and $9.6 million, respectively, at principal and cost, were assumed by PSI Molded and combined into a new secured second lien term loan totaling $24.6 million. Our preferred equity investment in GI Plastek, with a cost basis of $5.2 million and our preferred and common equity investments in Precision, with a combined cost basis of $3.8 million, were converted into a preferred equity investment in PSI Molded with the same cost basis.

 

    In November 2017, we invested $31.1 million in ImageWorks Display and Marketing Group, Inc. (“ImageWorks”) through a combination of secured first lien debt and preferred equity. ImageWorks, headquartered in Winston-Salem, North Carolina, is a market leading point-of-purchase display provider specializing in the design, engineering and production of custom semi-permanent and permanent displays across a variety of brands and consumer product end markets.

 

    In December 2017, we invested $6.9 million in an existing portfolio company, Brunswick Bowling Products, Inc., through a secured first lien debt investment.

Investment Concentrations

As of December 31, 2017, our investment portfolio consisted of investments in 34 portfolio companies located in 17 states across 18 different industries with an aggregate fair value of $566.4 million. Our investments in Cambridge, Nth Degree, Inc. (“Nth Degree”), JR Hobbs Co. – Atlanta, LLC, PSI Molded, and Counsel Press, Inc. represented our five largest portfolio investments at fair value as of December 31, 2017, and collectively comprised $171.2 million, or 30.3%, of our total investment portfolio at fair value.

The following table summarizes our investments by security type as of December 31, 2017 and March 31, 2017:    

 

     December 31 2017     March 31, 2017  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 306,802        53.8   $ 292,909        51.7   $ 284,823        54.3   $ 268,150        53.5

Secured second lien debt

     110,229        19.3       97,863        17.3       93,078        17.7       95,040        18.9  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

     417,031        73.1       390,772        69.0       377,901        72.0       363,190        72.4  

Preferred equity

     151,162        26.5       147,196        26.0       140,791        26.8       113,515        22.6  

Common equity/equivalents

     2,540        0.4       28,411        5.0       6,477        1.2       24,874        5.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity/equivalents

     153,702        26.9       175,607        31.0       147,268        28.0       138,389        27.6  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 570,733        100.0   $ 566,379        100.0   $ 525,169        100.0   $ 501,579        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications as of December 31, 2017 and March 31, 2017:

 

     December 31, 2017     March 31, 2017  
     Fair Value      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Diversified/Conglomerate Services

   $ 128,972        22.8   $ 85,248        17.0

Home and Office Furnishings, Housewares, and Durable Consumer Products

     118,635        20.9       93,062        18.6  

Chemicals, Plastics, and Rubber

     59,571        10.5       65,156        13.0  

Personal and Non-Durable Consumer Products (Manufacturing Only)

     42,617        7.5       19,011        3.8  

Leisure, Amusement, Motion Pictures, Entertainment

     30,384        5.4       32,453        6.5  

Diversified/Conglomerate Manufacturing

     27,188        4.8       40,303        8.0  

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

     21,799        3.8       17,283        3.4  

Containers, Packaging, and Glass

     21,144        3.7       18,266        3.6  

Farming and Agriculture

     19,581        3.5       19,096        3.8  

Textiles and Leather

     19,083        3.4       20,369        4.1  

Cargo Transport

     15,832        2.8       15,891        3.2  

Automobile

     14,226        2.5       20,792        4.1  

Telecommunications

     14,000        2.5       14,000        2.8  

Beverage, Food, and Tobacco

     12,960        2.3       14,802        3.0  

Aerospace and Defense

     10,861        1.9       16,042        3.2  

Other < 2.0%

     9,526        1.7       9,805        1.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 566,379        100.0   $ 501,579        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Investments at fair value were included in the following geographic regions of the U.S. as of December 31, 2017 and March 31, 2017:

 

     December 31, 2017     March 31, 2017  
     Fair Value      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

South

   $ 213,409        37.7   $ 175,136        34.9

Northeast

     177,453        31.3       159,614        31.8  

West

     130,743        23.1       123,475        24.6  

Midwest

     44,774        7.9       43,354        8.7  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 566,379        100.0   $ 501,579        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of December 31, 2017:

 

          Amount(A)  

For the remaining three months ending March 31:

   2018    $ 11,713  

For the fiscal years ending March 31:

   2019      68,416  
   2020      89,253  
   2021      80,007  
   2022      80,196  
   Thereafter      87,535  
     

 

 

 
           Total contractual repayments    $ 417,120  
   Adjustments to cost basis of debt investments      (89
   Investments in equity securities      153,702  
     

 

 

 
  

        Total cost basis of investments held as of December 31, 2017:

   $ 570,733  
     

 

 

 

 

(A) Subsequent to December 31, 2017, three debt investments with principal balances of $9.9 million, $9.7 million, and $11.3 million, respectively, which were previously scheduled to mature during the fiscal years ending March 31, 2018, March 31, 2019, and March 31, 2021, respectively, were extended to mature during the fiscal years ending March 31, 2019, March 31, 2020, and March 31, 2023, 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 December 31, 2017 and March 31, 2017, we had gross receivables from portfolio companies of $0.9 million and $1.2 million, respectively. The allowance for uncollectible receivables was $0.2 million and $0.3 million as of December 31, 2017 and March 31, 2017, 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 11, 2017, 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, 2018.

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

 

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

 

     Three Months Ended December 31,     Nine Months Ended December 31,  
     2017     2016     2017     2016  

Average total assets subject to base management fee(A)

   $ 553,800     $ 488,200     $ 522,600     $ 495,900  

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.5     1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(B)

     2,769       2,441       7,839       7,439  

Credits to fees from Adviser - other(B)

     (1,066     (535     (2,540     (2,486
  

 

 

   

 

 

   

 

 

   

 

 

 

Net base management fee

   $ 1,703     $ 1,906     $ 5,299     $ 4,953  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee(B)

     1,567       1,678       4,616       5,081  

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

     (1,567     (1,678     (4,616     (5,081
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan servicing fee

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee – income-based

   $ 2,070     $ 1,178     $ 4,537     $ 3,427  

Incentive fee – capital gains-based(C)

     752       —         752       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total incentive fee(B)

     2,822       1,178       5,289       3,427  

Credits to fees from Adviser - other(B)

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net total incentive fee

   $ 2,822     $ 1,178     $ 5,289     $ 3,427  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 $0.1 million for each of the three month periods ended December 31, 2017 and 2016 and $0.2 million for each of the nine month periods ended December 31, 2017 and 2016, 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.

Incentive Fee

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

 

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The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets, adjusted appropriately for any share issuances or repurchases during the period (the “Hurdle Rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is payable quarterly to the Adviser and is computed as follows:

 

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

 

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

 

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

The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the preceding calendar year. The capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital losses since our inception, less (iii) the entire portfolio’s aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit between the net sales price of each investment, when sold, and the original cost of such investment since our inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of deficit between the fair value of each investment security as of the applicable calculation date and the original cost of such investment security. We have not incurred capital gains-based incentive fees from inception through December 31, 2017, 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. As of and for the three and nine month periods ended December 31, 2017, we recorded a capital gains-based incentive fee of $0.8 million, which is not contractually due under the terms of the Advisory Agreement. There has been no GAAP accrual of a capital gains-based incentive fee for any period prior to December 31, 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) and their respective staffs.

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. These administrative fees are accrued at the end of the quarter when the services are performed and recorded on our accompanying Consolidated Statements of Operations and generally

 

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paid the following quarter. On July 11, 2017, our Board of Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of such party, approved the annual renewal of the Administration Agreement through August 31, 2018.

Other Transactions

Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee. The fees received by Gladstone Securities from portfolio companies totaled $0.3 million and $0 during the three month periods ended December 31, 2017 and 2016, respectively, and $0.6 million and $0.3 million during the nine month periods ended December 31, 2017 and 2016, respectively.

Related Party Fees Due

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

 

     As of December 31,      As of March 31,  
     2017      2017  

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

   $ 519      $ 346  

Incentive fee due to Adviser(A)

     2,822        1,324  

Other due to Adviser

     50        1  
  

 

 

    

 

 

 

Total fees due to Adviser

   $ 3,391      $ 1,671  

Fee due to Administrator

   $ 261      $ 296  
  

 

 

    

 

 

 

Total related party fees due

   $ 3,652      $ 1,967  
  

 

 

    

 

 

 

 

(A)  Includes a capital gains-based incentive fee of $0.8 million and $0 at December 31, 2017 and March 31, 2017, 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 AdviserIncentive 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 $24 and $27 as of December 31, 2017 and March 31, 2017, 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 December 31, 2017 and March 31, 2017.

NOTE 5. BORROWINGS

Revolving Line of Credit

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

On January 20, 2017, we entered into Amendment No. 3 to the Credit Facility, which clarified a definition in the Company’s performance guaranty under the Credit Facility.

 

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

 

     As of December 31,      As of March 31,  
     2017      2017  

Commitment amount

   $ 165,000      $ 165,000  

Borrowings outstanding at cost

     96,600        69,700  

Availability(A)

     68,400        95,300  

 

     For the Three Months Ended
December 31,
    For the Nine Months Ended
December 31,
 
     2017     2016     2017     2016  

Weighted average borrowings outstanding

   $ 71,523     $ 59,392     $ 51,938     $ 96,236  

Effective interest rate(B)

     5.3     4.9     5.8     4.0

Commitment (unused) fees incurred

   $ 135     $ 160     $ 522     $ 388  

 

(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 $62.6 million and $93.4 million as of December 31, 2017 and March 31, 2017, respectively.
(B) Excludes the impact of deferred financing costs and includes weighted average 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 (a) $210.0 million or (b) $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 $220.6 million as of December 31, 2017, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Sections 18 and 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 December 31, 2017, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $471.7 million, asset coverage on our senior securities representing indebtedness of 551.9%, 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 December 31, 2017, we were in compliance with all covenants under the Credit Facility.

In July 2013, pursuant to the terms of the then effective revolving line of credit, we entered into an interest rate cap agreement with KeyBank effective October 2013 for a notional amount of $45.0 million. The interest rate cap agreement expired in April 2016. Prior to its expiration in April 2016, the agreement effectively limited the interest rate on a portion of our borrowings under the then effective revolving line of credit. We incurred a premium fee of $75 in conjunction with this agreement, which was recorded in Net realized loss on other on our accompanying Consolidated Statements of Operations during the nine months ended December 31, 2016.

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 December 31, 2017 and March 31, 2017, the discount rate used to determine the fair value of the Credit Facility was 30-day LIBOR, plus 3.00% and 3.15%, respectively, per annum, plus an unused fee of 0.5% and 0.6%, respectively. 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 December 31, 2017 and March 31, 2017, the Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in Net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations.

 

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The following tables present the Credit Facility, carried at fair value as of December 31, 2017 and March 31, 2017, by caption on our accompanying Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and a roll-forward of the changes in fair value during the three and nine months ended December 31, 2017 and 2016:

 

     Level 3 – Borrowings  
     Recurring Fair Value Measurements  
     Reported in Consolidated  
     Statements of Assets and Liabilities Using Significant
Unobservable Inputs (Level 3)
 
     December 31, 2017      March 31, 2017  

Credit Facility

   $ 96,858      $ 69,700  
  

 

 

    

 

 

 

 

Fair Value Measurements of Borrowings Using Significant

Unobservable Inputs (Level 3) Reported in

 

Consolidated Statements of Assets and Liabilities

 
       Credit Facility  

Three months ended December 31, 2017:

    

Fair value at September 30, 2017

     $         56,700  

Borrowings

       46,700  

Repayments

       (6,800

Unrealized appreciation

       258  
    

 

 

 

Fair value at December 31, 2017

     $ 96,858  
    

 

 

 

Nine months ended December 31, 2017:

    

Fair value at March 31, 2017

     $ 69,700  

Borrowings

       96,300  

Repayments

       (69,400

Unrealized appreciation

       258  

Fair value at December 31, 2017

     $ 96,858  
    

 

 

 

Fair Value Measurements of Borrowings Using Significant

Unobservable Inputs (Level 3) Reported in

 

Consolidated Statements of Assets and Liabilities

 
       Credit Facility  

Three months ended December 31, 2016:

    

Fair value at September 30, 2016

     $ 63,500  

Borrowings

       8,000  

Repayments

       (27,800
    

 

 

 

Fair value at December 31, 2016

     $ 43,700  
    

 

 

 

Nine months ended December 31, 2016:

    

Fair value at March 31, 2016

     $ 95,000  

Borrowings

       45,200  

Repayments

       (96,500
    

 

 

 

Fair value at December 31, 2016

     $ 43,700  
    

 

 

 

The fair value of the collateral under the Credit Facility was $484.6 million and $448.0 million as of December 31, 2017 and March 31, 2017, respectively.

 

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NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

The following tables summarize our 6.75% Series B Cumulative Term Preferred Stock (our “Series B Term Preferred Stock” or “Series B”), our 6.50% Series C Cumulative Term Preferred Stock (our “Series C Term Preferred Stock” or “Series C”), and our 6.25% Series D Cumulative Term Preferred Stock (our “Series D Term Preferred Stock” or “Series D”) outstanding as of December 31, 2017 and March 31, 2017:

As of December 31, 2017:

 

Class of
Term
Preferred
Stock
  Ticker
Symbol
  Date Issued   Mandatory
Redemption
Date(A)
  Interest
Rate
  Shares
Outstanding
    Liquidation
Preference
per Share
    Total
Liquidation
Preference
 
Series B   GAINO   November 13,
2014
  December 31,
2021
  6.75%     1,656,000     $ 25.00     $ 41,400  
Series C   GAINN   May 12,
2015
  May 31,
2022
  6.50%     1,610,000       25.00       40,250  
Series D   GAINM   September 26,
2016
  September 30,

2023

  6.25%     2,300,000       25.00       57,500  
         

 

 

   

 

 

   

 

 

 

Term preferred stock, gross(B)

    5,566,000     $ 25.00     $ 139,150  

Less: Discounts

        (3,730
     

 

 

 

Term preferred stock, net(C)

      $ 135,420  
     

 

 

 

As of March 31, 2017:

 

Class of
Term
Preferred
Stock
  Ticker
Symbol
  Date Issued   Mandatory
Redemption
Date(A)
  Interest
Rate
  Shares
Outstanding
    Liquidation
Preference
per Share
    Total
Liquidation
Preference
 
Series B   GAINO   November 13,
2014
  December 31,
2021
  6.75%     1,656,000     $ 25.00     $ 41,400  
Series C   GAINN   May 12,
2015
  May 31,
2022
  6.50%     1,610,000       25.00       40,250  
Series D   GAINM   September 26,
2016
  September 30,

2023

  6.25%     2,300,000       25.00       57,500  
         

 

 

   

 

 

   

 

 

 

Term preferred stock, gross(B)

    5,566,000     $ 25.00     $ 139,150  

Less: Discounts

        (4,315
     

 

 

 

Term preferred stock, net(C)

      $ 134,835  
     

 

 

 

 

(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, any time on or after May 31, 2018 for our Series C Term Preferred Stock, and any time on or after September 30, 2018 for our Series D Term Preferred Stock.
(B) As of December 31, 2017 and March 31, 2017, the asset coverage on our senior securities that are stock calculated pursuant to Sections 18 and 61 of the 1940 Act was 236.0% and 235.6%, 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” during the nine months ended December 31, 2016.

 

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The following tables summarize dividends declared by our Board of Directors and paid by us on our 7.125% Series A Cumulative Term Preferred Stock (our “Series A Term Preferred Stock”), Series B Term Preferred Stock, Series C Term Preferred Stock, and Series D Term Preferred Stock during the nine months ended December 31, 2017 and 2016:

For the Nine Months Ended December 31, 2017:

 

Declaration Date

  

Record Date

  

Payment Date

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

Series D Term
Preferred
Stock(A)
 

April 11, 2017

   April 21, 2017    April 28, 2017    $ 0.140625      $ 0.135417      $ 0.13020833  

April 11, 2017

   May 19, 2017    May 31, 2017      0.140625        0.135417        0.13020833  

April&nb