Gladstone Investment Corporation
GLADSTONE INVESTMENT CORPORATION\DE (Form: 10-Q, Received: 11/02/2016 16:04:43)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016

OR

 

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

For the transition period from                      to                     

Commission file number: 811-23191

GLADSTONE INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   83-0423116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 100

MCLEAN, VIRGINIA

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

(703) 287-5800

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of November 1, 2016, was 30,270,958.

 

 

 


Table of Contents

GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

 

PART I.     FINANCIAL INFORMATION:   
  Item 1.   Financial Statements (Unaudited)   
    Consolidated Statements of Assets and Liabilities as of September 30 and March 31, 2016      2   
    Consolidated Statements of Operations for the three and six months ended September 30, 2016 and 2015      3   
    Consolidated Statements of Changes in Net Assets for the six months ended September 30, 2016 and 2015      4   
    Consolidated Statements of Cash Flows for the six months ended September 30, 2016 and 2015      5   
    Consolidated Schedules of Investments as of September 30 and March 31, 2016      6   
    Notes to Consolidated Financial Statements      14   
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   
    Overview      37   
    Results of Operations      42   
    Liquidity and Capital Resources      52   
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk      59   
  Item 4.   Controls and Procedures      59   
PART II.     OTHER INFORMATION:   
  Item 1.   Legal Proceedings      60   
  Item 1A.   Risk Factors      60   
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      60   
  Item 3.   Defaults Upon Senior Securities      60   
  Item 4.   Mine Safety Disclosures      60   
  Item 5.   Other Information      60   
  Item 6.   Exhibits      60   
SIGNATURES      61   


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     September 30,     March 31,  
     2016     2016  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $199,644 and $191,757, respectively)

   $ 187,900      $ 180,933   

Affiliate investments (Cost of $301,719 and $304,856, respectively)

     279,615        296,723   

Control investments (Cost of $21,012 and $21,512 respectively)

     18,457        10,000   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $522,375 and $518,125, respectively)

     485,972        487,656   

Cash and cash equivalents

     5,097        4,481   

Restricted cash and cash equivalents

     1,035        1,107   

Interest receivable

     1,972        2,790   

Due from custodian

     2,689        1,638   

Deferred financing costs, net

     696        1,147   

Other assets, net

     1,601        4,256   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 499,062      $ 503,075   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Line of credit at fair value (Cost of $63,500 and $95,000, respectively)

   $ 63,500      $ 95,000   

Secured borrowing

     5,096        5,096   
  

 

 

   

 

 

 

Total borrowings

     68,596        100,096   

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

6,356,000 and 4,956,000 shares authorized; 5,566,000 and 4,866,000 shares issued and outstanding, respectively, net

     134,459        118,465   

Accounts payable and accrued expenses

     1,274        1,054   

Fees due to Adviser (A)

     622        1,912   

Fee due to Administrator (A)

     275        311   

Other liabilities

     1,734        2,215   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 206,960      $ 224,053   
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

   $ 292,102      $ 279,022   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

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

   $ 30      $ 30   

Capital in excess of par value

     310,793        311,608   

Cumulative net unrealized depreciation of investments

     (36,403     (30,469

Cumulative net unrealized depreciation of other

     —          (75

Net investment income in excess of distributions

     7,684        6,426   

Accumulated net realized gain (loss)

     9,998        (8,498
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 292,102      $ 279,022   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 9.65      $ 9.22   
  

 

 

   

 

 

 

 

(A) Refer to Note 4 — Related Party Transactions for additional information.
(B) Refer to Note 10 — Commitments and Contingencies for additional information.

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

 

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GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 
     2016     2015     2016     2015  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 4,357      $ 3,970      $ 8,862      $ 7,772   

Affiliate investments

     7,168        7,329        14,082        14,253   

Control investments

     204        645        413        1,304   

Cash and cash equivalents

     1        1        1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     11,730        11,945        23,358        23,330   

Other income

        

Non-Control/Non-Affiliate investments

     14        1,795        29        3,116   

Affiliate investments

     —          —          2,750        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     14        1,795        2,779        3,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     11,744        13,740        26,137        26,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee (A)

     2,489        2,510        4,998        4,963   

Loan servicing fee (A)

     1,722        1,707        3,403        3,266   

Incentive fee (A)

     549        1,505        2,249        2,796   

Administration fee (A)

     275        270        574        625   

Interest expense on borrowings

     953        1,081        1,924        2,145   

Dividends on mandatorily redeemable preferred stock

     2,115        2,065        4,180        3,832   

Amortization of deferred financing costs and discounts

     481        483        962        943   

Professional fees

     194        261        386        703   

Other general and administrative expenses

     690        403        891        959   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     9,468        10,285        19,567        20,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1,722     (1,707     (3,403     (3,266

Credit to fees from Adviser — other (A)

     (1,114     (861     (1,951     (1,706
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits to fees

     6,632        7,717        14,213        15,260   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,112        6,023        11,924        11,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     (12     (1     (165     (1

Affiliate investments

     3        (2,740     18,792        (2,740

Control investments

     (2     1        (3     200   

Other

     (182     —          (257     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized (loss) gain

     (193     (2,740     18,367        (2,541

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     (8,136     (9,990     (919     (3,482

Affiliate investments

     1,977        11,852        (13,972     8,651   

Control investments

     1,138        (5,255     8,957        (5,365

Other

     —          —          75        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized depreciation

     (5,021     (3,393     (5,859     (196
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain

     (5,214     (6,133     12,508        (2,737
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (102   $ (110   $ 24,432      $ 8,449   
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.17      $ 0.20      $ 0.39      $ 0.37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     —          —          0.81        0.28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions

     0.19        0.19        0.38        0.38   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

        

Basic and diluted

     30,270,958        30,270,958        30,270,958        30,265,548   

 

(A) Refer to Note 4 — Related Party Transactions 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)

 

     Six Months Ended September 30,  
     2016     2015  

OPERATIONS

    

Net investment income

   $ 11,924      $ 11,186   

Net realized gain (loss) on investments

     18,624        (2,541

Net realized loss on other

     (257     —     

Net unrealized depreciation of investments

     (5,934     (196

Net unrealized appreciation of other

     75        —     
  

 

 

   

 

 

 

Net increase in net assets from operations

     24,432        8,449   
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (11,352     (11,352
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (11,352     (11,352
  

 

 

   

 

 

 

CAPITAL ACTIVITY

    

Issuance of common stock

     —          3,663   

Offering costs for issuance of common stock

     —          (221
  

 

 

   

 

 

 

Net increase in net assets from capital activity

     —          3,442   
  

 

 

   

 

 

 

TOTAL INCREASE IN NET ASSETS

     13,080        539   

NET ASSETS, BEGINNING OF PERIOD

     279,022        273,429   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 292,102      $ 273,968   
  

 

 

   

 

 

 

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)

 

     Six Months Ended September 30,  
     2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 24,432      $ 8,449   

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

    

Purchase of investments

     (31,186     (40,045

Principal repayments of investments

     16,661        10,583   

Net proceeds from the sale of investments

     28,479        2,159   

Net realized (gain) loss on investments

     (18,662     2,525   

Net realized loss on other

     257        —     

Net unrealized depreciation of investments

     5,934        196   

Net unrealized appreciation of other

     (75     —     

Amortization of deferred financing costs and discounts

     962        943   

Bad debt expense, net of recoveries

     (186     172   

Changes in assets and liabilities:

    

Decrease (increase) in restricted cash and cash equivalents

     464        (388

Decrease (increase) in interest receivable

     818        (876

(Increase) decrease in due from custodian

     (1,051     2,816   

Decrease (increase) in other assets, net

     2,885        (272

Decrease in accounts payable and accrued expenses

     (71     (347

(Decrease) increase in fees due to Adviser (A)

     (1,290     412   

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

     (36     8   

Decrease in other liabilities

     (481     (891
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     27,854        (14,556
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from issuance of common stock

     —          3,663   

Offering costs for issuance of common stock

     —          (221

Proceeds from line of credit

     37,200        65,500   

Repayments on line of credit

     (68,700     (80,800

Proceeds from issuance of mandatorily redeemable preferred stock

     57,500        40,250   

Redemption of mandatorily redeemable preferred stock

     (40,000     —     

Deferred financing and offering costs

     (1,886     (1,711

Distributions paid to common stockholders

     (11,352     (11,352
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (27,238     15,329   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     616        773   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     4,481        4,921   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 5,097      $ 5,694   
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 1,730      $ 1,942   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES (B)

   $ —        $ 15,740   
  

 

 

   

 

 

 

 

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

In August 2015, NDLI, Inc. (“NDLI”) was acquired by Diligent Delivery Systems (“Diligent”). As part of this acquisition, we restructured our investment in NDLI, which resulted in the termination of our debt investments in NDLI, which had a cost basis and fair value of $17.7 million and $14.2 million, respectively. We received cash proceeds of $1.9 million and a $13.0 million secured second lien debt investment in Diligent, which resulted in a net realized loss of $2.7 million. We recognized this net realized loss in our Consolidated Statements of Operations during the three and six months ended September 30, 2015.

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

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)(F)

   Principal      Cost      Fair Value  

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

     
Auto Safety House, LLC   

Automobile

  

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

   $ —         $ —         $ —     
     

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

     5,000         5,000         5,414   
           

 

 

    

 

 

 
              5,000         5,414   
B-Dry, LLC   

Personal, Food and Miscellaneous Services

  

Secured First Lien Line of Credit, $100 available (6.8% (0.8% Unused Fee), Due 12/2016) (L)

     3,900         3,900         3,900   
     

Secured First Lien Term Debt (1.5%, Due 12/2019) (L)

     6,433         6,443         1,502   
     

Secured First Lien Term Debt (1.5%, Due 12/2019) (L)

     840         840         —     
     

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

        2,516         —     
     

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

        300         —     
           

 

 

    

 

 

 
              13,999         5,402   

Country Club Enterprises, LLC

  

Automobile

  

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

     4,000         4,000         4,000   
     

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

        7,725         5,740   
     

Guaranty ($2,000) (D)

        —           —     
     

Guaranty ($71) (D)

        —           —     
           

 

 

    

 

 

 
              11,725         9,740   
Diligent Delivery Systems   

Cargo Transport

  

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

     13,000         13,000         13,130   
     

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

        500         2,000   
           

 

 

    

 

 

 
              13,500         15,130   
Drew Foam Companies, Inc.   

Chemicals, Plastics, and Rubber

  

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

     9,913         9,913         9,913   
     

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

        3,375         3,727   
     

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

        63         6,519   
           

 

 

    

 

 

 
              13,351         20,159   
Frontier Packaging, Inc.   

Containers, Packaging, and Glass

  

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

     9,750         9,750         9,750   
     

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

        1,373         1,442   
     

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

        152         7,298   
           

 

 

    

 

 

 
              11,275         18,490   

Funko Acquisition Holdings, LLC (M)

  

Personal and Non-Durable Consumer Products (Manufacturing Only)

  

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

        260         358   
     

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

        —           —     
           

 

 

    

 

 

 
              260         358   
Ginsey Home Solutions, Inc.   

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

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

     13,300         13,300         13,300   
     

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

        9,583         5,883   
     

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

        8         —     
           

 

 

    

 

 

 
              22,891         19,183   
Jackrabbit, Inc.   

Farming and Agriculture

  

Secured First Lien Term Debt (13.5%, Due 4/2018) (L)

     11,000         11,000         11,000   
     

Preferred Stock (3,556 shares) (C)(L)

        3,556         4,650   
     

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

        94         2,084   
           

 

 

    

 

 

 
              14,650         17,734   
Mathey Investments, Inc.   

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

  

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

     1,375         1,375         1,375   
     

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

     3,727         3,727         3,727   
     

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

     3,500         3,500         2,148   
     

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

        777         —     
           

 

 

    

 

 

 
              9,379         7,250   
Mitchell Rubber Products, Inc.   

Chemicals, Plastics, and Rubber

  

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

     13,560         13,560         10,848   
     

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

        2,790         —     
     

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

        28         —     
           

 

 

    

 

 

 
              16,378         10,848   

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

 

6


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)(F)

   Principal      Cost      Fair Value  

Nth Degree, Inc.

  

Diversified/Conglomerate Service

  

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

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

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

        5,660         7,025   
           

 

 

    

 

 

 
              18,950         20,315   

Quench Holdings Corp.

  

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

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

        3,397         4,359   
           

 

 

    

 

 

 
              3,397         4,359   

SBS Industries, LLC

  

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

  

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

     11,355         11,355         9,013   
     

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

        1,994         —     
     

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

        222         —     
           

 

 

    

 

 

 
              13,571         9,013   

Schylling, Inc.

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Secured First Lien Term Debt (13.0%, Due 8/2018) (L)

     13,081         13,081         13,081   
     

Preferred Stock (4,000
shares) (C)(L)

        4,000         4,306   
           

 

 

    

 

 

 
              17,081         17,387   

Star Seed, Inc.

  

Farming and Agriculture

  

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

     5,000         5,000         4,700   
     

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

        1,499         —     
     

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

        1         —     
           

 

 

    

 

 

 
              6,500         4,700   

Tread Corporation

  

Oil and Gas

  

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

     3,216         3,216         2,418   
     

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

        3,768         —     
     

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

        753         —     
           

 

 

    

 

 

 
              7,737         2,418   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 38.7% of total investments at fair value)

  

   $ 199,644       $ 187,900   
  

 

 

    

 

 

 

AFFILIATE INVESTMENTS (O) :

           

Alloy Die Casting Co. (M)

  

Diversified/Conglomerate Manufacturing

  

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

   $ 12,215       $ 12,215       $ 11,604   
     

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

     175         175         166   
     

Secured First Lien Term Debt (Due 10/2018) (K)(R)

     910         910         869   
     

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

        4,064         —     
     

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

        41         —     
           

 

 

    

 

 

 
              17,405         12,639   

Behrens Manufacturing, LLC (M)

  

Diversified/Conglomerate Manufacturing

  

Secured First Lien Term Debt (13.0%, Due 12/2018) (Q)

     9,975         9,975         10,823   
     

Preferred Stock (2,923
shares) (C)(Q)

        2,922         9,565   
           

 

 

    

 

 

 
              12,897         20,388   

Brunswick Bowling Products, Inc.

  

Home and Office Furnishings, Housewares and Durable Consumer Products

  

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

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

     11,307         11,307         11,307   
              4,943         9,887   
           

 

 

    

 

 

 
              16,250         21,194   

B+T Group Acquisition Inc. (M)

  

Telecommunications

  

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

     14,000         14,000         14,000   
     

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

        4,196         —     
           

 

 

    

 

 

 
              18,196         14,000   

Cambridge Sound Management, Inc.

  

Home and Office Furnishings, Housewares and Durable Consumer Products

  

Secured Second Lien Term Debt (13.0%, Due
8/2021) (L)

     16,000         16,000         16,000   
     

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

        4,500         10,061   
           

 

 

    

 

 

 
              20,500         26,061   

Channel Technologies Group, LLC

  

Diversified/Conglomerate Manufacturing

  

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

        1,841         —     
     

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

        —           —     
           

 

 

    

 

 

 
              1,841         —     

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

 

7


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)(F)

   Principal      Cost      Fair Value  
Counsel Press, Inc.   

Diversified/Conglomerate Services

  

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

   $ —         $ —         $ —     
     

Secured First Lien Term Debt (12.8%, Due
3/2020) (L)

     18,000         18,000         18,000   
     

Secured First Lien Term Debt (14.0%, Due
3/2020) (L)

     5,500         5,500         5,500   
     

Preferred Stock
(6,995 shares) (C)(L)

        6,995         8,437   
           

 

 

    

 

 

 
              30,495         31,937   
D.P.M.S., Inc.   

Diversified/Conglomerate Manufacturing

  

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

     4,000         4,000         4,000   
     

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

     2,575         2,575         2,420   
     

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

     8,795         8,795         —     
     

Secured First Lien Term Debt (5.3%, Due
8/2017) (E)(L)

     1,150         1,150         —     
     

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

        2,500         —     
     

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

        3         —     
           

 

 

    

 

 

 
              19,023         6,420   

Edge Adhesives Holdings, Inc.  (M)

  

Diversified/Conglomerate Manufacturing

  

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

     9,300         9,300         9,114   
     

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

     2,400         2,400         2,364   
     

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

        3,774         —     
           

 

 

    

 

 

 
              15,474         11,478   
GI Plastek, Inc.   

Chemicals, Plastics, and Rubber

  

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

     15,000         15,000         15,000   
     

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

        5,150         6,291   
           

 

 

    

 

 

 
              20,150         21,291   
Head Country, Inc.   

Beverage, Food and Tobacco

  

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

     9,050         9,050         9,050   
     

Preferred Stock (4,000
shares) (C)(L)

        4,000         4,240   
           

 

 

    

 

 

 
              13,050         13,290   
Logo Sportswear, Inc.   

Textiles and Leather

  

Secured First Lien Term Debt (12.5%, Due
3/2020) (L)

     9,200         9,200         9,200   
     

Preferred Stock (1,550
shares) (C)(L)

        1,550         5,709   
           

 

 

    

 

 

 
              10,750         14,909   

Meridian Rack & Pinion, Inc. (M)

  

Automobile

  

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

     9,660         9,660         8,791   
     

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

        3,381         595   
           

 

 

    

 

 

 
              13,041         9,386   
The Mountain Corporation   

Personal and Non-Durable Consumer Products (Manufacturing Only)

  

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

     18,600         18,600         18,600   
     

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

        6,899         5,028   
     

Common Stock (751
shares) (C)(L)

        1         —     
           

 

 

    

 

 

 
              25,500         23,628   
NDLI, Inc.   

Cargo Transport

  

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

        3,600         —     
     

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

        —           —     
           

 

 

    

 

 

 
              3,600         —     
Old World Christmas, Inc.   

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

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

     15,770         15,770         15,770   
     

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

        6,180         6,373   
           

 

 

    

 

 

 
              21,950         22,143   
Precision Southeast, Inc.   

Diversified/Conglomerate Manufacturing

  

Secured Second Lien Term Debt (14.0%, Due 9/2020) (L)

     9,618         9,618         9,618   
     

Preferred Stock (37,391
shares) (C)(L)

        3,739         —     
     

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

        91         —     
           

 

 

    

 

 

 
              13,448         9,618   

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

 

8


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)(F)

   Principal      Cost      Fair Value  

SOG Specialty Knives & Tools, LLC

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Secured First Lien Term
Debt (13.3%, Due
10/2017) (L)

     $6,200         $6,200         $6,200   
     

Secured First Lien Term
Debt (14.8%, Due
10/2017) (L)

     12,200         12,200         12,200   
     

Preferred Stock (9,749
shares) (C)(L)

        9,749         2,833   
           

 

 

    

 

 

 
              28,149         21,233   
           

 

 

    

 

 

 

Total Affiliate Investments (represents 57.5% of total investments at fair value)

  

     $301,719         $279,615   
           

 

 

    

 

 

 

CONTROL INVESTMENTS (P) :

        

Galaxy Tool Holding Corporation

  

Aerospace and Defense

  

Secured First Lien Line of
Credit, $500 available (6.5% (1.0% Unused Fee),
Due 8/2017) (L)

     $4,500         $4,500         $4,500   
     

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

     5,000         5,000         5,000   
     

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

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

        11,464         8,957   
              48         —     
           

 

 

    

 

 

 
              21,012         18,457   
           

 

 

    

 

 

 

Total Control Investments (represents 3.8% of total investments at fair value)

  

     $21,012         $18,457   
           

 

 

    

 

 

 

TOTAL INVESTMENTS

              $522,375         $485,972   
           

 

 

    

 

 

 

 

(A)   Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $451.6 million at fair value, are pledged as collateral to our revolving line of credit as described further in Note 5 — Borrowings . Additionally, all of our investments are considered qualifying assets under Section 55 of the Investment Company Act of 1940, as amended, (the “1940 Act”) as of September 30, 2016. Under the 1940 Act, we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.
(B)   Percentages represent the weighted average cash interest rates in effect at September 30, 2016, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate. If applicable, paid-in-kind interest rates are noted separately from the cash interest rates.
(C)   Security is non-income producing.
(D)   Refer to Note 10 —  Commitments and Contingencies for additional information regarding these guaranties.
(E)   Last Out Tranche (“LOT”) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT generally is paid after the other secured first lien debt but before the secured second lien debt.
(F)   Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(G)   Debt security is on non-accrual status.
(H)   $5.1 million of the debt security was participated to a third party, but is accounted for as collateral for a secured borrowing under accounting principles generally accepted in the U.S. and presented as secured borrowing on our accompanying Consolidated Statements of Assets and Liabilities as of September 30, 2016.
(I)   Debt security has a fixed interest rate.
(J)   Reserved.
(K)   Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. Refer to Note 3 —  Investments for additional information.
(L)   Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio company’s securities in order of their relative priority in the capital structure. Refer to Note 3 —  Investments for additional information.
(M)   One of our affiliated funds, Gladstone Capital Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.
(N)   Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(O)   Affiliate investments, as defined by the 1940 Act, are those that are not Control investments and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(P)   Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(Q)   Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.
(R)   Debt security does not have a stated current interest rate.

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

 

9


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)(F)

   Principal      Cost      Fair Value  

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

  

     

Auto Safety House, LLC

  

Automobile

  

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

   $ —         $ —         $ —     
     

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

     5,000         5,000         5,311   
           

 

 

    

 

 

 
           5,000         5,311   

B-Dry, LLC

  

Personal, Food and Miscellaneous Services

  

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

     3,500         3,500         3,500   
     

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

     6,433         6,443         1,191   
     

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

     840         840         —     
     

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

        2,516         —     
     

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

        300         —     
           

 

 

    

 

 

 
              13,599         4,691   

Country Club Enterprises, LLC

  

Automobile

  

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

     4,000         4,000         4,000   
     

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

        7,725         5,313   
     

Guaranty ($2,000) (D)

        —           —     
     

Guaranty ($279) (D)

        —           —     
           

 

 

    

 

 

 
           11,725         9,313   

Diligent Delivery Systems

  

Cargo Transport

  

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

     13,000         13,000         12,984   
     

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

        —           1,500   
           

 

 

    

 

 

 
           13,000         14,484   

Drew Foam Companies, Inc.

  

Chemicals, Plastics, and Rubber

  

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

     9,913         9,913         9,913   
     

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

        3,375         3,583   
     

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

        63         6,459   
           

 

 

    

 

 

 
           13,351         19,955   

Frontier Packaging, Inc.

  

Containers, Packaging, and Glass

  

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

     10,500         10,500         10,500   
     

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

        1,373         1,386   
     

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

        152         8,222   
           

 

 

    

 

 

 
           12,025         20,108   

Funko Acquisition Holdings, LLC (M)

  

Personal and Non-Durable Consumer

  

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

        260         315   
  

Products (Manufacturing Only)

  

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

        —           —     
           

 

 

    

 

 

 
           260         315   

Ginsey Home Solutions, Inc.

  

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Secured Second Lien Term Debt (13.5%, Due 1/2018) (H)(L)

     13,300         13,300         13,300   
     

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

     

 

 

 

9,583

 

  

  

 

 

 

4,813

 

  

     

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

        8         —     
           

 

 

    

 

 

 
           22,891         18,113   

Jackrabbit, Inc.

  

Farming and Agriculture

  

Secured First Lien Term Debt (13.5%, Due 4/2018) (L)

     11,000         11,000         11,000   
     

Preferred Stock (3,556 shares) (C)(L)

        3,556         4,471   
     

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

        94         934   
           

 

 

    

 

 

 
           14,650         16,405   

Mathey Investments, Inc.

  

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

  

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

     1,375         1,375         1,375   
     

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

     3,727         3,727         3,727   
     

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

     3,500         3,500         3,500   
     

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

        777         54   
           

 

 

    

 

 

 
           9,379         8,656   

Mitchell Rubber Products, Inc.

  

Chemicals, Plastics, and Rubber

  

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

     13,560         13,560         5,082   
     

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

        2,790         —     
     

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

        28         —     
           

 

 

    

 

 

 
           16,378         5,082   

Nth Degree, Inc.

  

Diversified/Conglomerate Service

  

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

     13,290         13,290         13,290   
     

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

        5,660         7,712   
           

 

 

    

 

 

 
           18,950         21,002   

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

 

10


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)(F)

   Principal      Cost      Fair Value  

Quench Holdings Corp.

  

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

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

   $         $ 3,397       $ 4,359   
           

 

 

    

 

 

 
              3,397         4,359   

SBS Industries, LLC

  

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

  

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

     11,355         11,355         11,355   
     

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

        1,994         —     
     

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

        222         —     
           

 

 

    

 

 

 
              13,571         11,355   

Schylling, Inc.

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Secured First Lien Term Debt (13.0%, Due 8/2018) (L)

     13,081         13,081         13,081   
     

Preferred Stock (4,000
shares) (C)(L)

        4,000         4,103   
           

 

 

    

 

 

 
              17,081         17,184   

Star Seed, Inc.

  

Farming and Agriculture

  

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

     5,000         5,000         4,600   
     

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

        1,499         —     
     

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

        1         —     
           

 

 

    

 

 

 
              6,500         4,600   
           

 

 

    

 

 

 

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

  

   $ 191,757       $ 180,933   
           

 

 

    

 

 

 

AFFILIATE INVESTMENTS (O) :

        

Acme Cryogenics, Inc.

  

Chemicals, Plastics, and Rubber

  

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

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

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

        7,956         22,337   
     

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

        1,197         4,201   
     

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

        25         3,856   
           

 

 

    

 

 

 
              23,678         44,894   

Alloy Die Casting Corp. (M)

  

Diversified/Conglomerate Manufacturing

  

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

     12,215         12,215         11,390   
     

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

        4,064         612   
     

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

        41         —     
           

 

 

    

 

 

 
              16,320         12,002   

Behrens Manufacturing, LLC (M)

  

Diversified/Conglomerate Manufacturing

  

Secured First Lien Term Debt (13.0%, Due 12/2018) (L)

     9,975         9,975         9,975   
     

Preferred Stock (2,923
shares) (C)(L)

        2,922         8,593   
           

 

 

    

 

 

 
              12,897         18,568   

Brunswick Bowling Products, Inc.

  

Home and Office Furnishings, Housewares and Durable Consumer Products

  

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

     11,307         11,307         11,307   
     

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

        4,943         5,267   
           

 

 

    

 

 

 
              16,250         16,574   

B+T Group Acquisition, Inc. (M)

  

Telecommunications

  

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

     14,000         14,000         14,000   
     

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

        4,196         —     
           

 

 

    

 

 

 
              18,196         14,000   

Cambridge Sound Management, Inc.

  

Home and Office Furnishing, Housewares and Durable Consumer Products

  

Secured First Lien Term Debt (13.0%, Due 9/2019) (L)

     15,000         15,000         15,000   
     

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

        4,500         12,835   
           

 

 

    

 

 

 
              19,500         27,835   

Channel Technologies Group, LLC

  

Diversified/Conglomerate Manufacturing

  

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

        2,938         989   
     

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

        —           —     
           

 

 

    

 

 

 
              2,938         989   

Counsel Press, Inc.

  

Diversified/Conglomerate Services

  

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

     —           —           —     
     

Secured First Lien Term Debt (12.8%, Due 3/2020) (L)

     18,000         18,000         18,000   
     

Secured First Lien Term Debt (14.0%, Due 3/2020) (L)

     5,500         5,500         5,500   
     

Preferred Stock (6,995
shares) (C)(L)

        6,995         5,399   
           

 

 

    

 

 

 
              30,495         28,899   

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

 

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GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)(F)

   Principal      Cost      Fair Value  

D.P.M.S., Inc.

  

Diversified/Conglomerate Manufacturing

  

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

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

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

     2,575         2,575         2,575   
     

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

     8,795         8,795         2,073   
     

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

     1,150         1,150         —     
     

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

        2,500         —     
     

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

        3         —     
           

 

 

    

 

 

 
              19,023         8,648   

Edge Adhesives Holdings,
Inc. (M)

  

Diversified/Conglomerate Manufacturing

  

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

     9,300         9,300         8,928   
     

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

     2,400         2,400         2,310   
     

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

        3,774         —     
           

 

 

    

 

 

 
              15,474         11,238   

GI Plastek, Inc.

  

Chemicals, Plastics, and Rubber

  

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

     15,000         15,000         15,000   
     

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

        5,150         5,672   
           

 

 

    

 

 

 
              20,150         20,672   

Head Country, Inc.

  

Beverage, Food and Tobacco

  

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

     9,050         9,050         9,050   
     

Preferred Stock (4,000
shares) (C)(L)

        4,000         —     
           

 

 

    

 

 

 
              13,050         9,050   

Logo Sportswear, Inc.

  

Textiles and Leather

  

Secured First Lien Term Debt (12.5%, Due
3/2020) (L)

     9,200         9,200         9,200   
     

Preferred Stock (1,550
shares) (C)(L)

        1,550         2,795   
           

 

 

    

 

 

 
              10,750         11,995   

Meridian Rack & Pinion, Inc. (M)

  

Automobile

  

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

     9,660         9,660         8,791   
     

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

        3,381         988   
           

 

 

    

 

 

 
              13,041         9,779   

NDLI, Inc.

  

Cargo Transport

  

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

        3,600         —     
     

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

        —           —     
           

 

 

    

 

 

 
              3,600         —     

Old World Christmas, Inc.

  

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

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

     15,770         15,770         15,770   
     

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

        6,180         4,159   
           

 

 

    

 

 

 
              21,950         19,929   

Precision Southeast, Inc.

  

Diversified/Conglomerate Manufacturing

  

Secured Second Lien Term Debt (14.0%, Due
9/2020) (L)

     9,618         9,618         9,618   
     

Preferred Stock (37,391 shares) (C)(L)

        3,739         3,922   
     

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

        91         —     
           

 

 

    

 

 

 
              13,448         13,540   

SOG Specialty Knives & Tools, LLC

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Secured First Lien Term Debt (13.3%, Due 10/2017) (L)

     6,200         6,200         6,200   
     

Secured First Lien Term Debt (14.8%, Due 10/2017) (L)

     12,200         12,200         12,200   
     

Preferred Stock (9,749 shares) (C)(L)

        9,749         7,747   
           

 

 

    

 

 

 
              28,149         26,147   

Tread Corporation

  

Oil and Gas

  

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

     1,426         1,426         1,426   
     

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

        3,768         538   
     

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

        753         —     
           

 

 

    

 

 

 
              5,947         1,964   
           

 

 

    

 

 

 

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

  

   $ 304,856       $ 296,723   
           

 

 

    

 

 

 

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

 

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GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)(F)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS (P) :

        

Galaxy Tool Holding Corporation

  

Aerospace and Defense

  

Secured First Lien Line of Credit, $0 available (6.5% (1.0% Unused Fee), Due 9/2016) (L)

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

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

     5,000         5,000         5,000   
     

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

        11,464         —     
     

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

        48         —     
           

 

 

    

 

 

 
        21,512         10,000   
           

 

 

    

 

 

 

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

  

   $ 21,512       $ 10,000   
           

 

 

    

 

 

 

TOTAL INVESTMENTS (R)

      $ 518,125       $ 487,656   
           

 

 

    

 

 

 

 

(A)   Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $461.4 million at fair value, are pledged as collateral to our revolving line of credit as described further in Note 5 —  Borrowings . Additionally, all of our investments are considered qualifying assets under Section 55 of the Investment Company Act of 1940, as amended, (the “1940 Act”) as of March 31, 2016. Under the 1940 Act, we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.
(B)   Percentages represent the weighted average cash interest rates in effect at March 31, 2016, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate. If applicable, paid-in-kind interest rates are noted separately from the cash interest rates.
(C)   Security is non-income producing.
(D)   Refer to Note 10 — Commitments and Contingencies for additional information regarding these guaranties.
(E)   Last Out Tranche (“LOT”) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT generally is paid after the other secured first lien debt but before the secured second lien debt.
(F)   Where applicable, aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(G)   Debt security is on non-accrual status.
(H)   $5.1 million of the debt security was participated to a third party, but is accounted for as collateral for a secured borrowing under accounting principles generally accepted in the U.S. and presented as secured borrowing on our accompanying Consolidated Statements of Assets and Liabilities as of March 31, 2016.
(I)   Debt security has a fixed interest rate.
(J)   Reserved.
(K)   Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. Refer to Note 3 — Investments for additional information.
(L)   Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio company’s securities in order of their relative priority in the capital structure. Refer to Note 3 — Investments for additional information.
(M)   One of our affiliated funds, Gladstone Capital Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.
(N)   Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(O)   Affiliate investments, as defined by the 1940 Act, are those that are not Control investments and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(P)   Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(Q)   Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.
(R)   Cumulative gross unrealized depreciation for federal income tax purposes is $86.2 million; cumulative gross unrealized appreciation for federal income tax purposes is $60.4 million. Cumulative net unrealized depreciation is $25.8 million, based on a tax cost of $513.5 million.

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

 

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GLADSTONE INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

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

NOTE 1. ORGANIZATION

Gladstone Investment Corporation (“Gladstone Investment”) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005, and completed an initial public offering on June 22, 2005. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Investment and its consolidated subsidiaries. We are an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and is applying the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 Financial Services-Investment Companies (“ASC 946”). In addition, we have elected to be treated for tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Debt investments primarily take the form of two types of loans: secured first lien loans and secured second lien loans. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to our stockholders that grow over time, and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow in value over time to permit us to sell our equity investments for capital gains. We aim to maintain a portfolio allocation of approximately 75.0% debt investments and 25.0% equity investments, at cost.

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of SEC Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, we have not included in this quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In accordance with Article 6 of Regulation S-X, under the Securities Act of 1933, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended September 30, 2016 are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended March 31, 2016, as filed with the SEC on May 17, 2016.

 

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Use of Estimates

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

Reclassifications

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

In April 2015, the FASB issued Accounting Standards Update 2015-03, “ Simplifying the Presentation of Debt Issuance Costs ” (“ASU 2015-03”), which simplifies the presentation of debt issuance costs. ASU 2015-03 requires the presentation of debt issuance costs as a deduction from the carrying amount of the related debt liability instead of as a deferred financing cost asset on the balance sheet. In August 2015, the FASB issued Accounting Standards Update 2015-15, “ Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements ” (“ASU 2015-15”), which codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line of credit arrangements as assets. ASU 2015-03 was effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-03 during the three months ended June 30, 2016. ASU 2015-15 was effective immediately and we opted to continue to present debt issuance costs related to line of credit arrangements as assets.

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

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

 

     March 31, 2016  
     As Previously
Reported
    

Retrospective

Application

 

Deferred financing costs, net

   $ 4,332       $ 1,147  

Mandatorily redeemable preferred stock, net

     121,650         118,465   

Investment Valuation Policy

Accounting Recognition

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

Board Responsibility

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

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

 

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Use of Third Party Valuation Firms

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

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

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

Valuation Techniques

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

 

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

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

 

    Yield Analysis — The Valuation Team generally determines the fair value of our debt investments using the yield analysis, which includes a DCF calculation and the Valuation Team’s own assumptions, including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes.

 

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

 

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

In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments, including but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; 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.

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

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

Revenue Recognition

Interest Income Recognition

Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid, and, in management’s judgment, are likely to remain current, or due to a restructuring, the interest income is deemed to be collectible. As of September 30 and March 31, 2016 our loan to Tread Corporation (“Tread”) was on non-accrual status, with an aggregate debt cost basis of $3.2 million and $1.4 million, or 0.9% and 0.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $2.4 million and $1.4 million, or 0.7% and 0.4% of the fair value of all debt investments in our portfolio, respectively.

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

Other Income Recognition

We record success fee income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically from an exit or sale. We did not record any success fee income during the three and six months ended September 30, 2016. During the three and six months ended September 30, 2015, we recorded success fee income of $0 and $0.9 million, respectively.

We accrue dividend income on preferred and common equity securities of our portfolio companies to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration. During the three and six months ended September 30, 2016, we recorded dividend income of $12 and $2.8 million, respectively. During the three and six months ended September 30, 2015, we recorded dividend income of $1.8 million and $2.2 million, respectively.

 

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

Deferred Financing and Offering Costs

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

Related Party Fees

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

We have entered into an administration agreement (the “Administration Agreement”) with the Administrator, which is owned and controlled by our chairman and chief executive officer, whereby we pay separately for administrative services. These fees are accrued when the services are performed and generally paid one month in arrears.

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

Recent Accounting Pronouncements

In 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. We are currently assessing the impact of ASU 2016-06 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-06 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted.

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

In May 2015, the FASB issued Accounting Standards Update 2015-07, “ Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or its Equivalent) ” (“ASU 2015-07”), which eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. The adoption of ASU 2015-07 did not have a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-07 is required to be adopted retrospectively and is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-07 effective April 1, 2016.

 

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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. We are currently assessing the impact of ASU 2016-17 and do not anticipate 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, with early adoption permitted.

In August 2014, the FASB issued Accounting Standards Update 2014–15, “ Presentation of Financial Statements – Going Concern (Subtopic 205 – 40):   Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern ” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. Since this guidance is primarily around certain disclosures to the financial statements, we anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. We are currently assessing the additional disclosure requirements, if any, of ASU 2014-15. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter, with early adoption permitted.

In May 2014, the FASB issued Accounting Standards Update 2014-09, “ Revenue from Contracts with Customers ” (“ASU 2014-09”), as amended in March 2016 by FASB Accounting Standards Update 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”), in April 2016 by FASB Accounting Standards Update 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), and in May 2016 by FASB Accounting Standards Update 2016-12, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. We are currently assessing the impact of ASU 2014-09, as amended, and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. In July 2015, the FASB issued Accounting Standards Update 2015-14, “ Deferral of the Effective Date, ” which deferred the effective date of ASU 2014-09. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, and ASU 2016-12, is now effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years, with early adoption permitted for annual reporting periods beginning after December 15, 2016 and interim periods within those years.

NOTE 3. INVESTMENTS

Fair Value

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

 

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

 

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

 

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

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

 

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As of September 30, 2016 and March 31, 2016, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy. We transfer investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three and six months ended September 30, 2016 and 2015, there were no transfers in or out of Level 1, 2 and 3.

The following table presents our portfolio investments carried at fair value as of September 30, 2016 and March 31, 2016, 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
 
     September 30, 2016      March 31, 2016  

Non-Control/Non-Affiliate Investments

     

Secured first lien debt

   $ 91,231       $ 92,343   

Secured second lien debt

     41,278         35,366   

Preferred equity

     33,132         31,696   

Common equity/equivalents

     22,259         21,528   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     187,900         180,933   

Affiliate Investments

     

Secured first lien debt

     166,377         182,694   

Secured second lien debt

     44,218         24,118   

Preferred equity

     69,020         81,854   

Common equity/equivalents

     —           8,057   
  

 

 

    

 

 

 

Total Affiliate Investments

     279,615         296,723   

Control Investments

     

Secured first lien debt

     4,500         5,000   

Secured second lien debt

     5,000         5,000   

Preferred equity

     8,957         —     

Common equity/equivalents

     —           —     
  

 

 

    

 

 

 

Total Control Investments

     18,457         10,000   
  

 

 

    

 

 

 

Total investments at fair value using Level 3 inputs

   $ 485,972       $ 487,656   
  

 

 

    

 

 

 

 

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

 

     Quantitative Information about Level 3 Fair Value Measurements
     Fair Value as of
September 30, 2016
    Fair Value as
of March 31,
2016
    Valuation
Technique/

Methodology
    

Unobservable
Input

  

Range /  Weighted
Average as of

September 30, 2016

  

Range /  Weighted
Average as of

March 31, 2016

Secured first lien debt

   $ 219,086 (A)     $ 238,707        TEV       EBITDA multiple    4.2x – 7.8x / 6.0x    4.4x – 8.2x / 6.3x
          EBITDA   

$1,057 - $10,486 /

$4,037

  

$970 - $8,713 /

$3,374

          Discount Rate     —     20.0% - 20.0% / 20.0%
     43,022 (B)       41,330 (B)       Yield Analysis       Discount Rate    13.5% - 18.5% / 16.2%    14.2% - 17.7% / 16.4%

Secured second lien debt

     66,518 (C)       46,418 (C)       TEV       EBITDA multiple    5.2x – 7.3x / 6.3x    5.5x – 6.2x / 5.9x
          EBITDA    $2,559 - $5,391 / $4,611    $2,718 - $4,851 / $3,790
     23,978        18,066        Yield Analysis       Discount Rate   

9.7% - 18.8% /

14.3%

  

10.1% - 20.0% /

15.1%

Preferred equity (D)

     111,109        113,550        TEV       EBITDA multiple    4.2x – 7.8x / 6.1x    4.4x – 8.2x / 6.4x
          EBITDA    $1,057 - $86,041 / $4,456    $0 - $76,487 / $3,565
          Discount Rate    20.0% - 20.0% / 20.0%    20.0% - 20.0% / 20.0%
          Revenue multiple     —     0.2x – 0.5x / 0.4x
          Revenue     —     $29,300 - $56,937 / $42,761

Common equity/equivalents (E)

     22,259        29,585        TEV       EBITDA multiple    4.2x – 11.0x / 8.6x    4.4x – 11.0x / 8.7x
          EBITDA    $1,057 - $17,465 / $10,917    $0 - $76,487 / $820
          Discount Rate    20.0% - 20.0% / 20.0%    20.0% - 20.0% / 20.0%
          Revenue multiple     —     0.2x – 0.5x / 0.2x
          Revenue    —      $29,300 - $56,937 / $56,937
  

 

 

   

 

 

            

Total

   $     485,972      $     487,656              
  

 

 

   

 

 

            

 

(A) Fair value as of September 30, 2016 includes one proprietary debt investment for $10.8 million, which was valued at the expected payoff amount.
(B) Fair value as of September 30, 2016 includes one proprietary debt investment for $5.4 million, which was valued at the expected payoff amount. Fair value as of March 31, 2016 includes one proprietary debt investment for $5.3 million which was valued at the expected payoff amount.
(C) Fair value as of March 31, 2016 includes one proprietary debt investment for $14.5 million, which was valued at the expected payoff amount.
(D) Fair value as of September 30, 2016 includes one proprietary equity investment for $9.6 million, which was valued at the expected payoff amount. Fair value as of March 31, 2016 includes one proprietary equity investment for $22.3 million, which was valued at the expected exit amount.
(E) Fair value as of March 31, 2016 includes two proprietary equity investments for a combined $8.1 million, which were valued at the expected exit amount.

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

 

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Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value of our portfolio, broken out by security type, during the three and six months ended September 30, 2016 and 2015 for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

     Secured
First Lien
    Debt    
    Secured
    Second    
Lien Debt
    Preferred
    Equity    
    Common
Equity/
Equivalents
        Total      
Three months ended September 30, 2016:           

Fair value as of June 30, 2016

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

Total gain (loss):

          

Net realized gain (loss) (A)

     —          —          —          20        20   

Net unrealized appreciation (depreciation) (B)

     (3,240     4,506        (1,509     (4,778     (5,021

Reversal of previously recorded appreciation upon realization (B)

     —          —          —          —          —     

New investments, repayments and settlements (C) :

          

Issuances / originations

     1,210        1,000        —          —          2,210   

Settlements / repayments

     (1,250     —          —          —          (1,250

Sales

     —          —          (948     (20     (968

Transfers (D)

     (15,000     15,000        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Secured
First Lien
    Debt    
    Secured
    Second    
Lien Debt
    Preferred
    Equity    
    Common
Equity/
Equivalents
        Total      
Six months ended September 30, 2016:           

Fair value as of March 31, 2016

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

Total gain (loss):

          

Net realized gain (loss) (A)

     —          —          —          18,826        18,826   

Net unrealized appreciation (depreciation) (B)

     (4,954     5,912        14,095        229        15,282   

Reversal of previously recorded appreciation upon realization (B)

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

New investments, repayments and settlements (C) :

          

Issuances / originations

     4,186        19,600        6,899        501        31,186   

Settlements / repayments

     (2,161     (14,500     —          —          (16,661

Sales

     —          —          (9,054     (20,047     (29,101

Transfers (D)

     (15,000     15,000        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Fair value as of June 30, 2015

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

Total gain (loss):

          

Net realized (loss) gain (A)

     (2,740     —          (1     1        (2,740

Net unrealized (depreciation) appreciation (B)

     1,943        (3,675     (6,135     2,468        (5,399

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

     3,489        —          (1,483     —          2,006   

New investments, repayments and settlements (C) :

          

Issuances / originations

     17,569        13,000        5,150        —          35,719   

Settlements / repayments

     (18,350     —          —          —          (18,350

Sales

     —          —          (1,844     —          (1,844

Transfers

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Fair value as of March 31, 2015

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

Total gain (loss):

          

Net realized (loss) gain (A)

     (2,740     —          (1     216        (2,525

Net unrealized (depreciation) (B)

     5,775        (3,782     (9,723     5,638        (2,092

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

     3,489        —          (1,483     (110     1,896   

New investments, repayments and settlements (C) :

          

Issuances / originations

     29,652        13,000        10,393        —          53,045   

Settlements / repayments

     (22,783     (800     —          —          (23,583

Sales

     —          —          (1,844     (315     (2,159

Transfers

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the respective periods ended September 30, 2016 and 2015.
(B) Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the periods ended September 30, 2016 and 2015.
(C) Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, PIK and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments.
(D) Transfers represent $15.0 million of secured first lien debt of Cambridge Sound Management, Inc. (“Cambridge”), which was converted into secured second lien debt in August 2016.

Investment Activity

During the six months ended September 30, 2016, the following significant transactions occurred:

 

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

 

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

Investment Concentrations

As of September 30, 2016, our investment portfolio consisted of investments in 36 portfolio companies located in 19 states across 17 different industries with an aggregate fair value of $486.0 million, of which our investments in Counsel Press Inc. (“Counsel Press”), Cambridge, The Mountain, Old World Christmas, Inc. (“Old World”), and GI Plastek, Inc. (“GI Plastek”), our five largest portfolio investments at fair value, collectively comprised $125.1 million, or 25.9%, of our total investment portfolio at fair value. The following table summarizes our investments by security type as of September 30, 2016 and March 31, 2016:

 

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

Secured first lien debt

   $ 283,272         54.2   $ 262,108         53.9   $ 296,247         57.2   $ 280,037         57.4

Secured second lien debt

     93,078         17.8        90,496         18.6        72,978         14.1        64,484         13.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

     376,350         72.0        352,604         72.5        369,225         71.3        344,521         70.6   

Preferred equity

     139,546         26.7        111,109         22.9        141,702         27.3        113,550         23.3   

Common equity/equivalents

     6,479         1.3        22,259         4.6        7,198         1.4        29,585         6.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity/equivalents

     146,025         28.0        133,368         27.5        148,900         28.7        143,135         29.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 522,375         100.0   $ 485,972         100.0   $ 518,125         100.0   $ 487,656         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

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

Home and Office Furnishings, Housewares, and Durable Consumer Products

   $ 92,941         19.1   $ 86,811         17.8

Diversified/Conglomerate Manufacturing

     60,544         12.5        64,986         13.3   

Chemicals, Plastics, and Rubber

     52,297         10.8        90,602         18.6   

Diversified/Conglomerate Service

     52,252         10.8        49,901         10.2   

Leisure, Amusement, Motion Pictures, Entertainment

     38,620         7.9        43,330         8.9   

Automobile

     24,540         5.0        24,402         5.0   

Personal and Non-Durable Consumer Products (Manufacturing Only)

     23,986         4.9        315         0.1   

Farming and Agriculture

     22,434         4.6        21,005         4.3   

Containers, Packaging, and Glass

     18,489         3.8        20,108         4.1   

Aerospace and Defense

     18,457         3.8        10,000         2.1   

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

     16,263         3.4        20,011         4.1   

Cargo Transport

     15,130         3.1        14,484         3.0   

Textiles and Leather

     14,909         3.1        11,995         2.5   

Telecommunications

     14,000         2.9        14,000         2.9   

Beverage, Food, and Tobacco

     13,290         2.7        9,050         1.8   

Other < 2.0%

     7,820         1.6        6,656         1.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 485,972         100.0   $ 487,656         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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

Northeast

   $ 168,495         34.7   $ 183,265         37.6

South

     128,072         26.4        129,934         26.6   

West

     124,665         25.6        124,713         25.6   

Midwest

     64,740         13.3        49,744         10.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 485,972         100.0   $ 487,656         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

Investment Principal Repayments

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

 

          Amount  
For the remaining six months ending March 31:    2017    $ 3,900   
For the fiscal years ending March 31:    2018      93,460   
   2019      82,766   
   2020      86,109   
   2021      75,515   
   Thereafter      34,600   
     

 

 

 
           Total contractual repayments    $ 376,350   
   Investments in equity securities      146,025   
     

 

 

 
  

        Total cost basis of investments held as of

                September 30, 2016:

   $ 522,375   
     

 

 

 

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 collection efforts have been exhausted and the receivables are deemed uncollectible. As of September 30, 2016 and March 31, 2016, we had gross receivables from portfolio companies of $0.9 million and $1.0 million, respectively. The allowance for uncollectible receivables was $0.2 million and $0.4 million as of September 30, 2016 and March 31, 2016, respectively .

 

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NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with the Adviser

We pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee, as provided for in the Advisory Agreement, and a loan servicing fee for the Adviser’s role as servicer pursuant to our Credit Facility, each as described below. On July 12, 2016, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, approved the annual renewal of the Advisory Agreement through August 31, 2017.

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

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

 

     Three Months Ended September 30,     Six Months Ended September 30,  
     2016     2015     2016     2015  

Average total assets subject to base management fee (A)

   $ 497,800      $ 502,000      $ 499,800      $ 496,300   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.0     1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee (B)

     2,489        2,510        4,998        4,963   

Credits to fees from Adviser - other (B)

     (1,114     (861     (1,951     (1,706
  

 

 

   

 

 

   

 

 

   

 

 

 

Net base management fee

   $ 1,375      $ 1,649      $ 3,047      $ 3,257   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee (B)

     1,722        1,707        3,403        3,266   

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

     (1,722     (1,707     (3,403     (3,266
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan servicing fee

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee (B)

   $ 549      $ 1,505      $ 2,249      $ 2,796   

Credits to fees from Adviser - other (B)

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net incentive fee

   $ 549        1,505        2,249        2,796   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B) Reflected as a line item on our accompanying Consolidated Statements of Operations .

Base Management Fee

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

Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser voluntarily, unconditionally, and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $75 and $53 for the three month periods ended September 30, 2016 and 2015, respectively, and $132 and $109 for the six month periods ended September 30, 2016 and 2015, respectively, was retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser and primarily for the valuation of portfolio companies.

 

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Loan Servicing Fee

The Adviser also services the loans held by our wholly-owned subsidiary, Business Investment (the borrower under our Credit Facility), in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under our Credit Facility. Since Business Investment is a consolidated subsidiary of ours, coupled with the fact that the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given calendar year, we treat payment of the loan servicing fee pursuant to our Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% voluntarily, unconditionally, and irrevocably credited back to us by the Adviser.

Incentive Fee

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

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 September 30, 2016, as cumulative net unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a reporting period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that any such unrealized capital appreciation will be realized in the future. There has been no GAAP accrual recorded for a capital gains-based incentive fee since our inception through September 30, 2016.

 

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Transactions with the Administrator

We pay the Administrator pursuant to the Administration Agreement for our allocable portion of the Administrator’s expenses incurred while performing services to us, which are primarily rent as well as salaries and benefits expenses of the Administrator’s employees, including, but not limited to, our chief financial officer and treasurer, chief valuation officer, chief compliance officer and general counsel and secretary (who also serves as the Administrator’s president) and their respective staffs. 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 paid the following quarter. On July 12, 2016, our Board of Directors, including each of our independent directors, approved the annual renewal of the Administration Agreement through August 31, 2017.

Other Transactions

Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the voluntary, unconditional, and irrevocable credits against the base management fee. The fees received by Gladstone Securities from portfolio companies totaled $0 and $0.2 million during the three month periods ended September 30, 2016 and 2015, respectively, and $0.3 million and $0.4 million during the six month periods ended September 30, 2016 and 2015, respectively.

Related Party Fees Due

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

 

     As of September 30,      As of March 31  
     2016      2016  

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

   $ 63       $ 647   

Incentive fee due to Adviser

     549         1,224   

Other due to Adviser

     10         41   
  

 

 

    

 

 

 

Total fees due to Adviser

   $ 622       $ 1,912   

Fee due to Administrator

   $ 275       $ 311   
  

 

 

    

 

 

 

Total related party fees due

   $ 897       $ 2,223   
  

 

 

    

 

 

 

Net co-investment expenses payable to Gladstone Capital Corporation, one of our affiliated funds, (for reimbursement purposes) and payables to other affiliates totaled $0 and $19 as of September 30, 2016 and March 31, 2016, respectively. These amounts are generally paid in full in the quarter subsequent to being incurred and have been included in Other liabilities on the accompanying Consolidated Statements of Assets and Liabilities as of September 30, 2016 and March 31, 2016, respectively .  

NOTE 5. BORROWINGS

Revolving Line of Credit

On June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013. The revolving period was extended to June 26, 2017, and if not renewed or extended by June 26, 2017, all principal and interest will be due and payable on or before June 26, 2019 (two years after the revolving period end date). Subject to certain terms and conditions, our Credit Facility can be expanded to a total facility amount of $250.0 million, through additional commitments of existing or new committed lenders. On September 19, 2014, we further increased our borrowing capacity under our Credit Facility to $185.0 million by entering into Joinder Agreements pursuant to our Credit Facility. Advances under our Credit Facility generally bear interest at 30-day London Interbank Offered Rate (“LIBOR”), plus 3.25% per annum, and our Credit Facility includes a fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity.

 

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

 

     As of September 30,      As of March 31,  
     2016      2016  

Commitment amount

   $ 185,000       $ 185,000   

Borrowings outstanding at cost

     63,500         95,000   

Availability (A)

     121,500         90,000   

 

     For the Three Months Ended
September 30,
    For the Six Months Ended
September 30,
 
     2016     2015     2016     2015  

Weighted average borrowings outstanding

   $ 75,248      $ 98,768      $ 77,549      $ 100,943   

Effective interest rate (B)

     4.6     4.0     4.5     4.0

Commitment (unused) fees incurred

   $ 140      $ 107      $ 273      $ 209   

 

(A) Availability is subject to various constraints imposed under our Credit Facility, which equated to an adjusted availability of $80.7 million and $47.1 million as of September 30, 2016 and March 31, 2016, respectively.
(B) Excludes the impact of deferred financing costs and includes weighted average unused commitment fees.

Among other things, our Credit Facility contains a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatory redeemable term preferred stock) of $170 million plus 50% of all equity and subordinated debt raised minus any equity or subordinated debt redeemed or retired after June 26, 2014, which equates to $233.6 million as of September 30, 2016, (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 September 30, 2016, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $425.9 million, an asset coverage ratio on our senior securities representing indebtedness of 697.8%, calculated in compliance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. Our Credit Facility requires a minimum of 12 obligors in the borrowing base and, as of September 30, 2016, we had 29 obligors. As of September 30, 2016, we were in compliance with all covenants under our Credit Facility.

Pursuant to the terms of our Credit Facility, in July 2013, we entered into an interest rate cap agreement with KeyBank National Association effective October 2013 for a notional amount of $45.0 million. The interest rate cap agreement expired in April 2016. Prior to its expiration in April 2016, the agreement effectively limited the interest rate on a portion of our borrowings under our Credit Facility. We incurred a premium fee of $75 in conjunction with this agreement, which was recorded in Net realized loss on other on our accompanying Consolidated Statements of Operations during the six months ended September 30, 2016. As of March 31, 2016, the fair value of our interest rate cap agreement was $0.

Secured Borrowing

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

Fair Value

We elected to apply the fair value option of ASC Topic 825, “ Financial Instruments ,” to our Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and also takes into account the Valuation Team’s own assumptions, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At September 30, 2016 and March 31, 2016, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.15% per annum, and 30-day LIBOR, plus 3.25% per annum, respectively, plus an unused fee of 0.59% and 0.5%, 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 our Credit Facility. At each of September 30, 2016 and March 31, 2016, our Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in Net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations .

 

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

 

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

Credit Facility

   $ 63,500       $ 95,000   
  

 

 

    

 

 

 

 

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

Consolidated Statements of Assets and Liabilities

 
       Credit Facility  

Three months ended September 30, 2016:

    

Fair value at June 30, 2016

     $         79,600   

Borrowings

       6,100   

Repayments

       (22,200
    

 

 

 

Fair value at September 30, 2016

     $ 63,500   
    

 

 

 

Six months ended September 30, 2016:

    

Fair value at March 31, 2016

     $ 95,000   

Borrowings

       37,200   

Repayments

       (68,700
    

 

 

 

Fair value at September 30, 2016

     $ 63,500   
    

 

 

 

 

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

Consolidated Statements of Assets and Liabilities

 
       Credit Facility  

Three months ended September 30, 2015:

    

Fair value at June 30, 2015

     $         89,750   

Borrowings

       27,000   

Repayments

       (13,250
    

 

 

 

Fair value at September 30, 2015

     $ 103,500   
    

 

 

 

Six months ended September 30, 2015:

    

Fair value at March 31, 2015

     $ 118,800   

Borrowings

       65,500   

Repayments

       (80,800
    

 

 

 

Fair value at September 30, 2015

     $ 103,500   
    

 

 

 

The fair value of the collateral under our Credit Facility was $451.6 million and $461.4 million as of September 30, 2016 and March 31, 2016, respectively.

 

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NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In September 2016, we completed a public offering of 2,300,000 shares of 6.25% Series D Cumulative Term Preferred Stock (our “Series D Term Preferred Stock” or “Series D”) at a public offering price of $25.00 per share. Gross proceeds totaled $57.5 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $55.4 million. Total underwriting discounts and offering costs related to this offering were $2.1 million, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending September 30, 2023, the mandatory redemption date.

The shares of Series D Term Preferred Stock are traded under the ticker symbol GAINM on the NASDAQ Global Select Market (“NASDAQ”). Our Series D Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.25% per year, payable monthly. We are required to redeem all shares of our outstanding Series D Term Preferred Stock on September 30, 2023, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series D Term Preferred Stock, and (2) if we fail to maintain an asset coverage ratio of at least 200% and are unable to correct such failure within a specific amount of time, we are required to redeem a portion of our outstanding Series D Term Preferred Stock or otherwise cure the ratio redemption trigger. We may also voluntarily redeem all or a portion of our Series D Term Preferred Stock at our sole option at the redemption price at any time on or after September 30, 2018.

In September 2016, we used a portion of the proceeds from the issuance of our Series D Term Preferred Stock to voluntarily redeem all 1.6 million outstanding shares of our 7.125% Series A Cumulative Term Preferred Stock (our “Series A Term Preferred Stock” or “Series A”), which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption of our Series A Term Preferred Stock, we incurred a loss on extinguishment of debt of $0.2 million, which has been recorded in Realized loss on other in our accompanying Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption.

The following tables summarize our Series A Term Preferred Stock, 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 Series D Term Preferred Stock outstanding as of September 30, 2016 and March 31, 2016:

As of September 30, 2016 :

 

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

      (4,691
             

 

 

 

Term preferred stock, net (C)

      $ 134,459   
             

 

 

 

 

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As of March 31, 2016 :

 

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 A   GAINP   March 6,
2012
  February 28,
2017
  7.125%   1,600,000   $ 25.00      $ 40,000   
Series B   GAINO   November 13,
2014
  December 31,
2021
  6.750%   1,656,000       25.00        41,400   
Series C   GAINN   May 12,

2015

  May 31,

2022

  6.500%   1,610,000       25.00        40,250   
         

 

 

 

 

   

 

 

 

Term preferred stock, gross (B)

  4,866,000   $ 25.00      $ 121,650   

Less: Discounts

        (3,185
     

 

 

 

Term preferred stock, net (C)

      $ 118,465   
     

 

 

 

 

(A) The optional redemption dates for each of our series of mandatorily redeemable preferred stock are February 28, 2016 for our Series A Term Preferred Stock, (and we redeemed all outstanding shares of our Series A Term Preferred Stock on September 30, 2016), December 31, 2017 for our Series B Term Preferred Stock, May 31, 2018 for our Series C Term Preferred Stock, and September 30, 2018 for our Series D Term Preferred Stock.
(B)   As of September 30, 2016 and March 31, 2016, the asset coverage on our senior securities that are stock calculated pursuant to Sections 18 and 61 of the 1940 Act was 235.5% and 221.4%, respectively.
(C)   Reflected as a line item on our accompanying Consolidated Statements of Assets and Liabilities pursuant to the adoption of ASU 2015-03. Refer to Note 2 – Summary of Significant Accounting Policies – Reclassifications for additional information regarding the adoption of ASU 2015-03.

The following tables summarize dividends declared by our Board of Directors and paid by us on each of our series of mandatorily redeemable preferred stock during the six months ended September 30, 2016 and 2015:

For the Six Months Ended September 30, 2016 :

 

Declaration Date

  

Record Date

  

Payment Date

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

April 12, 2016

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

April 12, 2016

   May 19, 2016    May 31, 2016      0.1484375         0.140625         0.135417   

April 12, 2016

   June 17, 2016    June 30, 2016      0.1484375         0.140625         0.135417   

July 12, 2016

   July 22, 2016    August 2, 2016      0.1484375         0.140625         0.135417   

July 12, 2016

   August 22, 2016    August 31, 2016      0.1484375         0.140625         0.135417   

July 12, 2016

   September 21, 2016    September 30, 2016      0.1484375         0.140625         0.135417   
        

 

 

    

 

 

    

 

 

 
      Total    $ 0.8906250       $ 0.843750       $ 0.812502   
        

 

 

    

 

 

    

 

 

 

For the Six Months Ended September 30, 2015 :

 

Declaration Date

  

Record Date

  

Payment Date

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

April 14, 2015

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

April 14, 2015

   May 19, 2015    May 29, 2015      0.1484375         0.140625         —     

April 14, 2015

   June 19, 2015    June 30, 2015      0.1484375         0.140625         —     

May 14, 2015 (A)

   June 19, 2015    June 30, 2015      —           —           0.221181   

July 14, 2015

   July 24, 2015    August 4, 2015      0.1484375         0.140625         0.135417   

July 14, 2015

   August 20, 2015    August 31, 2015      0.1484375         0.140625         0.135417   

July 14, 2015

   September 21, 2015    September 30, 2015      0.1484375         0.140625         0.135417   
        

 

 

    

 

 

    

 

 

 
      Total    $ 0.8906250       $ 0.843750       $ 0.627432   
        

 

 

    

 

 

    

 

 

 

 

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

 

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

In accordance with ASC Topic 480, “ Distinguishing Liabilities from Equity ,” mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet and we have recorded our mandatorily redeemable preferred stock at cost, which equals the liquidation preference, less discounts as of September 30, 2016 and March 31, 2016. The related dividend payments to preferred stockholders are treated as dividend expense on our accompanying Consolidated Statements of Operations on the ex-dividend date.

The following table summarizes the fair value of each of our series of mandatorily redeemable preferred stock based on the last reported closing sale price as of September 30, 2016 and March 31, 2016, each of which we consider to be a Level 1 input within the fair value hierarchy:

 

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

Series A Term Preferred Stock (A)

   $ —         $ 40,944   

Series B Term Preferred Stock

     42,559         40,738   

Series C Term Preferred Stock

     41,844         38,849   

Series D Term Preferred Stock (B)

     58,466         —     
  

 

 

    

 

 

 

Total

   $ 142,869       $ 120,531   
  

 

 

    

 

 

 

 

(A) We voluntarily redeemed our Series A Term Preferred Stock in full on September 30, 2016.
(B) Our Series D Term Preferred Stock was issued on September 26, 2016.

NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS

Registration Statement

On June 16, 2015, we filed a registration statement on Form N-2 (File No. 333-204996) with the SEC and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 28, 2015, which the SEC declared effective on July 29, 2015. On June 8, 2016, we filed Post-Effective Amendment No. 1 to the registration statement, which the SEC declared effective on July 28, 2016. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through concurrent, separate offerings of such securities. After the Series D Term Preferred Stock offering in September 2016, we currently have the ability to issue up to $242.5 million in securities under the registration statement.

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

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

 

     Three Months Ended September 30,      Six Months Ended September 30,  
     2016      2015      2016      2015  

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

   $ (102    $ (110    $ 24,432       $ 8,449   

Denominator: basic and diluted weighted average common shares

     30,270,958         30,270,958         30,270,958         30,265,548   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ —         $ —         $ 0.81       $ 0.28   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify for treatment as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90% of our ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“Investment Company Taxable Income”). The amount to be paid out as distributions to our common stockholders is determined by our Board of Directors quarterly and is based on management’s estimate of Investment Company Taxable Income. Based on that estimate, our Board of Directors declares three monthly distributions to common stockholders each quarter.

The federal income tax characteristics of all distributions (including preferred stock dividends) will be reported to stockholders on Internal Revenue Service Form 1099 after the end of each calendar year.

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

 

Fiscal
Year

   Declaration Date      Record Date    Payment Date    Distribution
per

Common
Share
 

2017

     April 12, 2016       April 22, 2016    May 2, 2016    $ 0.0625   
     April 12, 2016       May 19, 2016    May 31, 2016      0.0625   
     April 12, 2016       June 17, 2016    June 30, 2016      0.0625   
     July 12, 2016       July 22, 2016    August 2, 2016      0.0625   
     July 12, 2016       August 22, 2016    August 31, 2016      0.0625   
     July 12, 2016       September 21, 2016    September 30, 2016      0.0625   
           

 

 

 
      Six months ended September 30, 2016:    $ 0.3750   
           

 

 

 

Fiscal
Year

   Declaration Date      Record Date    Payment Date    Distribution
per
Common
Share
 

2016

     April 14, 2015       April 24, 2015    May 5, 2015    $ 0.0625   
     April 14, 2015       May 19, 2015    May 29, 2015      0.0625   
     April 14, 2015       June 19, 2015    June 30, 2015      0.0625   
     July 14, 2015       July 24, 2015    August 4, 2015      0.0625   
     July 14, 2015       August 20, 2015    August 31, 2015      0.0625   
     July 14, 2015       September 21, 2015    September 30, 2015      0.0625   
           

 

 

 
      Six months ended September 30, 2015:    $ 0.3750   
           

 

 

 

Aggregate distributions to our common stockholders declared quarterly and paid monthly were $11.4 million for both the six months ended September 30, 2016 and 2015 and were declared based on estimates of Investment Company Taxable Income for each respective fiscal year. We determine the tax characterization of distributions to our common stockholders as of the end of our fiscal year, based upon our taxable income for the full year and distributions paid during the full year. Therefore, a determination of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of distributions for the full year. If we determined the tax characterization of our distributions as of September 30, 2016, 100% would be from ordinary income and 0% would be a return of capital. For the six months ended September 30, 2016, we recorded $0.8 million of net estimated adjustments for permanent book-tax differences to reflect tax character which decreased Capital in excess of par value by $0.8 million, increased Accumulated net realized gain (loss) by $0.1 million and increased Net investment income in excess of distributions by $0.7 million on our accompanying Consolidated Statements of Assets and Liabilities . For the fiscal year ended March 31, 2016, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $6.9 million of the first distributions paid to common stockholders in fiscal year 2017, as having been paid in the prior year.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of September 30, 2016 and March 31, 2016, we had no established reserves for such loss contingencies.

 

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Escrow Holdbacks

From time to time, we will enter into arrangements relating to exits of certain investments whereby specific amounts of the proce