Gladstone Investment Corporation
GLADSTONE INVESTMENT CORPORATION\DE (Form: 497, Received: 02/23/2018 06:09:23)
Table of Contents

Filed pursuant to Rule 497
Registration Statement No. 333-204996

PROSPECTUS SUPPLEMENT

(To Prospectus Dated July 31, 2017)

 

LOGO

Up to $35,000,000

Common Stock

 

 

We are an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). For federal income tax purposes, we have elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Generally, our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, generally in combination with the aforementioned debt securities, of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

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

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

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made by transactions that are deemed to be part of an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act, by means of ordinary brokers’ transactions that qualify for delivery of a prospectus to the Nasdaq Global Select Market (“Nasdaq”), in accordance with Rule 153 under the Securities Act, or such other sales as may be agreed by us and the Sales Agents, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices. The offering of shares of common stock pursuant to the Sales Agreements will terminate upon the earlier of (1) the sale of shares of common stock having an aggregate offering price of $35,000,000, or (2) the termination of the Sales Agreements by us or the Sales Agents. See “ Plan of Distribution ” beginning on page S-50 of this prospectus supplement.

Our common stock is traded on Nasdaq under the symbol “GAIN.” On February 21, 2018 the last reported sale price of our common stock on Nasdaq was $10.09 per share. The net asset value (“NAV”), per share of our common stock on December 31, 2017 (the last date prior to the date of this prospectus supplement as of which we determined NAV) was $10.37. You are urged to obtain current market quotations of our common stock.

Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their NAV. If our shares trade at a discount to our NAV, it will likely increase the risk of loss for purchasers in this offering. On August 24, 2017, our stockholders voted to allow us to issue common stock at a price below NAV per share for the period ending on the one year anniversary of the date of our 2017 Annual Meeting of Stockholders. Our stockholders did not specify a maximum discount below NAV at which we are able to issue our common stock, although the number of shares sold in each offering may not exceed 25% of our outstanding common stock immediately prior to such sale. In addition, we cannot issue shares of our common stock below NAV unless our board of directors (“Board of Directors”) determines that it would be in our and our stockholders’ best interests to do so. Sales of common stock at prices below NAV per share dilute the interests of existing stockholders, have the effect of reducing our NAV per share and may reduce our market price per share. In addition, continuous sales of common stock below NAV may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. See “ Sales of Common Stock Below Net Asset Value ” in this prospectus supplement and in the accompanying prospectus.

 

 

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

Investing in shares of our common stock involves a high degree of risk. Before investing, you should read the material risks described in the “ Risk Factors ” section beginning on page S-11 of this prospectus supplement and beginning on page 13 of the accompanying prospectus.

This prospectus supplement and the accompanying prospectus contain important information you should know before investing in our common stock, including information about risks. Please read it before you invest and retain it for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission (the “SEC”), and can be accessed at its website at www.sec.gov . This information is also available free of charge by calling us collect at (703) 287-5893 or on the investor relations section of our corporate website located at www.gladstoneinvestment.com . You may also call us collect at this number to request other information or to make a shareholder inquiry. See “ Where You Can Find More Information ” on page S-53 of this prospectus supplement. The SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.

 

 

 

Cantor Fitzgerald & Co.   Ladenburg Thalmann   Wedbush Securities

The date of this prospectus supplement is February 22, 2018


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Supplement

  

Prospectus Supplement Summary

     S-1  

The Offering

     S-5  

Fees and Expenses

     S-7  

Risk Factors

     S-11  

Special Note Regarding Forward-Looking Statements

     S-15  

Use of Proceeds

     S-16  

Price Range of Common Stock and Distributions

     S-17  

Common Share Price Data

     S-17  

Consolidated Selected Financial Data

     S-19  

Selected Quarterly Financial Data

     S-21  

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

     S-22  

Sales of Common Stock Below Net Asset Value

     S-48  

Plan of Distribution

     S-50  

Additional Material U.S. Federal Income Tax Considerations

     S-52  

Custodian, Transfer Agent, Dividend Disbursing Agent and Paying Agent

     S-53  

Legal Matters

     S-53  

Experts

     S-53  

Where You Can Find More Information

     S-53  

Index to Interim Consolidated Financial Statements

     S-F-1  

Prospectus

  

Prospectus Summary

     1  

The Offering

     6  

Fees and Expenses

     9  

Risk Factors

     13  

Special Note Regarding Forward-Looking Statements

     37  

Use of Proceeds

     38  

Price Range of Common Stock and Distributions

     39  

Ratios of Earnings to Fixed Charges

     40  

Consolidated Selected Financial Data

     41  

Selected Quarterly Data (Unaudited)

     43  

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

     44  

Sales of Common Stock Below Net Asset Value

     70  

Senior Securities

     77  

Business

     79  

Portfolio Companies

     93  

Management

     100  

Control Persons and Principal Stockholders

     116  

Dividend Reinvestment Plan

     119  

Material U.S. Federal Income Tax Considerations

     120  

Regulation as a Business Development Company

     123  

Description of Our Securities

     126  

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

     132  

Share Repurchases

     136  

Plan of Distribution

     137  

Brokerage Allocation and Other Practices

     139  

Proxy Voting Policies and Procedures

     139  

Custodian, Transfer and Dividend Paying Agent and Registrar

     140  

Legal Matters

     140  

Experts

     140  

Additional Information

     141  

Index to Consolidated Financial Statements

     F-1  


Table of Contents

ABOUT THIS PROSPECTUS SUPPLEMENT

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

This prospectus supplement is part of a registration statement on Form N-2 (Registration No. 333-204996) that we have filed with the SEC relating to the securities offered hereby. This prospectus supplement does not contain all of the information that we have included in the registration statement and the accompanying exhibits and schedules thereto in accordance with the rules and regulations of the SEC, and we refer you to such omitted information. It is important for you to read and consider all of the information contained in this prospectus supplement and the accompanying prospectus before making your investment decision. You should also read and consider the additional information incorporated by reference into this prospectus supplement and the accompanying prospectus. See “ Where You Can Find More Information ” in this prospectus supplement.

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

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


Table of Contents

PROSPECTUS SUPPLEMENT SUMMARY

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

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

Gladstone Investment Corporation

We were incorporated under the General Corporation Laws of the state of Delaware on February 18, 2005. On June 22, 2005, we completed our initial public offering and commenced operations. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the 1940 Act. For federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. From our initial public offering in 2005 through December 31, 2017, we have made 150 consecutive monthly distributions to common stockholders.

Our shares of common stock, 6.75% Series B Cumulative Term Preferred Stock, par value $0.001 per share (the “Series B Term Preferred Stock”), 6.50% Series C Cumulative Term Preferred Stock due 2022, par value $0.001 per share (the “Series C Term Preferred Stock”), and 6.25% Series D Cumulative Term Preferred Stock due 2023, par value $0.001 per share (the “Series D Term Preferred Stock” and together with the Series B Term Preferred Stock and the Series C Term Preferred Stock, the “Term Preferred Stock”) trade on Nasdaq under the trading symbols “GAIN,” “GAINO,” “GAINN,” and “GAINM,” respectively.

Investment Objectives and Strategy

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”). Our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness, and make distributions to our stockholders that grow over time; and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, generally in combination with the aforementioned debt securities, of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to $30 million, although investment size may vary depending upon our total assets or available capital at the time of investment. We intend that our investment portfolio over time will consist of approximately 75% in debt securities and 25% in equity securities, at cost. As of December 31, 2017, our investment portfolio was made up of 73.1% in debt securities and 26.9% in equity securities, at cost.

We focus on investing in lower middle market private businesses (which we generally define as private companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million



 

S-1


Table of Contents

to $20 million) (“Lower Middle Market”) in the U.S. that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company’s stock or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, as applicable, though there can be no assurance that we will always have these rights. We invest in portfolio companies that need funds for growth capital or to finance acquisitions or recapitalize or, to a lesser extent, refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises.

We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us an exemptive order (the “Co-Investment Order”) that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital Corporation (“Gladstone Capital”) and any future business development company or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. Since 2012, we have opportunistically made several co-investments with our affiliate Gladstone Capital pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone.

In general, our investments in debt securities have a term of five years, accrue interest at variable rates (based on the one-month London Interbank Offered Rate (“LIBOR”)) and, to a lesser extent, at fixed rates. As of December 31, 2017, our loan portfolio consisted of 96.9% variable rate loans with floors and 3.1% fixed rate loans based on the total principal balance of all outstanding debt investments. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, and which may include a yield enhancement such as a success fee or, to a lesser extent, deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of the business. Some debt securities may have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called “paid-in-kind” (“PIK”) interest. As of December 31, 2017, we did not have any securities with a PIK feature.

Typically, our investments in equity securities take the form of common stock, preferred stock, limited liability company interests, or warrants or options to purchase any of the foregoing. Often, these equity investments occur in connection with our original investment, buyouts and recapitalizations of a business, or refinancing existing debt. From our initial public offering in 2005 and through December 31, 2017, we have made investments in 47 companies, excluding investments in syndicated loans, for a total of approximately $1 billion, before giving effect to principal repayments and divestitures.

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

 

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


 

S-2


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

 

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

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

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

Investment Adviser and Administrator

We are externally managed by the Adviser, an affiliate of ours, under an investment advisory and management agreement (the “Advisory Agreement”), and another of our affiliates, the Administrator, provides administrative services to us pursuant to a contractual agreement (the “Administration Agreement”). Each of the Adviser and Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone and Terry Brubaker, our vice chairman and chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and serve as executive officers of the Adviser and the Administrator. The Administrator employs, among others, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator), and their respective staffs. The Adviser and Administrator have extensive experience in our lines of business and also provide investment advisory and administrative services, respectively, to our affiliates, including, but not limited to: Gladstone Commercial Corporation, a publicly-traded real estate investment trust; Gladstone Capital, a publicly-traded BDC and RIC; and Gladstone Land Corporation, a publicly-traded real estate investment trust. In the future, the Adviser and Administrator may provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.

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



 

S-3


Table of Contents

Adviser also has offices in other states. We have been externally managed by the Adviser pursuant to the Advisory Agreement since June 22, 2005 pursuant to which we pay the Adviser a base management fee and an incentive fee for its services.

Recent Developments

Distributions to Stockholders

In January 2018, our Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to holders of our three series of Term Preferred Stock:

 

Record Date

  

Payment Date

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

January 22, 2018

   January 31, 2018    $ 0.065      $ 0.140625      $ 0.135417      $ 0.13020833  

February 16, 2018

   February 28, 2018      0.065        0.140625        0.135417        0.13020833  

March 20, 2018

   March 30, 2018      0.065        0.140625        0.135417        0.13020833  
     

 

 

    

 

 

    

 

 

    

 

 

 

Total for the Quarter:

   $ 0.195      $ 0.421875      $ 0.406251      $ 0.39062499  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment Activity

 

    In January 2018, we invested $14.5 million in an existing portfolio company, Schylling, Inc., through a secured first lien debt investment.

 

    In January 2018, we invested $11.0 million in an existing portfolio company, Nth Degree, through a secured first lien debt investment.


 

S-4


Table of Contents

THE OFFERING

 

Common stock offered    Shares with a maximum aggregate offering price of up to $35,000,000.
Common stock outstanding prior to this offering    32,526,223 shares.
Plan of Distribution    “At the market offering” that may be made from time to time through the Sales Agents. See “ Plan of Distribution ” beginning on page S-50 of this prospectus supplement.
   On February 22, 2018, we established the at-the-market program to which this prospectus supplement relates and entered into the Sales Agreements with the Sales Agents.
Use of Proceeds    If we sell shares of our common stock with an aggregate offering price of $35.0 million, which is available under the Sales Agreements as of the date of this prospectus supplement, we anticipate that our net proceeds, after deducting the Sales Agents’ maximum commissions and estimated offering expenses payable by us, will be approximately $34.1 million. We intend to use the net proceeds from this offering first to repay outstanding indebtedness under the Fifth Amended and Restated Credit Agreement, as further amended, (the “Credit Facility”), with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and a lender, then to fund new investment opportunities in accordance with our investment objectives, with any remaining proceeds to be used for other general corporate purposes. See “ Use of Proceeds ” on page S-16 of this prospectus supplement.
Nasdaq symbol    “GAIN”
Distributions on common stock    From our initial public offering in June 2005 through December 31, 2017, we have made 150 consecutive monthly distributions to common stockholders and generally intend to continue to do so. The amount of monthly distributions on our common stock is generally determined by our Board of Directors on a quarterly basis and is based on management’s estimate of our annual taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“Investment Company Taxable Income”), if any. See “ Price Range of Common Stock and Distributions ” beginning on page S-17 of this prospectus supplement. Because our distributions to common stockholders are based


 

S-5


Table of Contents
   on estimates of Investment Company Taxable Income that may differ from actual results, future distributions payable to our common stockholders may also include a return of capital. Such return of capital distributions may increase an investor’s tax liability for capital gains upon the sale of our shares by reducing the investor’s tax basis for such shares. See “ Risk Factors—Risks Related to an Investment in Our Securities— Distributions to our common stockholders have included and may in the future include a return of capital ” in the accompanying prospectus. Certain additional amounts may be deemed as distributed to stockholders for income tax purposes or may be paid as supplemental distributions, as applicable. We expect other types of securities to pay distributions in accordance with their terms.
Tax matters    See “ Additional Material U.S. Federal Income Tax Considerations ” in this prospectus supplement and “ Material U.S. Federal Income Tax Considerations ” beginning on page 120 of the accompanying prospectus for a discussion of material U.S. federal income tax considerations applicable to an investment in shares of our common stock.
Risk Factors    Investing in shares of our common stock involves substantial risks. Please carefully read and consider the information described under “ Risk Factors ” beginning on page S-11 of this prospectus supplement and beginning on page 13 of the accompanying prospectus before making an investment decision.


 

S-6


Table of Contents

FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus supplement contains a reference to fees or expenses paid by “us” or “Gladstone Investment,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Gladstone Investment. The following annualized percentages were calculated based on actual expenses incurred in the quarter ended December 31, 2017 and average net assets for the quarter ended December 31, 2017. The table and examples below include all fees and expenses of our consolidated subsidiaries.

 

Stockholder Transaction Expenses:

  

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

     2.00

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

     0.48

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

    

Up to $25.00
Transaction
fee
 
 
 

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

     2.48

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

  

Base management fee (5)

     3.34

Loan Servicing fee (6)

     1.89

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

     3.40

Interest payments on borrowed funds (8)

     1.45

Dividend expense on mandatorily redeemable preferred stock (9)

     2.95

Other expenses (10)

     0.57
  

 

 

 

Total annual expenses (11)

     13.60

 

(1) Represents the maximum commission with respect to the shares of common stock being sold in this offering. The Sales Agents will be entitled to compensation up to 2.0% of the gross proceeds of the sale of any shares of our common stock under the Sales Agreement, with the exact amount of such compensation to be mutually agreed upon by us and the Sales Agents from time to time. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus.
(2) The percentage reflects estimated offering expenses of approximately $0.2 million and assumes we sell all $35.0 million of common stock available under the Sales Agreement pursuant to this prospectus supplement and the accompanying prospectus.
(3) The expenses of the dividend reinvestment plan, if any, are included in stock record expenses, a component of “Other expenses.” If a participant elects by written notice to the plan agent prior to termination of his or her account to have the plan agent sell part or all of the shares held by the plan agent in the participant’s account and remit the proceeds to the participant, the plan agent is authorized to deduct a transaction fee, plus per share brokerage commissions, from the proceeds. The participants in the dividend reinvestment plan will also bear a transaction fee, plus pro rata share of brokerage commissions incurred with respect to open market purchases, if any. See “ Dividend Reinvestment Plan ” in the accompanying prospectus for information on the dividend reinvestment plan.
(4) The percentages presented in this table are gross of credits to any fees.


 

S-7


Table of Contents
(5) In accordance with the Advisory Agreement, our annual base management fee is 2.0% (0.5% quarterly) of our average gross assets, which are defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, and adjusted appropriately for any share issuances or repurchases. In accordance with the requirements of the SEC, the table above shows our base management fee as a percentage of average net assets attributable to common shareholders. For purposes of the table, the annualized base management fee has been converted to 3.34% of the average net assets for the quarter ended December 31, 2017 by dividing the total annualized amount of the base management fee by our average net assets. The base management fee for the quarter ended December 31, 2017 before application of any credits was $2.8 million.

Pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser non-contractually, unconditionally, and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser and primarily for the valuation of portfolio companies. For the quarter ended December 31, 2017, $1.1 million of these fees were non-contractually, unconditionally and irrevocably credited against the base management fee. See “Business—Transactions with Related Parties—Investment Advisory and Management Agreement ” and “Management—Certain Transactions—Investment Advisor and Administrator ” in the accompanying prospectus.

(6) The Adviser services, administers and collects on the loans held by Gladstone Business Investment, LLC, our wholly-owned subsidiary (“Business Investment”), in return for which the Adviser receives a 2.0% annual loan servicing fee payable monthly by Business Investment based on the monthly aggregate balance of loans held by Business Investment in accordance with the Credit Facility. Since Business Investment is a consolidated subsidiary of ours, coupled with the fact that the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 2.0% 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% non-contractually, unconditionally and irrevocably credited back to us by the Adviser. The loan servicing fee for the three months ended December 31, 2017 was $1.6 million. See “ Business—Transactions with Related Parties—Loan Servicing Fee Pursuant to Credit Facility ” and “ Management—Certain Transactions—Loan Servicing Fee Pursuant to Credit Facility ” in the accompanying prospectus and footnote 7 below.
(7)

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



 

S-8


Table of Contents
  our pre-incentive fee net investment income exceeds 125% of the quarterly hurdle rate in any calendar quarter (8.75% annualized). For the three months ended December 31, 2017, the income-based incentive fee was $2.1 million.

The capital gains-based incentive fee equals 20% of our net realized capital gains in excess of unrealized depreciation since our inception, if any, computed as all realized capital gains net of all realized capital losses and unrealized capital depreciation since our inception, less any prior payments, and is payable at the end of each fiscal year. As of and for the three months ended December 31, 2017, we recorded a capital gains-based incentive fee of $0.8 million in accordance with the provisions of U.S. generally accepted accounting principles (“GAAP”), which is not contractually due under the terms of the Advisory Agreement.

No credits were applied to the incentive fee for the three months ended December 31, 2017; however, the Adviser may credit such fee in the future.

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

 

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

 

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

= 100.0% × (2.00% – 1.75%)

= 0.25%

 

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

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

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

= 0.4375% + 0.0225%

= 0.46%

 

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

= 20.0% × (6.0% – 1.0%)

= 20.0% × 5.0%

= 1.0%

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

 

(8) Includes amortization of deferred financing costs. As of December 31, 2017, we had $96.6 million in borrowings outstanding under our Credit Facility.
(9) Includes dividends paid on our Series B Term Preferred Stock, Series C Term Preferred Stock and Series D Term Preferred Stock and amortization of deferred financing costs. See “ Description of Our Securities—Preferred Stock ” in the accompanying prospectus for additional information.
(10)

Includes our overhead expenses, including payments under the Administration Agreement based on our projected allocable portion of overhead and other expenses incurred by our Administrator in performing its



 

S-9


Table of Contents
  obligations under the Administration Agreement. See “ Business—Transactions with Related Parties—Administration Agreement” and “Management—Certain Transactions—Investment Advisor and Administrator ” in the accompanying prospectus.
(11) Total annualized gross expenses, based on actual amounts incurred for the three months ended December 31, 2017, would be $45.1 million. After all non-contractual, unconditional, and irrevocable credits described in footnote 5, footnote 6, and footnote 7 above are applied to the base management fee and the loan servicing fee, total annualized expenses after fee credits, based on actual amounts incurred for the three months ended December 31, 2017, would be $34.6 million or 10.43% as a percentage of net assets.

Example

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

 

     1 Year      3 Years      5 Years      10 Years  

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

           

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

   $ 107      $ 303      $ 478      $ 834  

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

   $ 116      $ 326      $ 509      $ 870  

 

(1) For purposes of this example, we have assumed that the entire amount of the assumed 5.0% annual return would constitute ordinary income as we have not historically realized positive capital gains (computed net of all realized capital losses) in excess of unrealized depreciation on our investments through December 31, 2017. While we recorded a capital gains-based incentive fee of $0.8 million during the three month ended December 31, 2017 in accordance with GAAP, this amount is not contractually due under the terms of the Advisory Agreement. Because the assumed 5.0% annual return is significantly below the hurdle rate of 7.0% (annualized) that we must achieve under the investment advisory and management agreement to trigger the payment of an income-based incentive fee, we have assumed, for purposes of this example, that no income-based incentive fee would be payable if we realized a 5.0% annual return on our investments.
(2) While the example assumes reinvestment of all distributions at NAV per share, participants in the dividend reinvestment plan will receive a number of shares of our common stock determined by dividing the total dollar amount of the distribution payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the distribution, and this price per share may differ from NAV per share. See “ Dividend Reinvestment Plan ” in the accompanying prospectus for additional information regarding our dividend reinvestment plan.
(3) For purposes of this example, we have assumed that the entire amount of the assumed 5.0% annual return would constitute capital gains and that no accumulated capital losses or unrealized depreciation would have to be overcome first before a capital gains-based incentive fee is payable.


 

S-10


Table of Contents

RISK FACTORS

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

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

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

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

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

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

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

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

Our most recent NAV was calculated on December 31, 2017 and our NAV when calculated as of March 31, 2018 and subsequent periods may be higher or lower.

As of December 31, 2017, our NAV per share was $10.37, which was based on the fair value our investments that were reviewed and approved by our Board of Directors (and the valuation committee thereof (the “Valuation Committee”)). NAV per share as of March 31, 2018, and following quarters, may be higher or lower than $10.37 based on potential changes in valuations, issuances of securities, or distributions paid and earnings for the quarter then ended. Our Board of Directors determines the fair value of our portfolio investments on a quarterly basis, and if our March 31, 2018 fair value is less than the December 31, 2017 fair value, we will record an unrealized loss on our investment portfolio. If the fair value is greater, we will record an unrealized gain on our investment portfolio. Upon publication of our next quarterly NAV per share determination (generally in our next Quarterly Report on Form 10-Q), the market price of our common stock may fluctuate materially.

 

S-11


Table of Contents

The recently enacted legislation informally titled the Tax Cuts and Jobs Act and other legislative, regulatory and administrative developments may adversely affect us or our stockholders.

On December 22, 2017, President Trump signed into law P.L. 115-97, informally titled the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes major changes to the Code, including a number of provisions of the Code that affect the taxation of RICs and their stockholders. Certain provisions of the Tax Act that may impact us and our stockholders include:

 

    temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate will be reduced from 39.6% to 37% (through taxable years ending in 2025);

 

    reducing the maximum corporate income tax rate from 35% to 21%;

 

    reducing the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%;

 

    permitting a deduction for certain pass-through business income, which generally will allow individuals, trusts, and estates to deduct up to 20% of such amounts, resulting in an effective maximum U.S. federal income tax rate of 29.6% on such dividends (through taxable years ending in 2025);

 

    requiring that, subject to exceptions, income be included in taxable income no later than the tax year in which it is taken into account as income on specified types of financial statements;

 

    amending the limitation on the deduction of net interest expense for all businesses, other than certain electing businesses; and

 

    eliminating the corporate alternative minimum tax.

The individual and collective impact of these provisions and other provisions of the Tax Act on the Company and its stockholders is uncertain, and may not become evident for some period of time. In addition, other legislative, regulatory or administrative changes may be enacted or promulgated, either prospectively or with retroactive effect, and may adversely affect the Company or its stockholders. The Company’s stockholders should consult their individual tax advisors regarding the implications of the Tax Act and other potential legislative, regulatory or administrative changes on their investment in our stock.

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

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

Under the 1940 Act, we are generally not able to issue additional shares of our common stock at a price below NAV per share to purchasers other than our existing common stockholders through a rights offering without first obtaining the approval of our stockholders, our directors who have no financial interest in the transaction, and our independent directors. Additionally, at times when our common stock is trading below its NAV per share, our dividend yield may exceed the weighted average returns that we would expect to realize on new investments that would be made with the proceeds from the sale of such stock, making it unlikely that we

 

S-12


Table of Contents

would determine to issue additional common shares in such circumstances. Thus, for as long as our common stock may trade below NAV we will be subject to significant constraints on our ability to raise capital through the issuance of common stock. Additionally, an extended period of time in which we are unable to raise capital may restrict our ability to grow and adversely impact our ability to increase or maintain our distributions.

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

At our 2017 Annual Meeting of Stockholders our stockholders approved our ability, subject to the condition that the maximum number of shares salable below net asset value pursuant to this authority in any particular offering that could result in such dilution is limited to 25% of our then outstanding common stock immediately prior to each such offering, to sell shares of our common stock at any level of discount from net asset value per share for a period of 12 months. It should be noted that, theoretically, we may offer up to 25% of our then outstanding common stock each day. The issuance or sale by us of shares of our common stock at a discount to net asset value poses a risk of dilution to our stockholders. In particular, stockholders who do not purchase additional shares of common stock at or below the discounted price in proportion to their current ownership will experience an immediate decrease in net asset value per share (as well as in the aggregate net asset value of their shares of common stock if they do not participate at all). These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we experience in our assets, potential earning power and voting interests from such issuance or sale. In addition, such sales may adversely affect the price at which our common stock trades. For additional information about possible sales below NAV per share, see “ Sales of Common Stock Below Net Asset Value ” in this prospectus supplement and in the accompanying prospectus.

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

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

 

S-13


Table of Contents

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

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

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

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

Rising interest rates may negatively impact our investments and have an adverse effect on our business, financial condition, results of operations, and cash flows.

Over the past year, the Federal Reserve has made gradual increases in the federal funds rate and we expect such gradual increases to continue. A substantial portion of our debt investments have variable interest rates that reset periodically and are generally based on LIBOR with a floor, so an increase in interest rates above the applicable floor may make it more difficult for our portfolio companies to meet their debt servicing obligations to us, which could result in a default under their loan documents with us. To the extent that interest rates increase, this may negatively impact the operating performance of our portfolio companies as they shift cash from other productive uses to the payment of interest or may cause our portfolio companies to refinance or otherwise repay our debt investments earlier than they otherwise would, requiring us to incur management time and expense to re-deploy such proceeds, including on terms that may not be as favorable as our existing loans. There can be no guarantee the Federal Reserve will continue to raise rates at the gradual pace they originally proposed.

The current U.S. presidential administration (the “Administration”) may make substantial changes to certain regulations that may adversely affect our business.

The Administration has called for substantial change to fiscal and tax policies as discussed in part above. On February 3, 2017, President Trump signed an executive order calling for the Administration to review U.S. financial laws and regulations in order to determine their consistency with a set of core principles identified in the order. Some areas identified as subject to potential change, amendment or repeal include the Dodd-Frank Act, the Consumer Protection Act, the Volcker Rule, credit risk retention requirements and the authorities of the Federal Reserve and the Financial Stability Oversight Council. We cannot predict which, if any, of these or other actions will be taken or, if taken, their effect on the financial stability of the credit market in which we operate. Such actions could have a significant adverse effect on our business, financial condition, results of operations, and cash flows.

 

S-14


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained or incorporated by reference in this prospectus or any accompanying prospectus supplement, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with the Adviser and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “project,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to:

 

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

 

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

 

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

 

    changes in our investment objectives and strategy;

 

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

 

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

 

    the degree and nature of our competition;

 

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

 

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

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. Except as required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus. The forward-looking statements contained or incorporated by reference in this prospectus or any accompanying prospectus supplement are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.

 

S-15


Table of Contents

USE OF PROCEEDS

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be by transactions that are deemed to be part of an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act, by means of ordinary brokers’ transactions that qualify for delivery of a prospectus to Nasdaq in accordance with Rule 153 under the Securities Act or such other sales as may be agreed by us and the Sales Agents, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at other negotiated prices. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in this paragraph depending on, among other things, the market price of our common stock at the time of any such sale. As a result, the actual net proceeds we receive may be more or less than the amount of net proceeds estimated in this prospectus supplement. However, assuming the sale of all of the $35.0 million of common stock offered under this prospectus supplement and the accompanying prospectus, we anticipate that our net proceeds from this offering will be approximately $34.1 million, after deducting the maximum estimated sales commission payable to the Sales Agents and our estimated offering expenses of $0.2 million. As of the date of this prospectus supplement, we have not sold any shares of common stock under our at-the-market program.

We intend to use the net proceeds from this offering first to pay down outstanding debt (which may include borrowings under the Credit Facility), if any, then to make investments in accordance with our investment objectives and strategy, with any remaining proceeds to be used for other general corporate purposes. As of February 21, 2018, we had $113.8 million outstanding under the Credit Facility and advances under the Credit Facility generally bear interest at 30-day LIBOR plus 3.15% per annum until November 15, 2019, with the margin then increasing to 3.40% for the period from November 15, 2019 to November 15, 2020, and increasing further to 3.65% thereafter through maturity. If not renewed or extended by November 15, 2019, all principal and interest will be due and payable on or before November 15, 2021. We intend to re-borrow under our Credit Facility to make investments in portfolio companies in accordance with our investment objectives depending on the availability of appropriate investment opportunities consistent with our investment objectives and market conditions.

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

 

S-16


Table of Contents

PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

We currently intend to distribute in the form of cash distributions, a minimum of 90% of our Investment Company Taxable Income, if any, to our stockholders in the form of monthly distributions. We may retain net long-term capital gains in excess of net short-term capital losses and treat them as deemed distributions for tax purposes or may distribute such amounts as supplemental distributions. The tax characteristics of distributions are reported annually to each stockholder on IRS Form 1099-DIV. There is no assurance that we will achieve investment results or maintain a tax status that will permit any specified level of cash distributions or year-to-year increases in cash distributions. At the option of a holder of record of common stock, all cash distributions with respect to shares of our common stock can be reinvested automatically under the dividend reinvestment plan. A stockholder whose shares of our common stock are held in the name of a broker or other nominee should contact the broker or nominee regarding participation in the dividend reinvestment plan on the stockholder’s behalf. See “ Risk Factors—Risks Related to Our Regulation and Structure—We will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification ;” “ Dividend Reinvestment Plan ;” and “ Material U.S. Federal Income Tax Considerations ” in the accompanying prospectus.

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

As of February 20, 2018, there were 22 record owners of our common stock.

The following table reflects, by quarter, the high and low intraday sales prices per share of our common stock on Nasdaq, the intraday sales prices as a percentage of NAV and distributions declared per share of our common stock for each fiscal quarter during the last two completed fiscal years and the current fiscal year through February 21, 2018.

COMMON SHARE PRICE DATA

 

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

Fiscal Year ended March 31, 2016

               

First Quarter

   $ 9.24      $ 8.10      $ 7.35      $ 0.1875       (12 )%      (20 )% 

Second Quarter

     9.05        8.25        6.66        0.1875       (9     (26

Third Quarter

     8.66        8.00        6.96        0.1875       (8     (20

Fourth Quarter

     9.22        7.96        6.40        0.1875       (14     (31

Fiscal Year ended March 31, 2017

               

First Quarter

     9.84        7.24        6.65        0.1875       (26     (32

Second Quarter

     9.65        9.30        7.16        0.1875       (4     (26

Third Quarter

     9.82        9.15        7.16        0.1875       (7     (27

Fourth Quarter

     9.95        9.36        8.45        0.1875       (6     (15

Fiscal Year ending March 31, 2018

               

First Quarter

     9.88        9.84        8.90        0.2520 (3)       (0     (10

Second Quarter

     10.10        9.84        9.04        0.1920       (3     (10

Third Quarter

     10.37        11.50        9.48        0.2550 (3)       11       (9

Fourth Quarter (through February 21, 2018)

     *        11.42        9.00        0.1950       *       *  

 

S-17


Table of Contents

 

(1) NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low intraday sales prices. The NAVs per share shown are based on outstanding common shares at the end of each period.
(2) The premiums and discounts set forth in these columns represent the high or low, as applicable, intraday sale prices per share for the relevant quarter minus the NAV per share as of the end of such quarter, and therefore may not reflect the premium or discount to NAV per share on the date of the high and low intraday sales prices.
(3) Includes a supplemental distribution of $0.06 per share of common stock.
* Not yet available, as the NAV per share as of the end of this quarter cannot yet be determined.

 

S-18


Table of Contents

CONSOLIDATED SELECTED FINANCIAL DATA

The following consolidated selected financial data as of and for the fiscal years ended March 31, 2017, 2016, 2015, 2014 and 2013 are derived from our audited consolidated financial statements. The consolidated selected financial data as of and for the nine months ended December 31, 2017 and 2016 are derived from our unaudited consolidated financial statements included in this prospectus supplement. The other data included in the second table below is also unaudited. The data should be read in conjunction with our Consolidated Financial Statements and notes thereto and “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” included elsewhere in this prospectus supplement and the accompanying prospectus.

(Dollar amounts in thousands, except per share data)

 

    Nine Months Ended
December 31,
    Year Ended March 31,  
    2017     2016     2017     2016     2015     2014     2013  

Statement of Operations Data:

             

Total investment income

  $ 42,936     $ 39,511     $ 51,875     $ 50,955     $ 41,643     $ 36,264     $ 30,538  

Total expenses, net of credits from Adviser

    24,220       22,383       29,453       30,239       21,746       16,957       14,050  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    18,716       17,128       22,422       20,716       19,897       19,307       16,488  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

    20,125       18,259       22,341       4,138       30,317       (20,636     791  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ 38,841     $ 35,387     $ 44,763     $ 24,854     $ 50,214     $ (1,329   $ 17,279  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

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

  $ 1.21     $ 1.17     $ 1.48     $ 0.82     $ 1.88     $ (0.05   $ 0.71  

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

    0.58       0.57       0.74       0.68       0.75       0.73       0.68  

Cash distributions declared per common share (B)

    0.70       0.56       0.75       0.75       0.77       0.71       0.60  

Statement of Assets and Liabilities Data:

             

Total assets

  $ 580,615     $ 486,009     $ 515,195     $ 506,260     $ 483,521     $ 330,694     $ 379,803  

Net assets

    337,397       297,382       301,082       279,022       273,429       220,837       240,963  

Net asset value per common share

    10.37       9.82       9.95       9.22       9.18       8.34       9.10  

Common shares outstanding

    32,526,223       30,270,958       30,270,958       30,270,958       29,775,958       26,475,958       26,475,958  

Weighted common shares outstanding—basic and diluted

    32,178,127       30,270,958       30,270,958       30,268,253       26,665,821       26,475,958       24,189,148  

Senior Securities Data:

             

Total borrowings, at cost (C)

  $ 101,696     $ 48,796     $ 74,796     $ 100,096     $ 123,896     $ 66,250     $ 94,016  

Mandatorily redeemable preferred stock (D)

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

 

(A)   Per share data is based on the weighted average common stock outstanding for both basic and diluted.
(B)   The tax character of distributions is determined on an annual basis. For further information on the estimated tax character of our distributions to common stockholders, including changes in estimates, refer to Note 9— Distributions to Common Stockholders to our consolidated financial statements included elsewhere in the accompanying prospectus.
(C)   Includes borrowings under our Credit Facility, other secured borrowings, and short-term loans, as applicable.
(D)   Represents the aggregate liquidation preference of our mandatorily redeemable preferred stock.

 

S-19


Table of Contents
    Nine Months Ended
December 31,
    Year Ended March 31,  
    2017     2016     2017     2016     2015     2014     2013  

Other Unaudited Data:

             

Number of portfolio companies

    34       35       35       36       34       29       21  

Average size of portfolio company investment at cost

  $ 16,786     $ 14,256     $ 15,005     $ 14,392     $ 14,861     $ 13,225     $ 15,544  

Principal amount of new investments

    59,424       25,500       54,370       69,380       108,197       132,291       87,607  

Proceeds from loan repayments and investments sold

    26,617       63,674       68,825       44,582       11,260       83,415       28,424  

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

    13.23     12.61     12.65     12.62     12.60     12.61     12.51

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

    12.41     12.51     12.44     12.33     12.12     11.65     11.34

Total return (C)

    32.01     29.35     41.58     4.82     11.96     24.26     4.73

 

(A)   Weighted average yield on investments, excluding loans on non-accrual status, equals interest income earned on investments divided by the weighted average interest-bearing principal balance throughout the fiscal year.
(B)   Weighted average yield on investments, including loans on non-accrual status, equals interest income earned on investments divided by the weighted average total principal balance throughout the fiscal year.
(C)   Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, taking into account common dividends reinvested in accordance with the terms of the dividend reinvestment plan. Total return does not take into account common distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, including changes in estimates, refer to Note 9— Distributions to Common Stockholders to our consolidated financial statements included elsewhere in the accompanying prospectus.

 

S-20


Table of Contents

SELECTED QUARTERLY FINANCIAL DATA

(UNAUDITED)

The following tables set forth certain quarterly financial information for each of the eight quarters in the two years ended March 31, 2017 and the first three quarters of the fiscal year ending March 31, 2018. The information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the past fiscal year or for any future quarter.

 

     Quarter Ended  

Year ended March 31, 2018

   June 30, 2017      September 30, 2017      December 31, 2017  

Total investment income

   $ 13,620      $ 13,132      $ 16,184  

Net investment income

     5,435        5,750        7,531  

Net increase in net assets resulting from operations

     8,141        13,556        17,144  

Net increase in Net Assets Resulting From Operations per Weighted Average Common Share (Basic and Diluted)

   $ 0.26      $ 0.42      $ 0.53  

 

     Quarter Ended  

Year ended March 31, 2017

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

Total investment income

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

Net investment income

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

Net increase (decrease) in net assets resulting from operations

     24,534        (102     10,955       9,376  

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

   $ 0.81      $ —       $ 0.36     $ 0.31  
     Quarter Ended  

Year ended March 31, 2016

   June 30, 2015      September 30, 2015     December 31, 2015     March 31, 2016  

Total investment income

   $ 12,706      $ 13,740     $ 12,068     $ 12,441  

Net investment income

     5,163        6,023       4,631       4,899  

Net increase (decrease) in net assets resulting from operations

     8,559        (110     (6,213     22,618  

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

   $ 0.29      $ —       $ (0.21   $ 0.74  

 

S-21


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the notes thereto contained elsewhere in this prospectus supplement and the accompanying prospectus. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods. Except per share amounts or unless otherwise indicated, dollar amounts in the tables included herein are in thousands.

OVERVIEW

General

We were incorporated under the General Corporation Laws of the State of Delaware on February 18, 2005. On June 22, 2005, we completed our initial public offering and commenced operations. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the 1940 Act. For federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. From our initial public offering in 2005 through December 31, 2017, we have made 150 consecutive monthly distributions to common stockholders.

We are externally managed by the Adviser pursuant to the Advisory Agreement. The Adviser manages our investment activities. We have also entered into the Administration Agreement with the Administrator, an affiliate of ours and the Adviser, whereby we pay separately for administrative services. The Adviser and Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer.

Additionally, Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee. For additional information refer to Note 4— Related Party Transactions in the accompanying Notes to Consolidated Financial Statements .

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the U.S. Our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness, and make distributions to our stockholders that grow over time; and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, generally in combination with the aforementioned debt securities, of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to $30 million, although investment size may vary depending upon our total assets or available capital at the time of investment. We intend that our investment portfolio over time will consist of approximately 75% in debt securities and 25% in equity securities, at cost. As of December 31, 2017, our investment portfolio was made up of 73.1% in debt securities and 26.9% in equity securities, at cost.

We focus on investing in Lower Middle Market private businesses in the U.S. that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to

 

S-22


Table of Contents

grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company’s stock, or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We invest in portfolio companies that need funds for growth capital or to finance acquisitions or recapitalize or, to a lesser extent, refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises.

We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity.

In July 2012, the SEC granted us the Co-Investment Order that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital and any future business development company or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. Since 2012, we have opportunistically made several co-investments with Gladstone Capital pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone.

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

Business

Portfolio Activity

While the business environment remains competitive, we continue to see new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and independent sponsor-led buyouts of Lower Middle Market companies in the U.S. During the nine months ended December 31, 2017, we exited one portfolio company with a fair value prior to its sale of $19.2 million, invested $59.4 million in two new portfolio companies, and completed two separate mergers in which one of our existing portfolio companies merged with another one of our portfolio companies, resulting in a net reduction of one company from our portfolio, which was comprised of 34 companies as of December 31, 2017. From our initial public offering in June 2005 through December 31, 2017, we have made investments in 47 companies, excluding investments in syndicated loans, for a total of approximately $1 billion, before giving effect to principal repayments and divestitures.

The majority of the debt securities in our portfolio have a success fee component, which enhances the yield on our debt investments. Unlike PIK income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as of December 31, 2017, we had unrecognized, contractual success fees of $25.9 million, or $0.80 per common share. Consistent with GAAP, we generally have not recognized success fee receivables and related income in our Consolidated Financial Statements until earned.

From inception through December 31, 2017, we have completed eleven buyout liquidity events, which, in the aggregate, have generated $85.5 million in net realized gains and $22.0 million in other income upon exit, for a total increase to our net assets of $107.5 million. We believe each of these transactions was an equity-oriented

 

S-23


Table of Contents

investment success and exemplifies our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. The eleven liquidity events have offset any realized losses since inception, which were primarily incurred during the recession in connection with the sale of performing syndicated loans at a realized loss to pay off a former lender. These successful exits, in part, enabled us to increase the monthly distribution by 62.5% from March 2011 through December 31, 2017, and allowed us to pay a $0.03 per common share supplemental distribution in fiscal year 2012, a $0.05 per common share supplemental distribution in November 2013, a $0.05 per common share supplemental distribution in December 2014, a $0.06 per common share supplemental distribution in June 2017, and a $0.06 per common share supplemental distribution in December 2017.

Capital Raising Efforts

We have been able to meet our capital needs through extensions of and increases to the Credit Facility, and by accessing the capital markets in the form of public offerings of common and preferred stock. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to November 2019, and currently have a total commitment amount of $165.0 million (with a potential total commitment of $250.0 million through additional commitments of new or existing lenders). Most recently, we issued approximately 2.3 million shares of common stock for gross proceeds of $21.2 million in May 2017, inclusive of the June 2017 over-allotment, and 2.3 million shares of our Series D Term Preferred Stock for gross proceeds of $57.5 million in September 2016. Refer to “—Liquidity and Capital Resources—Revolving Line of Credit” for further discussion of the Credit Facility, “—Liquidity and Capital Resources—Equity—Common Stock” and “—Liquidity and Capital Resources—Equity—Term Preferred Stock” for further discussion of our common stock and mandatorily redeemable preferred stock.

Although we have been able to access the capital markets historically, market conditions may continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of common equity. On February 5, 2018, the closing market price of our common stock was $9.25 per share, which represented a 10.8% discount to our NAV of $10.37 per share as of December 31, 2017. When our common stock trades below NAV, our ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock at an issuance price below the then current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering.

At our 2017 Annual Meeting of Stockholders held on August 24, 2017, our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then current NAV per share, subject to certain limitations, including that the number of common shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each such sale, provided that our Board of Directors makes certain determinations prior to any such sale. This August 2017 stockholder authorization is in effect for one year from the date of stockholder approval. We sought and obtained stockholder approval concerning similar proposals at each Annual Meeting of Stockholders since 2008, and with our Board of Directors’ subsequent approval, we issued shares of our common stock in three offerings (including offerings of additional shares of common stock to cover over-allotments) at a price below the then current NAV per share, once in May and June 2017, once in March and April 2015, and once in October and November 2012. The resulting proceeds, in part, have allowed us to (i) grow our portfolio by making new investments, (ii) generate additional income through these new investments, (iii) ensure continued compliance with regulatory tests and (iv) increase our debt capital while still complying with our applicable debt-to-equity ratios. Refer to “—Liquidity and Capital Resources—Equity—Common Stock” for further discussion of our common stock.

Regulatory Compliance

Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have asset coverage (as

 

S-24


Table of Contents

defined in Sections 18(h) and 61 of the 1940 Act), of at least 200.0% on each of our senior securities representing indebtedness and our senior securities that are stock (such as our three series of Term Preferred Stock). As of December 31, 2017, our asset coverage on our senior securities representing indebtedness was 551.9% and our asset coverage on our senior securities that are stock was 236.0%.

Investment Highlights

During the nine months ended December 31, 2017, and inclusive of non-cash transactions, we invested $59.4 million in two new portfolio companies, received $66.4 million in proceeds from repayments and sales, and extended $54.8 million of follow-on investments to existing portfolio companies through revolver draws, term loans, and additions to equity, as applicable.

Investment Activity

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

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

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

In June 2017, one of our portfolio companies, Mathey Investments, Inc. (“Mathey”) merged with and into another one of our portfolio companies, SBS Industries, LLC (“SBS”). As a result of this transaction, we received success fee income of $0.3 million from Mathey. Our debt investments in Mathey, which totaled $8.6 million at principal and cost, were assumed by SBS and combined with our existing debt investment in SBS, which totaled $11.4 million at principal and cost, into a new secured first lien term loan totaling $20.0 million. Our common equity investment in Mathey, with a cost basis of $0.8 million, was converted into a preferred equity investment in SBS with the same cost basis. In connection with the merger, we also extended a secured first lien revolving line of credit to SBS with a total facility amount of $1.5 million, which was undrawn at the time of the transaction.

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

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

In November 2017, we invested $31.1 million in ImageWorks Display and Marketing Group, Inc. (“ImageWorks”) through a combination of secured first lien debt and preferred equity. ImageWorks, headquartered in Winston-Salem, North Carolina, is a market leading point-of-purchase display provider

 

S-25


Table of Contents

specializing in the design, engineering and production of custom semi-permanent and permanent displays across a variety of brands and consumer product end markets.

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

The following significant investment activity occurred subsequent to December 31, 2017. Also refer to Note 13— Subsequent Events in the accompanying Notes to Consolidated Financial Statements.

 

    In January 2018, we invested $14.5 million in an existing portfolio company, Schylling, Inc., through a secured first lien debt investment.

 

    In January 2018, we invested $11.0 million in an existing portfolio company, Nth Degree, Inc., through a secured first lien debt investment.

Recent Developments

Registration Statement

On June 16, 2015, we filed a registration statement on Form N-2 (File No. 333-204996) with the SEC and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 28, 2015, which the SEC declared effective on July 29, 2015. On June 8, 2016, we filed Post-Effective Amendment No. 1 to the registration statement, which the SEC declared effective on July 28, 2016. On July 28, 2017, we filed Post-Effective Amendment No. 5 to the registration statement, which the SEC declared effective on July 31, 2017. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt securities, including through concurrent, separate offerings of such securities. As of December 31, 2017, we have the ability to issue up to $221.3 million in securities under the registration statement.

Common Stock Offering

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

Executive Officers

In October 2017, our Board of Directors announced that Julia Ryan, the Company’s Chief Financial Officer and Treasurer, had taken a temporary family medical leave of absence and that Nicole Schaltenbrand, the Chief Financial Officer and Treasurer of the Company’s affiliated fund, Gladstone Capital Corporation, would serve as the Company’s Acting Principal Financial Officer during Ms. Ryan’s absence. Ms. Ryan returned to her position as Chief Financial Officer and Treasurer of the Company in January 2018.

 

S-26


Table of Contents

Distributions and Dividends

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

 

Record Date

  

Payment Date

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

January 22, 2018

   January 31, 2018    $ 0.065      $ 0.140625      $ 0.135417      $ 0.13020833  

February 16, 2018

   February 28, 2018      0.065        0.140625        0.135417        0.13020833  

March 20, 2018

   March 30, 2018      0.065        0.140625        0.135417        0.13020833  
     

 

 

    

 

 

    

 

 

    

 

 

 

Total for the Quarter:

   $ 0.195      $ 0.421875      $ 0.406251      $ 0.39062499  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

S-27


Table of Contents

RESULTS OF OPERATIONS

Comparison of the Three Months Ended December 31, 2017 to the Three Months Ended December 31, 2016

 

     For the Three Months Ended December 31,  
     2017     2016     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 13,588     $ 11,707     $ 1,881       16.1

Dividend, success fee, and other income

     2,596       1,667       929       55.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     16,184       13,374       2,810       21.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     2,769       2,441       328       13.4  

Loan servicing fee

     1,567       1,678       (111     (6.6

Incentive fee

     2,822       1,178       1,644       139.6  

Administration fee

     261       251       10       4.0  

Interest and dividend expense

     3,286       3,076       210       6.8  

Amortization of deferred financing costs and discounts

     366       546       (180     (33.0

Other

     215       1,213       (998     (82.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     11,286       10,383       903       8.7  

Credits to fees from Adviser

     (2,633     (2,213     (420     19.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits to fees

     8,653       8,170       483       5.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     7,531       5,204       2,327       44.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss) on investments

     25       (3,140     3,165       NM  

Net realized gain on other

     —         3       (3     (100.0

Net unrealized appreciation of investments

     9,846       8,888       958       10.8  

Net unrealized appreciation of other

     (258     —         (258     NM  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain

     9,613       5,751       3,862       67.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 17,144     $ 10,955     $ 6,189       56.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.23     $ 0.17     $ 0.06       35.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.53     $ 0.36     $ 0.17       47.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

NM = Not Meaningful

Investment Income

Total investment income increased by 21.0% for the three months ended December 31, 2017, as compared to the prior year period. This increase was due to an increase in both interest income and other income for the three months ended December 31, 2017 as compared to the prior year period.

Interest income from our investments in debt securities increased 16.1% for the three months ended December 31, 2017, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended December 31, 2017 was $381.9 million, compared to $369.4 million for the prior year period. This increase was primarily due to $70.1 million in new debt investments and $43.3 million in follow-on debt investments in existing portfolio companies originated after

 

S-28


Table of Contents

December 31, 2016, partially offset by the pay-off or restructure of $57.7 million of debt investments principally related to the exit, merger, or restructure of portfolio companies and $12.4 million of loans placed on non-accrual since December 31, 2016, and their respective impact on the weighted average principal balance when considering timing of new investments, pay-offs, mergers, restructures, and non-accruals, as applicable. The weighted average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as other income, was 14.2% for the three months ended December 31, 2017, compared to 12.7% for the prior year period. The weighted average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments.

At December 31, 2017, certain of our loans to two portfolio companies, Alloy Die Casting Co. (“Alloy Die Casting”) and Tread Corporation (“Tread”), were on non-accrual status, with an aggregate debt cost basis of $15.6 million. At December 31, 2016, our loan to Tread was on non-accrual status, with a debt cost basis of $3.2 million.

Other income for the three months ended December 31, 2017 increased by 55.7% as compared to the prior year period. During the three months ended December 31, 2017, other income primarily consisted of $2.4 million of success fee income and $0.2 million of dividend income. During the three months ended December 31, 2016, other income primarily consisted of success fee income of $1.2 million and dividend income of $0.4 million.

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

 

     As of December 31, 2017     Three months ended
December 31, 2017
 

Portfolio Company

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

Cambridge Sound Management, Inc.

   $ 39,977        7.1   $ 1,806        11.2

Nth Degree, Inc.

     37,721        6.7       987        6.1  

J.R. Hobbs Co. – Atlanta, LLC

     32,710        5.8       1,161        7.2  

PSI Molded Plastics, Inc. (A)

     31,332        5.5       434        2.7  

Counsel Press, Inc.

     29,416        5.2       802        4.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     171,156        30.3       5,190        32.1  

Other portfolio companies

     395,223        69.7       10,990        67.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 566,379        100.0   $ 16,180        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 
     As of December 31, 2016     Three months ended
December 31, 2016
 

Portfolio Company

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

Counsel Press, Inc.

   $ 32,526        6.9   $ 786        5.9

Cambridge Sound Management, Inc.

     25,116        5.3       532        4.0  

Old World Christmas, Inc.

     23,585        5.0       534        4.0  

Nth Degree, Inc.

     23,401        5.0       425        3.2  

Drew Foam Companies, Inc.

     22,812        4.8       651        4.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     127,440        27.0       2,928        22.0  

Other portfolio companies

     344,000        73.0       10,446        78.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 471,440        100.0   $ 13,374        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A) New investment during the applicable period as a result of the merger of two portfolio companies, GI Plastek and Precision. Refer to Note 3— Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

 

S-29


Table of Contents

Expenses

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased 5.9% during the three months ended December 31, 2017, as compared to the prior year period, primarily as a result of an increase in the incentive fee, the base management fee, and interest and dividend expense, partially offset by a decrease in other expenses and amortization of deferred financing costs and discounts and an increase in non-contractual, unconditional, and irrevocable credits from the Adviser.

The income-based incentive fee increased for the three months ended December 31, 2017, as compared to the prior year period, as pre-incentive fee net investment income increased over the respective periods. Additionally, in accordance with GAAP, we recorded a capital gains-based incentive fee of $0.8 million during the three months ended December 31, 2017. There was no capital gains-based incentive fee during the prior year period.

The base management fee increased for the three months ended December 31, 2017, as compared to the prior year period, as average total assets increased over the respective periods.

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

 

     Three Months Ended
December 31,
 
     2017     2016  

Average total assets subject to base management fee (A)

   $ 553,800     $ 488,200  

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee (B)

     2,769       2,441  

Credits to fees from Adviser—other (B)

     (1,066     (535
  

 

 

   

 

 

 

Net base management fee

   $ 1,703     $ 1,906  
  

 

 

   

 

 

 

Loan servicing fee (B)

   $ 1,567     $ 1,678  

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

     (1,567     (1,678
  

 

 

   

 

 

 

Net loan servicing fee

   $ —       $ —    
  

 

 

   

 

 

 

Incentive fee – income-based

   $ 2,070     $ 1,178  

Incentive fee – capital gains-based (C)

     752       —    
  

 

 

   

 

 

 

Total incentive fee (B)

     2,822       1,178  

Credits to fees from Adviser—other (B)

     —         —    
  

 

 

   

 

 

 

Net total incentive fee

   $ 2,822     $ 1,178  
  

 

 

   

 

 

 

 

(A) Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B) Reflected as a line item on our accompanying Consolidated Statements of Operations .
(C) The capital gains-based incentive fee is not contractually due under the terms of the Advisory Agreement.

Interest and dividend expense increased 6.8% during the three months ended December 31, 2017, as compared to the prior year period, primarily due to a higher weighted average balance outstanding and higher costs of borrowings on the Credit Facility. The weighted average balance outstanding on the Credit Facility during the three months ended December 31, 2017 was $71.5 million, as compared to $59.4 million in the prior

 

S-30


Table of Contents

year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the three months ended December 31, 2017 was 5.3%, as compared to 4.9% in the prior year period.

Amortization of deferred financing costs and discounts decreased 33.0% for the three months ended December 31, 2017, as compared to the prior year period, primarily as a result of the write-off of previously deferred costs related to the Credit Facility due to its amendment in November 2016.

Other expenses decreased 82.3% during the three months ended December 31, 2017, as compared to the prior year period, primarily due to bad debt recoveries in the current year period as compared to bad debt expense in the prior year period.

Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

There was no significant realized gain (loss) activity during the three months ended December 31, 2017. During the three months ended December 31, 2016, we recorded net realized losses on investments of $3.1 million, primarily related to a $10.2 million realized loss from the restructure of D.P.M.S., Inc. (“Danco”), partially offset by a $5.8 million realized gain from the exit of Behrens Manufacturing, LLC (“Behrens”) and a $1.3 million realized gain related to an additional earn-out from Funko, LLC, which was exited during the fiscal year ended March 31, 2016.

Net Unrealized Appreciation (Depreciation) of Investments

During the three months ended December 31, 2017, we recorded net unrealized appreciation of investments of $9.8 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2017, were as follows:

 

     Three Months Ended December 31, 2017  
Portfolio Company    Realized
Gain
(Loss)
     Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
(Appreciation)
Depreciation
     Net Gain
(Loss)
 

Nth Degree, Inc.

   $ —        $ 5,007     $ —        $ 5,007  

Cambridge Sound Management, Inc.

     —          4,597       —          4,597  

J.R. Hobbs Co.—Atlanta, LLC

     —          3,809       —          3,809  

Ginsey Home Solutions, Inc.

     —          3,354       —          3,354  

GI Plastek, Inc.

     —          —         1,252        1,252  

Precision Southeast, Inc.

     —          —         1,054        1,054  

Star Seed, Inc.

     —          1,022       —          1,022  

D.P.M.S., Inc.

     —          818       —          818  

Pioneer Square Brands, Inc.

     —          732       —          732  

Edge Adhesives Holdings, Inc.

     —          723       —          723  

Counsel Press, Inc.

     —          470       —          470  

Tread Corporation

     —          443       —          443  

Old World Christmas, Inc.

     —          297       —          297  

AquaVenture Holdings Limited

     —          79       205        284  

Alloy Die Casting Co.

     —          200       —          200  

B+T Group Acquisition, Inc.

     —          (327     —          (327

Jackrabbit, Inc.

     —          (690     —          (690

Meridian Rack & Pinion, Inc.

     —          (707     —          (707

Logo Sportswear, Inc.

     —          (1,039     —          (1,039

Brunswick Bowling Products, Inc.

     —          (1,199     —          (1,199

 

S-31


Table of Contents
     Three Months Ended December 31, 2017  
Portfolio Company    Realized
Gain
(Loss)
     Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
(Appreciation)
Depreciation
     Net Gain
(Loss)
 

Head Country, Inc.

     —          (1,207     —          (1,207

Galaxy Tool Holding Corporation

     —          (1,257     —          (1,257

The Mountain, Inc.

     —          (1,329     —          (1,329

SOG Specialty Knives & Tools, LLC

     —          (1,635     —          (1,635

PSI Molded Plastics, Inc.

     —          (2,266     —          (2,266

Drew Foam Companies, Inc.

     —          (2,685     —          (2,685

Other, net (<$250 Net)

     25        125       —          150  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 25      $ 7,335     $ 2,511      $ 9,871  
  

 

 

    

 

 

   

 

 

    

 

 

 

The primary drivers of net unrealized appreciation of $9.8 million for the three months ended December 31, 2017, were increased performance of certain of our portfolio companies and an increase in comparable multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by a decline in performance of certain of our other portfolio companies.

During the three months ended December 31, 2016, we recorded net unrealized appreciation of investments of $8.9 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2016, were as follows:

 

     Three Months Ended December 31, 2016  
Portfolio Company    Realized
Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
(Appreciation)
Depreciation
    Net Gain
(Loss)
 

Mitchell Rubber Products, Inc.

   $ —       $ 4,341     $ —       $ 4,341  

Nth Degree, Inc.

     —         3,085       —         3,085  

Drew Foam Companies, Inc.

     —         2,654       —         2,654  

Logo Sportswear, Inc.

     —         2,537       —         2,537  

SBS Industries, LLC

     —         2,221       —         2,221  

Old World Christmas, Inc.

     —         1,442       —         1,442  

Meridian Rack & Pinion, Inc.

     —         1,411       —         1,411  

Funko Acquisition Holdings, LLC

     1,250       53       —         1,303  

GI Plastek, Inc.

     —         1,124       —         1,124  

Edge Adhesives Holdings, Inc.

     —         999       —         999  

Tread Corporation

     —         994       —         994  

Head Country, Inc.

     —         968       —         968  

Ginsey Home Solutions, Inc.

     —         631       —         631  

Counsel Press, Inc.

     —         589       —         589  

Diligent Delivery Systems

     —         429       —         429  

Galaxy Tool Holding Corporation

     —         281       —         281  

Frontier Packaging, Inc.

     —         (230     —         (230

AquaVenture Holdings Limited

     —         (319     —         (319

Country Club Enterprises, LLC

     —         (538     —         (538

Brunswick Bowling Products, Inc.

     —         (651     —         (651

Jackrabbit, Inc.

     —         (680     —         (680

D.P.M.S., Inc.

     (10,226     (3,126     12,601       (751

Cambridge Sound Management, Inc.

     —         (945     —         (945

Mathey Investments, Inc.

     —         (1,248     —         (1,248

Behrens Manufacturing, LLC

     5,845       —         (7,491     (1,646

 

S-32


Table of Contents
     Three Months Ended December 31, 2016  
Portfolio Company    Realized
Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
(Appreciation)
Depreciation
     Net Gain
(Loss)
 

SOG Specialty Knives & Tools, LLC

     —         (2,833     —          (2,833

Schylling, Inc.

     —         (4,306     —          (4,306

The Mountain Corporation

     —         (5,028     —          (5,028

Other, net (<$250 Net)

     (9     (77     —          (86
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ (3,140   $ 3,778     $ 5,110      $ 5,748  
  

 

 

   

 

 

   

 

 

    

 

 

 

The primary drivers of net unrealized appreciation of $8.9 million for the three months ended December 31, 2016, were the reversal of previously recorded unrealized depreciation related to our investment in Danco upon its restructure and increased performance of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized appreciation related to the exit of our investment in Behrens and a decline in performance of certain of our portfolio companies.

Across our entire investment portfolio, we recorded $2.7 million of net unrealized depreciation on our debt positions and $12.5 million of net unrealized appreciation on our equity positions for the three months ended December 31, 2017. At December 31, 2017, the fair value of our investment portfolio was less than our cost basis by $4.4 million, as compared to $14.2 million at September 30, 2017, representing net unrealized appreciation of $9.8 million for the three months ended December 31, 2017. Our entire portfolio had a fair value of 99.2% of cost as of December 31, 2017.

Net Unrealized Appreciation of Other

During the three months ended December 31, 2017, we recorded net unrealized appreciation of other of $0.3 million related to the Credit Facility recorded at fair value. There was no unrealized appreciation or depreciation on other during the three months ended December 31, 2016.

Comparison of the Nine Months Ended December 31, 2017 to the Nine Months Ended December 31, 2016

 

     For the Nine Months Ended December 31,  
     2017     2016     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 35,547     $ 35,065     $ 482       1.4

Dividend, success fee, and other income

     7,389       4,446       2,943       66.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     42,936       39,511       3,425       8.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     7,839       7,439       400       5.4  

Loan servicing fee

     4,616       5,081       (465     (9.2

Incentive fee

     5,289       3,427       1,862       54.3  

Administration fee

     769       825       (56     (6.8

Interest and dividend expense

     9,271       9,180       91       1.0  

Amortization of deferred financing costs and discounts

     1,100       1,508       (408     (27.1

Other

     2,492       2,490       2       0.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     31,376       29,950       1,426       4.8  

Credits to fees from Adviser

     (7,156     (7,567     411       (5.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits to fees

     24,220       22,383       1,837       8.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     18,716       17,128       1,588       9.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

S-33


Table of Contents
     For the Nine Months Ended December 31,  
     2017     2016     $ Change     % Change  

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain on investments

     1,147       15,484       (14,337     (92.6

Net realized loss on other

     —         (254     254       (100.0

Net unrealized appreciation of investments

     19,236       2,954       16,282       551.2  

Net unrealized appreciation of other

     (258     75       (333     NM  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain

     20,125       18,259       1,866       10.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 38,841     $ 35,387     $ 3,454       9.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.58     $ 0.57     $ 0.01       1.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 1.21     $ 1.17     $ 0.04       3.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

NM = Not Meaningful

Investment Income

Total investment income increased by 8.7% for the nine months ended December 31, 2017, as compared to the prior year period. This increase was due to an increase in other income and, to a lesser extent, an increase in interest income for the nine months ended December 31, 2017 as compared to the prior year period.

Interest income from our investments in debt securities increased by 1.4% for the nine months ended December 31, 2017, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the nine months ended December 31, 2017 was $358.0 million, compared to $370.8 million for the prior year period. This decrease was primarily due to the pay-off or restructure of $57.7 million of debt investments principally related to the exit, merger, or restructure of portfolio companies and $12.4 million of loans placed on non-accrual since December 31, 2016, which was partially offset by $70.1 million in new debt investments and $43.3 million in follow-on debt investments in existing portfolio companies originated after December 31, 2016, and their respective impact on the weighted average principal balance when considering timing of new investments, pay-offs, mergers, restructures, and non-accruals, as applicable. The weighted average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as other income, was 13.2% for the nine months ended December 31, 2017, compared to 12.6% for the prior year period. The weighted average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments.

At December 31, 2017, certain of our loans to two portfolio companies, Alloy Die Casting and Tread, were on non-accrual status, with an aggregate debt cost basis of $15.6 million. At December 31, 2016, our loan to Tread was on non-accrual status, with a debt cost basis of $3.2 million.

Other income for the nine months ended December 31, 2017 increased by 66.2% as compared to the prior year period. During the nine months ended December 31, 2017, other income primarily consisted of $4.6 million of success fee income and $2.8 million of dividend income. During the nine months ended December 31, 2016, other income primarily consisted of $3.2 million of dividend income and $1.2 million of success fee income.

 

S-34


Table of Contents

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

 

     As of December 31, 2017     Nine months ended
December 31, 2017
 
Portfolio Company    Fair Value      % of
Portfolio
    Investment
Income
     % of Total
Investment
Income
 

Cambridge Sound Management, Inc.

   $ 39,977        7.1   $ 2,863        6.7

Nth Degree, Inc.

     37,721        6.7       1,840        4.3  

J.R. Hobbs Co. – Atlanta, LLC

     32,710        5.8       2,698        6.3  

PSI Molded Plastics, Inc. (A)

     31,332        5.5       434        1.0  

Counsel Press, Inc.

     29,416        5.2       2,378        5.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     171,156        30.3       10,213        23.8  

Other portfolio companies

     395,223        69.7       32,709        76.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 566,379        100.0   $ 42,922        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 
     As of December 31, 2016     Nine months ended
December 31, 2016
 
Portfolio Company    Fair Value      % of
Portfolio
    Investment
Income
     % of Total
Investment
Income
 

Counsel Press, Inc.

   $ 32,526        6.9   $ 2,349        6.0

Cambridge Sound Management, Inc.

     25,116        5.3       1,545        3.9  

Old World Christmas, Inc.

     23,585        5.0       1,596        4.0  

Nth Degree, Inc.

     23,401        5.0       1,269        3.2  

Drew Foam Companies, Inc.

     22,812        4.8       1,331        3.4  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     127,440        27.0       8,090        20.5  

Other portfolio companies

     344,000        73.0       31,420        79.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 471,440        100.0   $ 39,510        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A) New investment during the applicable period as a result of the merger of two portfolio companies, GI Plastek and Precision. Refer to Note 3— Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

Expenses

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased by 8.2% during the nine months ended December 31, 2017, as compared to the prior year period, primarily as a result of an increase in the incentive fee and the base management fee, partially offset by a decrease in amortization of deferred financing fees and discounts.

The income-based incentive fee increased for the nine months ended December 31, 2017 as compared to the prior year period, as pre-incentive fee net investment income increased over the respective periods. Additionally, in accordance with GAAP, we recorded a capital gains-based incentive fee of $0.8 million during the nine months ended December 31, 2017. There was no capital gains-based incentive fee during the prior year period.

The base management fee increased for the nine months ended December 31, 2017, as compared to the prior year period, as average total assets increased over the respective periods.

 

S-35


Table of Contents

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

 

     Nine Months
Ended December 31,
 
     2017     2016  

Average total assets subject to base management fee (A)

   $ 522,600     $ 495,900  

Multiplied by prorated annual base management fee of 2.0%

     1.5     1.5
  

 

 

   

 

 

 

Base management fee (B)

     7,839       7,439  

Credits to fees from Adviser—other (B)

     (2,540     (2,486
  

 

 

   

 

 

 

Net base management fee

   $ 5,299     $ 4,953  
  

 

 

   

 

 

 

Loan servicing fee (B)

   $ 4,616     $ 5,081  

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

     (4,616     (5,081
  

 

 

   

 

 

 

Net loan servicing fee

   $ —       $ —    
  

 

 

   

 

 

 

Incentive fee – income-based

   $ 4,537     $ 3,427  

Incentive fee – capital gains-based (C)

     752       —    
  

 

 

   

 

 

 

Total incentive fee (B)

     5,289       3,427  

Credits to fees from Adviser—other (B)

     —         —    
  

 

 

   

 

 

 

Net total incentive fee

   $ 5,289     $ 3,427  
  

 

 

   

 

 

 

 

(A) Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B) Reflected as a line item on our accompanying Consolidated Statements of Operations .
(C) The capital gains-based incentive fee is not contractually due under the terms of the Advisory Agreement.

Amortization of deferred financing costs and discounts decreased 27.1% for the nine months ended December 31, 2017, as compared to the prior year period, primarily as a result of the write-off of previously deferred costs related to the Series A Term Preferred Stock upon its redemption in September 2016, as well as the write-off of previously deferred costs related to the Credit Facility due to its amendment in November 2016.

Realized and Unrealized Gain (Loss)

Net Realized Gain on Investments

During the nine months ended December 31, 2017, we recorded net realized gains on investments of $1.1 million, primarily related to a $1.0 million realized gain from the exit of Mitchell, compared to net realized gains on investments of $15.5 million during the prior year period, primarily related to an $18.8 million realized gain from the exit of Acme Cryogenics, Inc. (“Acme”), a $5.8 million realized gain from the exit of Behrens, and a $1.3 million realized gain related to an additional earn-out from Funko, LLC, which was exited during the fiscal year ended March 31, 2016, partially offset by a $10.2 million realized loss from the restructure of Danco.

Net Realized Loss on Other

There were no realized gains or losses on other during the nine months ended December 31, 2017. During the nine months ended December 31, 2016, we recorded a net realized loss on other of $0.3 million, of which $0.2 million related to the redemption of our Series A Term Preferred Stock in September 2016 and $0.1 million related to the expiration of our interest rate cap agreement in April 2016.

 

S-36


Table of Contents

Net Unrealized Appreciation (Depreciation) of Investments

During the nine months ended December 31, 2017, we recorded net unrealized appreciation of investments of $19.2 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended December 31, 2017, were as follows:

 

     Nine Months Ended December 31, 2017  

Portfolio Company

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

Cambridge Sound Management, Inc.

   $ —        $ 12,932     $ —       $ 12,932  

Nth Degree, Inc.

     —          11,959       —         11,959  

J.R. Hobbs Co.—Atlanta, LLC

     —          5,790       —         5,790  

Ginsey Home Solutions, Inc.

     —          4,537       —         4,537  

Precision Southeast, Inc.

     —          2,776       1,054       3,830  

Old World Christmas, Inc.

     —          3,829       —         3,829  

Tread Corporation

     —          3,374       —         3,374  

Drew Foam Companies, Inc.

     —          2,997       —         2,997  

Frontier Packaging, Inc.

     —          2,879       —         2,879  

Mathey Investments, Inc.

     —          —         2,658       2,658  

Star Seed, Inc.

     —          2,325       —         2,325  

SBS Industries, LLC

     —          1,859       —         1,859  

Pioneer Square Brands, Inc.

     —          732       —         732  

Schylling, Inc.

     —          (262     —         (262

GI Plastek, Inc.

     —          (1,856     1,252       (604

B-Dry, LLC

     —          (847     —         (847

Logo Sportswear, Inc.

     —          (1,287     —         (1,287

Edge Adhesives Holdings, Inc.

     —          (1,366     —         (1,366

Mitchell Rubber Products, Inc.

     982        —         (2,783     (1,801

Jackrabbit, Inc.

     —          (1,840     —         (1,840

Head Country, Inc.

     —          (1,842     —         (1,842

PSI Molded Plastics, Inc.

     —          (2,266     —         (2,266

Alloy Die Casting Co.

     —          (2,338     —         (2,338

SOG Specialty Knives & Tools, LLC

     —          (2,346     —         (2,346

Brunswick Bowling Products, Inc.

     —          (2,641     —         (2,641

Country Club Enterprises, LLC

     —          (3,134     —         (3,134

Meridian Rack & Pinion, Inc.

     —          (3,432     —         (3,432

Galaxy Tool Holding Corporation

     —          (5,381     —         (5,381

The Mountain, Inc.

     —          (7,824     —         (7,824

Other, net (<$250 Net)

     165        (455     183       (107
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 1,147      $ 16,872     $ 2,364     $ 20,383  
  

 

 

    

 

 

   

 

 

   

 

 

 

The primary drivers of net unrealized appreciation of $19.2 million for the nine months ended December 31, 2017, were increased performance of certain of our portfolio companies and an increase in comparable multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by a decline in performance of certain of our other portfolio companies.

 

S-37


Table of Contents

During the nine months ended December 31, 2016, we recorded net unrealized appreciation of investments of $3.0 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended December 31, 2016, were as follows:

 

     Nine Months Ended December 31, 2016  

Portfolio Company

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

Mitchell Rubber Products, Inc.

   $ —       $ 10,107     $ —       $ 10,107  

Galaxy Tool Holding Corporation

     —         9,238       —         9,238  

Logo Sportswear, Inc.

     —         5,451       —         5,451  

Head Country, Inc.

     —         5,208       —         5,208  

Brunswick Bowling Products, Inc.

     —         3,968       —         3,968  

Old World Christmas, Inc.

     —         3,656       —         3,656  

Counsel Press, Inc.

     —         3,627       —         3,627  

Drew Foam Companies, Inc.

     —         2,857       —         2,857  

Nth Degree, Inc.

     —         2,399       —         2,399  

GI Plastek, Inc.

     —         1,744       —         1,744  

Ginsey Home Solutions, Inc.

     —         1,700       —         1,700  

Edge Adhesives Holdings, Inc.

     —         1,239       —         1,239  

Funko Acquisition Holdings, LLC

     1,086       97       —         1,183  

Meridian Rack & Pinion, Inc.

     —         1,017       —         1,017  

Jackrabbit, Inc.

     —         649       —         649  

Diligent Delivery Systems

     —         575       —         575  

Behrens Manufacturing, LLC

     5,845       1,820       (7,491     174  

AquaVenture Holdings Limited

     —         (319     —         (319

Tread Corporation

     —         (342     —         (342

Alloy Die Casting Co.

     —         (385     —         (385

Frontier Packaging, Inc.

     —         (1,099     —         (1,099

Acme Cryogenics, Inc.

     18,826       —         (21,216     (2,390

Mathey Investments, Inc.

     —         (2,653     —         (2,653

D.P.M.S., Inc.

     (10,226     (5,354     12,601       (2,979

Cambridge Sound Management, Inc.

     —         (3,719     —         (3,719

Precision Southeast, Inc.

     —         (3,879     —         (3,879

Schylling, Inc.

     —         (4,103     —         (4,103

The Mountain Corporation

     —         (6,900     —         (6,900

SOG Specialty Knives & Tools, LLC

     —         (7,747     —         (7,747

Other, net (<$250 Net)

     (47     208       —         161  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 15,484     $ 19,060     $ (16,106   $ 18,438  
  

 

 

   

 

 

   

 

 

   

 

 

 

The primary drivers of net unrealized appreciation of $3.0 million for the nine months ended December 31, 2016, were the reversal of previously recorded unrealized depreciation related to our investment in Danco upon its restructure and increased performance of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized appreciation related to the exit of our investments in Acme and Behrens and a decline in performance of certain of our portfolio companies.

Across our entire investment portfolio, we recorded $11.5 million of net unrealized depreciation on our debt positions and $30.7 million of net unrealized appreciation on our equity positions for the nine months ended December 31, 2017. At December 31, 2017, the fair value of our investment portfolio was less than our cost basis

by $4.4 million, as compared to $23.6 million at March 31, 2017, representing net unrealized appreciation of $19.2 million for the nine months ended December 31, 2017. Our entire portfolio had a fair value of 99.2% of cost as of December 31, 2017.

 

S-38


Table of Contents

Net Unrealized Appreciation on Other

During the nine months ended December 31, 2017, we recorded net unrealized appreciation of other of $0.3 million related to the Credit Facility recorded at fair value. During the nine months ended December 31, 2016, we recorded net unrealized appreciation of other of $0.1 million due to the reversal of previously recorded unrealized depreciation upon the expiration of our interest rate cap agreement in April 2016.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash used in operating activities for the nine months ended December 31, 2017 was $24.4 million, as compared to net cash provided by operating activities of $53.9 million for the nine months ended December 31, 2016. This change was primarily due to an increase in purchases of investments and lower repayments and net proceeds from the sale of investments. Purchases of investments totaled $71.2 million during the nine months ended December 31, 2017, compared to $31.2 million during the nine months ended December 31, 2016. Repayments and net proceeds from the sale of investments totaled $26.6 million during the nine months ended December 31, 2017, compared to $63.7 million during the nine months ended December 31, 2016.

As of December 31, 2017, we had equity investments in or loans to 34 portfolio companies with an aggregate cost basis of $570.7 million. As of December 31, 2016, we had equity investments in or loans to 35 portfolio companies with an aggregate cost basis of $499.0 million. The following table summarizes our total portfolio investment activity during the nine months ended December 31, 2017 and 2016:

 

     Nine Months Ended
December 31,
 
     2017      2016  

Beginning investment portfolio, at fair value

   $ 501,579      $ 487,656  

New investments

     59,424        25,500  

Disbursements to existing portfolio companies

     11,764        5,686  

Unscheduled principal repayments

     (19,610      (26,886

Net proceeds from sales of investments

     (7,007      (36,788

Net realized gain on investments

     982        13,318  

Net unrealized appreciation of investments

     16,872        19,060  

Reversal of net unrealized depreciation (appreciation) of investments

     2,364        (16,106

Amortization of premiums, discounts, and acquisition costs, net

     11        —    
  

 

 

    

 

 

 

Ending investment portfolio, at fair value

   $ 566,379      $ 471,440  
  

 

 

    

 

 

 

 

S-39


Table of Contents

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

 

         Amount (A)  

For the remaining three months ending March 31:

  2018    $ 11,713  

For the fiscal years ending March 31:

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

 

 

 
 

Total contractual repayments

   $ 417,120  
 

Adjustments to cost basis of debt investments

     (89
  Investments in equity securities      153,702  
    

 

 

 
 

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

   $ 570,733  
    

 

 

 

 

(A) Subsequent to December 31, 2017, three debt investments with principal balances of $9.9 million, $9.7 million, and $11.3 million, respectively, which were previously scheduled to mature during the fiscal years ending March 31, 2018, March 31, 2019, and March 31, 2021, respectively, were extended to mature during the fiscal years ending March 31, 2019, March 31, 2020, and March 31, 2023, respectively.

Financing Activities

Net cash provided by financing activities for the nine months ended December 31, 2017 was $24.3 million, which consisted primarily of $26.9 million of net proceeds from the Credit Facility and $20.1 million of net proceeds from the issuance of common stock in May 2017, including the partial exercise of the underwriters’ over-allotment option in June 2017, partially offset by $22.6 million in distributions to common stockholders. Net cash used in financing activities for the nine months ended December 31, 2016 was $54.4 million, which consisted primarily of $51.3 million of net repayments on the Credit Facility, $17.0 million in distributions to common stockholders, and the redemption of our Series A Term Preferred Stock in September 2016 of $40.0 million, partially offset by net proceeds from the issuance of our Series D Term Preferred Stock of $55.4 million in September 2016.

Distributions and Dividends to Stockholders

Common Stock Distributions

To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90% of our Investment Company Taxable Income. Additionally, the Credit Facility generally restricts the amount of distributions to stockholders that we can pay out to be no greater than the sum of certain amounts, including, but not limited to, our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. In accordance with these requirements, our Board of Directors declared, and we paid, monthly cash distributions of $0.064 per common share for each of the six months from April 2017 through September 2017, and $0.065 per common share for each of the three months from October 2017 through December 2017, and supplemental distributions of $0.06 per common share for each of June 2017 and December 2017. In January 2018, our Board of Directors declared a monthly distribution of $0.065 per common share for each of January, February, and March 2018. Our Board of Directors declared these distributions based on estimates of taxable income for the fiscal year ending March 31, 2018.

 

S-40


Table of Contents

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

For the year ended March 31, 2017, distributions to common stockholders totaled $22.7 million and were less than our taxable income for the same year, after also taking into account spillover amounts under Section 855(a) of the Code with respect to the prior year. At March 31, 2017, we elected to treat $8.2 million of the first distributions paid after fiscal year-end as having been paid in the prior fiscal year, in accordance with Section 855(a) of the Code. In addition, we recorded a $1.3 million adjustment for estimated book-tax differences, which decreased Capital in excess of par value and increased Accumulated net realized gain (loss) and Net investment income in excess of distributions. For the nine months ended December 31, 2017, 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 and increased Net investment income in excess of distributions on our accompanying Consolidated Statements of Assets and Liabilities .

Preferred Stock Dividends

Our Board of Directors declared and we paid monthly cash dividends of (i) $0.140625 per share to holders of our Series B Term Preferred Stock, (ii) $0.135417 per share to holders of our Series C Term Preferred Stock, and (iii) $0.13020833 per share to holders of our Series D Term Preferred Stock for each of the nine months from April 2017 through December 2017. In accordance with GAAP, we treat these monthly dividends as an operating expense. The federal income tax characteristics of dividends paid to our preferred stockholders generally constitute ordinary income or capital gains to the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year. Such a characterization made on an interim, quarterly basis may not be representative of the actual tax characterization for the full year.

Dividend Reinvestment Plan

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

Equity

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 thereto 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. On July 28, 2017, we filed Post-Effective Amendment No. 5 to the registration statement, which the SEC declared effective on July 31, 2017. The registration statement permits us

 

S-41


Table of Contents

to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock or debt securities, including through concurrent, separate offerings of such securities. We currently have the ability to issue up to $221.3 million in securities under the registration statement.

Common Stock

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

We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. When our common stock is trading at a price below NAV per share, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors and meeting other stated requirements. On February 5, 2018, the closing market price of our common stock was $9.25 per share, which represented a 10.8% discount to our NAV per share of $10.37 as of December 31, 2017. At our 2017 Annual Meeting of Stockholders held on August 24, 2017, our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then current NAV per common share for a period of one year from the date of such approval, provided that our Board of Directors makes certain determinations prior to any such sale.

Term Preferred Stock

Pursuant to an earlier registration statement on Form N-2 (File No. 333-160720), in March 2012, we completed an offering of 1,600,000 shares of our Series A Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40.0 million, and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $38.0 million, a portion of which was used to repay borrowings under the Credit Facility, with the remaining proceeds being held to make additional investments and for general corporate purposes. Total underwriting discounts and offering costs related to this offering were $2.0 million, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and which, prior to the redemption in September 2016, were amortized over the period ended February 28, 2017, the mandatory redemption date.

In September 2016, we used a portion of the proceeds from the issuance of our Series D Term Preferred Stock, discussed below, to voluntarily redeem all 1.6 million outstanding shares of our Series A Term Preferred Stock, which had a liquidation preference of $25.00 per share. In connection with this voluntary redemption, 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.

Prior to its redemption in September 2016, our Series A Term Preferred Stock provided for a fixed dividend equal to 7.125% per year, payable monthly (which equated to $2.9 million per year). We were required to redeem all of the outstanding Series A Term Preferred Stock on February 28, 2017, for cash at a redemption price equal

 

S-42


Table of Contents

to $25.00 per share plus an amount equal to accumulated but unpaid dividends, if any, to the date of redemption. Our Series A Term Preferred Stock was not convertible into our common stock or any other security.

Pursuant to our prior registration statement on Form N-2 (Registration No. 333-181879), in November 2014, we completed a public offering of 1,656,000 shares of our Series B Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $41.4 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $39.7 million. Total underwriting discounts and offering costs related to this offering were $1.7 million, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending December 31, 2021, the mandatory redemption date.

Our Series B Term Preferred Stock is not convertible into our common stock or any other security. Our Series B Term Preferred Stock provides for a fixed dividend equal to 6.75% per year, payable monthly (which equates to $2.8 million per year). We are required to redeem all shares of our outstanding Series B Term Preferred Stock on December 31, 2021, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series B Term Preferred Stock, and (2) if we fail to maintain asset coverage of at least 200%, we are required to redeem a portion of our outstanding Series B Term Preferred Stock or otherwise cure the asset coverage redemption trigger (and we may also redeem additional securities to cause the asset coverage to be 215%). We may also voluntarily redeem all or a portion of our Series B Term Preferred Stock at our sole option at the redemption price at any time on or after December 31, 2017.

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

Our Series C Term Preferred Stock is not convertible into our common stock or any other security. Our Series C Term Preferred Stock provides for a fixed dividend equal to 6.50% per year, payable monthly (which equates to $2.6 million per year). We are required to redeem all shares of our outstanding Series C Term Preferred Stock on May 31, 2022, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series C Term Preferred Stock, and (2) if we fail to maintain asset coverage of at least 200%, we are required to redeem a portion of our outstanding Series C Term Preferred Stock or otherwise cure the asset coverage redemption trigger (and we may also redeem additional securities to cause the asset coverage to be 215%). We may also voluntarily redeem all or a portion of our Series C Term Preferred Stock at our sole option at the redemption price at any time on or after May 31, 2018.

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

 

S-43


Table of Contents

Our Series D Term Preferred Stock is not convertible into our common stock or any other security. Our Series D Term Preferred Stock provides for a fixed dividend equal to 6.25% per year, payable monthly (which equates to $3.6 million per year). We are required to redeem all shares of our outstanding Series D Term Preferred Stock on September 30, 2023, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series D Term Preferred Stock, and (2) if we fail to maintain asset coverage of at least 200% and are unable to correct such failure within a specific amount of time, we are required to redeem a portion of our outstanding Series D Term Preferred Stock or otherwise cure the asset coverage redemption trigger (and we may also redeem additional securities to cause the asset coverage to be 240%). We may also voluntarily redeem all or a portion of our Series D Term Preferred Stock at our sole option at the redemption price at any time on or after September 30, 2018.

Each series of our mandatorily redeemable preferred stock has a preference over our common stock with respect to dividends, whereby no distributions are payable on our common stock unless the stated dividends, including any accrued and unpaid dividends, on the mandatorily redeemable preferred stock have been paid in full. The Series B Term Preferred Stock, Series C Term Preferred Stock, and Series D Term Preferred Stock are considered liabilities in accordance with GAAP and, as such, affect our asset coverage, exposing us to additional leverage risks. The asset coverage on our senior securities that are stock (our Series B Term Preferred Stock, Series C Term Preferred Stock, and Series D Term Preferred Stock) as of December 31, 2017 was 236.0%, calculated pursuant to Sections 18 and 61 of the 1940 Act.

Revolving Line of Credit

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

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

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

 

S-44


Table of Contents

Among other things, the Credit Facility contains covenants that require Business Investment to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders’ consent. The Credit Facility also generally seeks to restrict distributions to shareholders to the sum of (i) our net investment income, (ii) net capital gains, and (iii) amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. Loans eligible to be pledged as collateral are subject to certain limitations, including, among other things, restrictions on geographic concentrations, industry concentrations, loan size, payment frequency and status, average life, portfolio company leverage, and lien property. The Credit Facility also requires Business Investment to comply with other financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base. Additionally, the Credit Facility contains a performance guaranty that requires the Company to maintain (i) a minimum net worth (defined in the Credit Facility to include our mandatory redeemable term preferred stock) of the greater of (a) $210.0 million or (b) $210.0 million plus 50% of all equity and subordinated debt raised minus 50% of any equity or subordinated debt redeemed or retired after November 16, 2016, which equated to $220.6 million as of December 31, 2017, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Sections 18 and 61 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of December 31, 2017, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $471.7 million, asset coverage on our senior securities representing indebtedness of 551.9%, calculated in compliance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As of December 31, 2017, we had availability, after adjustments for various constraints based on collateral quality, of approximately $62.6 million under the Credit Facility and were in compliance with all covenants under the Credit Facility. As of February 5, 2018, we had availability, before adjustments for various constraints based on collateral quality, of $47.7 million under the Credit Facility.

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

OFF-BALANCE SHEET ARRANGEMENTS

Unlike PIK income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as of December 31, 2017 and March 31, 2017, we had unrecognized, contractual off-balance sheet success fee receivables of $25.9 million and $24.2 million (or approximately $0.80 per common share for each period), respectively, on our debt investments. Consistent with GAAP, we generally have not recognized success fee receivables and related income in our Consolidated Financial Statements until earned.

CONTRACTUAL OBLIGATIONS

We have line of credit commitments to certain of our portfolio companies that have not been fully drawn. Since these line of credit commitments have expiration dates and we expect many will never be fully drawn, the total line of credit commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused line of credit commitments as of December 31, 2017 to be immaterial.

We have also extended a guaranty on behalf of one of our portfolio companies, whereby we have guaranteed $2.0 million of obligations of Country Club Enterprises, LLC. The guaranty expires in February 2018, unless renewed. As of December 31, 2017, we have not been required to make payments on this or any

 

S-45


Table of Contents

previous guaranties, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial.

The following table shows our contractual obligations as of December 31, 2017, at cost:

 

     Payments Due by Period  
Contractual Obligations (A)    Total      Less
than
1 Year
     1-3 Years      3-5 Years      More
than
5 Years
 

Credit Facility (B)

   $ 96,600      $ —        $ —        $ 96,600      $ —    

Mandatorily redeemable preferred stock

     139,150        —          —          81,650        57,500  

Secured borrowing

     5,096        —          —          5,096        —    

Interest payments on obligations (C)

     63,730        14,330        28,675        18,030        2,695  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 304,576      $ 14,330      $ 28,675      $ 201,376      $ 60,195  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) Excludes unused line of credit commitments and guaranties to our portfolio companies in the aggregate principal amount of $8.6 million.
(B) Principal balance of borrowings outstanding under the Credit Facility, based on the maturity date following the current contractual revolving period end date.
(C) Includes interest payments due on the Credit Facility and secured borrowing and dividend obligations on each series of our mandatorily redeemable preferred stock. The amount of interest expense calculated for purposes of this table was based upon rates and outstanding balances as of December 31, 2017. Dividend obligations on our mandatorily redeemable preferred stock assume quarterly declarations and monthly dividend payments through the date of mandatory redemption of each series.

Critical Accounting Policies

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

Investment Valuation

Credit Monitoring and Risk Rating

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

 

S-46


Table of Contents

The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate equity securities. For loans that have been rated by an SEC-registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss, if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of Lower Middle Market companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the Lower Middle Market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.

The following table reflects risk ratings for all loans in our portfolio as of December 31, 2017 and March 31, 2017:

 

Rating

   December 31,      March 31,  
     2017      2017  

Highest

     10.0        10.0  

Average

     6.1        6.1  

Weighted Average

     6.4        6.5  

Lowest

     3.0        3.0  

Tax Status

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

In an effort to limit certain federal excise taxes imposed on RICs, we generally intend to distribute to our stockholders, during each calendar year, an amount close to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and (3) any ordinary income and capital gains in excess of capital losses from preceding years that were not distributed during such years. Under the RIC Modernization Act, we are permitted to carryforward any capital losses that we may incur for an unlimited period, and such capital loss carryforwards will retain their character as either short-term or long-term capital losses. Our capital loss carryforward balance was $0 as of both December 31, 2017 and March 31, 2017.

Recent Accounting Pronouncements

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

 

S-47


Table of Contents

Quantitative and Qualitative Disclosures About Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies whose securities are owned by us; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and interest rate fluctuations.

The primary risk we believe we are exposed to is interest rate risk. Because we borrow money to make investments, our net investment income is dependent upon the difference between the rates at which we borrow funds, such as under the Credit Facility (which is variable) and our mandatorily redeemable preferred stock (which are fixed), and the rates at which we invest those funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We use a combination of debt and equity capital to finance our investing activities. We may use interest rate risk management techniques to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.

We target to have approximately 10% of the loans in our portfolio at fixed rates, with approximately 90% at variable rates or variables rates with a floor mechanism. Currently, all of our variable-rate loans have rates associated with the current 30-day LIBOR rate. As of December 31, 2017, our portfolio consisted of the following breakdown based on the total principal balance of all outstanding debt investments:

 

96.9%  

Variable rates with a floor

3.1  

Fixed rates

 

 
100.0%  

Total

 

 

There have been no material changes in the quantitative and qualitative market risk disclosures for the nine months ended December 31, 2017 from that disclosed in “ —Quantitative and Qualitative Disclosures About Market Risk ” in the accompanying prospectus.

SALES OF COMMON STOCK BELOW NET ASSET VALUE

At our 2017 annual stockholders meeting, our stockholders approved our ability to sell or otherwise issue shares of our common stock at a price below the then current NAV per common share, which we refer to as the Stockholder Approval, during a period beginning on August 24, 2017 and expiring on the first anniversary of such date. We intend to seek a similar approval at our 2018 annual meeting of stockholders in August 2018. To sell shares of common stock pursuant to this authorization, no further authorization from our stockholders will be solicited but a majority of our directors who have no financial interest in the sale and a majority of our independent directors must (i) find that the sale is in our best interests and in the best interests of our stockholders and (ii) in consultation with any underwriter or underwriters of the offering, make a good faith determination as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares of common stock, or immediately prior to the issuance of such common stock, that the price at which such shares of common stock are to be sold is not less than a price which closely approximates the market value of those shares of common stock, less any distributing commission or discount. Further, the total number of shares issued and sold pursuant to such Stockholder Approval may not exceed 25% of our then outstanding common stock immediately prior to each such sale, aggregated over a period of one year from the date of such Stockholder Approval. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business—Capital Raising Efforts” for details on prior stockholder approval for the issuance and sale of shares of our common stock at a price below NAV per share.

 

S-48


Table of Contents

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    the leverage available to us.

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

 

S-49


Table of Contents

PLAN OF DISTRIBUTION

We entered into the Sales Agreements with the Sales Agents on February 22, 2018, pursuant to which we may issue and sell shares of our common stock, par value $0.001 per share, from time to time through the Sales Agents that have an aggregate offering price of up to $35.0 million. As of the date of this prospectus supplement, we have not sold any shares of common stock under the Sales Agreements.

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

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

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

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

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

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

 

S-50


Table of Contents

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

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

 

S-51


Table of Contents

ADDITIONAL MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

This discussion serves as a supplement to the discussion in the accompanying prospectus under the heading “ Material U.S. Federal Income Tax Considerations .”

On December 22, 2017, President Trump signed into law the Tax Act. The Tax Act makes significant changes to U.S. federal income tax laws applicable to businesses and their owners, including RICs and their stockholders, and may lessen the relative competitive advantage of operating as a RIC rather than a C corporation.

Certain key provisions of the Tax Act that could impact us and our stockholders, beginning in 2018, include:

 

    temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate will be reduced from 39.6% to 37% (through taxable year ending in 2025);

 

    reducing the maximum corporate income tax rate from 35% to 21%;

 

    reducing the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%;

 

    permitting a deduction for certain pass-through business income, which generally will allow individuals, trusts, and estates to deduct up to 20% of such amounts, resulting in an effective maximum U.S. federal income tax rate of 29.6% on such dividends (through taxable years ending in 2025);

 

    requiring that, subject to exceptions, income be included in taxable income no later than the tax year in which it is taken into account as income on specified types of financial statements;

 

    amending the limitation on the deduction of net interest expense for all businesses, other than certain electing businesses; and

 

    eliminating the corporate alternative minimum tax.

Prospective stockholders should consult with their own tax advisors regarding the effects of the Tax Act or other legislative, regulatory or administrative developments on an investment in our common stock.

 

S-52


Table of Contents

CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PAYING AGENT

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

LEGAL MATTERS

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

EXPERTS

The financial statements as of March 31, 2017 and March 31, 2016 and for each of the three years in the period ended March 31, 2017 and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Annual Report on Internal Control over Financial Reporting) as of March 31, 2017, included in the accompanying prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

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

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

 

S-53


Table of Contents

This prospectus supplement and the accompanying prospectus do not contain all of the information in our registration statement, including amendments, exhibits and schedules. Statements in this prospectus supplement and in the accompanying prospectus about the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by this reference.

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

 

S-54


Table of Contents


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,     March 31,  
     2017     2017  

ASSETS

    

Investments at fair value

    

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

   $ 227,631     $ 223,451  

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

     327,887       262,086  

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

     10,861       16,042  

Cash and cash equivalents

     2,733       2,868  

Restricted cash and cash equivalents

     428       1,231  

Interest receivable

     2,902       2,305  

Due from custodian

     5,937       2,238  

Deferred financing costs, net

     1,148       1,588  

Other assets, net

     1,088       3,386  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 580,615     $ 515,195  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

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

   $ 96,858     $ 69,700  

Secured borrowing

     5,096       5,096  
  

 

 

   

 

 

 

Total borrowings

     101,954       74,796  

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

     135,420       134,835  

Accounts payable and accrued expenses

     1,233       578  

Fees due to Adviser (A)

     3,391       1,671  

Fee due to Administrator (A)

     261       296  

Other liabilities

     959       1,937  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 243,218     $ 214,113  
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

   $ 337,397     $ 301,082  
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

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

   $ 33     $ 30  

Capital in excess of par value

     329,548       310,332  

Cumulative net unrealized depreciation of investments

     (4,354     (23,590

Cumulative net unrealized appreciation of other

     (258     —    

Net investment income in excess of distributions

     6,570       7,283  

Accumulated net realized gain

     5,858       7,027  
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 337,397     $ 301,082  
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 10.37     $ 9.95  
  

 

 

   

 

 

 

 

(A) Refer to Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.
(B) Refer to Note 10 — Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information.

 

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

 

S-F-2


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

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

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

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

Affiliate investments

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

Control investments

     211       204       627       617  

Cash and cash equivalents

     4       —         14       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

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

Dividend income

        

Non-Control/Non-Affiliate investments

     152       4       1,922       20  

Affiliate investments

     —         440       865       3,190  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend income

     152       444       2,787       3,210  

Success fee income

        

Non-Control/Non-Affiliate investments

     706       309       2,864       309  

Affiliate investments

     1,738       914       1,738       914  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total success fee income

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

Other income

     —         —         —         13  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

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

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee (A)

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

Loan servicing fee (A)

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

Incentive fee (A)

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

Administration fee (A)

     261       251       769       825  

Interest expense on borrowings

     1,035       825       2,518       2,749  

Dividends on mandatorily redeemable preferred stock

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

Amortization of deferred financing costs and discounts

     366       546       1,100       1,508  

Professional fees

     231       142       810       528  

Other general and administrative expenses

     (16     1,071       1,682       1,962  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

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

 

 

   

 

 

   

 

 

   

 

 

 

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

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

Credits to fees from Adviser — other (A)

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

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits to fees

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

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

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

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     25       1,251       1,003       1,086  

Affiliate investments

     —         (4,391     144       14,401  

Control investments

     —         —         —         (3

Other

     —         3       —         (254
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     25       (3,137     1,147       15,230  

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

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

Affiliate investments

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

Control investments

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

Other

     (258     —         (258     75  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation

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

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain

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

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

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

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

S-F-3


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

BASIC AND DILUTED PER COMMON SHARE:

           

Net investment income

   $ 0.23      $ 0.17      $ 0.58      $ 0.57  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations

     0.53        0.36        1.21        1.17  
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributions

     0.26        0.19        0.70        0.56  
  

 

 

    

 

 

    

 

 

    

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

           

Basic and diluted

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

 

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

 

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

 

S-F-4


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended
December 31,
 
     2017     2016  

OPERATIONS

    

Net investment income

   $ 18,716     $ 17,128  

Net realized gain on investments

     1,147       15,484  

Net realized loss on other

     —         (254

Net unrealized appreciation of investments

     19,236       2,954  

Net unrealized appreciation of other

     (258     75  
  

 

 

   

 

 

 

Net increase in net assets from operations

     38,841       35,387  
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income

     (20,826     (17,027

Distributions to common stockholders from realized gains

     (1,756     —    
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (22,582     (17,027
  

 

 

   

 

 

 

CAPITAL ACTIVITY

    

Issuance of common stock

     21,154       —    

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

     (1,098     —    
  

 

 

   

 

 

 

Net increase in net assets from capital activity

     20,056       —    
  

 

 

   

 

 

 

TOTAL INCREASE IN NET ASSETS

     36,315       18,360  

NET ASSETS, BEGINNING OF PERIOD

     301,082       279,022  
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 337,397     $ 297,382  
  

 

 

   

 

 

 

 

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

 

S-F-5


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended
December 31,
 
     2017     2016  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 38,841     $ 35,387  

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

    

Purchase of investments

     (71,188     (31,186

Principal repayments of investments

     19,610       26,886  

Net proceeds from the sale of investments

     7,007       36,788  

Net realized gain on investments

     (1,239     (15,028

Net realized loss on other

     —         239  

Net unrealized appreciation of investments

     (19,236     (2,954

Net unrealized appreciation of other

     258       (75

Amortization of premiums, discounts, and acquisition costs, net

     (11     —    

Amortization of deferred financing costs and discounts

     1,100       1,508  

Bad debt expense, net of recoveries

     302       460  

Changes in assets and liabilities:

    

Decrease in restricted cash and cash equivalents

     803       449  

(Increase) decrease in interest receivable

     (1,051     44  

Increase in due from custodian

     (3,699     (520

Decrease in other assets, net

     2,606       2,230  

Increase (decrease) in accounts payable and accrued expenses

     655       (65

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

     1,720       (51

Decrease in fee due to Administrator (A)

     (35     (60

Decrease in other liabilities

     (885     (124
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (24,442     53,928  
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from issuance of common stock

     21,154       —    

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

     (1,090     —    

Proceeds from line of credit

     96,300       45,200  

Repayments on line of credit

     (69,400     (96,500

Proceeds from issuance of mandatorily redeemable preferred stock

     —         57,500  

Redemption of mandatorily redeemable preferred stock

     —         (40,000

Deferred financing and offering costs

     (75     (3,589

Distributions paid to common stockholders

     (22,582     (17,027
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     24,307       (54,416
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (135     (488

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     2,868       4,481  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 2,733     $ 3,993  
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 1,928     $ 2,433  
  

 

 

   

 

 

 

NON-CASH ACTIVITIES (B)

   $ 42,977     $ 8,796  
  

 

 

   

 

 

 

 

(A)   Refer to Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.
(B)   2017: Significant non-cash operating activities consisted principally of the following transactions:

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

In June 2017, one of our portfolio companies, Mathey Investments, Inc. (“Mathey”) merged with and into another one of our portfolio companies, SBS Industries, LLC (“SBS”). As a result of this transaction, our debt investments in Mathey, which totaled $8.6 million at

 

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

 

S-F-6


Table of Contents

principal and cost, were assumed by SBS and combined with our existing debt investment in SBS, which totaled $11.4 million at principal and cost, into a new secured first lien term loan totaling $20.0 million. Our common equity investment in Mathey, with a cost basis of $0.8 million, was converted into a preferred equity investment in SBS with the same cost basis.

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

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

 

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

 

S-F-7


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

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

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

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

        

Secured First Lien Debt — 33.3%

        

Chemicals, Plastics, and Rubber — 2.9%

        

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

   $ 9,913      $ 9,913      $ 9,913

Containers, Packaging, and Glass — 2.8%

        

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

     9,500        9,500        9,500

Diversified/Conglomerate Services — 10.9%

        

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

     —          —          —    

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

     18,000        18,000        18,000

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

     5,500        5,500        5,500

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

     13,290        13,290        13,290
     

 

 

    

 

 

 
        36,790        36,790

Farming and Agriculture — 4.7%

        

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

     11,000        11,000        11,000

Star Seed, Inc. — Term Debt (L+10.0%, 12.5% Cash, Due 5/2018) (L)

     5,000        5,000        5,000
     

 

 

    

 

 

 
        16,000        16,000

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

        

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

     13,081        13,081        13,081

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

        

SBS Industries, LLC — Line of Credit, $1,500 available (L+8.5%, 10.1% Cash (1.0% Unused Fee), Due 6/2018) (L)

     —          —          —    

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

     19,957        19,957        19,957
     

 

 

    

 

 

 
        19,957        19,957

Oil and Gas — 1.0%

        

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

     3,216        3,216        3,216

 

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

 

S-F-8


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2017

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

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

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

Personal, Food, and Miscellaneous Services — 1.2%

        

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

     4,550        4,550        3,908

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

     6,443        6,443        —    

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

     840        840        —    
     

 

 

    

 

 

 
        11,833        3,908
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 120,290      $ 112,365
     

 

 

    

 

 

 

Secured Second Lien Debt — 9.0%

        

Automobile — 1.2%

        

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

   $ 4,000      $ 4,000      $ 4,000

Cargo Transport — 3.9%

        

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

     13,000        12,911        13,000

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

        

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

     13,300        13,300        13,300
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 30,211      $ 30,300
     

 

 

    

 

 

 

Preferred Equity — 16.8%

        

Automobile — 0.6%

        

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

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

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

     —          —          —    
     

 

 

    

 

 

 
        7,725        2,122

Chemicals, Plastics, and Rubber — 1.0%

        

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

     34,045      $ 3,375      $ 3,375

Containers, Packaging, and Glass — 0.4%

        

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

     1,373        1,373        1,400

Diversified/Conglomerate Services — 9.0%

        

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

     6,995        6,995        5,916

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

     5,660        5,660        24,431