To the Stockholders and Board of Directors of Gladstone Capital Corporation:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and include those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of
our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of
September 30, 2017, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal ControlIntegrated Framework (2013)
. Based on its assessment, management has concluded that
our internal control over financial reporting was effective as of September 30, 2017.
The effectiveness of the Companys internal control over
financial reporting as of September 30, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
In September 2016, our investment in Precision Acquisition Group Holdings, Inc. was restructured, resulting in non-cash activity of $1.9
million and new investments in PIC 360, LLC and Precision International, LLC, which are listed on the accompanying
Consolidated Schedule of Investments
as of September 30, 2017 and 2016.
In February 2016, our investment in Targus Group International, Inc. was restructured resulting in non-cash activity of $3.9 million and a new
investment in Targus Cayman HoldCo Limited, which is listed on the accompanying
Consolidated Schedule of Investments
as of September 30, 2017 and September 30, 2016.
In September 2015, GFRC Holdings, LLC was restructured, resulting in non-cash activity of $1.9 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
NOTE 1. ORGANIZATION
Gladstone Capital Corporation
was incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 2001. The terms the Company, we, our and us all refer to
Gladstone Capital Corporation and its consolidated subsidiaries. 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), and is applying the guidance of the Financial Accounting Standards Board (the FASB) Accounting Standards Codification (ASC) Topic 946
Financial
Services-Investment Companies
(ASC 946). In addition, we have elected to be treated for tax purposes as a regulated investment company (RIC) under the Internal Revenue Code of 1986, as amended (the Code). We
were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (U.S). Our investment objectives are to: (1) achieve and grow current income by investing
in debt securities of established lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million) in the U.S. 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 (2) provide our stockholders with long-term capital appreciation
in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.
Gladstone Business Loan, LLC (Business Loan), a wholly-owned subsidiary of ours, was established on February 3, 2003, for the sole purpose of
owning a portion of our portfolio of investments in connection with our Credit Facility (defined in Note 5
Borrowings
).
Gladstone Financial
Corporation (Gladstone Financial), a wholly-owned subsidiary of ours, was established on November 21, 2006, for the purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial
acquired this license in February 2007. The license enables us to make investments in accordance with the United States Small Business Administration guidelines for specialized small business investment companies.
The financial statements of Business Loan and Gladstone Financial are consolidated with ours. We also have significant subsidiaries whose financial statements
are not consolidated with ours. Refer to Note 14
Unconsolidated Significant Subsidiaries
for additional information regarding our unconsolidated significant subsidiaries.
We are externally managed by Gladstone Management Corporation (the Adviser), a Delaware corporation and a U.S. Securities and Exchange Commission
(the SEC) registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the Advisory Agreement). Administrative services are provided by our affiliate, Gladstone
Administration, LLC (the Administrator), a Delaware limited liability company, pursuant to an administration agreement (the Administration Agreement). Refer to Note 4
Related Party Transactions
for additional
information regarding these arrangements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We prepare our
Consolidated
Financial Statements
and the accompanying notes in accordance with accounting principles generally accepted in the U.S. (GAAP) and conform to Regulation S-X under the Securities Exchange Act of 1934, as amended. Management believes
it has made all necessary adjustments so that our accompanying
Consolidated Financial Statements
are presented fairly and that all such adjustments are of a normal recurring nature. Our accompanying
Consolidated Financial Statements
include our accounts and the accounts of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
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Consolidation
In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended, we do not consolidate portfolio company investments. Under the
investment company rules and regulations pursuant to the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity
other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries.
Use of Estimates
Preparing financial statements requires
management to make estimates and assumptions that affect the amounts reported in our accompanying
Consolidated Financial Statements
and accompanying notes. Actual results may differ from those estimates.
Reclassifications
Certain amounts have been reclassified
to conform to the current year presentation.
In April 2015, the FASB issued Accounting Standards Update 2015-03,
Simplifying the Presentation of
Debt Issuance Costs
(ASU 2015-03), which simplifies the presentation of debt issuance costs. ASU 2015-03 requires the presentation of debt issuance costs as a deduction from the carrying amount of the related debt liability
instead of as a deferred financing cost asset on the balance sheet. In August 2015, the FASB issued Accounting Standards Update 2015-15,
Interest Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of
Debt Issuance Costs Associated with Line-of-Credit Arrangements
(ASU 2015-15), which codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line of credit arrangements
as assets. ASU 2015-03 was effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-03 during the three months ended December 31, 2016. ASU 2015-15 was
effective immediately and, as a result, we continue to present debt issuance costs related to line of credit arrangements as assets.
As of
September 30, 2016, we had unamortized deferred financing costs related to our mandatorily redeemable preferred stock of $1.6 million. These costs have been reclassified from Deferred financing costs, net, to Mandatorily redeemable preferred
stock, net. All periods presented have been retrospectively adjusted.
The following table summarizes the retrospective adjustment and the overall impact
on the previously reported consolidated financial statements:
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September 30, 2016
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As Previously
Reported
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Retrospective
Application
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Deferred financing costs, net
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$
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3,161
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$
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1,521
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Mandatorily redeemable preferred stock, net
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61,000
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59,360
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Classification of Investments
In accordance with the BDC regulations in the 1940 Act, we classify portfolio investments on our accompanying
Consolidated Financial Statements
into the
following categories:
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Control Investments
Control investments are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the
power to vote, more than 25.0% of the issued and outstanding voting securities;
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Affiliate Investments
Affiliate investments are those in which we own, with the power to vote, between 5.0% and 25.0% of the issued and outstanding voting securities that are not classified as Control
Investments; and
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Non-Control/Non-Affiliate Investments
Non-Control/Non-Affiliate investments are those that are neither control nor affiliate investments and in which we own less than 5.0% of the issued and outstanding
voting securities.
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Cash and cash equivalents
We consider all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of
purchase to be cash equivalents. Cash is carried at cost, which approximates fair value. We place our cash with financial institutions, and at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.
We seek to mitigate this concentration of credit risk by depositing funds with major financial institutions.
Restricted Cash and Cash Equivalents
Restricted cash is cash held in escrow that was generally received as part of an investment exit. Restricted cash is carried at cost, which
approximates fair value.
Investment Valuation Policy
Accounting Recognition
We record our investments at fair
value in accordance with the FASB Accounting Standards Codification Topic 820,
Fair Value Measurements and Disclosures
(ASC 820) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains
or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized depreciation or appreciation previously recognized, and include investments charged
off during the period, net of recoveries. Unrealized depreciation or appreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized depreciation or appreciation when gains or losses are
realized.
Board Responsibility
In accordance with
the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our investment valuation policy, which has been approved by our Board of Directors (the
Policy). Such review occurs in three phases. First, prior to its quarterly meetings, our Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and
Administrator with oversight and direction from our chief valuation officer, who reports directly to our Board of Directors (the Valuation Team). Second, the Valuation Committee of our Board of Directors, comprised entirely of
independent directors, meets to review the valuation recommendations and supporting materials. Third, after the Valuation Committee concludes its meeting, it and our chief valuation officer present the Valuation Committees findings to the
entire Board of Directors and, after discussion, the Board of Directors ultimately approves the value of our portfolio of investments in accordance with the Policy.
There is no single method for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and
circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by our chief valuation officer, uses the Policy and each quarter the Valuation Committee and Board of Directors reviews the
Policy to determine if changes are advisable and also reviews whether the Valuation Team has applied the Policy consistently.
Use of Third Party
Valuation Firms
The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.
Standard & Poors Securities Evaluation, Inc. (SPSE), a valuation specialist, generally provides estimates of fair value on our
proprietary debt investments. The Valuation Team, in accordance with the Policy, generally assigns SPSEs estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company.
The Valuation Team corroborates SPSEs estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Teams estimate of value on a specific debt investment may significantly differ from SPSEs.
When this occurs, the Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Teams recommended fair value is reasonable in light of the Policy and other facts and
circumstances and then votes to accept or reject the Valuation Teams recommended fair value.
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We may engage other independent valuation firms to provide earnings multiple ranges, as well as other
information, and evaluate such information for incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review our valuation of our
significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our total enterprise value, including review of all inputs provided by the independent
valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value, whether it is reasonable in light of the
Policy, as well as other relevant facts and circumstances and then votes to accept or reject the Valuation Teams recommended fair value.
Valuation Techniques
In accordance with ASC 820, the
Valuation Team uses the following techniques when valuing our investment portfolio:
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Total Enterprise Value
In determining the fair value using a total enterprise value (TEV), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of
the following factors: the portfolio companys ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes,
depreciation and amortization (EBITDA)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of
comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, inputs provided by an independent
valuation firm, if any, and other pertinent factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team
generally allocates the TEV to the portfolio companys securities based on the facts and circumstances of the securities, which typically results in the allocation of fair value to securities based on the order of their relative priority in the
capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.
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TEV is primarily calculated using EBITDA or revenue multiples; however, TEV may also be calculated using a discounted cash flow (DCF) analysis whereby future expected cash flows of the portfolio company are
discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses the DCF to calculate the TEV to corroborate estimates
of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit impaired portfolio companies.
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Yield Analysis
The Valuation Team generally determines the fair value of our debt investments (where we do not have the ability to effectuate a sale of a portfolio company) using the yield analysis, which
includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique
develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to
corroborate both estimates of value provided by SPSE and market quotes.
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Market Quotes
For our syndicate investments for which a limited market exists, fair value is generally based on readily available and reliable market quotations which are corroborated by the Valuation Team
(generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar syndicated investments and evaluates variances in quotations and other market insights to determine if any available
quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (IBP) in the bid-to-ask price range obtained from the respective originating syndication agents trading desk on or near the valuation
date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy.
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Investments in Funds
For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our
invested capital at the net asset value (NAV) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.
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In addition to the above valuation techniques, the Valuation Team may also consider other factors when
determining fair values of our investments, including, but not limited to: the nature and realizable value of the collateral, including external parties guaranties; any relevant offers or letters of intent to acquire the portfolio company;
timing of expected loan repayments; and the markets in which the portfolio company operates. If applicable, new and follow-on debt and equity investments made during the current reporting quarter are generally valued at our original cost basis, as
near-measurement date transaction value is a reasonable indicator of fair value.
Fair value measurements of our investments may involve subjective
judgments and estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market
for these securities existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our exit of such securities. Additionally,
changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such
investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize
significantly less than the value at which it is recorded.
Refer to Note 3
Investments
for additional information regarding fair value
measurements and our application of ASC 820.
Revenue Recognition
Interest Income Recognition
Interest income, including
the amortization of premiums, acquisition costs and amendment fees, the accretion of original issue discounts (OID), and paid-in-kind (PIK) interest, is recorded on the accrual basis to the extent that such amounts are
expected to be collected. Generally, when a loan becomes 90 days or more past due or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease
recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments
received on non-accrual loans may be recognized as income or applied to the cost basis depending upon managements judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in
managements judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectible. At September 30, 2017, two portfolio companies were either fully or partially on non-accrual status
with an aggregate debt cost basis of approximately $27.9 million, or 7.5% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $5.6 million, or 1.7% of the fair value of all debt investments in our
portfolio. At September 30, 2016, two portfolio companies were on non-accrual status with an aggregate debt cost basis of approximately $26.5 million, or 7.7% of the cost basis of all debt investments in our portfolio, and an aggregate fair
value of approximately $5.9 million, or 1.9% of the fair value of all debt investments in our portfolio.
We currently hold, and we expect to hold in the
future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. PIK interest,
computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt
principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both of our OID and PIK non-cash income amounts in the form of distributions, even though we have not yet collected the cash on either.
As of September 30, 2017 and 2016, we had six and 12 OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID
income of $0.3 million, $0.1 million and $0.3 million for the years ended September 30, 2017, 2016 and 2015, respectively. The unamortized balance of OID investments as of September 30, 2017 and 2016 totaled $0.4 million. As of
September 30, 2017 and 2016, we had six and seven investments which had a PIK interest component, respectively. We recorded PIK interest income of $5.0 million, $2.4 million and $0.7 million for the years ended September 30, 2017, 2016 and
2015, respectively. We collected $2.0 million, $0.1 million, and $0 million of PIK interest in cash for the years ended September 30, 2017, 2016 and 2015, respectively.
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Success Fee Income Recognition
We record success fees as income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in
a portfolio company, typically resulting from an exit or sale.
Dividend Income Recognition
Dividend income on equity investments is accrued to the extent that such amounts are expected to be collected and if we have the option to collect such amounts
in cash or other consideration. During the year ended September 30, 2017, we recharacterized $0.2 million of dividend income from our investment in Behrens Manufacturing, LLC (Behrens) recorded during our fiscal year ended
September 30, 2016 as a return of capital.
Deferred Financing Fees
Deferred financing costs consist of costs incurred to obtain financing, including legal fees, origination fees and administration fees. Costs associated with
our Credit Facility and the issuance of our mandatorily redeemable preferred stock are deferred and amortized in our accompanying
Consolidated Statements of Operations
using the straight-line method, which approximates the effective interest
method, over the terms of the respective financings. Refer to Note 6
Mandatorily Redeemable Preferred Stock
for additional information regarding our preferred stock and Note 5
Borrowings
for additional information regarding
our Credit Facility.
Related Party Fees
In
accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. These fees are accrued at the end of the quarter when the services are performed and
generally paid the following quarter.
Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms
of our Fifth Amended and Restated Credit Agreement, as amended. This fee is also accrued at the end of the quarter when the service is performed and generally paid the following quarter.
We pay separately for administrative services pursuant to the Administration Agreement. These administrative fees are accrued at the end of the quarter when
the services are performed and generally paid the following quarter. Refer to Note 4
Related Party Transactions
for additional information regarding these related party fees and agreements.
Income Taxes
We intend to continue to qualify for
treatment as a RIC under subchapter M of the Code, which generally allows us to avoid paying corporate income taxes on any income or gains that we distribute to our stockholders. We intend to continue to distribute sufficient dividends to eliminate
taxable income. Refer to Note 10
Federal and State Income Taxes
for additional information regarding our RIC requirements.
ASC 740,
Income Taxes
requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the
applicable tax authorities. Tax positions not deemed to satisfy the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current fiscal year. We have evaluated the implications of ASC 740, for all open tax
years and in all major tax jurisdictions, and determined that there is no material impact on our accompanying
Consolidated Financial Statements
. Our federal tax returns for fiscal years 20142016 remain subject to examination by the
Internal Revenue Service (IRS).
Distributions
Distributions to stockholders are recorded on the ex-dividend date. We are required to pay out at least 90.0% of our investment company taxable income, which
is generally our net ordinary income plus the excess of our net short-term capital gains over net long-term capital losses for each taxable year as a distribution to our stockholders in order to maintain our ability to be taxed as a RIC under
Subchapter M of the Code. It is our policy to pay out as a distribution up to 100.0% of those amounts. The amount to be paid is determined by our Board of Directors each quarter and is based on the annual earnings estimated by our management. Based
on that estimate, a distribution is declared each quarter and is paid out monthly over the course of the respective quarter. Refer to Note 9
Distributions to Common Stockholders
for further information.
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Our transfer agent, Computershare, Inc., offers a dividend reinvestment plan for our common stockholders. This is
an opt in dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do not make such election will
receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. As plan
agent, Computershare, Inc. purchases shares in the open market in connection with the obligations under the plan. We do not have a dividend reinvestment plan for our preferred stock stockholders.
Recent Accounting Pronouncements
In November 2016, the
FASB issued Accounting Standards Update 2016-18, Restricted Cash (a consensus of the Emerging Issues Task Force) (ASU 2016-18), which requires that the statement of cash flows explain the change during the period in the total
of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. We are currently assessing the impact of ASU 2016-18 and do not anticipate a material impact on our financial position, results of
operations or cash flows. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.
In August 2016, the FASB issued Accounting Standards Update 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the
Emerging Issues Task Force) (ASU 2016-15), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. We are currently assessing the impact of ASU 2016-15 and
do not anticipate a material impact on our cash flows. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.
In March 2016, the FASB issued Accounting Standards Update 2016-06,
Contingent Put and Call Options in Debt Instruments
(ASU
2016-06), which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related. We assessed the impact of ASU 2016-06 and do
not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-06 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years,
with early adoption permitted.
In January 2016, the FASB issued Accounting Standards Update 2016-01,
Financial InstrumentsOverall:
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01), which changes how entities measure certain equity investments and how entities present changes in the fair value of financial liabilities
measured under the fair value option that are attributable to instrument-specific credit risk. We are currently assessing the impact of ASU 2016-01 and do not anticipate a material impact on our financial position, results of operations or cash
flows. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for certain aspects of ASU 2016-01 relating to the recognition of
changes in fair value of financial liabilities when the fair value option is elected.
In February 2015, the FASB issued Accounting Standards Update
2015-02,
Amendments to the Consolidation Analysis
(ASU 2015-02), which amends or supersedes the scope and consolidation guidance under existing GAAP. The adoption of ASU 2015-02 did not have a material impact on our
financial position, results of operations or cash flows. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-02 effective April 1, 2016. In
October 2016, the FASB issued Accounting Standards Update 2016-17,
Interests Held through Related Parties That Are under Common Control
(ASU 2016-17), which amends the consolidation guidance in ASU 2015-02 regarding
the treatment of indirect interests held through related parties that are under common control. We assessed the impact of ASU 2016-17 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-17
is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those years, with early adoption permitted.
In August 2014, the FASB issued Accounting Standards Update 201415,
Presentation of Financial Statements Going Concern (Subtopic 205
40): Disclosure of Uncertainties About an Entitys Ability to Continue as a Going Concern
(ASU 2014-15). ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial
doubt about the entitys ability to continue as a going concern, and to provide certain disclosures when it is
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probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The guidance is primarily around
certain disclosures to the financial statements. The adoption of ASU 2014-15 did not have a material impact on our financial position, results of operations or cash flows. ASU 2014-15 is effective for annual periods ending after December 15,
2016 and annual and interim periods thereafter, and we adopted ASU 2014-15 effective September 30, 2017.
In May 2014, the FASB issued Accounting
Standards Update 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which was amended in March 2016 by FASB Accounting Standards Update 2016-08,
Principal versus Agent Considerations
(ASU 2016-08), in April 2016 by FASB Accounting Standards Update 2016-10,
Identifying Performance Obligations and Licensing
(ASU 2016-10), in May 2016 by FASB Accounting Standards Update 2016-12,
Narrow-Scope Improvements and Practical Expedients
(ASU 2016-12), and in December 2016 by FASB Accounting Standards Update 2016-20,
Technical Corrections and Improvements to Topic 606
(ASU
2016-20). ASU 2014-09, as amended, supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over
time or at a point in time and will expand disclosures about revenue. In July 2015, the FASB issued Accounting Standards Update 2015-14,
Deferral of the Effective Date,
which deferred the effective date of ASU 2014-09. ASU
2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20, is now effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years, with early adoption permitted
for annual reporting periods beginning after December 15, 2016 and interim periods within those years. We continue to assess the impact of ASU 2014-09, as amended, and expect to identify similar performance obligations as compared to existing
guidance. As a result, we do not anticipate a material change in the timing of revenue recognition or a material impact on our financial position, results of operations, or cash flows from adopting this standard.
NOTE 3. INVESTMENTS
In accordance with ASC 820, the fair
value of each investment is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses
on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
|
|
|
Level 1
inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;
|
|
|
|
Level 2
inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either
directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices
vary substantially over time or among brokered market makers; and
|
|
|
|
Level 3
inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use
when pricing the financial instrument and can include the Valuation Teams assumptions based upon the best available information.
|
When
a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial
instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair
value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. As of September 30, 2017 and 2016, all of our investments were valued using Level 3 inputs within the ASC 820 fair value
hierarchy, except for our investments in FedCap Partners, LLC and Leeds Novamark Capital I, L.P., which were valued using net asset value as a practical expedient. During the years ended September 30, 2017 and 2016, there were no investments
transferred into or out of Levels 1, 2 or 3. The following table presents our investments carried at fair value as of September 30, 2017 and 2016, by caption on our accompanying
Consolidated Statements of Assets and Liabilities
and by
security type, all of which are valued using level 3 inputs:
90
|
|
|
|
|
|
|
|
|
|
|
Total Recurring Fair Value Measurements Reported in
Consolidated Statements of Assets
and Liabilities
Using
Significant Unobservable Inputs (Level 3)
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
|
|
$
|
147,447
|
|
|
$
|
134,067
|
|
Secured second lien debt
|
|
|
129,890
|
|
|
|
80,446
|
|
Unsecured debt
|
|
|
3,324
|
|
|
|
3,012
|
|
Preferred equity
|
|
|
5,735
|
|
|
|
7,051
|
|
Common equity/equivalents
|
|
|
2,068
|
|
|
|
1,046
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments
|
|
$
|
288,464
|
|
|
$
|
225,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
|
|
$
|
18,821
|
|
|
$
|
54,620
|
|
Secured second lien debt
|
|
|
17,294
|
|
|
|
13,650
|
|
Preferred equity
|
|
|
826
|
|
|
|
3,211
|
|
Common equity/equivalents
|
|
|
5,707
|
|
|
|
2,727
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
$
|
42,648
|
|
|
$
|
74,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
|
|
$
|
7,628
|
|
|
$
|
10,034
|
|
Secured second lien debt
|
|
|
8,065
|
|
|
|
6,224
|
|
Common equity/equivalents
|
|
|
3,172
|
|
|
|
3,982
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
$
|
18,865
|
|
|
$
|
20,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments at Fair Value Using Level 3 Inputs
|
|
$
|
349,977
|
|
|
$
|
320,070
|
|
|
|
|
|
|
|
|
|
|
In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of
our investments as of September 30, 2017 and 2016. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average
calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
As of September
30,
|
|
|
|
|
|
|
|
|
Range / Weighted Average as of
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Valuation
Techniques/
Methodologies
|
|
|
Unobservable
Input
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Secured first lien debt
(A)
|
|
$
|
136,272
|
|
|
$
|
141,550
|
|
|
|
Yield Analysis
|
|
|
|
Discount Rate
|
|
|
|
8.0% - 25.0% / 12.5%
|
|
|
|
8.1% - 18.5% / 12.1%
|
|
|
|
|
37,624
|
|
|
|
54,630
|
|
|
|
TEV
|
|
|
|
EBITDA multiple
|
|
|
|
3.2x - 10.1x / 8.2x
|
|
|
|
3.2x 5.5x / 2.3x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
$1,378 - $9,420 / $6,676
|
|
|
|
$1,262 - $20,269 / $4,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue multiple
|
|
|
|
0.3x 0.4x / 0.3x
|
|
|
|
0.2x 0.4x / 0.4x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
$6,934 - $12,094 / $11,733
|
|
|
|
$4,696 - $15,083 /$14,139
|
|
|
|
|
|
|
|
|
2,541
|
|
|
|
Market Quote
|
|
|
|
IBP
|
|
|
|
|
|
|
|
64.5% - 64.5% /64.5%
|
|
Secured second lien debt
(B)
|
|
|
122,165
|
|
|
|
72,678
|
|
|
|
Yield Analysis
|
|
|
|
Discount Rate
|
|
|
|
10.8% - 23.3% / 14.0%
|
|
|
|
12.0% - 22.0% / 15.1%
|
|
|
|
|
22,607
|
|
|
|
21,417
|
|
|
|
Market Quotes
|
|
|
|
IBP
|
|
|
|
84.5% - 101.5% / 97.2%
|
|
|
|
40.0% - 98.3% / 83.7%
|
|
|
|
|
10,477
|
|
|
|
6,225
|
|
|
|
TEV
|
|
|
|
EBITDA multiple
|
|
|
|
4.8x 6.6x /5.4x
|
|
|
|
4.7x - 4.7x /4.7x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
$3,000 - $73,650 / $26,424
|
|
|
|
$2,759 - $2,759 / $2,759
|
|
Unsecured debt
|
|
|
3,324
|
|
|
|
3,012
|
|
|
|
Yield Analysis
|
|
|
|
Discount Rate
|
|
|
|
10.0% - 10.0% / 10.0%
|
|
|
|
9.9% - 9.9% / 9.9%
|
|
Preferred and common equity / equivalents
(C)
|
|
|
15,604
|
|
|
|
18,017
|
|
|
|
TEV
|
|
|
|
EBITDA multiple
|
|
|
|
3.2x 10.1x / 6.1x
|
|
|
|
3.2x - 7.5x / 5.8x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
$890 - $84,828/ $12,835
|
|
|
|
$1,132 - $86,041/ $7,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue multiple
|
|
|
|
0.3x 6.5 x /0.7x
|
|
|
|
0.4x - 0.4x /0.4x
|
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
$2,317 - $503,620/ $128,819
|
|
|
|
$7,708 - $15,083/ $14,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
|
|
|
|
|
11.7% - 11.7% / 11.7%
|
|
|
|
|
138
|
|
|
|
|
|
|
|
Market Quotes
|
|
|
|
IBP
|
|
|
|
27.9% - 27.9% / 27.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 Investments, at Fair Value
|
|
$
|
349,977
|
|
|
$
|
320,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Fair value as of September 30, 2017 includes one new proprietary debt investment totaling $12.0 million, which was valued at cost, using the transaction price as the unobservable input, and one proprietary debt
investment totaling $7.8 million, which was valued at the expected payoff amount as the unobservable input. Fair value as of September 30, 2016 includes one new proprietary debt investment and two restructured proprietary debt investments
totaling $12.6 million, which were valued at cost, using the transaction price as the unobservable input, and two proprietary debt investments totaling $38.8 million, which were valued at the expected payoff amount as the unobservable input.
|
(B)
|
Fair value as of September 30, 2017 includes one proprietary debt investment totaling $3.5 million which was valued at the expected payoff as the unobservable
input. Fair value as of September 30, 2016 includes one new proprietary debt investment for $10.0 million which was valued at cost using transaction price as the unobservable input.
|
(C)
|
Fair value as of September 30, 2017 includes two new proprietary investments totaling $1.0 million, which were valued at cost, using transaction price as the
unobservable input, and one proprietary investment totaling $1.4 million, which was valued at the expected payoff amount as the unobservable input. Fair value as of September 30, 2016 includes one new proprietary investment and one restructured
proprietary investment totaling $0.5 million, which were valued at cost, using transaction price as the unobservable input, and two proprietary investments for $7.3 million, which were valued at the expected payoff amount as the unobservable input.
|
Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in market yields, discounts rates,
leverage, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase or decrease in market yields, discount rates or leverage or a decrease in
EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a corresponding decrease or increase, respectively, in the fair value of certain of our investments.
92
Changes in Level 3 Fair Value Measurements of Investments
The following tables provide the changes in fair value, broken out by security type, during the years ended September 30, 2017 and 2016 for all
investments for which the Adviser determines fair value using unobservable (Level 3) factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
|
Year Ended September 30, 2017
|
|
Secured First
Lien Debt
|
|
|
Secured
Second
Lien Debt
|
|
|
Unsecured
Debt
|
|
|
Preferred
Equity
|
|
|
Common
Equity/
Equivalents
|
|
|
Total
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2016
|
|
$
|
198,721
|
|
|
$
|
100,320
|
|
|
$
|
3,012
|
|
|
$
|
10,262
|
|
|
$
|
7,755
|
|
|
$
|
320,070
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain
(A)
|
|
|
(4,913
|
)
|
|
|
(217
|
)
|
|
|
|
|
|
|
1,503
|
|
|
|
152
|
|
|
|
(3,475
|
)
|
Net unrealized (depreciation)
appreciation
(B)
|
|
|
958
|
|
|
|
548
|
|
|
|
(51
|
)
|
|
|
1,558
|
|
|
|
(3,793
|
)
|
|
|
(780
|
)
|
Reversal of prior period net depreciation (appreciation) on realization
(B)
|
|
|
2,099
|
|
|
|
280
|
|
|
|
|
|
|
|
(1,059
|
)
|
|
|
370
|
|
|
|
1,690
|
|
New investments, repayments and
settlements:
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances/originations
|
|
|
45,501
|
|
|
|
67,115
|
|
|
|
323
|
|
|
|
2,145
|
|
|
|
1,100
|
|
|
|
116,184
|
|
Settlements/repayments
|
|
|
(61,778
|
)
|
|
|
(13,734
|
)
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
(75,472
|
)
|
Sales
|
|
|
(86
|
)
|
|
|
217
|
|
|
|
|
|
|
|
(7,848
|
)
|
|
|
(523
|
)
|
|
|
(8,240
|
)
|
Transfers
|
|
|
(6,606
|
)
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
5,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2017
|
|
$
|
173,896
|
|
|
$
|
155,249
|
|
|
$
|
3,324
|
|
|
$
|
6,561
|
|
|
$
|
10,947
|
|
|
$
|
349,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
|
Year Ended September 30, 2016
|
|
Secured First
Lien Debt
|
|
|
Secured
Second
Lien Debt
|
|
|
Unsecured
Debt
|
|
|
Preferred
Equity
|
|
|
Common
Equity/
Equivalents
|
|
|
Total
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2015
|
|
$
|
206,840
|
|
|
$
|
120,303
|
|
|
$
|
|
|
|
$
|
24,315
|
|
|
$
|
12,231
|
|
|
$
|
363,689
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain
(A)
|
|
|
(10,452
|
)
|
|
|
(131
|
)
|
|
|
|
|
|
|
17,820
|
|
|
|
(21
|
)
|
|
|
7,216
|
|
Net unrealized (depreciation)
appreciation
(B)
|
|
|
478
|
|
|
|
(8,050
|
)
|
|
|
17
|
|
|
|
4,276
|
|
|
|
(6,177
|
)
|
|
|
(9,456
|
)
|
Reversal of prior period net depreciation (appreciation) on realization(B)
|
|
|
12,014
|
|
|
|
147
|
|
|
|
|
|
|
|
(17,173
|
)
|
|
|
(497
|
)
|
|
|
(5,509
|
)
|
New investments, repayments and
settlements:
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances/originations
|
|
|
75,675
|
|
|
|
14,369
|
|
|
|
144
|
|
|
|
578
|
|
|
|
3,571
|
|
|
|
94,337
|
|
Settlements/repayments
|
|
|
(67,186
|
)
|
|
|
(40,317
|
)
|
|
|
5
|
|
|
|
(1,271
|
)
|
|
|
|
|
|
|
(108,769
|
)
|
Sales
|
|
|
(1,760
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
(18,865
|
)
|
|
|
(770
|
)
|
|
|
(21,438
|
)
|
Transfers
|
|
|
(16,888
|
)
|
|
|
14,042
|
|
|
|
2,846
|
|
|
|
582
|
|
|
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2016
|
|
$
|
198,721
|
|
|
$
|
100,320
|
|
|
$
|
3,012
|
|
|
$
|
10,262
|
|
|
$
|
7,755
|
|
|
$
|
320,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Included in net realized (loss) gain on investments on our accompanying
Consolidated Statements of Operations
for the years ended September 30, 2017 and 2016.
|
(B)
|
Included in net unrealized appreciation (depreciation) on investments on our accompanying
Consolidated Statements of Operations
for the years ended September 30, 2017 and 2016.
|
(C)
|
Includes increases in the cost basis of investments resulting from new portfolio investments, accretion of discounts, PIK, and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis
of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.
|
93
Investment Activity
Proprietary Investments
As of September 30, 2017 and
2016, we held 35 and 32 proprietary investments with an aggregate fair value of $318.6 million and $291.3 million, or 90.4% of the total aggregate portfolio for both periods. The following significant proprietary investment transactions occurred
during the year ended September 30, 2017:
|
|
|
In November 2016, we completed the sale of substantially all the assets of RBC Acquisition Corp. for net proceeds of $36.3 million, which resulted in a realized loss of $2.3 million. In connection with the sale, we
received success fee income of $1.1 million and net receivables of $1.5 million, which are recorded within Other assets, net.
|
|
|
|
In November 2016, we invested $5.2 million in Sea Link International IRB, Inc. through secured second lien debt and equity.
|
|
|
|
In December 2016, we sold our investment in Behrens, which resulted in success fee income of $0.4 million and a realized gain of $2.5 million. In connection with the sale, we received net cash proceeds of $8.2 million,
including the repayment of our debt investment of $4.3 million at par.
|
|
|
|
In December 2016, we invested $7.0 million in Vacation Rental Pros Property Management, LLC through secured second lien debt.
|
|
|
|
In February 2017, we invested $10.0 million in Belnick, Inc. through secured second lien debt.
|
|
|
|
In February 2017, we invested $29.0 million in NetFortris Corp. through secured first lien debt.
|
|
|
|
In March 2017, LCR Contractors, LLC paid off at par for net cash proceeds of $8.6 million. In connection with the payoff, we received a prepayment fee of $0.2 million.
|
|
|
|
In April 2017, we invested $22.0 million in HB Capital Resources, Ltd. through secured second lien debt.
|
|
|
|
In May 2017, we invested an additional $4.1 million in an existing portfolio company, Lignetics, Inc., through secured second lien debt and equity, to support an acquisition.
|
|
|
|
In August 2017, we invested $12.5 million in EL Academies, Inc. through secured first lien debt and equity.
|
|
|
|
In August 2017, Drumcree, LLC paid off at par for net cash proceeds of $6.3 million.
|
|
|
|
In September 2017, our investment in Targus Cayman HoldCo, Ltd. was restructured. As part of the transaction, our secured first lien debt investment with a cost basis of approximately $2.6 million was converted to
shares of common equity with a cost basis of approximately $2.6 million. There were no changes to our existing common stock investment with a cost basis of approximately $2.3 million.
|
|
|
|
In September 2017, we invested $0.5 million in Frontier Financial Group, Inc. through equity.
|
Syndicated
Investments
As of September 30, 2017 and September 30, 2016, we held 12 and 13 syndicated investments with an aggregate fair value of $33.8
million and $30.8 million, or 9.6% of the total portfolio at fair value for both periods. The following significant syndicated investment transactions occurred during the year ended September 30, 2017:
|
|
|
In October 2016, RP Crown Parent, LLC paid off at par for proceeds of $2.0 million.
|
94
|
|
|
In October 2016, our $3.9 million secured first lien debt investment in Vertellus Specialties, Inc. was restructured. As a result of the restructure, we received a new $1.1 million secured second lien debt investment in
Vertellus Holdings LLC and common equity with a cost basis of $3.0 million.
|
|
|
|
In December 2016, Autoparts Holdings Limited paid off at par for net proceeds of $0.7 million.
|
|
|
|
In December 2016, we invested $5.0 million in LDiscovery, LLC through secured second lien debt.
|
|
|
|
In February 2017, Vitera Healthcare Solutions, LLC paid off at par for net proceeds of $4.5 million.
|
|
|
|
In May 2017, we invested $4.0 million in Keystone Acquisition Corp. through secured second lien debt.
|
|
|
|
In June 2017, we invested $3.0 million in Medical Solutions Holdings, Inc. through secured second lien debt.
|
|
|
|
In July 2017, our loan to SourceHOV, LLC was paid off for net proceeds of $4.8 million, resulting in a realized loss of $0.2 million.
|
|
|
|
In August 2017, The Active Network, Inc. paid off at par for net proceeds of $0.5 million.
|
|
|
|
In August 2017, we invested $1.0 million in Neustar, Inc. through secured second lien debt.
|
Investment
Concentrations
As of September 30, 2017, our investment portfolio consisted of investments in 47 portfolio companies located in 22 states in 19
different industries, with an aggregate fair value of $352.4 million. The five largest investments at fair value totaled $110.9 million, or 31.5% of our total investment portfolio, as compared to the five largest investments at fair value as of
September 30, 2016 totaling $112.1 million, or 34.8% of our total investment portfolio. As September 30, 2017 and 2016 our average investment by obligor was $8.8 million and $8.5 million at cost, respectively.
The following table outlines our investments by security type at September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Secured first lien debt
|
|
$
|
198,942
|
|
|
|
48.4
|
%
|
|
$
|
173,896
|
|
|
|
49.4
|
%
|
|
$
|
227,439
|
|
|
|
59.6
|
%
|
|
$
|
198,721
|
|
|
|
61.7
|
%
|
Secured second lien debt
|
|
|
168,247
|
|
|
|
40.9
|
|
|
|
155,249
|
|
|
|
44.1
|
|
|
|
113,796
|
|
|
|
29.8
|
|
|
|
100,320
|
|
|
|
31.2
|
|
Unsecured debt
|
|
|
3,324
|
|
|
|
0.8
|
|
|
|
3,324
|
|
|
|
0.9
|
|
|
|
2,995
|
|
|
|
0.8
|
|
|
|
3,012
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt investments
|
|
|
370,513
|
|
|
|
90.1
|
|
|
|
332,469
|
|
|
|
94.4
|
|
|
|
344,230
|
|
|
|
90.2
|
|
|
|
302,053
|
|
|
|
93.8
|
|
|
|
|
|
|
|
|
|
|
Preferred equity
|
|
|
18,794
|
|
|
|
4.5
|
|
|
|
6,561
|
|
|
|
1.9
|
|
|
|
22,988
|
|
|
|
6.0
|
|
|
|
10,262
|
|
|
|
3.2
|
|
Common equity/equivalents
|
|
|
22,128
|
|
|
|
5.4
|
|
|
|
13,343
|
|
|
|
3.7
|
|
|
|
14,583
|
|
|
|
3.8
|
|
|
|
9,799
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity investments
|
|
|
40,922
|
|
|
|
9.9
|
|
|
|
19,904
|
|
|
|
5.6
|
|
|
|
37,571
|
|
|
|
9.8
|
|
|
|
20,061
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
411,435
|
|
|
|
100.0
|
%
|
|
$
|
352,373
|
|
|
|
100.0
|
%
|
|
$
|
381,801
|
|
|
|
100.0
|
%
|
|
$
|
322,114
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
Our investments at fair value consisted of the following industry classifications at September 30, 2017 and
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
Industry Classification
|
|
Fair Value
|
|
|
Percentage of
Total
Investments
|
|
|
Fair Value
|
|
|
Percentage of
Total
Investments
|
|
|
|
|
|
|
Diversified/Conglomerate Service
|
|
$
|
80,723
|
|
|
|
22.9
|
%
|
|
$
|
48,898
|
|
|
|
15.2
|
%
|
Healthcare, education and childcare
|
|
|
46,288
|
|
|
|
13.1
|
|
|
|
70,577
|
|
|
|
21.9
|
|
Diversified/Conglomerate Manufacturing
|
|
|
40,843
|
|
|
|
11.6
|
|
|
|
50,106
|
|
|
|
15.6
|
|
Oil and gas
|
|
|
34,712
|
|
|
|
9.9
|
|
|
|
31,279
|
|
|
|
9.7
|
|
Telecommunications
|
|
|
31,350
|
|
|
|
8.9
|
|
|
|
5,790
|
|
|
|
1.8
|
|
Automobile
|
|
|
20,082
|
|
|
|
5.7
|
|
|
|
14,837
|
|
|
|
4.6
|
|
Diversified natural resources, precious metals and minerals
|
|
|
18,949
|
|
|
|
5.4
|
|
|
|
14,821
|
|
|
|
4.6
|
|
Beverage, food and tobacco
|
|
|
14,103
|
|
|
|
4.0
|
|
|
|
15,022
|
|
|
|
4.7
|
|
Cargo Transportation
|
|
|
13,081
|
|
|
|
3.7
|
|
|
|
13,000
|
|
|
|
4.0
|
|
Home and Office Furnishings, Housewares and Durable Consumer Products
|
|
|
10,100
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
Leisure, Amusement, Motion Pictures, Entertainment
|
|
|
9,225
|
|
|
|
2.6
|
|
|
|
8,769
|
|
|
|
2.7
|
|
Hotels, Motels, Inns, and Gaming
|
|
|
7,136
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
Personal and non-durable consumer products
|
|
|
7,035
|
|
|
|
2.0
|
|
|
|
7,858
|
|
|
|
2.4
|
|
Machinery
|
|
|
5,114
|
|
|
|
1.4
|
|
|
|
5,597
|
|
|
|
1.7
|
|
Textiles and leather
|
|
|
4,879
|
|
|
|
1.4
|
|
|
|
3,836
|
|
|
|
1.2
|
|
Printing and publishing
|
|
|
3,628
|
|
|
|
1.0
|
|
|
|
6,033
|
|
|
|
1.9
|
|
Buildings and real estate
|
|
|
3,004
|
|
|
|
0.9
|
|
|
|
11,223
|
|
|
|
3.5
|
|
Broadcast and entertainment
|
|
|
|
|
|
|
|
|
|
|
4,682
|
|
|
|
1.5
|
|
Finance
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
0.9
|
|
Electronics
|
|
|
|
|
|
|
|
|
|
|
2,980
|
|
|
|
0.9
|
|
Other, < 2.0%
|
|
|
2,121
|
|
|
|
0.6
|
|
|
|
3,806
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
352,373
|
|
|
|
100.0
|
%
|
|
$
|
322,114
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investments at fair value were included in the following U.S. geographic regions at September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
Geographic Region
|
|
Fair Value
|
|
|
Percentage of
Total
Investments
|
|
|
Fair Value
|
|
|
Percentage of
Total
Investments
|
|
South
|
|
$
|
150,727
|
|
|
|
42.8
|
%
|
|
$
|
131,181
|
|
|
|
40.8
|
%
|
West
|
|
|
116,302
|
|
|
|
33.0
|
|
|
|
57,786
|
|
|
|
17.9
|
|
Midwest
|
|
|
58,915
|
|
|
|
16.7
|
|
|
|
100,142
|
|
|
|
31.1
|
|
Northeast
|
|
|
26,429
|
|
|
|
7.5
|
|
|
|
33,005
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
352,373
|
|
|
|
100.0
|
%
|
|
$
|
322,114
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have a
number of other business locations in other geographic regions.
Investment Principal Repayment
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments,
at September 30, 2017.
|
|
|
|
|
Year Ending September 30,
|
|
Amount
(A)
|
|
2018
|
|
$
|
43,413
|
|
2019
|
|
|
51,545
|
|
2020
|
|
|
87,823
|
|
2021
|
|
|
61,056
|
|
2022
|
|
|
52,503
|
|
Thereafter
|
|
|
79,970
|
|
|
|
|
|
|
Total contractual repayments
|
|
$
|
376,310
|
|
Equity investments
|
|
|
40,922
|
|
Adjustments to cost basis on debt investments
|
|
|
(5,797
|
)
|
|
|
|
|
|
Investment Portfolio as of September 30, 2017, at Cost:
|
|
$
|
411,435
|
|
|
|
|
|
|
(A)
|
Subsequent to September 30, 2017, three debt investments with aggregate principal balances maturing during each of the years ending September 30, 2019, September 30, 2020 and September 30, 2022,
of $2.0 million, $7.8 million and $3.5 million, respectively, were repaid at par. Additionally, debt investments in one portfolio company with a combined principal balance of $5.7 million, which had maturity dates during the fiscal year ended
September 30, 2019, were extended to mature during the fiscal year ending September 30, 2021.
|
96
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs incurred on behalf of such portfolio companies and are included in other assets on our
accompanying
Consolidated Statements of Assets and Liabilities
. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined,
based upon managements judgment, that the portfolio company is unable to pay its obligations. We write-off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of September 30,
2017 and 2016, we had gross receivables from portfolio companies of $0.5 million and $0.3 million, respectively. The allowance for uncollectible receivables was $44 and $0 at September 30, 2017 and 2016, respectively.
NOTE 4. RELATED PARTY TRANSACTIONS
Transactions
with the Adviser
We have been externally managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay
the Adviser a base management fee and an incentive fee for its services. The Advisory Agreement originally included administrative services; however, it was amended and restated on October 1, 2006. Simultaneously, we entered into the
Administration Agreement with the Administrator (discussed further below) to provide those services. With the unanimous approval of our Board of Directors, the Advisory Agreement was later amended in October 2015 to reduce the base management fee
payable under the agreement from 2.0% per annum to 1.75% per annum, effective July 1, 2015, with all other terms remaining unchanged. On July 11, 2017, our Board of Directors, including a majority of the directors who are not
parties to the Advisory Agreement or interested persons of such party, unanimously approved the annual renewal of the Advisory Agreement through August 31, 2018.
We also pay the Adviser a loan servicing fee for its role of servicer pursuant to our Credit Facility (defined in Note 5
Borrowings
). The entire
loan servicing fee paid to the Adviser by Business Loan is voluntarily, unconditionally and irrevocably credited against the base management fee otherwise payable to the Adviser, since Business Loan is a consolidated subsidiary of ours, and overall,
the base management fee (including any loan servicing fee) cannot exceed 1.75% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year pursuant to the Advisory Agreement.
Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating
officer) serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. Robert Marcotte (our president) also serves as an executive managing director of the Adviser.
97
The following table summarizes the base management fee, incentive fee, and loan servicing fee and associated
non-contractual, unconditional and irrevocable credits reflected in our accompanying
Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Average total assets subject to base management
fee
(A)
|
|
$
|
330,343
|
|
|
$
|
324,800
|
|
|
$
|
355,510
|
|
Multiplied by annual base management fee of 1.75% - 2.0%
|
|
|
1.75
|
%
|
|
|
1.75
|
%
|
|
|
2.0 1.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management fee
(B)
|
|
|
5,781
|
|
|
|
5,684
|
|
|
|
6,888
|
|
Portfolio company fee credit
|
|
|
(1,588
|
)
|
|
|
(785
|
)
|
|
|
(1,399
|
)
|
Syndicated loan fee credit
|
|
|
(221
|
)
|
|
|
(92
|
)
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Base Management Fee
|
|
$
|
3,972
|
|
|
$
|
4,807
|
|
|
$
|
5,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fee
(B)
|
|
|
4,146
|
|
|
|
3,890
|
|
|
|
3,816
|
|
Credit to base management fee - loan servicing
fee
(B)
|
|
|
(4,146
|
)
|
|
|
(3,890
|
)
|
|
|
(3,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loan Servicing Fee
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive fee
(B)
|
|
$
|
4,779
|
|
|
$
|
4,514
|
|
|
$
|
4,083
|
|
Incentive fee credit
|
|
|
(2,317
|
)
|
|
|
(1,429
|
)
|
|
|
(1,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Incentive Fee
|
|
$
|
2,462
|
|
|
$
|
3,085
|
|
|
$
|
2,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio company fee credit
|
|
$
|
(1,588
|
)
|
|
$
|
(785
|
)
|
|
$
|
(1,399
|
)
|
Syndicated loan fee credit
|
|
|
(221
|
)
|
|
|
(92
|
)
|
|
|
(118
|
)
|
Incentive fee credit
|
|
|
(2,317
|
)
|
|
|
(1,429
|
)
|
|
|
(1,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to Fees from Adviser -
Other
(B)
|
|
$
|
(4,126
|
)
|
|
$
|
(2,306
|
)
|
|
$
|
(2,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued
at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
|
(B)
|
Reflected, on a gross basis, as a line item, on our accompanying
Consolidated Statements of Operations
.
|
Base Management Fee
The base management fee is payable
quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current
quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period.
Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The
Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining,
sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the
portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in
connection with adding and retaining key portfolio company management team members. The Adviser voluntarily, unconditionally, and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to
the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $0.1 million, $0.1 million, and $0.3 million for the years ended September 30, 2017, 2016, and 2015, respectively, was
retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser primarily for the valuation of portfolio companies.
Our Board of Directors accepted a non-contractual, unconditional and irrevocable credit from the Adviser to reduce the annual base management fee on
syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations, for each of the years ended September 30, 2017 and 2016.
Incentive Fee
The incentive fee consists of two parts:
an income-based incentive fee and a capital gains incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds
98
1.75% of our net assets (the hurdle rate). The income-based incentive fee with respect to our pre-incentive fee net investment income is generally payable quarterly to the Adviser and
is computed as follows:
|
|
no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized);
|
|
|
100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% of our net assets,
adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized); and
|
|
|
20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar
quarter (8.75% annualized).
|
The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable
in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based
incentive fee payable to the Adviser, we calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the entire portfolios aggregate unrealized capital depreciation, if
any and excluding any unrealized capital appreciation, as of the date of the calculation. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when
sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment
since inception. The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of the difference, between the valuation of each investment as of the applicable calculation date and the original cost of such
investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate
realized capital losses, less the entire portfolios aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such
amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since our inception through September 30, 2017, as
cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
Additionally, in
accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital
gains-based incentive fee. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees
paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as
a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based
incentive fee has been recorded or paid from our inception through September 30, 2017.
Our Board of Directors accepted non-contractual,
unconditional and irrevocable credits from the Adviser to reduce the income-based incentive fee to the extent net investment income did not 100.0% cover distributions to common stockholders for the years ended September 30, 2017, 2016, and
2015.
Loan Servicing Fee
The Adviser also services
the loans held by Business Loan (the borrower under the Credit Facility), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the aggregate outstanding balance of loans pledged under our Credit Facility (defined in
Note 5
Borrowings
). As discussed in the notes to the table above, we treat payment of the loan servicing fee pursuant to our line of credit as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these
loan servicing fees are 100% voluntarily, unconditionally and irrevocably credited back to us by the Adviser.
99
Transactions with the Administrator
We pay the Administrator pursuant to the Administration Agreement for the portion of expenses the Administrator incurs while performing services for us. The
Administrators expenses are primarily rent and the salaries, benefits and expenses of the Administrators employees, including, but not limited to, our chief financial officer and treasurer, chief compliance officer, chief valuation
officer, and general counsel and secretary (who also serves as the Administrators president, general counsel and secretary) and their respective staffs. Two of our executive officers, David Gladstone (our chairman and chief executive officer)
and Terry Lee Brubaker (our vice chairman and chief operating officer) serve as members of the board of managers and executive officers of the Administrator, which is 100% indirectly owned and controlled by Mr. Gladstone.
Our portion of the Administrators expenses are generally derived by multiplying the Administrators total expenses by the approximate percentage of
time during the current quarter the Administrators employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. These administrative fees are accrued at the end of the
quarter when the services are performed and recorded on our accompanying
Consolidated Statements of Operations
and generally paid the following quarter to the Administrator. On July 11, 2017, our Board of Directors, including a majority
of the directors who are not parties to the Administration Agreement or interested persons of such party, approved the annual renewal of the Administration Agreement through August 31, 2018.
Other Transactions
Gladstone Securities, LLC
(Gladstone Securities), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by
Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees
paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional and irrevocable credits against the base management fee or incentive fee. Gladstone Securities received fees from
portfolio companies totaling $1.0 million, $0.5 million, and $1.0 million during the years ended September 30, 2017, 2016, and 2015, respectively.
Related Party Fees Due
Amounts due to related
parties on our accompanying
Consolidated Statements of Assets and Liabilities
were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Base management fee due to Adviser
|
|
$
|
45
|
|
|
$
|
162
|
|
Loan servicing fee due to Adviser
|
|
|
242
|
|
|
|
236
|
|
Incentive fee due to Adviser
|
|
|
1,005
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
Total fees due to Adviser
|
|
|
1,292
|
|
|
|
1,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee due to Administrator
|
|
|
244
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
Total Related Party Fees Due
|
|
$
|
1,536
|
|
|
$
|
1,504
|
|
|
|
|
|
|
|
|
|
|
In addition to the above fees, other operating expenses due to the Adviser as of September 30, 2017 and 2016, totaled $12
and $10, respectively. In addition, other net co-investment expenses payable to Gladstone Investment Corporation (for reimbursement purposes) totaled $55 and $8 as of September 30, 2017 and September 30, 2016, respectively. These amounts
are generally settled in the quarter subsequent to being incurred and have been included in other assets, net and other liabilities, as appropriate, on the accompanying
Consolidated Statements of Assets and Liabilities
as of
September 30, 2017 and 2016.
Note Receivable from Former Employee
Our employee note receivable was paid in full in May 2015 and all shares of common stock that were held as collateral were released at that time. During
the year ended September 30, 2015, we received $0.1 million in principal repayments from the former employee, paying off the note in full, and we recognized interest income from the employee note of $4.
100
NOTE 5. BORROWINGS
Revolving Credit Facility
On May 1, 2015, we,
through Business Loan, entered into a Fifth Amended and Restated Credit Agreement with KeyBank National Association (KeyBank), as administrative agent, lead arranger and a lender (our Credit Facility), which increased the
commitment amount from $137.0 million to $140.0 million, extended the revolving period end date by three years to January 19, 2019, decreased the marginal interest rate added to 30-day LIBOR from 3.75% to 3.25% per annum, set the unused
commitment fee at 0.50% on all undrawn amounts, expanded the scope of eligible collateral, and amended certain other terms and conditions. If our Credit Facility is not renewed or extended by January 19, 2019, all principal and interest will be
due and payable on or before April 19, 2020 (fifteen months after the revolving period end date). Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of $250.0 million through additional commitments of new
or existing lenders. We incurred fees of approximately $1.1 million in connection with this amendment, which are being amortized through our Credit Facilitys revolving period end date of January 19, 2019.
On June 19, 2015, we through Business Loan entered into certain joinder and assignment agreements with three new lenders to increase borrowing capacity
under our Credit Facility by $30.0 million to $170.0 million. We incurred fees of approximately $0.6 million in connection with this expansion, which are being amortized through our Credit Facilitys revolving period end date of
January 19, 2019.
On October 9, 2015, August 18, 2016, and August 24, 2017, we entered into Amendments No. 1, 2 and 3 to
our Credit Facility, respectively, each of which clarified or modified various constraints on available borrowings.
The following tables summarize
noteworthy information related to our Credit Facility (at cost):
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Commitment amount
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Borrowings outstanding, at cost
|
|
|
93,000
|
|
|
|
71,300
|
|
Availability
(A)
|
|
|
58,576
|
|
|
|
31,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Weighted average borrowings outstanding, at cost
|
|
$
|
58,384
|
|
|
$
|
64,055
|
|
|
$
|
92,488
|
|
Weighted average interest
rate
(B)
|
|
|
5.3
|
%
|
|
|
4.5
|
%
|
|
|
4.1
|
%
|
Commitment (unused) fees incurred
|
|
$
|
564
|
|
|
$
|
539
|
|
|
$
|
383
|
|
(A)
|
Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether
such repayments are prepayments or made as contractually required.
|
(B)
|
Includes unused commitment fees and excludes the impact of deferred financing fees.
|
Our Credit Facility also requires that any interest or 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.
Our Credit Facility contains covenants
that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and
collection policies without the lenders consent. Our Credit Facility also generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been
paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing
availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply
with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.
Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include
our mandatorily redeemable preferred stock) of $205.0 million plus 50.0% of all equity and subordinated debt raised after May 1, 2015 less 50% of any equity and subordinated debt retired or redeemed after May 1,
101
2015, which equates to $221.8 million as of September 30, 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
September 30, 2017, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $268.6 million, asset coverage on our senior securities representing indebtedness of 388.2%, calculated in compliance with
the requirements of Section 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 32 obligors in our Credit Facilitys borrowing base as of September 30, 2017. As of September 30, 2017, we were in
compliance with all of our Credit Facility covenants.
Fair Value
We elected to apply the fair value option of ASC 825,
Financial Instruments
, specifically for the Credit Facility, which was consistent with
our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and the assumptions that the Valuation Team believes market participants would use,
including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of September 30, 2017, the discount rate used to
determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.15% per annum, plus a 0.50% unused fee. As of September 30, 2016, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus
3.25% per annum, plus a 0.50% unused fee. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding increase or decrease, respectively, in the fair value of our Credit Facility. As of
September 30, 2017 and 2016, our Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying
Consolidated Statements of
Operations
.
The following tables present our Credit Facility carried at fair value as of September 30, 2017 and 2016, on our accompanying
Consolidated Statements of Assets and Liabilities
for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the years ended September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
Total Recurring Fair Value Measurement Reported in
Consolidated Statements of
Assets and Liabilities
Using Significant Unobservable Inputs (Level 3)
|
|
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Credit Facility
|
|
$
|
93,115
|
|
|
$
|
71,300
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Data Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Fair value as of September 30, 2016 and 2015, respectively
|
|
$
|
71,300
|
|
|
$
|
127,300
|
|
Borrowings
|
|
|
138,700
|
|
|
|
103,000
|
|
Repayments
|
|
|
(117,000
|
)
|
|
|
(159,000
|
)
|
Net unrealized appreciation
(A)
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2017 and 2016, respectively
|
|
$
|
93,115
|
|
|
$
|
71,300
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Included in net unrealized appreciation of other on our accompanying
Consolidated Statements of Assets and Liabilities
for the years ended September 30, 2017 and 2016.
|
The fair value of the collateral under our Credit Facility totaled approximately $317.4 million and $282.0 million as of September 30, 2017 and 2016,
respectively.
NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK
In September 2017, we completed a public offering of approximately 2.1 million shares of 6.00% Series 2024 Term Preferred Stock, par value $0.001 per
share (Series 2024 Term Preferred Stock), at a public offering price of $25.00 per share. Gross proceeds totaled $51.8 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were
approximately $49.8 million. We incurred approximately $1.9 million in total underwriting discounts and offering costs related to the issuance of the Series 2024 Term Preferred Stock, which have been recorded as discounts to the liquidation value on
our accompanying
Consolidated Statements of Assets and Liabilities
and are being amortized from issuance through September 30, 2024, the mandatory redemption date. The proceeds plus borrowings under our Credit
102
Facility were used to voluntarily redeem all 2.4 million outstanding shares of our then existing 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share (Series 2021 Term
Preferred Stock). In connection with the voluntary redemption of our Series 2021 Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.3 million, which has been reflected in Realized loss on other our accompanying
Consolidated Statement of Operations
and which is primarily comprised of the unamortized deferred issuance costs at the time of redemption.
The
shares of our Series 2024 Term Preferred Stock are traded under the ticker symbol GLADN on the Nasdaq Global Select Market. Our Series 2024 Term Preferred Stock is not convertible into our common stock or any other security and provides
for a fixed dividend equal to 6.00% per year, payable monthly (which equates in total to approximately $3.1 million per year). We are required to redeem all of the outstanding Series 2024 Term Preferred Stock on September 30, 2024 for cash
at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions on such share accumulated to (but excluding) the date of redemption (the Redemption Price). We may additionally be required to
mandatorily redeem some or all of the shares of our Series 2024 Term Preferred Stock early, at the Redemption Price, in the event of the following: (1) upon the occurrence of certain events that would constitute a change in control, and
(2) if we fail to maintain an asset coverage of at least 200% on our senior securities that are stock (which is currently only our Series 2024 Term Preferred Stock) and the failure remains for a period of 30 days following the
filing date of our next SEC quarterly or annual report. The asset coverage on our senior securities that are stock as of September 30, 2017 was 249.6%, calculated in accordance with Sections 18 and 61 of the 1940 Act.
We may also voluntarily redeem all or a portion of the Series 2024 Term Preferred Stock at our option at the Redemption Price at any time after
September 30, 2019. If we fail to redeem our Series 2024 Term Preferred Stock pursuant to the mandatory redemption date of September 30, 2024, or in any other circumstance in which we are required to mandatorily redeem our Series 2024 Term
Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of September 30, 2017, we have not redeemed, nor have we been required to redeem, any shares of our outstanding Series 2024 Term
Preferred Stock.
In May 2014, we completed a public offering of approximately 2.4 million shares of Series 2021 Term Preferred Stock, at a public
offering price of $25.00 per share. Gross proceeds totaled $61.0 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were approximately $58.5 million, a portion of which was used to
voluntarily redeem all 1.5 million outstanding shares of our then existing 7.125% Series 2016 Term Preferred Stock, par value $0.001 per share and the remainder was used to repay a portion of outstanding borrowings under our Credit Facility. We
incurred $2.5 million in total offering costs related to the issuance of our Series 2021 Term Preferred Stock, which were recorded as discounts to the liquidation value on our accompanying
Consolidated Statements of Assets and Liabilities
and
were amortized over the redemption period ending June 30, 2021. In September 2017, when we voluntarily redeemed all of our outstanding Series 2021 Term Preferred Stock, the remaining unamortized costs were fully written off as part of the
realized loss discussed above.
We paid the following monthly dividends on our Series 2021 Term Preferred Stock for the year ended September 30,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Declaration Date
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
Distribution per
Series 2021 Term
Preferred Share
|
|
|
|
|
|
|
2017
|
|
|
October 11, 2016
|
|
|
|
October 21, 2016
|
|
|
|
October 31, 2016
|
|
|
$
|
0.1406250
|
|
|
|
|
October 11, 2016
|
|
|
|
November 17, 2016
|
|
|
|
November 30, 2016
|
|
|
|
0.1406250
|
|
|
|
|
October 11, 2016
|
|
|
|
December 20, 2016
|
|
|
|
December 30, 2016
|
|
|
|
0.1406250
|
|
|
|
|
January 10, 2017
|
|
|
|
January 20, 2017
|
|
|
|
January 31, 2017
|
|
|
|
0.1406250
|
|
|
|
|
January 10, 2017
|
|
|
|
February 16, 2017
|
|
|
|
February 28, 2017
|
|
|
|
0.1406250
|
|
|
|
|
January 10, 2017
|
|
|
|
March 22, 2017
|
|
|
|
March 31, 2017
|
|
|
|
0.1406250
|
|
|
|
|
April 11, 2017
|
|
|
|
April 21, 2017
|
|
|
|
April 28, 2017
|
|
|
|
0.1406250
|
|
|
|
|
April 11, 2017
|
|
|
|
May 19, 2017
|
|
|
|
May 31, 2017
|
|
|
|
0.1406250
|
|
|
|
|
April 11, 2017
|
|
|
|
June 21, 2017
|
|
|
|
June 30, 2017
|
|
|
|
0.1406250
|
|
|
|
|
July 11, 2017
|
|
|
|
July 21, 2017
|
|
|
|
July 31, 2017
|
|
|
|
0.1406250
|
|
|
|
|
July 11, 2017
|
|
|
|
August 21, 2017
|
|
|
|
August 31, 2017
|
|
|
|
0.1406250
|
|
|
|
|
July 11, 2017
|
|
|
|
September 20, 2017
|
|
|
|
September 29, 2017
|
|
|
|
0.1406250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.6875000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
We paid the following monthly dividends on our Series 2021 Term Preferred Stock for the year ended
September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Declaration Date
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
Distribution per
Series 2021 Term
Preferred Share
|
|
|
|
|
|
|
2016
|
|
|
October 13, 2015
|
|
|
|
October 26, 2015
|
|
|
|
November 4, 2015
|
|
|
$
|
0.1406250
|
|
|
|
|
October 13, 2015
|
|
|
|
November 17, 2015
|
|
|
|
November 30, 2015
|
|
|
|
0.1406250
|
|
|
|
|
October 13, 2015
|
|
|
|
December 18, 2015
|
|
|
|
December 31, 2015
|
|
|
|
0.1406250
|
|
|
|
|
January 12, 2016
|
|
|
|
January 22, 2016
|
|
|
|
February 2, 2016
|
|
|
|
0.1406250
|
|
|
|
|
January 12, 2016
|
|
|
|
February 18, 2016
|
|
|
|
February 29, 2016
|
|
|
|
0.1406250
|
|
|
|
|
January 12, 2016
|
|
|
|
March 21, 2016
|
|
|
|
March 31, 2016
|
|
|
|
0.1406250
|
|
|
|
|
April 12, 2016
|
|
|
|
April 22, 2016
|
|
|
|
May 2, 2016
|
|
|
|
0.1406250
|
|
|
|
|
April 12, 2016
|
|
|
|
May 19, 2016
|
|
|
|
May 31, 2016
|
|
|
|
0.1406250
|
|
|
|
|
April 12, 2016
|
|
|
|
June 17, 2016
|
|
|
|
June 30, 2016
|
|
|
|
0.1406250
|
|
|
|
|
July 12, 2016
|
|
|
|
July 22, 2016
|
|
|
|
August 2, 2016
|
|
|
|
0.1406250
|
|
|
|
|
July 12, 2016
|
|
|
|
August 22, 2016
|
|
|
|
August 31, 2016
|
|
|
|
0.1406250
|
|
|
|
|
July 12, 2016
|
|
|
|
September 21, 2016
|
|
|
|
September 30, 2016
|
|
|
|
0.1406250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.6875000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax character of dividends paid by us to our preferred stockholders generally constitute ordinary income to the extent of
our current and accumulated earnings and profits.
In accordance with ASC 480,
Distinguishing Liabilities from Equity
, mandatorily
redeemable financial instruments should be classified as liabilities in the balance sheet and we have recorded our mandatorily redeemable preferred stock as a liability at cost, as of September 30, 2017 and 2016. The related dividend payments
to our mandatorily redeemable preferred stockholders are treated as dividend expense on our statement of operations as of the ex-dividend date. Aggregate preferred stockholder dividends declared and paid on our Series 2021 Term Preferred Stock for
the years ended September 30, 2017 and 2016, was $4.1 million.
For disclosure purposes, the fair value, based on the last quoted closing price, for
our Series 2024 Term Preferred Stock as of September 30, 2017 was approximately $52.7 million. The fair value, based on the last quoted closing price, for our Series 2021 Term Preferred Stock as of September 30, 2016 was approximately
$62.4 million. We consider our mandatorily redeemable preferred stock to be a Level 1 liability within the ASC 820 hierarchy.
NOTE 7.
REGISTRATION STATEMENT, COMMON EQUITY OFFERINGS AND SHARE REPURCHASES
Registration Statement
We filed Post-Effective Amendment No. 2 to our current universal shelf registration statement on Form N-2 (our Registration Statement) on Form
N-2 (File No. 333-208637) with the SEC on December 22, 2016, which was declared effective by the SEC on February 6, 2017. Our 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. As of September 30, 2017, we have the ability to issue up to
$224.6 million in securities under the Registration Statement.
Common Stock Offerings
Pursuant to our prior Registration Statement, in October 2016, we completed a public offering of 2.0 million shares of our common stock at a public
offering price of $7.98 per share, which was below our then current NAV per share. In November 2016, the underwriters partially exercised their overallotment option to purchase an additional 173,444 shares of our common stock. Gross proceeds totaled
$17.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $16.4 million.
Pursuant to our
prior registration statement, in October 2015, we completed a public offering of 2.0 million shares of our common stock at a public offering price of $8.55 per share, which was below our then current NAV per share. In November 2015, the
underwriters exercised their option to purchase an additional 300,000 shares. Gross proceeds totaled $19.7 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $18.4 million.
104
In February 2015, we entered into equity distribution agreements (commonly referred to as at-the-market
agreements or the Sales Agreements) with KeyBanc Capital Markets Inc. and Cantor Fitzgerald & Co., each a Sales Agent, under which we had the ability to issue and sell, from time to time, through the Sales
Agents, up to an aggregate offering price of $50.0 million shares of our common stock. In May 2017, we terminated the Sales Agreement with KeyBanc Capital Markets Inc. and amended the Sales Agreement with Cantor Fitzgerald & Co. to
reference our current registration statement. All other material terms of the Sales Agreement with Cantor Fitzgerald & Co. remained unchanged. During the year ended September 30, 2017, we sold 642,818 shares of our common stock under
the Sales Agreement with Cantor Fitzgerald & Co., at a weighted-average price of $9.88 per share and raised $6.4 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately
$6.1 million. As of September 30, 2017, we had a remaining capacity to sell up to $42.5 million of common stock under the Sales Agreement with Cantor Fitzgerald & Co. We did not sell any shares under the Sales Agreements during
the year ended September 30, 2016.
Share Repurchases
In January 2016, our Board of Directors authorized a share repurchase program for up to an aggregate of $7.5 million of the Companys common stock. The
program expired on January 31, 2017. During the year ended September 30, 2016, we repurchased 87,200 shares of our common stock at an average share price of $6.53, resulting in aggregate gross purchases of $0.6 million. We did not
repurchase any shares during the year ended September 30, 2017.
NOTE 8. NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON
SHARE
The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per weighted average
common share for the years ended September 30, 2017, 2016, and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Numerator for basic and diluted net increase in net assets resulting from operations per
weighted average common share
|
|
$
|
17,180
|
|
|
$
|
11,367
|
|
|
$
|
8,484
|
)
|
Denominator for basic and diluted weighted average common shares
|
|
|
25,495,117
|
|
|
|
23,200,642
|
|
|
|
21,066,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Increase in Net Assets Resulting from Operations per Weighted Average
Common Share
|
|
$
|
0.67
|
|
|
$
|
0.49
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify to be taxed as a RIC, we are required to distribute to our stockholders 90.0% of our investment company taxable income. The amount to be paid out as
distributions to our stockholders is determined by our Board of Directors quarterly and is based on managements estimate of the fiscal year earnings. Based on that estimate, our Board of Directors declares three monthly distributions to common
stockholders each quarter.
The federal income tax characteristics of all distributions will be reported to stockholders on the IRS Form 1099 at the end
of each calendar year. For calendar years ended December 31, 2016 and 2015, 100% of distributions to common stockholders during these periods were deemed to be paid from ordinary income for 1099 stockholder reporting purposes.
105
We paid the following monthly distributions to common stockholders for the fiscal years ended September 30,
2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Declaration Date
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
Distribution
per Common
Share
|
|
2017
|
|
|
October 11, 2016
|
|
|
|
October 21, 2016
|
|
|
|
October 31, 2016
|
|
|
$
|
0.07
|
|
|
|
|
October 11, 2016
|
|
|
|
November 17, 2016
|
|
|
|
November 30, 2016
|
|
|
|
0.07
|
|
|
|
|
October 11, 2016
|
|
|
|
December 20, 2016
|
|
|
|
December 30, 2016
|
|
|
|
0.07
|
|
|
|
|
January 10, 2017
|
|
|
|
January 20, 2017
|
|
|
|
January 31, 2017
|
|
|
|
0.07
|
|
|
|
|
January 10, 2017
|
|
|
|
February 16, 2017
|
|
|
|
February 28, 2017
|
|
|
|
0.07
|
|
|
|
|
January 10, 2017
|
|
|
|
March 22, 2017
|
|
|
|
March 31, 2017
|
|
|
|
0.07
|
|
|
|
|
April 11, 2017
|
|
|
|
April 21, 2017
|
|
|
|
April 28, 2017
|
|
|
|
0.07
|
|
|
|
|
April 11, 2017
|
|
|
|
May 19, 2017
|
|
|
|
May 31, 2017
|
|
|
|
0.07
|
|
|
|
|
April 11, 2017
|
|
|
|
June 21, 2017
|
|
|
|
June 30, 2017
|
|
|
|
0.07
|
|
|
|
|
July 11, 2017
|
|
|
|
July 21, 2017
|
|
|
|
July 31, 2017
|
|
|
|
0.07
|
|
|
|
|
July 11, 2017
|
|
|
|
August 21, 2017
|
|
|
|
August 31, 2017
|
|
|
|
0.07
|
|
|
|
|
July 11, 2017
|
|
|
|
September 20, 2017
|
|
|
|
September 29, 2017
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2017 Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
October 13, 2015
|
|
|
|
October 26, 2015
|
|
|
|
November 4, 2015
|
|
|
$
|
0.07
|
|
|
|
|
October 13, 2015
|
|
|
|
November 17, 2015
|
|
|
|
November 30, 2015
|
|
|
|
0.07
|
|
|
|
|
October 13, 2015
|
|
|
|
December 18, 2015
|
|
|
|
December 31, 2015
|
|
|
|
0.07
|
|
|
|
|
January 12, 2016
|
|
|
|
January 22, 2016
|
|
|
|
February 2, 2016
|
|
|
|
0.07
|
|
|
|
|
January 12, 2016
|
|
|
|
February 18, 2016
|
|
|
|
February 29, 2016
|
|
|
|
0.07
|
|
|
|
|
January 12, 2016
|
|
|
|
March 21, 2016
|
|
|
|
March 31, 2016
|
|
|
|
0.07
|
|
|
|
|
April 12, 2016
|
|
|
|
April 22, 2016
|
|
|
|
May 2, 2016
|
|
|
|
0.07
|
|
|
|
|
April 12, 2016
|
|
|
|
May 19, 2016
|
|
|
|
May 31, 2016
|
|
|
|
0.07
|
|
|
|
|
April 12, 2016
|
|
|
|
June 17, 2016
|
|
|
|
June 30, 2016
|
|
|
|
0.07
|
|
|
|
|
July 12, 2016
|
|
|
|
July 22, 2016
|
|
|
|
August 2, 2016
|
|
|
|
0.07
|
|
|
|
|
July 12, 2016
|
|
|
|
August 22, 2016
|
|
|
|
August 31, 2016
|
|
|
|
0.07
|
|
|
|
|
July 12, 2016
|
|
|
|
September 21, 2016
|
|
|
|
September 30, 2016
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016 Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate distributions declared and paid to our common stockholders were approximately $21.4 million and $19.5 million for
the years ended September 30, 2017 and 2016, and were declared based on estimates of investment company taxable income for the respective fiscal years. For each of the fiscal years ended September 30, 2017, 2016, and 2015, Investment
Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $0.3 million, $5.5 million, and $1.7 million, respectively, of the first distributions paid to common
stockholders in the respective subsequent fiscal year as having been paid in the respective prior year.
The components of our net assets on a tax basis
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Common stock
|
|
$
|
26
|
|
|
$
|
23
|
|
Capital in excess of par value
|
|
|
348,248
|
|
|
|
327,678
|
|
Cumulative net unrealized depreciation of investments
|
|
|
(59,062
|
)
|
|
|
(59,687
|
)
|
Cumulative net unrealized appreciation of other
|
|
|
(115
|
)
|
|
|
|
|
Undistributed Ordinary Income
|
|
|
339
|
|
|
|
5,521
|
|
Capital loss carryforward
|
|
|
(64,350
|
)
|
|
|
(63,259
|
)
|
Post-October tax loss deferral
|
|
|
|
|
|
|
(2,257
|
)
|
Other temporary differences
|
|
|
(5,436
|
)
|
|
|
(6,812
|
)
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
219,650
|
|
|
$
|
201,207
|
|
|
|
|
|
|
|
|
|
|
We intend to retain some or all of our realized capital gains first to the extent we have available capital loss carryforwards
and second, through treating the retained amount as a deemed distribution. As of September 30, 2017, we had $26.4 million and $0.9 million of capital loss carryforwards that expire in 2018 and 2019, respectively. Additionally,
as of September 30, 2017, we had $37.1 million of capital loss carryforwards that do not expire.
106
For the years ended September 30, 2017 and 2016, we recorded the following adjustments for book-tax
differences to reflect tax character. Results of operations, total net assets and cash flows were not affected by these adjustments.
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Undistributed net investment income
|
|
$
|
(4,416
|
)
|
|
$
|
5,818
|
|
Accumulated net realized losses
|
|
|
6,541
|
|
|
|
(7,754
|
)
|
Capital in excess of par value
|
|
|
(2,125
|
)
|
|
|
1,936
|
|
NOTE 10. FEDERAL AND STATE INCOME TAXES
We intend to continue to maintain our qualifications as a RIC for federal income tax purposes. As a RIC, we are not subject to federal income tax on the
portion of our taxable income and gains that we distribute to stockholders. To maintain our qualification as a RIC, we must meet certain source-of-income and asset diversification requirements. In addition, to qualify to be taxed as a RIC, we must
also meet certain annual stockholder distribution requirements. To satisfy the RIC annual distribution requirement, we must distribute to stockholders at least 90.0% of our investment company taxable income. Our policy generally is to make
distributions to our stockholders in an amount up to 100.0% of our investment company taxable income. Because we have distributed more than 90.0% of our investment company taxable income, no income tax provisions have been recorded for the years
ended September 30, 2017, 2016, and 2015.
In an effort to limit certain federal excise taxes imposed on RICs, we generally distribute during each
calendar year, an amount at least equal to the sum of (1) 98.0% 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 for preceding years that were not distributed during such years. No excise tax provisions have been recorded for the years ended September 30, 2017, 2016, and 2015.
Under the RIC Modernization Act (the RIC Act), we are permitted to carry forward capital losses incurred in taxable years beginning after
September 30, 2011, for an unlimited period. However, any losses incurred during post-enactment taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a
result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather
than being considered all short-term as permitted under the Treasury regulations applicable to pre-enactment capital losses.
NOTE 11. COMMITMENTS AND
CONTINGENCIES
Legal Proceedings
We are party to
certain legal proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are
not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect
on our financial condition, results of operations or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of September 30, 2017 and 2016, we have
not established reserves for such loss contingencies.
Escrow Holdbacks
From time to time, we will enter into arrangements as it relates to exits of certain investments whereby specific amounts of the proceeds are held in escrow in
order to be used to satisfy potential obligations as stipulated in the sales agreements. We record escrow amounts in restricted cash and cash equivalents on our accompanying
Consolidated Statements of Assets and Liabilities
. We establish a
reserve against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. There were no aggregate reserves recorded against the escrow
amounts as of September 30, 2017 and 2016.
107
Financial Commitments and Obligations
We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn.
Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the
unused delayed draw term loans and the uncalled capital commitment as of September 30, 2017 and 2016 to be immaterial.
The following table
summarizes the amounts of our unused lines of credit, delayed draw term loans and uncalled capital commitment, at cost, as of September 30, 2017 and 2016, which are not reflected as liabilities in the accompanying
Consolidated Statements of
Assets and Liabilities
:
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Unused line of credit commitments
|
|
$
|
7,517
|
|
|
$
|
6,397
|
|
Delayed draw term loans
|
|
|
10,900
|
|
|
|
1,300
|
|
Uncalled capital commitment
|
|
|
1,367
|
|
|
|
2,004
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,784
|
|
|
$
|
9,701
|
|
|
|
|
|
|
|
|
|
|
108
NOTE 12. FINANCIAL HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Per Common Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of year
(A)
|
|
$
|
8.62
|
|
|
$
|
9.06
|
|
|
$
|
9.51
|
|
|
$
|
9.81
|
|
|
$
|
8.98
|
|
Income from
operations
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.84
|
|
|
|
0.84
|
|
|
|
0.84
|
|
|
|
0.87
|
|
|
|
0.88
|
|
Net realized and unrealized (loss) gain on investments
|
|
|
(0.12
|
)
|
|
|
(0.35
|
)
|
|
|
(0.50
|
)
|
|
|
(0.23
|
)
|
|
|
0.49
|
|
Net realized and unrealized (loss) gain on other
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
0.06
|
|
|
|
(0.11
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from operations
|
|
|
0.67
|
|
|
|
0.49
|
|
|
|
0.40
|
|
|
|
0.53
|
|
|
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to common stockholders
from
(B)(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
(0.84
|
)
|
|
|
(0.70
|
)
|
|
|
(0.84
|
)
|
|
|
(0.12
|
)
|
|
|
(0.78
|
)
|
Realized gains
|
|
|
|
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.72
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.84
|
)
|
|
|
(0.84
|
)
|
|
|
(0.84
|
)
|
|
|
(0.84
|
)
|
|
|
(0.84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
Offering costs for issuance of common stock
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of principal on employee notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.14
|
|
Dilutive effect of common stock
issuance
(D)
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital share transactions
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
(B)(E)
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of year
(A)
|
|
$
|
8.40
|
|
|
$
|
8.62
|
|
|
$
|
9.06
|
|
|
$
|
9.51
|
|
|
$
|
9.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share market value at beginning of year
|
|
$
|
8.13
|
|
|
$
|
8.13
|
|
|
$
|
8.77
|
|
|
$
|
8.73
|
|
|
$
|
8.75
|
|
Per common share market value at end of year
|
|
|
9.50
|
|
|
|
8.13
|
|
|
|
8.13
|
|
|
|
8.77
|
|
|
|
8.73
|
|
Total return
(F)
|
|
|
27.90
|
%
|
|
|
11.68
|
%
|
|
|
2.40
|
%
|
|
|
9.62
|
%
|
|
|
9.90
|
%
|
Common stock outstanding at end of
year
(A)
|
|
|
26,160,684
|
|
|
|
23,344,422
|
|
|
|
21,131,622
|
|
|
|
21,000,160
|
|
|
|
21,000,160
|
|
|
|
|
|
|
|
Statement of Assets and Liabilities Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of year
|
|
$
|
219,650
|
|
|
$
|
201,207
|
|
|
$
|
191,444
|
|
|
$
|
199,660
|
|
|
$
|
205,992
|
|
Average net assets
(G)
|
|
|
215,421
|
|
|
|
193,228
|
|
|
|
198,864
|
|
|
|
201,009
|
|
|
|
189,599
|
|
Senior securities Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Credit Facility, at cost
|
|
$
|
93,000
|
|
|
$
|
71,300
|
|
|
$
|
127,300
|
|
|
$
|
36,700
|
|
|
$
|
46,900
|
|
Mandatorily redeemable preferred stock
|
|
|
51,750
|
|
|
|
61,000
|
|
|
|
61,000
|
|
|
|
61,000
|
|
|
|
38,497
|
|
Ratios/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net expenses to average net
assets
(H)(I)
|
|
|
8.26
|
|
|
|
10.16
|
|
|
|
10.24
|
|
|
|
9.06
|
|
|
|
9.37
|
|
Ratio of net investment income to average net
assets
(J)
|
|
|
9.95
|
|
|
|
10.08
|
|
|
|
8.90
|
|
|
|
9.14
|
|
|
|
9.70
|
|
(A)
|
Based on actual shares outstanding at the end of the corresponding fiscal year.
|
(B)
|
Based on weighted average basic per share data.
|
(C)
|
The tax character of distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.
|
(D)
|
During the fiscal quarter ended December 31, 2015, the dilution was a result of issuing 2.3 million shares of common stock in an overnight offering at a public offering price of $8.55 per share, which was
below the then current NAV of $9.06 per share.
|
(E)
|
Represents the impact of the different share amounts (weighted average shares outstanding during the fiscal year and shares outstanding at the end of the fiscal year) in the per share data calculations and rounding
impacts.
|
(F)
|
Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, taking into account distributions reinvested in accordance with the terms of our dividend reinvestment
plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, refer to Note 9 -
Distributions to
Common Stockholders
.
|
(G)
|
Computed using the average of the balance of net assets at the end of each month of the fiscal year.
|
(H)
|
Ratio of net expenses to average net assets is computed using total expenses, net of credits from the Adviser, to the base management, loan servicing and incentive fees.
|
(I)
|
Had we not received any voluntary, unconditional and irrevocable credits of the incentive fee due to the Adviser, the ratio of net expenses to average net assets would have been 9.38%, 10.90%, 10.93%, 9.65%, and 9.91%
for the fiscal years ended September 30, 2017, 2016, 2015, 2014 and 2013, respectively.
|
(J)
|
Had we not received any voluntary, unconditional and irrevocable credits of the incentive fee due to the Adviser, the ratio of net investment income to average net assets would have been 8.85%, 9.35%, 8.22%, 8.55%, and
9.17% for the fiscal years ended September 30, 2017, 2016, 2015, 2014 and 2013, respectively.
|
109
NOTE 13. SELECTED QUARTERLY DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2017
|
|
|
|
Quarter
Ended
December 31,
2016
|
|
|
Quarter
Ended
March 31,
2017
|
|
|
Quarter
Ended
June 30,
2017
|
|
|
Quarter
Ended
September 30,
2017
|
|
|
|
|
|
|
Total investment income
|
|
$
|
9,974
|
|
|
$
|
8,793
|
|
|
$
|
9,632
|
|
|
$
|
10,834
|
|
Net investment income
|
|
|
5,207
|
|
|
|
5,359
|
|
|
|
5,379
|
|
|
|
5,488
|
|
Net increase in net assets resulting from operations
|
|
|
916
|
|
|
|
4,656
|
|
|
|
6,163
|
|
|
|
5,445
|
|
|
|
|
|
|
Net increase in net assets resulting from operations per weighted average common share (basic
and diluted)
|
|
$
|
0.04
|
|
|
$
|
0.18
|
|
|
$
|
0.24
|
|
|
$
|
0.21
|
|
|
|
|
|
Year Ended September 30, 2016
|
|
|
|
Quarter
Ended
December 31,
2015
|
|
|
Quarter
Ended
March 31,
2016
|
|
|
Quarter
Ended
June 30,
2016
|
|
|
Quarter
Ended
September 30,
2016
|
|
|
|
|
|
|
Total investment income
|
|
$
|
10,060
|
|
|
$
|
9,456
|
|
|
$
|
9,844
|
|
|
$
|
9,750
|
|
Net investment income
|
|
|
4,759
|
|
|
|
4,917
|
|
|
|
4,907
|
|
|
|
4,905
|
|
Net (decrease) increase in net assets resulting from operations
|
|
|
(8,704
|
)
|
|
|
(6,139
|
)
|
|
|
5,516
|
|
|
|
20,697
|
|
|
|
|
|
|
Net (decrease) increase in net assets resulting from operations per weighted average common
share (basic and diluted)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
0.24
|
|
|
$
|
0.89
|
|
110
NOTE 14. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES
In accordance with the SECs Regulation S-X, we do not consolidate portfolio company investments. Further, in accordance with ASC 946, we are precluded
from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated
subsidiaries. We had certain unconsolidated subsidiaries which met at least one of the significance conditions under Rule 1-02(w) of the SECs Regulation S-X as of or during at least one of the years ended September 30, 2017, 2016, and
2015. Accordingly, pursuant to Rule 4-08 of Regulation S-X, summarized, comparative financial information is presented below for our unconsolidated significant subsidiaries as of September 30, 2017 and 2016 and for the years ended
September 30, 2017, 2016, and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
|
|
For the Year Ended September 30,
|
|
Portfolio Company
|
|
Balance Sheet
|
|
2017
|
|
|
2016
|
|
|
Income Statement
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Defiance Integrated
|
|
Current assets
|
|
$
|
6,555
|
|
|
$
|
5,527
|
|
|
|
Net sales
|
|
|
$
|
25,120
|
|
|
$
|
23,427
|
|
|
$
|
28,345
|
|
Technologies, Inc.
|
|
Noncurrent assets
|
|
|
14,748
|
|
|
|
12,460
|
|
|
|
Gross profit
|
|
|
|
3,807
|
|
|
|
3,338
|
|
|
|
5,049
|
|
|
|
Current liabilities
|
|
|
2,563
|
|
|
|
2,158
|
|
|
|
Net (loss) income
|
|
|
|
127
|
|
|
|
106
|
|
|
|
(447
|
)
|
|
|
Noncurrent liabilities
|
|
|
11,831
|
|
|
|
8,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GFRC Holdings LLC
|
|
Current assets
|
|
|
3,115
|
|
|
|
3,116
|
|
|
|
Net sales
|
|
|
|
6,560
|
|
|
|
5,206
|
|
|
|
6,387
|
|
|
|
Noncurrent assets
|
|
|
1,237
|
|
|
|
1,520
|
|
|
|
Gross profit (loss)
|
|
|
|
1,487
|
|
|
|
935
|
|
|
|
(370
|
)
|
|
|
Current liabilities
|
|
|
1,381
|
|
|
|
1,612
|
|
|
|
Net loss
|
|
|
|
(200
|
)
|
|
|
(446
|
)
|
|
|
(12,839
|
)
|
|
|
Noncurrent liabilities
|
|
|
2,211
|
|
|
|
1,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest Metal Distribution, Inc.
(A)
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
17,148
|
|
|
|
Noncurrent assets
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
1,888
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(1,181
|
)
|
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
Sunshine Media Group, Inc.
|
|
Current assets
|
|
|
1,723
|
|
|
|
2,164
|
|
|
|
Net sales
|
|
|
|
11,858
|
|
|
|
14,514
|
|
|
|
16,083
|
|
|
|
Noncurrent assets
|
|
|
440
|
|
|
|
1,096
|
|
|
|
Gross profit
|
|
|
|
3,880
|
|
|
|
5,774
|
|
|
|
7,286
|
|
|
|
Current liabilities
|
|
|
9,527
|
|
|
|
8,460
|
|
|
|
Net loss
|
|
|
|
(2,264
|
)
|
|
|
(1,701
|
)
|
|
|
(1,406
|
)
|
|
|
Noncurrent liabilities
|
|
|
28,976
|
|
|
|
29,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Investment exited in December 2014 and is no longer in our portfolio as of September 30, 2016 and 2015. The financial information presented for the income statement for the year ended September 30, 2015 is
from October 1, 2014 through November 30, 2014.
|
Defiance Integrated Technologies, Inc. (Defiance) was incorporated in
Delaware on May 22, 2009 and is headquartered in Defiance, Ohio. Defiance is a leading manufacturer of axle nut and washer systems for the heavy (Class 8) truck industry in North America and also provides a wheel bearing retainer nut, used
primarily on light trucks, and brake cable tension limiters.
GFRC was incorporated in Texas on August 27, 2007 and is headquartered in Garland,
Texas. GFRC designs, engineers, fabricates and delivers glass fiber reinforced concrete panels for commercial construction.
Midwest Metal was
incorporated in Delaware, on May 18, 2010 and is a distributor and processor of custom cut aluminum and stainless steel sheet plate and bar products. Midwest Metal is headquartered in Midwest Metal, Ohio.
Sunshine Media Group, Inc. (Sunshine) was incorporated in Delaware on December 20, 2000 and is headquartered in Chattanooga, Tennessee.
Sunshine is a fully integrated publishing, media and marketing services company that provides custom media and branded content solutions across multiple platforms, with an emphasis on healthcare and financial services.
111
NOTE 15. SUBSEQUENT EVENTS
At-the-Market Program
Subsequent to
September 30, 2017 and through November 13, 2017, we sold an additional 471,498 shares of our common stock under the Sales Agreement with Cantor Fitzgerald & Co, at a weighted-average price of $9.69 per share and raised $4.6
million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $4.5 million.
Distributions
On October 10, 2017, our Board
of Directors declared the following monthly cash distributions to common and preferred stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
|
Distribution
per Common
Share
|
|
|
Distribution per
Series 2024
Term Preferred
Share
|
|
October 20, 2017
|
|
|
October 31, 2017
|
|
|
$
|
0.07
|
|
|
$
|
0.141667
|
(A)
|
November 20, 2017
|
|
|
November 30, 2017
|
|
|
|
0.07
|
|
|
|
0.125
|
|
December 19, 2017
|
|
|
December 29, 2017
|
|
|
|
0.07
|
|
|
|
0.125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the Quarter
|
|
|
|
|
|
$
|
0.21
|
|
|
$
|
0.391667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
The dividend paid on October 31, 2017 included the pro-rated period from and including the issuance date of September 27, 2017 to and including
September 30, 2017, and the full month of October 2017.
|
Portfolio and Investment Activity
In October 2017, we sold our investment in Flight Fit N Fun LLC, which had a cost basis and fair value of $8.5 million and $9.2 million, respectively, as of
September 30, 2017. In connection with the sale, we received net cash proceeds of approximately $9.4 million, including the repayment of our debt investment of $7.8 million at par.
In October 2017, PSC Industrial Holdings, LLC paid off at par for net proceeds of $3.5 million.
In October 2017, we invested $11.0 million in AVST Parent Holdings, LLC through secured first lien debt.
In November 2017, DataPipe, Inc. paid off at par for net proceeds of $2.0 million.
In November 2017, we invested $5.0 million in DigiCert Holdings, Inc. through secured second lien debt.
In November 2017, we invested $4.0 million in Red Ventures, LLC through secured second lien debt.
In November 2017, we invested $1.0 million in ABG Intermediate Holdings 2, LLC through secured second lien debt.
In November 2017, we invested $7.5 million in Arc Drilling Holdings, LLC through secured first lien debt and equity.
112