UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 814-00704
GLADSTONE INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE | 83-0423116 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
1521 WESTBRANCH DRIVE, SUITE 100 MCLEAN, VIRGINIA |
22102 | |
(Address of principal executive office) | (Zip Code) |
(703) 287-5800
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12 b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. The number of shares of the issuers Common Stock, $0.001 par value per share, outstanding as of October 28, 2015, was 30,270,958.
GLADSTONE INVESTMENT CORPORATION
TABLE OF CONTENTS
PART I. |
FINANCIAL INFORMATION: |
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Item 1. |
Financial Statements (Unaudited) |
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Condensed Consolidated Statements of Assets and Liabilities as of September 30 and March 31, 2015 |
2 | |||||
3 | ||||||
4 | ||||||
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2015 and 2014 |
5 | |||||
Condensed Consolidated Schedules of Investments as of September 30 and March 31, 2015 |
6 | |||||
14 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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36 | ||||||
41 | ||||||
51 | ||||||
Item 3. |
57 | |||||
Item 4. |
57 | |||||
PART II. |
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Item 1. |
58 | |||||
Item 1A. |
58 | |||||
Item 2. |
58 | |||||
Item 3. |
58 | |||||
Item 4. |
58 | |||||
Item 5. |
58 | |||||
Item 6. |
58 | |||||
59 |
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, | March 31, | |||||||
2015 | 2015 | |||||||
ASSETS |
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Investments at fair value |
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Non-Control/Non-Affiliate investments (Cost of $183,536 and $162,598, respectively) |
$ | 191,830 | $ | 174,373 | ||||
Affiliate investments (Cost of $314,967 and $310,628, respectively) |
284,040 | 271,050 | ||||||
Control investments (Cost of $31,532 and $32,032 respectively) |
14,765 | 20,630 | ||||||
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Total investments at fair value (Cost of $530,035 and $505,258, respectively) |
490,635 | 466,053 | ||||||
Cash and cash equivalents |
5,694 | 4,921 | ||||||
Restricted cash and cash equivalents |
648 | 260 | ||||||
Interest receivable |
2,743 | 1,867 | ||||||
Due from custodian |
1,696 | 4,512 | ||||||
Deferred financing costs |
5,297 | 4,529 | ||||||
Other assets, net |
1,479 | 1,379 | ||||||
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|
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TOTAL ASSETS |
$ | 508,192 | $ | 483,521 | ||||
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LIABILITIES |
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Borrowings: |
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Line of credit at fair value (Cost of $103,500 and $118,800, respectively) |
$ | 103,500 | $ | 118,800 | ||||
Secured borrowing |
5,096 | 5,096 | ||||||
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|
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Total borrowings |
108,596 | 123,896 | ||||||
Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 4,956,000 and 3,610,000 shares authorized, respectively; 4,866,000 and 3,256,000 shares issued and outstanding, respectively |
121,650 | 81,400 | ||||||
Accounts payable and accrued expenses |
924 | 1,271 | ||||||
Fees due to Adviser(A) |
1,914 | 1,502 | ||||||
Fee due to Administrator(A) |
270 | 262 | ||||||
Other liabilities |
870 | 1,761 | ||||||
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|
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TOTAL LIABILITIES |
$ | 234,224 | $ | 210,092 | ||||
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|
|
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Commitments and contingencies(B) |
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NET ASSETS |
$ | 273,968 | $ | 273,429 | ||||
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ANALYSIS OF NET ASSETS |
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Common stock, $0.001 par value per share, 100,000,000 shares authorized, 30,270,958 and 29,775,958 shares issued and outstanding |
$ | 30 | $ | 30 | ||||
Capital in excess of par value |
312,463 | 309,438 | ||||||
Cumulative net unrealized depreciation of investments |
(39,400 | ) | (39,204 | ) | ||||
Cumulative net unrealized depreciation of other |
(75 | ) | (75 | ) | ||||
Net investment income in excess of distributions |
3,762 | 3,511 | ||||||
Accumulated net realized loss |
(2,812 | ) | (271 | ) | ||||
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|
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TOTAL NET ASSETS |
$ | 273,968 | $ | 273,429 | ||||
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NET ASSET VALUE PER SHARE AT END OF PERIOD |
$ | 9.05 | $ | 9.18 | ||||
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(A) | Refer to Note 4Related Party Transactions for additional information. |
(B) | Refer to Note 10Commitments and Contingencies for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
INVESTMENT INCOME |
||||||||||||||||
Interest income |
||||||||||||||||
Non-Control/Non-Affiliate investments |
$ | 3,970 | $ | 4,494 | $ | 7,772 | $ | 9,751 | ||||||||
Affiliate investments |
7,329 | 3,540 | 14,253 | 6,156 | ||||||||||||
Control investments |
645 | 535 | 1,304 | 1,065 | ||||||||||||
Cash and cash equivalents |
1 | 1 | 1 | 2 | ||||||||||||
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|
|||||||||
Total interest income |
11,945 | 8,570 | 23,330 | 16,974 | ||||||||||||
Other income |
||||||||||||||||
Non-Control/Non-Affiliate investments |
1,795 | 501 | 3,116 | 1,900 | ||||||||||||
Affiliate investments |
| | | 34 | ||||||||||||
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Total other income |
1,795 | 501 | 3,116 | 1,934 | ||||||||||||
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|
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Total investment income |
13,740 | 9,071 | 26,446 | 18,908 | ||||||||||||
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EXPENSES |
||||||||||||||||
Base management fee(A) |
2,510 | 1,744 | 4,963 | 3,410 | ||||||||||||
Loan servicing fee(A) |
1,707 | 1,158 | 3,266 | 2,293 | ||||||||||||
Incentive fee(A) |
1,505 | 1,051 | 2,796 | 2,266 | ||||||||||||
Administration fee(A) |
270 | 209 | 625 | 444 | ||||||||||||
Interest expense on borrowings |
1,081 | 720 | 2,145 | 1,458 | ||||||||||||
Dividends on mandatorily redeemable preferred stock |
2,065 | 712 | 3,832 | 1,425 | ||||||||||||
Amortization of deferred financing fees |
483 | 282 | 943 | 536 | ||||||||||||
Professional fees |
261 | 305 | 703 | 547 | ||||||||||||
Other general and administrative expenses |
403 | 450 | 959 | 747 | ||||||||||||
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Expenses before credits from Adviser |
10,285 | 6,631 | 20,232 | 13,126 | ||||||||||||
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Credit to base management fee loan servicing fee(A) |
(1,707 | ) | (1,158 | ) | (3,266 | ) | (2,293 | ) | ||||||||
Credit to fees from Adviser other(A) |
(861 | ) | (606 | ) | (1,706 | ) | (988 | ) | ||||||||
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Total expenses net of credits to fees |
7,717 | 4,867 | 15,260 | 9,845 | ||||||||||||
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NET INVESTMENT INCOME |
6,023 | 4,204 | 11,186 | 9,063 | ||||||||||||
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REALIZED AND UNREALIZED (LOSS) GAIN |
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Net realized loss: |
||||||||||||||||
Non-Control/Non-Affiliate investments |
(1 | ) | | (1 | ) | | ||||||||||
Affiliate investments |
(2,740 | ) | | (2,740 | ) | | ||||||||||
Control investments |
1 | (12 | ) | 200 | (12 | ) | ||||||||||
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Total net realized loss |
(2,740 | ) | (12 | ) | (2,541 | ) | (12 | ) | ||||||||
Net unrealized (depreciation) appreciation: |
||||||||||||||||
Non-Control/Non-Affiliate investments |
(9,990 | ) | 9,454 | (3,482 | ) | 9,899 | ||||||||||
Affiliate investments |
11,852 | (4,283 | ) | 8,651 | (2,941 | ) | ||||||||||
Control investments |
(5,255 | ) | (6,666 | ) | (5,365 | ) | (2,993 | ) | ||||||||
Other |
| | | 451 | ||||||||||||
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Total net unrealized (depreciation) appreciation |
(3,393 | ) | (1,495 | ) | (196 | ) | 4,416 | |||||||||
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Net realized and unrealized (loss) gain |
(6,133 | ) | (1,507 | ) | (2,737 | ) | 4,404 | |||||||||
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | (110 | ) | $ | 2,697 | $ | 8,449 | $ | 13,467 | |||||||
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BASIC AND DILUTED PER COMMON SHARE: |
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Net investment income |
$ | 0.20 | $ | 0.16 | $ | 0.37 | $ | 0.34 | ||||||||
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Net increase in net assets resulting from operations |
$ | | $ | 0.10 | $ | 0.28 | $ | 0.51 | ||||||||
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Distributions |
$ | 0.19 | $ | 0.18 | $ | 0.38 | $ | 0.36 | ||||||||
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WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: |
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Basic and diluted |
30,270,958 | 26,475,958 | 30,265,548 | 26,475,958 |
(A) | Refer to Note 4Related Party Transactions for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended September 30, | ||||||||
2015 | 2014 | |||||||
OPERATIONS |
||||||||
Net investment income |
$ | 11,186 | $ | 9,063 | ||||
Net realized loss on investments |
(2,541 | ) | (12 | ) | ||||
Net unrealized appreciation of investments |
(196 | ) | 3,965 | |||||
Net unrealized depreciation of other |
| 451 | ||||||
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|
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Net increase in net assets from operations |
8,449 | 13,467 | ||||||
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DISTRIBUTIONS |
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Distributions to common stockholders |
(11,352 | ) | (9,531 | ) | ||||
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|
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Net decrease in net assets from distributions |
(11,352 | ) | (9,531 | ) | ||||
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CAPITAL ACTIVITY |
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Issuance of common stock |
3,663 | | ||||||
Offering costs for issuance of common stock |
(221 | ) | | |||||
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|
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Net increase in net assets from capital activity |
3,442 | | ||||||
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TOTAL INCREASE IN NET ASSETS |
539 | 3,936 | ||||||
NET ASSETS, BEGINNING OF PERIOD |
273,429 | 220,837 | ||||||
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NET ASSETS, END OF PERIOD |
$ | 273,968 | $ | 224,773 | ||||
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended September 30, | ||||||||
2015 | 2014 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
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Net increase in net assets resulting from operations |
$ | 8,449 | $ | 13,467 | ||||
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: |
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Purchase of investments |
(40,045 | ) | (29,287 | ) | ||||
Principal repayments of investments |
10,583 | 802 | ||||||
Increase in investment balance due to paid in kind interest |
| (58 | ) | |||||
Net proceeds from the sale of investments |
2,159 | (12 | ) | |||||
Net realized loss on investments |
2,525 | 12 | ||||||
Net unrealized depreciation (appreciation) of investments |
196 | (3,965 | ) | |||||
Net unrealized depreciation of other |
| (451 | ) | |||||
Amortization of deferred financing costs |
943 | 536 | ||||||
Bad debt expense |
172 | 16 | ||||||
Changes in assets and liabilities: |
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(Increase) decrease in restricted cash and cash equivalents |
(388 | ) | 1,864 | |||||
Increase in interest receivable |
(876 | ) | (424 | ) | ||||
Decrease in due from custodian |
2,816 | 527 | ||||||
Increase in other assets |
(272 | ) | (242 | ) | ||||
(Decrease) increase in accounts payable and accrued expenses |
(347 | ) | 357 | |||||
Increase in fees due to Adviser(A) |
412 | 82 | ||||||
Increase (decrease) in fee due to Administrator(A) |
8 | (15 | ) | |||||
Decrease in other liabilities |
(891 | ) | (58 | ) | ||||
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|
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Net cash used in operating activities |
(14,556 | ) | (16,849 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from issuance of common stock |
3,663 | | ||||||
Offering costs for issuance of common stock |
(221 | ) | | |||||
Proceeds from line of credit |
65,500 | 36,800 | ||||||
Repayments on line of credit |
(80,800 | ) | (10,300 | ) | ||||
Proceeds from secured borrowing |
| 96 | ||||||
Proceeds from issuance of mandatorily redeemable preferred stock |
40,250 | | ||||||
Deferred financing costs |
(1,711 | ) | (1,717 | ) | ||||
Distributions paid to common stockholders |
(11,352 | ) | (9,531 | ) | ||||
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Net cash provided by financing activities |
15,329 | 15,348 | ||||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
773 | (1,501 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
4,921 | 4,553 | ||||||
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 5,694 | $ | 3,052 | ||||
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NON-CASH ACTIVITIES(B) |
$ | 15,740 | $ | | ||||
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(A) | Refer to Note 4Related Party Transactions for additional information. | |||
(B) | 2015: | In August 2015, NDLI, Inc. (NDLI) was acquired by Diligent Delivery Systems (Diligent). As part of this acquisition, we restructured our investment in NDLI, which resulted in the termination of our debt investments in NDLI, which had a cost basis and fair value of $17.7 million and $14.2 million, respectively. We received cash proceeds of $1.9 million and a $13.0 million secured second lien debt investment in Diligent, which resulted in a net realized loss of $2.7 million. We recognized this net realized loss in our Condensed Consolidated Statements of Operations during the three and six months ended September 30, 2015. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2015
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
NON-CONTROL/NON-AFFILIATE INVESTMENTS(N): |
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Auto Safety House, LLC |
Automobile |
Secured First Lien Line of Credit, $1,000 available (7.0%, Due 10/2019)(I)(K) |
$ | | $ | | $ | | ||||||||
Secured First Lien Term Debt (7.0%, Due 10/2019)(I)(K) |
5,000 | 5,000 | 4,931 | |||||||||||||
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|
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5,000 | 4,931 | |||||||||||||||
B-Dry, LLC |
Personal, Food and Miscellaneous Services |
Secured First Lien Line of Credit, $250 available (6.5% (0.8% Unused Fee), Due 12/2016)(L) |
2,250 | 2,250 | 1,177 | |||||||||||
Secured First Lien Term Debt (12.0%, Due 12/2019)(L) |
6,433 | 6,443 | 3,370 | |||||||||||||
Secured First Lien Term Debt (12.0%, Due 12/2019)(L) |
840 | 840 | 439 | |||||||||||||
Preferred Stock (2,250 shares)(C)(F)(L) |
2,250 | | ||||||||||||||
Common Stock (2,250 shares)(C)(F)(L) |
300 | | ||||||||||||||
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|
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12,083 | 4,986 | |||||||||||||||
Country Club Enterprises, LLC |
Automobile |
Secured Second Lien Term Debt (18.7%, Due 5/2017)(L) |
4,000 | 4,000 | 4,000 | |||||||||||
Preferred Stock (7,079,792 shares)(C)(F)(L) |
7,725 | 1,870 | ||||||||||||||
Guaranty ($2,000)(D) |
||||||||||||||||
Guaranty ($459)(D) |
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11,725 | 5,870 | |||||||||||||||
Diligent Delivery Systems |
Cargo Transport |
Secured Second Lien Term Debt (10.0%, Due 8/2020)(J) |
13,000 | 13,000 | 13,000 | |||||||||||
Common Stock Warrants (6% ownership)(C)(F)(J) |
| | ||||||||||||||
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|
|||||||||||||
13,000 | 13,000 | |||||||||||||||
Drew Foam Company, Inc. |
Chemicals, Plastics, and Rubber |
Secured First Lien Term Debt (13.5%, Due 8/2017)(L) |
9,913 | 9,913 | 9,913 | |||||||||||
Preferred Stock (34,045 shares)(C)(F)(L) |
3,375 | 3,442 | ||||||||||||||
Common Stock (5,372 shares)(C)(F)(L) |
63 | 5,409 | ||||||||||||||
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|
|
|||||||||||||
13,351 | 18,764 | |||||||||||||||
Frontier Packaging, Inc. |
Containers, Packaging, and Glass |
Secured First Lien Term Debt (12.0%, Due 12/2017)(L) |
11,500 | 11,500 | 11,500 | |||||||||||
Preferred Stock (1,373 shares)(C)(F)(L) |
1,373 | 1,471 | ||||||||||||||
Common Stock (152 shares)(C)(F)(L) |
152 | 8,151 | ||||||||||||||
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|
|||||||||||||
13,025 | 21,122 | |||||||||||||||
Funko, LLC(M) |
Personal and Non-Durable Consumer Products (Manufacturing Only) |
Secured First Lien Term Debt (9.3%, Due 5/2019)(I)(L) |
7,500 | 7,500 | 7,500 | |||||||||||
Secured First Lien Term Debt (9.3%, Due 5/2019)(I)(L) |
2,000 | 2,000 | 2,000 | |||||||||||||
Preferred Stock (1,305 units)(C)(F)(L) |
1,305 | 17,314 | ||||||||||||||
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|
|||||||||||||
10,805 | 26,814 | |||||||||||||||
Ginsey Home Solutions, Inc. |
Home and Office Furnishings, Housewares, and Durable Consumer Products |
Secured Second Lien Term Debt (13.5%, Due 1/2018)(H)(L) |
13,300 | 13,300 | 13,300 | |||||||||||
Preferred Stock (18,898 shares)(C)(F)(L) |
9,583 | 6,514 | ||||||||||||||
Common Stock (63,747 shares)(C)(F)(L) |
8 | | ||||||||||||||
|
|
|
|
|||||||||||||
22,891 | 19,814 | |||||||||||||||
Jackrabbit, Inc. |
Farming and Agriculture |
Secured First Lien Term Debt (13.5%, Due 4/2018)(L) |
11,000 | 11,000 | 11,000 | |||||||||||
Preferred Stock (3,556 shares)(C)(F)(L) |
3,556 | 4,305 | ||||||||||||||
Common Stock (548 shares)(C)(F)(L) |
94 | 1,303 | ||||||||||||||
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|
|
|||||||||||||
14,650 | 16,608 | |||||||||||||||
Mathey Investments, Inc. |
Machinery (Nonagriculture, Nonconstruction, Nonelectronic) |
Secured First Lien Term Debt (10.0%, Due 3/2016)(L) |
1,375 | 1,375 | 1,375 | |||||||||||
Secured First Lien Term Debt (12.0%, Due 3/2016)(L) |
3,727 | 3,727 | 3,727 | |||||||||||||
Secured First Lien Term Debt (12.5%, Due 3/2016)(E)(I)(L) |
3,500 | 3,500 | 3,500 | |||||||||||||
Common Stock (29,102 shares)(C)(F)(L) |
777 | 6,850 | ||||||||||||||
|
|
|
|
|||||||||||||
9,379 | 15,452 | |||||||||||||||
Mitchell Rubber Products, Inc. |
Chemicals, Plastics, and Rubber |
Secured Second Lien Term Debt (13.0%, Due 10/2016)(I)(K) |
13,560 | 13,560 | 8,109 | |||||||||||
Secured Second Lien Term Debt (13.0%, Due 12/2015)(I)(K) |
700 | 700 | 419 | |||||||||||||
Preferred Stock (27,900 shares)(C)(F)(L) |
2,790 | | ||||||||||||||
Common Stock (27,900 shares)(C)(F)(L) |
28 | | ||||||||||||||
|
|
|
|
|||||||||||||
17,078 | 8,528 |
6
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2015
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
Quench Holdings Corp. |
Home and Office Furnishings, Housewares, and Durable Consumer Products |
Common Stock (4,770,391 shares)(C)(F)(L) |
$ | 3,397 | $ | 5,160 | ||||||||||
|
|
|
|
|||||||||||||
3,397 | 5,160 | |||||||||||||||
SBS Industries, LLC |
Machinery (Nonagriculture, Nonconstruction, Nonelectronic) |
Secured First Lien Term Debt (14.0%, Due 8/2016)(L) |
11,355 | 11,355 | 11,355 | |||||||||||
Preferred Stock (19,935 shares)(C)(F)(L) |
1,994 | 1,520 | ||||||||||||||
Common Stock (221,500 shares)(C)(F)(L) |
222 | | ||||||||||||||
|
|
|
|
|||||||||||||
13,571 | 12,875 | |||||||||||||||
Schylling, Inc. |
Leisure, Amusement, Motion |
Secured First Lien Term Debt (13.0%, Due 8/2018)(L) |
13,081 | 13,081 | 13,081 | |||||||||||
Preferred Stock (4,000 shares)(C)(F)(L) |
4,000 | | ||||||||||||||
|
|
|
|
|||||||||||||
17,081 | 13,081 | |||||||||||||||
Star Seed, Inc. |
Farming and Agriculture |
Secured First Lien Term Debt (12.5%, Due 5/2018)(E)(K) |
5,000 | 5,000 | 4,825 | |||||||||||
Preferred Stock (1,499 shares)(C)(F)(L) |
1,499 | | ||||||||||||||
Common Stock (600 shares)(C)(F)(L) |
1 | | ||||||||||||||
|
|
|
|
|||||||||||||
6,500 | 4,825 | |||||||||||||||
|
|
|
|
|||||||||||||
Total Non-Control/Non-Affiliate Investments (represents 39.1% of total investments at fair value) |
|
$ | 183,536 | $ | 191,830 | |||||||||||
|
|
|
|
|||||||||||||
AFFILIATE INVESTMENTS(O): |
||||||||||||||||
Acme Cryogenics, Inc. |
Chemicals, Plastics, and Rubber |
Secured Second Lien Term Debt (11.5%, Due 3/2020)(I)(L) |
$ | 14,500 | $ | 14,500 | $ | 14,500 | ||||||||
Preferred Stock (965,982 shares)(C)(F)(L) |
7,956 | 14,831 | ||||||||||||||
Common Stock (549,908 shares)(C)(F)(L) |
1,197 | | ||||||||||||||
Common Stock Warrants (465,639 shares)(C)(F)(L) |
25 | | ||||||||||||||
|
|
|
|
|||||||||||||
23,678 | 29,331 | |||||||||||||||
Alloy Die Casting Co.(M) |
Diversified/Conglomerate Manufacturing |
Secured First Lien Term Debt (13.5%, Due 10/2018)(K) |
12,215 | 12,215 | 11,543 | |||||||||||
Preferred Stock (4,064 shares)(C)(F)(L) |
4,064 | 356 | ||||||||||||||
Common Stock (630 shares)(C)(F)(L) |
41 | | ||||||||||||||
|
|
|
|
|||||||||||||
16,320 | 11,899 | |||||||||||||||
Behrens Manufacturing, LLC(M) |
Diversified/Conglomerate Manufacturing |
Secured First Lien Term Debt (13.0%, Due 12/2018)(L) |
9,975 | 9,975 | 9,975 | |||||||||||
Preferred Stock (2,923 shares)(C)(F)(L) |
2,922 | 5,292 | ||||||||||||||
|
|
|
|
|||||||||||||
12,897 | 15,267 | |||||||||||||||
Brunswick Bowling Products, Inc. |
Home and Office Furnishings, Housewares and Durable Consumer Products |
Secured First Lien Term Debt (16.3%, Due 5/2020)(L) |
11,307 | 11,307 | 11,307 | |||||||||||
Preferred Stock (4,943 shares)(C)(F)(L) |
4,943 | 3,869 | ||||||||||||||
|
|
|
|
|||||||||||||
16,250 | 15,176 | |||||||||||||||
B+T Group Acquisition Inc.(M) |
Telecommunications |
Secured First Lien Term Debt (13.0%, Due 12/2019)(L) |
14,000 | 14,000 | 14,000 | |||||||||||
Preferred Stock (12,841 shares)(C)(F)(L) |
4,196 | | ||||||||||||||
|
|
|
|
|||||||||||||
18,196 | 14,000 | |||||||||||||||
Cambridge Sound Management, Inc. |
Home and Office Furnishings, Housewares and Durable Consumer Products |
Secured First Lien Term Debt (13.0%, Due 9/2019)(L) |
15,000 | 15,000 | 15,000 | |||||||||||
Preferred Stock (4,500 shares)(C)(F)(L) |
4,500 | 13,218 | ||||||||||||||
|
|
|
|
|||||||||||||
19,500 | 28,218 | |||||||||||||||
Channel Technologies Group, LLC |
Diversified/Conglomerate Manufacturing |
Preferred Stock (2,279 shares)(C)(F)(L) |
2,864 | 1,922 | ||||||||||||
Common Stock (2,279,020 shares)(C)(F)(L) |
| | ||||||||||||||
|
|
|
|
|||||||||||||
2,864 | 1,922 | |||||||||||||||
Counsel Press, Inc. |
Diversified/Conglomerate Services |
Secured First Lien Line of Credit, $450 available (12.8% (1.0% Unused Fee), Due 3/2017)(L) |
550 | 550 | 550 | |||||||||||
Secured First Lien Term Debt (12.8%, Due 3/2020)(L) |
18,000 | 18,000 | 18,000 | |||||||||||||
Secured First Lien Term Debt (14.0%, Due 3/2020)(L) |
5,500 | 5,500 | 5,500 | |||||||||||||
Preferred Stock (6,995 shares)(C)(F)(L) |
6,995 | 3,657 | ||||||||||||||
|
|
|
|
|||||||||||||
31,045 | 27,707 | |||||||||||||||
D.P.M.S., Inc. |
Diversified/Conglomerate Manufacturing |
Secured First Lien Line of Credit, $550 available (4.0% (0.5% Unused Fee), Due 8/2016)(I)(L) |
4,000 | 4,000 | 2,224 | |||||||||||
Secured First Lien Term Debt (4.0%, Due 8/2016)(I)(L) |
2,575 | 2,575 | 1,432 | |||||||||||||
Secured First Lien Term Debt (4.0%, Due 8/2016)(I)(L) |
8,795 | 8,795 | 4,891 | |||||||||||||
Secured First Lien Term Debt (5.0%, Due 8/2016)(E)(L) |
1,150 | 1,150 | 639 | |||||||||||||
Preferred Stock (25 shares)(C)(F)(L) |
2,500 | | ||||||||||||||
Common Stock (1,241 shares)(C)(F)(L) |
3 | | ||||||||||||||
|
|
|
|
|||||||||||||
19,023 | 9,186 |
7
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2015
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
Edge Adhesives Holdings, Inc.(M) |
Diversified/Conglomerate Manufacturing |
Secured First Lien Term Debt (12.5%, Due 2/2019)(K) |
$ | 9,300 | $ | 9,300 | $ | 9,184 | ||||||||
Secured First Lien Term Debt (13.8%, Due 2/2019)(K) |
2,400 | 2,400 | 2,373 | |||||||||||||
Preferred Stock (3,774 shares)(C)(F)(L) |
3,774 | | ||||||||||||||
|
|
|
|
|||||||||||||
15,474 | 11,557 | |||||||||||||||
GI Plastek, Inc. |
Chemicals, Plastics, and Rubber |
Secured First Lien Line of Credit, $1,330 available (10.0% (1.0% Unused Fee), Due 7/2016)(J) |
670 | 670 | 670 | |||||||||||
Secured First Lien Term Debt (13.3%, Due 7/2020)(J) |
15,000 | 15,000 | 15,000 | |||||||||||||
Preferred Stock (5,150 units)(C)(F)(J) |
5,150 | 5,150 | ||||||||||||||
|
|
|
|
|||||||||||||
20,820 | 20,820 | |||||||||||||||
Head Country, Inc. |
Beverage, Food and Tobacco |
Secured First Lien Term Debt (12.5%, Due 2/2019)(L) |
9,050 | 9,050 | 9,050 | |||||||||||
Preferred Stock (4,000 shares)(C)(F)(L) |
4,000 | 4,255 | ||||||||||||||
|
|
|
|
|||||||||||||
13,050 | 13,305 | |||||||||||||||
Logo Sportswear, Inc. |
Textiles and Leather |
Secured First Lien Term Debt (12.5%, Due 3/2020)(L) |
9,200 | 9,200 | 9,200 | |||||||||||
Preferred Stock (1,550 shares)(C)(F)(L) |
1,550 | 2,141 | ||||||||||||||
|
|
|
|
|||||||||||||
10,750 | 11,341 | |||||||||||||||
Meridian Rack & Pinion, Inc.(M) |
Automobile |
Secured First Lien Term Debt (13.5%, Due 12/2018)(K) |
9,660 | 9,660 | 9,419 | |||||||||||
Preferred Stock (3,381 shares)(C)(F)(L) |
3,381 | | ||||||||||||||
|
|
|
|
|||||||||||||
13,041 | 9,419 | |||||||||||||||
NDLI, Inc. |
Cargo Transport |
Preferred Stock (3,600 shares)(C)(F)(L) |
3,600 | | ||||||||||||
Common Stock (545 shares)(C)(F)(L) |
| | ||||||||||||||
|
|
|
|
|||||||||||||
3,600 | | |||||||||||||||
Old World Christmas, Inc. |
Home and Office Furnishings, Housewares, and Durable Consumer Products |
Secured First Lien Term Debt (13.3%, Due 10/2019)(L) |
15,770 | 15,770 | 15,770 | |||||||||||
Preferred Stock (6,180 shares)(C)(F)(L) |
6,180 | | ||||||||||||||
|
|
|
|
|||||||||||||
21,950 | 15,770 | |||||||||||||||
Precision Southeast, Inc. |
Diversified/Conglomerate Manufacturing |
Secured Second Lien Term Debt (14.0%, Due 9/2020)(L) |
9,618 | 9,618 | 9,618 | |||||||||||
Preferred Stock (37,391 shares)(C)(F)(L) |
3,739 | 3,850 | ||||||||||||||
Common Stock (90,909 shares)(C)(F)(L) |
90 | | ||||||||||||||
|
|
|
|
|||||||||||||
13,447 | 13,468 | |||||||||||||||
SOG Specialty Knives & Tools, LLC |
Leisure, Amusement, Motion Pictures, Entertainment |
Secured First Lien Term Debt (13.3%, Due 10/2017)(L) |
6,200 | 6,200 | 6,200 | |||||||||||
Secured First Lien Term Debt (14.8%, Due 10/2017)(L) |
12,200 | 12,200 | 12,200 | |||||||||||||
Preferred Stock (9,749 shares)(C)(F)(L) |
9,749 | 13,455 | ||||||||||||||
|
|
|
|
|||||||||||||
28,149 | 31,855 | |||||||||||||||
Tread Corporation |
Oil and Gas |
Secured First Lien Line of Credit, $1,434 available (12.5%, Due 2/2018)(G)(L) |
1,816 | 1,816 | 623 | |||||||||||
Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L) |
5,000 | 5,000 | 1,715 | |||||||||||||
Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L) |
2,750 | 2,750 | 943 | |||||||||||||
Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L) |
1,000 | 1,000 | 343 | |||||||||||||
Secured First Lien Term Debt (12.5%, Due on Demand)(G)(I)(L) |
510 | 510 | 175 | |||||||||||||
Preferred Stock (3,332,765 shares)(C)(F)(L) |
3,333 | | ||||||||||||||
Common Stock (7,716,320 shares)(C)(F)(L) |
501 | | ||||||||||||||
Common Stock Warrants (2,372,727 shares)(C)(F)(L) |
3 | | ||||||||||||||
|
|
|
|
|||||||||||||
14,913 | 3,799 | |||||||||||||||
|
|
|
|
|||||||||||||
Total Affiliate Investments (represents 57.9% of total investments at fair value) |
$ | 314,967 | $ | 284,040 | ||||||||||||
|
|
|
|
8
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2015
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
CONTROL INVESTMENTS(P): |
||||||||||||||||
Galaxy Tool Holding Corporation |
Aerospace and Defense |
Secured First Lien Line of Credit, $0 available (10.0% (1.0% Unused Fee), Due 9/2016)(K) |
$ | 4,500 | $ | 4,500 | $ | 3,319 | ||||||||
Secured Second Lien Secured Term Debt (13.5%, Due 8/2017)(K) |
15,520 | 15,520 | 11,446 | |||||||||||||
Preferred Stock (6,039,387 shares)(C)(F)(L) |
11,464 | | ||||||||||||||
Common Stock (88,843 shares)(C)(F)(L) |
48 | | ||||||||||||||
|
|
|
|
|||||||||||||
31,532 | 14,765 | |||||||||||||||
|
|
|
|
|||||||||||||
Total Control Investments (represents 3.0% of total investments at fair value) |
$ | 31,532 | $ | 14,765 | ||||||||||||
|
|
|
|
|||||||||||||
TOTAL INVESTMENTS |
$ | 530,035 | $ | 490,635 | ||||||||||||
|
|
|
|
(A) | Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $470.6 million at fair value, are pledged as collateral to our revolving line of credit as described further in Note 5Borrowings. Additionally, all of our investments are considered qualifying assets under Section 55 of the Investment Company Act of 1940, as amended, (the 1940 Act,) as of September 30, 2015. |
(B) | Percentages represent the weighted average cash interest rates in effect at September 30, 2015, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate. If applicable, paid-in-kind interest rates are noted separately from the cash interest rates. |
(C) | Security is non-income producing. |
(D) | Refer to Note 10Commitments and Contingencies for additional information regarding these guaranties. |
(E) | Last Out Tranche (LOT) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT is generally paid after the other secured first lien debt but before the secured second lien debt. |
(F) | Where applicable, aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase. |
(G) | Debt security is on non-accrual status. |
(H) | $5.1 million of the debt security was participated to a third party but is accounted for as collateral for a secured borrowing under accounting principles generally accepted in the U.S. and presented as secured borrowing on our accompanying Condensed Consolidated Statement of Assets and Liabilities as of September 30, 2015. |
(I) | Debt security has a fixed interest rate. |
(J) | New portfolio investment valued at cost, as it was determined that the price paid during the three months ended September 30, 2015 best represents fair value as of September 30, 2015. |
(K) | Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poors Securities Evaluations, Inc. |
(L) | Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio companys securities in order of their relative priority in the capital structure. |
(M) | One of our affiliated funds, Gladstone Capital Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission. |
(N) | Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments or in which we own less than 5.0% of the issued and outstanding voting securities. |
(O) | Affiliate investments, as defined by the 1940 Act, are those that are not Control investments, and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities. |
(P) | Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
MARCH 31, 2015
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
NON-CONTROL/NON-AFFILIATE INVESTMENTS(N): | ||||||||||||||||
Auto Safety House, LLC |
Automobile |
Secured First Lien Line of Credit, $1,000 available (7.0%, Due 10/2019)(I)(K) |
$ | | $ | | $ | | ||||||||
Secured First Lien Term Debt (7.0%, Due 10/2019)(I)(K) |
5,000 | 5,000 | 4,938 | |||||||||||||
|
|
|
|
|||||||||||||
5,000 | 4,938 | |||||||||||||||
Cavert II Holding Corp. |
Containers, Packaging, and Glass |
Preferred Stock (18,446 shares)(C)(F)(L) |
1,845 | 3,265 | ||||||||||||
|
|
|
|
|||||||||||||
1,845 | 3,265 | |||||||||||||||
Country Club Enterprises, LLC |
Automobile |
Secured Second Lien Term Debt (18.7%, Due 5/2017)(L) |
4,000 | 4,000 | 4,000 | |||||||||||
Preferred Stock (7,079,792 shares)(C)(F)(L) Guaranty ($2,000)(D) Guaranty ($593)(D) |
7,725 | 2,863 | ||||||||||||||
|
|
|
|
|||||||||||||
11,725 | 6,863 | |||||||||||||||
Drew Foam Company, Inc. |
Chemicals, Plastics, and Rubber |
Secured First Lien Term Debt (13.5%, Due 8/2017)(L) |
10,913 | 10,913 | 10,913 | |||||||||||
Preferred Stock (34,045 shares)(C)(F)(L) |
3,375 | 3,532 | ||||||||||||||
Common Stock (5,372 shares)(C)(F)(L) |
63 | 2,813 | ||||||||||||||
|
|
|
|
|||||||||||||
14,351 | 17,258 | |||||||||||||||
Frontier Packaging, Inc. |
Containers, Packaging, and Glass |
Secured First Lien Term Debt (12.0%, Due 12/2017)(L) |
12,000 | 12,000 | 12,000 | |||||||||||
Preferred Stock (1,373 shares)(C)(F)(L) |
1,373 | 1,404 | ||||||||||||||
Common Stock (152 shares)(C)(F)(L) |
152 | 2,777 | ||||||||||||||
|
|
|
|
|||||||||||||
13,525 | 16,181 | |||||||||||||||
Funko, LLC(M) |
Personal and Non-Durable Consumer Products (Manufacturing Only) |
Secured First Lien Term Debt (9.3%, Due 5/2019)(I)(K) |
7,500 | 7,500 | 7,734 | |||||||||||
Secured First Lien Term Debt (9.3%, Due 5/2019)(I)(K) |
2,000 | 2,000 | 2,063 | |||||||||||||
Preferred Stock (1,305 units)(C)(F)(L) |
1,305 | 15,211 | ||||||||||||||
|
|
|
|
|||||||||||||
10,805 | 25,008 | |||||||||||||||
Ginsey Home Solutions, Inc. |
Home and Office Furnishings, Housewares and Durable Consumer Products |
Secured Second Lien Term Debt (13.5%, Due 1/2018)(H)(L) |
13,300 | 13,300 | 13,300 | |||||||||||
Preferred Stock (18,898 shares)(C)(F)(L) |
9,583 | 7,176 | ||||||||||||||
Common Stock (63,747 shares)(C)(F)(L) |
8 | | ||||||||||||||
|
|
|
|
|||||||||||||
22,891 | 20,476 | |||||||||||||||
Jackrabbit, Inc. |
Farming and Agriculture |
Secured First Lien Debt (13.5%, Due 4/2018)(L) |
11,000 | 11,000 | 11,000 | |||||||||||
Preferred Stock (3,556 shares)(C)(F)(L) |
3,556 | 4,139 | ||||||||||||||
Common Stock (548 shares)(C)(F)(L) |
94 | 2,399 | ||||||||||||||
|
|
|
|
|||||||||||||
14,650 | 17,538 | |||||||||||||||
Mathey Investments, Inc. |
Machinery (Nonagriculture, Nonconstruction, Nonelectronic) |
Secured First Lien Term Debt (10.0%, Due 3/2016)(L) |
1,375 | 1,375 | 1,375 | |||||||||||
Secured First Lien Term Debt (12.0%, Due 3/2016)(L) |
3,727 | 3,727 | 3,727 | |||||||||||||
Secured First Lien Term Debt (12.5%, Due 3/2016)(E)(I)(L) |
3,500 | 3,500 | 3,500 | |||||||||||||
Common Stock (29,102 shares)(C)(F)(L) |
777 | 7,630 | ||||||||||||||
|
|
|
|
|||||||||||||
9,379 | 16,232 | |||||||||||||||
Mitchell Rubber Products, Inc. |
Chemicals, Plastics, and Rubber |
Secured Second Lien Term Debt (13.0%, Due 10/2016)(I)(K) |
13,560 | 13,560 | 8,136 | |||||||||||
Secured Second Lien Term Debt (13.0%, Due 12/2015)(I)(K) |
1,500 | 1,500 | 900 | |||||||||||||
Preferred Stock (27,900 shares)(C)(F)(L) |
2,790 | | ||||||||||||||
Common Stock (27,900 shares)(C)(F)(L) |
28 | | ||||||||||||||
|
|
|
|
|||||||||||||
17,878 | 9,036 | |||||||||||||||
Quench Holdings Corp. |
Home and Office Furnishings, Housewares, and Durable Consumer Products |
Common Stock (4,770,391 shares)(C)(F)(L) |
3,397 | 5,432 | ||||||||||||
|
|
|
|
|||||||||||||
3,397 | 5,432 | |||||||||||||||
SBS Industries, LLC |
Machinery (Nonagriculture, Nonconstruction, Nonelectronic) |
Secured First Lien Term Debt (14.0%, Due 8/2016)(L) |
11,355 | 11,355 | 11,355 | |||||||||||
Preferred Stock (19,935 shares)(C)(F)(L) |
1,994 | 2,627 | ||||||||||||||
Common Stock (221,500 shares)(C)(F)(L) |
222 | 183 | ||||||||||||||
|
|
|
|
|||||||||||||
13,571 | 14,165 |
10
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2015
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
Schylling, Inc. |
Leisure, Amusement, Motion Pictures, Entertainment |
Secured First Lien Term Debt (13.0%, Due 8/2018)(L) |
$ | 13,081 | $ | 13,081 | $ | 13,081 | ||||||||
Preferred Stock (4,000 shares)(C)(F)(L) |
4,000 | | ||||||||||||||
|
|
|
|
|||||||||||||
17,081 | 13,081 | |||||||||||||||
Star Seed, Inc. |
Farming and Agriculture |
Secured First Lien Term Debt (12.5%, Due 5/2018)(E)(K) |
5,000 | 5,000 | 4,900 | |||||||||||
Preferred Stock (1,499 shares)(C)(F)(L) |
1,499 | | ||||||||||||||
Common Stock (600 shares)(C)(F)(L) |
1 | | ||||||||||||||
|
|
|
|
|||||||||||||
6,500 | 4,900 | |||||||||||||||
|
|
|
|
|||||||||||||
Total Non-Control/Non-Affiliate Investments (represents 37.4% of total investments at fair value) |
|
$ | 162,598 | $ | 174,373 | |||||||||||
|
|
|
|
|||||||||||||
AFFILIATE INVESTMENTS(O): |
||||||||||||||||
Acme Cryogenics, Inc. |
Chemicals, Plastics, and Rubber |
Secured Second Lien Term Debt (11.5%, Due 3/2020)(I)(L) |
$ | 14,500 | $ | 14,500 | $ | 14,500 | ||||||||
Preferred Stock (965,982 shares)(C)(F)(L) |
7,956 | 8,519 | ||||||||||||||
Common Stock (549,908 shares)(C)(F)(L) |
1,197 | | ||||||||||||||
Common Stock Warrants (465,639 shares)(C)(F)(L) |
25 | | ||||||||||||||
|
|
|
|
|||||||||||||
23,678 | 23,019 | |||||||||||||||
Alloy Die Casting Co.(M) |
Diversified/Conglomerate Manufacturing |
Secured First Lien Term Debt (13.5%, Due 10/2018)(K) |
12,215 | 12,215 | 12,154 | |||||||||||
Preferred Stock (4,064 shares)(C)(F)(L) |
4,064 | 4,122 | ||||||||||||||
Common Stock (630 shares)(C)(F)(L) |
41 | | ||||||||||||||
|
|
|
|
|||||||||||||
16,320 | 16,276 | |||||||||||||||
Behrens Manufacturing, LLC(M) |
Diversified/Conglomerate Manufacturing |
Secured First Lien Term Debt (13.0%, Due 12/2018)(L) |
9,975 | 9,975 | 9,975 | |||||||||||
Preferred Stock (2,923 shares)(C)(F)(L) |
2,922 | 3,447 | ||||||||||||||
|
|
|
|
|||||||||||||
12,897 | 13,422 | |||||||||||||||
B-Dry, LLC |
Personal, Food and Miscellaneous Services |
Secured First Lien Line of Credit, $175 available (6.5% (0.8% Unused Fee), Due 12/2016)(L) |
2,075 | 2,075 | 1,124 | |||||||||||
Secured First Lien Term Debt (13.5%, Due 12/2019)(L) |
6,433 | 6,443 | 3,490 | |||||||||||||
Secured First Lien Term Debt (13.5%, Due 12/2019)(L) |
840 | 840 | 455 | |||||||||||||
Preferred Stock (2,250 shares)(C)(F)(L) |
2,250 | | ||||||||||||||
Common Stock (2,250 shares)(C)(F)(L) |
300 | | ||||||||||||||
|
|
|
|
|||||||||||||
11,908 | 5,069 | |||||||||||||||
B+T Group Acquisition Inc.(M) |
Telecommunications |
Secured First Lien Line of Credit, $700 available (10.0% (1.0% Unused Fee), Due 6/2015)(L) |
700 | 700 | 700 | |||||||||||
Secured First Lien Term Debt (13.0%, Due 12/2019)(L) |
14,000 | 14,000 | 14,000 | |||||||||||||
Preferred Stock (12,841 shares)(C)(F)(L) |
4,196 | 4,541 | ||||||||||||||
|
|
|
|
|||||||||||||
18,896 | 19,241 | |||||||||||||||
Cambridge Sound Management, Inc. |
Home and Office Furnishing, Housewares and Durable Consumer Products |
Secured First Lien Term Debt (13.0%, Due 9/2019)(L) |
15,000 | 15,000 | 15,000 | |||||||||||
Preferred Stock (4,500 shares)(C)(F)(L) |
4,500 | 7,198 | ||||||||||||||
|
|
|
|
|||||||||||||
19,500 | 22,198 | |||||||||||||||
Channel Technologies Group, LLC |
Diversified/Conglomerate Manufacturing |
Preferred Stock (2,279 shares)(C)(F)(L) |
2,864 | 2,315 | ||||||||||||
Common Stock (2,279,020 shares)(C)(F)(L) |
| | ||||||||||||||
|
|
|
|
|||||||||||||
2,864 | 2,315 | |||||||||||||||
Counsel Press, Inc. |
Diversified/Conglomerate Services |
Secured First Lien Line of Credit, $500 available (12.8% (1.0% Unused Fee), Due 3/2017)(J) |
1,500 | 1,500 | 1,500 | |||||||||||
Secured First Lien Term Debt (12.8%, Due 3/2020)(J) |
18,000 | 18,000 | 18,000 | |||||||||||||
Secured First Lien Term Debt (14.0%, Due 3/2020)(J) |
5,500 | 5,500 | 5,500 | |||||||||||||
Preferred Stock (6,995 shares)(C)(F)(J) |
6,995 | 6,995 | ||||||||||||||
|
|
|
|
|||||||||||||
31,995 | 31,995 | |||||||||||||||
D.P.M.S., Inc. |
Diversified/Conglomerate Manufacturing |
Secured First Lien Line of Credit, $550 available (4.0% (0.5% Unused Fee), Due 8/2016)(I)(L) |
4,000 | 4,000 | 762 | |||||||||||
Secured First Lien Term Debt (4.0%, Due 8/2016)(I)(L) |
2,575 | 2,575 | 490 | |||||||||||||
Secured First Lien Term Debt (4.0%, Due 8/2016)(I)(L) |
8,795 | 8,795 | 1,674 | |||||||||||||
Secured First Lien Term Debt (5.0%, Due 8/2016)(E)(L) |
1,150 | 1,150 | 219 | |||||||||||||
Preferred Stock (25 shares)(C)(F)(L) |
2,500 | | ||||||||||||||
Common Stock (1,241 shares)(C)(F)(L) |
3 | | ||||||||||||||
|
|
|
|
|||||||||||||
19,023 | 3,145 |
11
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2015
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
Edge Adhesives Holdings, |
Diversified/Conglomerate Manufacturing |
Secured First Lien Line of Credit, $10 available (12.5% (1.0% Unused Fee), Due 8/2015)(K) |
$ | 1,490 | $ | 1,490 | $ | 1,488 | ||||||||
Secured First Lien Term Debt (12.5%, Due 2/2019)(K) |
9,300 | 9,300 | 9,300 | |||||||||||||
Secured First Lien Term Debt (13.8%, Due 2/2019)(K) |
2,400 | 2,400 | 2,403 | |||||||||||||
Preferred Stock (3,474 shares)(C)(F)(L) |
3,474 | 3,199 | ||||||||||||||
|
|
|
|
|||||||||||||
16,664 | 16,390 | |||||||||||||||
Head Country, Inc. |
Beverage, Food and Tobacco |
Secured First Lien Term Debt (12.5%, Due 2/2019)(L) |
9,050 | 9,050 | 9,050 | |||||||||||
Preferred Stock (4,000 shares)(C)(F)(L) |
4,000 | 3,931 | ||||||||||||||
|
|
|
|
|||||||||||||
13,050 | 12,981 | |||||||||||||||
Logo Sportswear, Inc. |
Textiles and Leather |
Secured First Lien Line of Credit, $500 available (10.0% (1.0% Unused Fee), Due 9/2015)(J) |
| | | |||||||||||
Secured First Lien Term Debt (12.5%, Due 3/2020)(J) |
9,200 | 9,200 | 9,200 | |||||||||||||
Preferred Stock (1,550 shares)(C)(F)(J) |
1,550 | 1,550 | ||||||||||||||
|
|
|
|
|||||||||||||
10,750 | 10,750 | |||||||||||||||
Meridian Rack & Pinion, |
Automobile |
Secured First Lien Term Debt (13.5%, Due 12/2018)(K) |
9,660 | 9,660 | 9,612 | |||||||||||
Preferred Stock (3,381 shares)(C)(F)(L) |
3,381 | 3,117 | ||||||||||||||
|
|
|
|
|||||||||||||
13,041 | 12,729 | |||||||||||||||
NDLI, Inc. |
Cargo Transport |
Secured First Lien Line of Credit, $50 available (10.5% (0.5% Unused Fee), Due 1/2016)(L) |
2,875 | 2,875 | 2,308 | |||||||||||
Secured First Lien Term Debt (11.0%, Due 1/2018)(L) |
7,227 | 7,227 | 5,803 | |||||||||||||
Secured First Lien Term Debt (10.5%, Due 1/2018)(L) |
3,650 | 3,650 | 2,931 | |||||||||||||
Secured First Lien Term Debt (10.5%, Due 1/2018)(E)(L) |
3,650 | 3,650 | 2,930 | |||||||||||||
Preferred Stock (3,600 shares)(C)(F)(L) |
3,600 | | ||||||||||||||
Common Stock (545 shares)(C)(F)(L) |
| | ||||||||||||||
|
|
|
|
|||||||||||||
21,002 | 13,972 | |||||||||||||||
Old World Christmas, Inc. |
Home and Office Furnishings, Housewares, and Durable Consumer Products |
Secured First Lien Term Debt (13.3%, Due 10/2019)(L) |
15,770 | 15,770 | 15,770 | |||||||||||
Preferred Stock (6,180 shares)(C)(F)(L) |
6,180 | 6,657 | ||||||||||||||
|
|
|
|
|||||||||||||
21,950 | 22,427 | |||||||||||||||
Precision Southeast, Inc. |
Diversified/Conglomerate Manufacturing |
Secured Second Lien Term Debt (14.0%, Due 9/2020)(L) |
9,617 | 9,617 | 9,617 | |||||||||||
Preferred Stock (37,391 shares)(C)(F)(J) |
3,739 | 1,830 | ||||||||||||||
Common Stock (90,909 shares)(C)(F)(L) |
91 | | ||||||||||||||
|
|
|
|
|||||||||||||
13,447 | 11,447 | |||||||||||||||
SOG Specialty Knives & Tools LLC |
Leisure, Amusement, Motion Pictures, Entertainment |
Secured First Lien Term Debt (13.3%, Due 10/2017)(L) |
6,200 | 6,200 | 6,200 | |||||||||||
Secured First Lien Term Debt (14.8%, Due 10/2017)(L) |
12,200 | 12,200 | 12,200 | |||||||||||||
Preferred Stock (9,749 shares)(C)(F)(L) |
9,749 | 13,451 | ||||||||||||||
|
|
|
|
|||||||||||||
28,149 | 31,851 | |||||||||||||||
Tread Corporation |
Oil and Gas |
Secured First Lien Line of Credit, $853 available (12.5%, Due 2/2018)(G)(L) |
2,397 | 2,397 | 375 | |||||||||||
Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L) |
5,000 | 5,000 | 782 | |||||||||||||
Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L) |
2,750 | 2,750 | 430 | |||||||||||||
Secured First Lien Term Debt (12.5%, Due 2/2018)(G)(I)(L) |
1,000 | 1,000 | 156 | |||||||||||||
Secured First Lien Term Debt (12.5%, Due on Demand)(G)(I)(L) |
510 | 510 | 80 | |||||||||||||
Preferred Stock (3,332,765 shares)(C)(F)(L) |
3,333 | | ||||||||||||||
Common Stock (7,716,320 shares)(C)(F)(L) |
501 | | ||||||||||||||
Common Stock Warrants (2,372,727 shares)(C)(F)(L) |
3 | | ||||||||||||||
|
|
|
|
|||||||||||||
15,494 | 1,823 | |||||||||||||||
|
|
|
|
|||||||||||||
Total Affiliate Investments (represents 58.2% of total investments at fair value) |
|
$ | 310,628 | $ | 271,050 | |||||||||||
|
|
|
|
12
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2015
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
CONTROL INVESTMENTS(P): | ||||||||||||||||
Galaxy Tool Holding Corporation |
Aerospace and Defense |
Secured First Lien Line of Credit, $1,250 available (10.0% (1.0% Unused Fee), Due 9/2015)(L) |
$ | 3,250 | $ | 3,250 | $ | 3,250 | ||||||||
Secured Second Lien Term Debt (13.5%, Due 8/2017)(L) |
15,520 | 15,520 | 15,520 | |||||||||||||
Preferred Stock (6,039,387 shares)(C)(F)(L) |
11,464 | | ||||||||||||||
Common Stock (88,843 shares)(C)(F)(L) |
48 | | ||||||||||||||
|
|
|
|
|||||||||||||
30,282 | 18,770 | |||||||||||||||
Roanoke Industries Corp. |
Buildings and Real Estate |
Secured First Lien Debt (10.0%, Due 11/2019)(I)(L) |
1,650 | 1,650 | 1,650 | |||||||||||
Common Stock (57 shares)(C)(F)(L) |
100 | 210 | ||||||||||||||
|
|
|
|
|||||||||||||
1,750 | 1,860 | |||||||||||||||
|
|
|
|
|||||||||||||
Total Control Investments (represents 4.4% of total investments at fair value) | $ | 32,032 | $ | 20,630 | ||||||||||||
|
|
|
|
|||||||||||||
TOTAL INVESTMENTS(Q) | $ | 505,258 | $ | 466,053 | ||||||||||||
|
|
|
|
(A) | Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $435.9 million at fair value, are pledged as collateral to our revolving line of credit as described further in Note 5Borrowings. Additionally, all of our investments are considered qualifying assets under Section 55 of the Investment Company Act of 1940, as amended, (the 1940 Act,) as of March 31, 2015. |
(B) | Percentages represent the weighted average cash interest rates in effect at March 31, 2015, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate. If applicable, paid-in-kind interest rates are noted separately from the cash interest rates. |
(C) | Security is non-income producing. |
(D) | Refer to Note 10Commitments and Contingencies for additional information regarding these guaranties. |
(E) | Last Out Tranche (LOT) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT is generally paid after the other secured first lien debt but before the secured second lien debt. |
(F) | Where applicable, aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase. |
(G) | Debt security is on non-accrual status. |
(H) | $5.1 million of the debt security was participated to a third party but is accounted for as collateral for a secured borrowing under accounting principles generally accepted in the U.S. and presented as secured borrowing on our accompanying Condensed Consolidated Statement of Assets and Liabilities as of March 31, 2015. |
(I) | Debt security has a fixed interest rate. |
(J) | New portfolio investment valued at cost, as it was determined that the price paid during the three months ended March 31, 2015 best represents fair value as of March 31, 2015. |
(K) | Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poors Securities Evaluations, Inc. |
(L) | Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio companys securities in order of their relative priority in the capital structure. |
(M) | One of our affiliated funds, Gladstone Capital Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission. |
(N) | Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments or in which we own less than 5.0% of the issued and outstanding voting securities. |
(O) | Affiliate investments, as defined by the 1940 Act, are those that are not Control investments, and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities. |
(P) | Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities. |
(Q) | Cumulative gross unrealized depreciation for federal income tax purposes is $80.6 million; cumulative gross unrealized appreciation for federal income tax purposes is $41.4 million. Cumulative net unrealized depreciation is $39.2 million, based on a tax cost of $505.6 million. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
13
GLADSTONE INVESTMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
NOTE 1. ORGANIZATION
Gladstone Investment Corporation (Gladstone Investment) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005, and completed an initial public offering on June 22, 2005. The terms the Company, we, our and us all refer to Gladstone Investment and its consolidated subsidiaries. We are an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act), and is applying the guidance of FASB ASC Topic 946 Financial Services-Investment Companies. In addition, we have elected to be treated for tax purposes as a regulated investment company (RIC) under the Internal Revenue Code of 1986, as amended (the Code). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (U.S.). Debt investments primarily come in the form of two types of loans: secured first lien loans and secured second lien loans. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. Our investment objectives are: (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time, and (b) to 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. We aim to maintain a portfolio allocation of approximately 75.0% debt investments and 25.0% equity investments, at cost.
Gladstone Business Investment, LLC (Business Investment), a wholly-owned subsidiary of ours, was established on August 11, 2006 for the sole purpose of owning our portfolio of investments in connection with our line of credit. The financial statements of Business Investment are consolidated with those of Gladstone Investment. We also have significant subsidiaries (as defined under Rule 1-02(w) of the U.S. Securities and Exchange Commissions (SEC) Regulation S-X) whose financial statements are not consolidated with ours. Refer to Note 12Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.
We are externally managed by Gladstone Management Corporation (the Adviser), an affiliate of ours and a SEC registered investment adviser, pursuant to an investment advisory agreement and management agreement. Administrative services are provided by Gladstone Administration, LLC (the Administrator), an affiliate of ours and the Adviser, pursuant to an administration agreement.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements and Basis of Presentation
We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of SEC Regulation S-X. Accordingly, we have omitted certain disclosures accompanying annual financial statements prepared in accordance with GAAP. The accompanying Condensed Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X, and the authoritative accounting guidance provided by the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any subsidiary or other entity that is not an investment company, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended September 30, 2015 are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended March 31, 2015, as filed with the SEC on May 20, 2015.
Our accompanying fiscal year-end Condensed Consolidated Statement of Assets and Liabilities was derived from audited financial statements, but does not include all disclosures required by GAAP.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation in the condensed consolidated financial statements and related notes. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities or total net assets, or statement of changes in net assets and statement of cash flows classifications.
14
Investment Valuation Policy
Accounting Recognition
We record our investments at fair value in accordance with the Financial Accounting Standards Board (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, the Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer (the Valuation Team). Second, the Valuation Committee of our Board of Directors (comprised entirely of independent directors) meets to review the valuation recommendations and supporting materials. Third, after the Valuation Committee concludes its meeting, it and the chief valuation officer present the Valuation Committees findings to the entire Board of Directs at a meeting the next day so that the full Board of Directors may review and approve the fair value of our investments in accordance with the Policy.
There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy and each quarter our Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and also review whether the Valuation Team has applied the Policy consistently.
Use of Third Party Valuation Firms
The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.
Standard & Poors Securities Evaluation, Inc. (SPSE) provides estimates of fair value on our debt investments. The Valuation Team 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, our 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.
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 and whether it is reasonable in light of the Policy and other relevant facts and circumstances and then votes to accept or reject the Valuation Teams recommended fair value.
Valuation Techniques
In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:
| Total Enterprise Value In determining the fair value using a total enterprise value (TEV), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio 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 |
15
original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The Valuation Team generally references industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team then generally allocates the TEV to the portfolio companys securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments. |
TEV is primarily calculated using EBITDA or revenue multiples; however, TEV may also be calculated using a discounted cash flow (DCF) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses the DCF to calculate TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit impaired portfolio companies.
| Yield Analysis The Valuation Team generally determines the fair value of our debt investments using the yield analysis, which includes a DCF calculation and the Valuation Teams own assumptions, including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes. |
| Market Quotes For our investments for which a limited market exists, we generally base fair value on readily available and reliable market quotations, which are corroborated by the Valuation Team (generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (IBP) in the bid-to-ask price range obtained from the respective originating syndication 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. |
| Investments in Funds For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our invested capital at the Net Asset Value (NAV) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity. |
In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments, including but not limited to: the nature and realizable value of the collateral, including external parties guaranties; any relevant offers or letters of intent to acquire the portfolio company; 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 (the three months ended September 30, 2015) are generally valued at our original cost basis.
Fair value measurements of our investments may involve subjective judgments and estimates and, due to the uncertainty inherent in valuing these securities, the Advisers determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the Advisers determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.
Refer to Note 3Investments for additional information regarding fair value measurements and our application of ASC 820.
16
Revenue Recognition Policy
Interest Income Recognition
Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon 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, the interest income is deemed to be collectible. As of September 30, 2015, our loans to Tread Corporation (Tread) were on non-accrual status, with an aggregate debt cost basis of $11.1 million, or 2.9% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $3.8 million, or 1.1% of the fair value of all debt investments in our portfolio. As of March 31, 2015, our loans to Tread were on non-accrual status, with an aggregate debt cost basis of $11.7 million, or 3.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $1.8 million, or 0.5% of the fair value of all debt investments in our portfolio.
Paid-in-kind (PIK) interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income over the life of the obligation. As of September 30, 2015 and March 31, 2015, respectively, we did not have any loans with a PIK interest component. During the three and six months ended September 30, 2015, we did not record PIK income. During the three and six months ended September 30, 2014, we recorded PIK income of $29 and $58, respectively.
Other Income Recognition
We generally record success fees upon receipt of cash. Typically, success fees are contractually due upon a change of control in a portfolio company. During the three and six months ended September 30, 2015, we recorded success fees of $0 and $0.9 million, respectively, which resulted from a prepayment from Drew Foam Company, Inc. (Drew Foam) in June 2015. During the three and six months ended September 30, 2014, we recorded $0.5 million of success fees, which resulted from prepayments of $0.2 million from each of Auto Safety House, LLC (ASH) and Frontier Packaging, Inc. (Frontier) and $0.1 million from Mathey Investments, Inc. (Mathey).
We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration. During the three and six months ended September 30, 2015, we recorded dividend income of $1.8 million and $2.2 million, respectively, which resulted from payments we received from Cavert II Holding Corp. (Cavert), Drew Foam and Funko, LLC (Funko) as well as an additional $0.2 million dividend receivable from Funko. For the three and six months ended September 30, 2014, we recorded $1.4 million of dividend income resulting from payments we received from Mathey.
Both dividend and success fee income are recorded in other income in our accompanying Condensed Consolidated Statements of Operations.
Related Party Fees
We have entered into an investment advisory and management agreement (the Advisory Agreement) with the Adviser, which is controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. Additionally, we pay the Advisor a loan servicing fee as compensation for its services as servicer under the terms of our Fifth Amended and Restated Credit Agreement dated April 30, 2013, as amended (our Credit Facility).
We have entered into an administration agreement (the Administration Agreement) with the Administrator whereby we pay separately for administrative services. These fees are accrued when the services are performed and generally paid one month in arrears. Refer to Note 4Related Party Transactions for additional information regarding these related party fees and agreements.
Recent Accounting Pronouncements
In August 2015, the FASB issued Accounting Standards Update 2015-15, Interest Imputation of Interest (Subtopic 835-30) (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. We have assessed the impact of ASU 2015-15 and identified no impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-15 was effective immediately.
17
In May 2015, the FASB issued Accounting Standards Update 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or its Equivalent) (ASU 2015-07), which eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value per share (or its equivalent) using the practical expedient in the FASBs fair value measurement guidance. We are currently assessing the impact of ASU 2015-07 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-07 is required to be adopted retrospectively and is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. We are currently assessing the impact of ASU 2014-09 and anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. In July 2015, the FASB voted to defer the effective date of ASU 2014-09 until January 1, 2018, with early adoption permitted beginning January 1, 2017.
NOTE 3. INVESTMENTS
Fair Value
In accordance with ASC 820, our investments fair value is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
| Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets; |
| Level 2 inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and |
| Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation 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, 2015 and March 31, 2015, all of our investments were valued using Level 3 inputs. We transfer investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three and six months ended September 30, 2015 and 2014, there were no transfers in or out of Level 1, 2 and 3.
18
The following table presents our portfolio investments carried at fair value as of September 30, 2015 and March 31, 2015, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type and all valued at Level 3 on the ASC 820 fair value hierarchy:
Total Recurring Fair Value Measurement Reported in Condensed Consolidated Statements of Assets and Liabilities |
||||||||
September 30, 2015 | March 31, 2015 | |||||||
Non-Control/Non-Affiliate Investments |
||||||||
Secured first lien debt |
$ | 89,694 | $ | 86,586 | ||||
Secured second lien debt |
38,828 | 26,336 | ||||||
Preferred equity |
36,435 | 40,217 | ||||||
Common equity/equivalents |
26,873 | 21,234 | ||||||
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|
|
|
|||||
Total Non-Control/Non-Affiliate Investments |
191,830 | 174,373 | ||||||
Affiliate Investments |
||||||||
Secured first lien debt |
187,925 | 176,059 | ||||||
Secured second lien debt |
24,118 | 24,118 | ||||||
Preferred equity |
71,997 | 70,873 | ||||||
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|
|
|||||
Total Affiliate Investments |
284,040 | 271,050 | ||||||
Control Investments |
||||||||
Secured first lien debt |
3,319 | 4,900 | ||||||
Secured second lien debt |
11,446 | 15,520 | ||||||
Preferred equity |
| | ||||||
Common equity/equivalents |
| 210 | ||||||
|
|
|
|
|||||
Total Control Investments |
14,765 | 20,630 | ||||||
|
|
|
|
|||||
Total Investments at fair value using Level 3 inputs |
$ | 490,635 | $ | 466,053 | ||||
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|
|
|
In accordance with the FASBs ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS), (ASU 2011-04), the following table provides quantitative information about our investments valued using Level 3 fair value measurements as of September 30, 2015 and March 31, 2015. 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.
19
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||
Fair Value as of September 30, 2015 |
Fair Value as of March 31, 2015 |
Valuation |
Unobservable |
Range / Weighted September 30, 2015 |
Range /Weighted March 31, 2015 | |||||||||||
Secured first lien debt (A) |
$ | 220,383 | $ | 212,954 | TEV | EBITDA multiples | 4.5x 8.3x /6.2x | 4.2x 18.2x /6.8x | ||||||||
EBITDA | $249 - $55,042/ $5,577 |
$712 - $5,871 / $3,185 | ||||||||||||||
4,986 | | DCF | Discount Rate | 20.0% -20.0% /20.0% | | |||||||||||
55,569 | 54,591 | Yield Analysis | Discount Rate | 7.4% - 46.0% / 16.0% | 5.0% -13.7% /11.3% | |||||||||||
Secured second lien debt(B) |
54,418 | 56,938 | TEV | EBITDA multiples | 5.8x 8.6x / 7.0x | 4.8x 7.0x / 6.2x | ||||||||||
EBITDA | $1,882 - $9,631 / $4,482 | $1,135 -$5,462 / $3,677 | ||||||||||||||
19,974 | 9,036 | Yield Analysis | Discount Rate | 19.0% - 32.6% / 25.5% |
20.5% - 20.5% / 20.5% | |||||||||||
Preferred equity(C) |
108,432 | 111,090 | TEV | EBITDA multiples | 4.5x 8.9x /6.5x | 3.6x 18.2x / 6.6x | ||||||||||
EBITDA | $249 - $55,042 / $4,072 | $712 - $29,235 / $3,749 | ||||||||||||||
Common equity/equivalents |
26,873 | 21,444 | TEV | EBITDA multiples | 4.5x 11.2x / 8.7x | 3.6x 18.2x / 9.4x | ||||||||||
EBITDA | $791 - $17,545 / $10,687 | $712 - $15,240 / $9,149 | ||||||||||||||
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|
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Total |
$ | 490,635 | $ | 466,053 | ||||||||||||
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(A) | September 30, 2015 includes one new proprietary secured first lien debt investment with a fair value of $15.7 million, which was valued at cost. March 31, 2015 includes two new proprietary secured first lien debt investments with a combined fair value of $34.2 million, which were valued at cost. |
(B) | September 30, 2015 includes one new proprietary secured second lien debt investment with a fair value of $13.0 million, which was valued at cost. |
(C) | September 30, 2015 includes one new proprietary preferred equity investment with a fair value of $5.2 million, which was valued at cost. March 31, 2015 includes two new proprietary preferred equity investments with a combined fair value of $8.5 million, which were valued at cost. |
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/ (decrease) in market yields, discount rates or leverage or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase in the fair value of certain of our investments.
Changes in Level 3 Fair Value Measurements of Investments
The following tables provide the changes in fair value, broken out by security type, during the three and six months ended September 30, 2015 and 2014 for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Secured First Lien Debt |
Secured Second Lien Debt |
Preferred Equity |
Common Equity/ Equivalents |
Total | ||||||||||||||||
Three months ended September 30, 2015: |
||||||||||||||||||||
Fair value as of June 30, 2015 |
$ | 279,027 | $ | 65,067 | $ | 112,745 | $ | 24,404 | $ | 481,243 | ||||||||||
Total gain (loss): |
||||||||||||||||||||
Net realized (loss) gain(A) |
(2,740 | ) | | (1 | ) | 1 | (2,740 | ) | ||||||||||||
Net unrealized appreciation (depreciation)(B) |
1,943 | (3,675 | ) | (6,135 | ) | 2,468 | (5,399 | ) | ||||||||||||
Reversal of previously recorded depreciation (appreciation) upon realization(B) |
3,489 | | (1,483 | ) | | 2,006 | ||||||||||||||
New investments, repayments and settlements(C): |
||||||||||||||||||||
Issuances / originations |
17,569 | 13,000 | 5,150 | | 35,719 | |||||||||||||||
Settlements / repayments |
(18,350 | ) | | | | (18,350 | ) | |||||||||||||
Sales |
| | (1,844 | ) | | (1,844 | ) | |||||||||||||
Transfers |
| | | | | |||||||||||||||
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|
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|
|
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Fair value as of September 30, 2015 |
$ | 280,938 | $ | 74,392 | $ | 108,432 | $ | 26,873 | $ | 490,635 | ||||||||||
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20
Secured First Lien Debt |
Secured Second Lien Debt |
Preferred Equity |
Common Equity/ Equivalents |
Total | ||||||||||||||||
Six months ended September 30, 2015: |
||||||||||||||||||||
Fair value as of March 31, 2015 |
$ | 267,545 | $ | 65,974 | $ | 111,090 | $ | 21,444 | $ | 466,053 | ||||||||||
Total (loss) gain: |
||||||||||||||||||||
Net realized (loss) gain(A) |
(2,740 | ) | | (1 | ) | 216 | (2,525 | ) | ||||||||||||
Net unrealized (depreciation) appreciation(B) |
5,775 | (3,782 | ) | (9,723 | ) | 5,638 | (2,092 | ) | ||||||||||||
Reversal of previously recorded depreciation (appreciation) upon realization(B) |
3,489 | | (1,483 | ) | (110 | ) | 1,896 | |||||||||||||
New investments, repayments and settlements(C): |
||||||||||||||||||||
Issuances / originations |
29,652 | 13,000 | 10,393 | | 53,045 | |||||||||||||||
Settlements / repayments |
(22,783 | ) | (800 | ) | | | (23,583 | ) | ||||||||||||
Sales |
| | (1,844 | ) | (315 | ) | (2,159 | ) | ||||||||||||
Transfers |
| | | | | |||||||||||||||
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Fair value as of September 30, 2015 |
$ | 280,938 | $ | 74,392 | $ | 108,432 | $ | 26,873 | $ | 490,635 | ||||||||||
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|
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Secured First Lien Debt |
Secured Second Lien Debt |
Preferred Equity |
Common Equity/ Equivalents |
Total | ||||||||||||||||
Three months ended September 30, 2014: |
||||||||||||||||||||
Fair value as of June 30, 2014 |
$ | 182,161 | $ | 65,820 | $ | 60,934 | $ | 12,917 | $ | 321,832 | ||||||||||
Total gain (loss): |
||||||||||||||||||||
Net realized loss(A) |
| | (12 | ) | | (12 | ) | |||||||||||||
Net unrealized depreciation(B) |
(1,547 | ) | (452 | ) | (4,207 | ) | 4,711 | (1,495 | ) | |||||||||||
Reversal of previously recorded appreciation upon realization(B) |
| | | | | |||||||||||||||
New investments, repayments and settlements(C): |
||||||||||||||||||||
Issuances / originations |
17,432 | 1,500 | 6,472 | 1,902 | 27,306 | |||||||||||||||
Settlements / repayments |
(742 | ) | | | | (742 | ) | |||||||||||||
Sales |
| | 12 | | 12 | |||||||||||||||
Transfers |
| | | | | |||||||||||||||
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Fair value as of September 30, 2014 |
$ | 197,304 | $ | 66,868 | $ | 63,199 | $ | 19,530 | $ | 346,901 | ||||||||||
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Secured First Lien Debt |
Secured Second Lien Debt |
Preferred Equity |
Common Equity/ Equivalents |
Total | ||||||||||||||||
Six months ended September 30, 2014: |
||||||||||||||||||||
Fair value as of March 31, 2014 |
$ | 174,382 | $ | 66,315 | $ | 62,901 | $ | 10,795 | $ | 314,393 | ||||||||||
Total gain (loss): |
||||||||||||||||||||
Net realized loss(A) |
| | (12 | ) | | (12 | ) | |||||||||||||
Net unrealized appreciation (depreciation)(B) |
4,693 | (1,197 | ) | (6,365 | ) | 6,834 | 3,965 | |||||||||||||
Reversal of previously recorded appreciation upon realization(B) |
| | | | | |||||||||||||||
New investments, repayments and settlements(C): |
||||||||||||||||||||
Issuances / originations |
18,971 | 1,750 | 6,723 | 1,901 | 29,345 | |||||||||||||||
Settlements / repayments |
(742 | ) | | (60 | ) | | (802 | ) | ||||||||||||
Sales |
| | 12 | | 12 | |||||||||||||||
Transfers |
| | | | | |||||||||||||||
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Fair value as of September 30, 2014 |
$ | 197,304 | $ | 66,868 | $ | 63,199 | $ | 19,530 | $ | 346,901 | ||||||||||
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(A) | Included in net realized gain (loss) on investments on our accompanying Condensed Consolidated Statements of Operations for the respective periods ended September 30, 2015 and 2014. |
(B) | Included in net unrealized appreciation (depreciation) of investments on our accompanying Condensed Consolidated Statements of Operations for the periods ended September 30, 2015 and 2014. |
(C) | Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, PIK and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments. |
21
Investment Activity
During the six months ended September 30, 2015, the following significant transactions occurred:
| In May 2015, we invested $16.3 million in Brunswick Bowling Products, Inc. (Brunswick) through a combination of secured first lien debt and equity. Brunswick, headquartered in Muskegon, Michigan, is a leader in the recreation industry and provides industry expertise, products, installation and maintenance for the development and renovation of new and existing centers as well as mixed-use facilities across the entertainment industry. |
| In June 2015, we sold our investment in Roanoke Industries Corp. (Roanoke). As a result of the sale, we received net cash proceeds of $0.3 million, resulting in a net realized gain of $0.2 million. In addition, we received full repayment of our debt investment of $1.7 million. |
| In July 2015, we invested $20.9 million in GI Plastek, Inc. (GI Plastek) through a combination of secured first lien debt and equity. GI Plastek, headquartered in Wolfeboro, New Hampshire, is a value-added provider of advanced manufacturing solutions for various non-automotive end markets. |
| In August 2015, NDLI, Inc. (NDLI) was acquired by Diligent Delivery Systems (Diligent). As part of this acquisition, we restructured our investment in NDLI, which resulted in the termination of our debt investments in NDLI. We received cash proceeds of $1.9 million and a $13.0 million secured second lien debt investment in Diligent, which resulted in a net realized loss of $2.7 million. Diligent, headquartered in Houston, Texas, has provided professional delivery services since 1994. |
| In September 2015, we sold our investment in Cavert. As a result of the sale, we received cash proceeds of $3.4 million, resulting in dividend income of $1.5 million and repayment of our equity investment at its cost basis of $1.8 million. |
Investment Concentrations
As of September 30, 2015, our investment portfolio consisted of investments in 35 portfolio companies located in 18 states across 17 different industries with an aggregate fair value of $490.6 million, of which our investments in SOG Specialty Knives & Tools, LLC (SOG), Acme Cryogenics, Inc. (Acme), Cambridge Sound Management, Inc. (Cambridge), Counsel Press Inc. (Counsel Press), and Funko, our five largest portfolio investments at fair value, collectively comprised $143.9 million, or 29.4%, of our total investment portfolio at fair value. The following table summarizes our investments by security type as of September 30, 2015 and March 31, 2015:
September 30, 2015 | March 31, 2015 | |||||||||||||||||||||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||||||||||||||||||
Secured first lien debt |
$ | 302,577 | 57.1 | % | $ | 280,938 | 57.3 | % | $ | 298,448 | 59.1 | % | $ | 267,545 | 57.4 | % | ||||||||||||||||
Secured second lien debt |
84,197 | 15.9 | 74,392 | 15.1 | 71,998 | 14.2 | 65,974 | 14.2 | ||||||||||||||||||||||||
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Total debt |
386,774 | 73.0 | 355,330 | 72.4 | 370,446 | 73.3 | 333,519 | 71.6 | ||||||||||||||||||||||||
Preferred equity |
136,311 | 25.7 | 108,432 | 22.1 | 127,762 | 25.3 | 111,090 | 23.8 | ||||||||||||||||||||||||
Common equity/equivalents |
6,950 | 1.3 | 26,873 | 5.5 | 7,050 | 1.4 | 21,444 | 4.6 | ||||||||||||||||||||||||
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Total equity/equivalents |
143,261 | 27.0 | 135,305 | 27.6 | 134,812 | 26.7 | 132,534 | 28.4 | ||||||||||||||||||||||||
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Total Investments |
$ | 530,035 | 100.0 | % | $ | 490,635 | 100.0 | % | $ | 505,258 | 100.0 | % | $ | 466,053 | 100.0 | % | ||||||||||||||||
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22
Investments at fair value consisted of the following industry classifications as of September 30, 2015 and March 31, 2015:
September 30, 2015 | March 31, 2015 | |||||||||||||||
Fair Value | Percentage of Total Investments |
Fair Value | Percentage of Total Investments |
|||||||||||||
Home and Office Furnishings, House wares, and Durable Consumer Products |
$ | 84,138 | 17.2 | % | $ | 70,533 | 15.1 | % | ||||||||
Chemicals, Plastics, and Rubber |
77,442 | 15.8 | 49,312 | 10.6 | ||||||||||||
Diversified/Conglomerate Manufacturing |
63,299 | 12.9 | 62,996 | 13.5 | ||||||||||||
Leisure, Amusement, Motion Pictures, Entertainment |
44,936 | 9.2 | 44,931 | 9.6 | ||||||||||||
Machinery (Non-agriculture, Non-construction, Non-electronic) |
28,327 | 5.8 | 30,397 | 6.5 | ||||||||||||
Diversified/Conglomerate Service |
27,707 | 5.6 | 31,995 | 6.9 | ||||||||||||
Personal and Non-Durable Consumer Products (Manufacturing Only) |
26,814 | 5.5 | 25,008 | 5.4 | ||||||||||||
Farming and Agriculture |
21,432 | 4.4 | 22,438 | 4.8 | ||||||||||||
Containers, Packaging, and Glass |
21,123 | 4.3 | 19,447 | 4.2 | ||||||||||||
Automobile |
20,220 | 4.1 | 24,530 | 5.3 | ||||||||||||
Aerospace and Defense |
14,765 | 3.0 | 18,770 | 4.0 | ||||||||||||
Telecommunications |
14,000 | 2.8 | 19,241 | 4.1 | ||||||||||||
Beverage, Food and Tobacco |
13,305 | 2.7 | 12,982 | 2.8 | ||||||||||||
Cargo Transport |
13,000 | 2.6 | 13,972 | 3.0 | ||||||||||||
Textiles and Leather |
11,341 | 2.3 | 10,750 | 2.3 | ||||||||||||
Other < 2.0% |
8,786 | 1.8 | 8,751 | 1.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Investments |
$ | 490,635 | 100.0 | % | $ | 466,053 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
Investments at fair value were included in the following geographic regions of the U.S. as of September 30, 2015 and March 31, 2015:
September 30, 2015 | March 31, 2015 | |||||||||||||||
Fair Value | Percentage of Total Investments |
Fair Value | Percentage of Total Investments |
|||||||||||||
Northeast |
$ | 161,342 | 32.9 | % | $ | 133,814 | 28.7 | % | ||||||||
West |
158,054 | 32.2 | 161,444 | 34.6 | ||||||||||||
South |
121,206 | 24.7 | 133,703 | 28.7 | ||||||||||||
Midwest |
50,033 | 10.2 | 37,092 | 8.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Investments |
$ | 490,635 | 100.0 | % | $ | 466,053 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional business locations in other geographic regions.
Investment Principal Repayments
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of September 30, 2015:
Amount | ||||||
For the remaining six months ending March 31: | 2016 |
$ | 9,302 | |||
For the fiscal year ending March 31: | 2017 |
49,406 | ||||
2018 |
83,707 | |||||
2019 |
81,681 | |||||
2020 |
113,753 | |||||
Thereafter |
48,925 | |||||
|
|
|||||
Total contractual repayments |
$ | 386,774 | ||||
Investments in equity securities |
143,261 | |||||
|
|
|||||
Total cost basis of investments held at September 30, 2015: |
$ | 530,035 | ||||
|
|
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies. Such receivables, net of any allowance for uncollectible receivables, are included in other assets on our accompanying Condensed 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,
23
that the portfolio company is unable to pay its obligations. We charge the accounts receivable to the established allowance when collection efforts have been exhausted and the receivables are deemed uncollectible. As of both September 30, 2015 and March 31, 2015, we had gross receivables from portfolio companies of $1.5 million. The allowance for uncollectible receivables was $0.5 million and $0.3 million as of September 30, 2015 and March 31, 2015, respectively.
NOTE 4. RELATED PARTY TRANSACTIONS
Transactions with our Adviser
We pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee, as provided for in the Advisory Agreement, and of a loan servicing fee, for the Advisors role as servicer pursuant to our Credit Facility, each as described below. On July 14, 2015, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, approved the annual renewal of the Advisory Agreement through August 31, 2016.
The following table summarizes the base management fees, loan servicing fees, incentive fees, and associated voluntary, non-contractual and irrevocable credits reflected in our accompanying Condensed Consolidated Statements of Operations:
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Average total assets subject to base management fee(A) |
$ | 502,000 | $ | 348,800 | $ | 496,300 | $ | 341,000 | ||||||||
Multiplied by prorated annual base management fee of 2.0% |
0.5 | % | 0.5 | % | 1.0 | % | 1.0 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Base management fee(B) |
2,510 | 1,744 | 4,963 | 3,410 | ||||||||||||
Credits to fees from Adviser - other(B) |
(861 | ) | (606 | ) | (1,706 | ) | (988 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net base management fee |
$ | 1,649 | $ | 1,138 | $ | 3,257 | $ | 2,422 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loan servicing fee(B) |
1,707 | 1,158 | 3,266 | 2,293 | ||||||||||||
Credits to base management fee - loan servicing fee(B) |
(1,707 | ) | (1,158 | ) | (3,266 | ) | (2,293 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loan servicing fee |
$ | | $ | | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Incentive fee(B) |
$ | 1,505 | $ | 1,051 | $ | 2,796 | $ | 2,266 | ||||||||
Credits to fees from Adviser - other(B) |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net incentive fee |
$ | 1,505 | 1,051 | 2,796 | 2,266 | |||||||||||
|
|
|
|
|
|
|
|
(A) | Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. |
(B) | Reflected as a line item on our accompanying Condensed Consolidated Statement of Operations. |
Base Management Fee
The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 2.0%, computed on the basis of the value of our average gross assets at the end of the two most recently completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, and adjusted appropriately for any share issuances or repurchases during the period.
Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser voluntarily, unconditionally, and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, primarily for the valuation of portfolio companies, is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser.
24
Loan Servicing Fee
The Adviser also services the loans held by our wholly-owned subsidiary, Business Investment (the borrower under our Credit Facility), in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under our Credit Facility. Since Business Investment is a consolidated subsidiary of ours, coupled with the fact that the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given calendar year, we treat payment of the loan servicing as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% voluntarily, unconditionally, and irrevocably credited back to us by the Adviser.
Incentive Fee
The incentive fee payable to the Adviser under our Advisory Agreement consists of two parts: an income-based incentive fee and a capital gains-based incentive fee.
The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the hurdle rate). The income-based incentive fee with respect to our pre-incentive fee net investment income is payable quarterly to the Adviser and is computed as follows:
| no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized); |
| 100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% of our net assets 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 in any calendar quarter (8.75% annualized). |
The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the preceding calendar year. The capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital losses since our inception, less (iii) the entire portfolios aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit between the net sales price of each investment, when sold, and the original cost of such investment since our inception. The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of deficit between the fair value of each investment security as of the applicable calculation date and the original cost of such investment security. We have not incurred capital gains-based incentive fees from inception through September 30, 2015, as cumulative net unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a reporting period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that any such unrealized capital appreciation will be realized in the future. There has been no GAAP accrual recorded for a capital gains-based incentive fee since our inception through September 30, 2015.
Administration Agreement
The Administration Agreement provides for payments equal to our allocable portion of the Administrators expenses incurred while performing services to us, which are primarily rent and salaries and benefits expenses of the Administrators employees, including, but not limited to, our chief financial officer and treasurer, chief valuation officer, chief compliance officer and general counsel and
25
secretary (who also serves as the Administrators president) and their respective staff. Prior to July 1, 2014, our allocable portion of the expenses was generally derived by multiplying that portion of the Administrators expenses allocable to all funds managed by the Adviser and serviced by the Administrator by the percentage of our total assets at the beginning of each quarter in comparison to the total assets at the beginning of each quarter of all funds managed by the Adviser and serviced by the Administrator.
Effective July 1, 2014, our allocable 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 Condensed Consolidated Statements of Operations and generally paid the following quarter. On July 14, 2015, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2016.
Related Party Fees Due
Amounts due to related parties on our accompanying Condensed Consolidated Statements of Assets and Liabilities were as follows:
As of September 30, | As of March 31 | |||||||
2015 | 2015 | |||||||
Base management fee due to Adviser |
$ | (58 | ) | $ | 191 | |||
Incentive fee due to Adviser |
1,505 | 1,249 | ||||||
Other due to Adviser |
467 | 62 | ||||||
|
|
|
|
|||||
Total fees due to Adviser |
$ | 1,914 | $ | 1,502 | ||||
Fee due to Administrator |
$ | 270 | $ | 262 | ||||
|
|
|
|
|||||
Total related party fees due |
$ | 2,184 | $ | 1,764 | ||||
|
|
|
|
Net co-investment expense receivable from or payable to Gladstone Capital (for reimbursement purposes) and payables to other affiliates totaled to a receivable of $0.1 million as of September 30, 2015 and a payable of $0.3 million as of March 31, 2015, respectively. These amounts were received or paid in full in the quarter subsequent to being incurred and have been included in other assets and other liabilities, as appropriate, on the accompanying Condensed Consolidated Statements of Assets and Liabilities as of September 30, 2015 and March 31, 2015, respectively.
NOTE 5. BORROWINGS
Revolving Line of Credit
On June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013. If not renewed or extended prior to June 26, 2017 (the Revolving Period End Date), all principal and interest will be due and payable on or before June 26, 2019. As of September 30, 2015, we have retained a one-year extension option, to be agreed upon by all parties, which may be exercised on or before June 26, 2016, and upon exercise, the option would extend the revolving period to June 26, 2018 and the maturity date to June 26, 2020. Subject to certain terms and conditions, our Credit Facility can be expanded up to a total facility amount of $250.0 million, through additional commitments of existing or new committed lenders. Advances under our Credit Facility generally bear interest at 30-day London Interbank Offered Rate (LIBOR), plus 3.25% per annum, and our Credit Facility includes a fee of 0.50% on undrawn amounts. After the Revolving Period End Date, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity.
The following tables summarize noteworthy information related to our Credit Facility:
As of September 30, | As of March 31, | |||||||
2015 | 2015 | |||||||
Commitment amount |
$ | 185,000 | $ | 185,000 | ||||
Borrowings outstanding at cost |
103,500 | 118,800 | ||||||
Availability(A) |
81,500 | 66,200 |
26
For the Three Months Ended September 30, |
For the Six Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Weighted average borrowings outstanding |
$ | 98,768 | $ | 64,934 | $ | 100,943 | $ | 62,690 | ||||||||
Effective interest rate(B) |
4.0 | % | 3.9 | % | 4.0 | % | 4.1 | % | ||||||||
Commitment (unused) fees incurred |
$ | 107 | $ | 65 | $ | 209 | $ | 121 |
(A) | Availability subject to various constraints imposed under our Credit Facility |
(B) | Excludes the impact of deferred financing fees and includes weighted average unused commitment fees. |
Among other things, our Credit Facility includes a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatory redeemable term preferred stock) of $170.0 million plus 50% of all equity and subordinated debt raised minus any equity or subordinated debt redeemed or retired after June 26, 2014, which equates to $224.9 million as of September 30, 2015, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) its status as a BDC under the 1940 Act and as a RIC under the Code. As of September 30, 2015, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $390.3 million, an asset coverage of 441.9%, calculated in compliance with the requirements of Section 18 of the 1940 Act, and an active status as a BDC and RIC. Our Credit Facility requires a minimum of 12 obligors in the borrowing base and, as of September 30, 2015, we had 30 obligors in its borrowing base. As of September 30, 2015, we were in compliance with all covenants under our Credit Facility.
Pursuant to the terms of our Credit Facility, in July 2013, we entered into an interest rate cap agreement with KeyBank National Association that effectively limits the interest rate on a portion of our borrowings under our Credit Facility. The agreement, which expires April 2016, provides that the interest rate on $45.0 million of our borrowings is capped at 6.0%, plus 3.25% per annum, when 30-day LIBOR is in excess of 6.0%. We incurred a premium fee of $75 in conjunction with this agreement, which is recorded in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. As of September 30, 2015 and March 31, 2015, the fair value of our interest rate cap agreement was $0.
Secured Borrowing
In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our secured second lien term debt investment in Ginsey Home Solutions, Inc. (Ginsey). In May 2014, we amended the agreement with the third-party to include an additional $0.1 million. Accounting Standards Codification Topic 860, Transfers and Servicing (ASC 860) requires us to treat the participation as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual rate established at origination. Therefore, our accompanying Condensed Consolidated Statements of Assets and Liabilities reflects the entire secured second lien term debt investment in Ginsey and a corresponding $5.1 million secured borrowing liability. The secured borrowing has a stated fixed interest rate of 7.0% and a maturity date of January 3, 2018.
Fair Value
We elected to apply the fair value option of ASC 825, Financial Instruments, specifically for our Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and also takes into account the Valuation Teams own assumptions, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At each of September 30, 2015 and March 31, 2015, 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. At each of September 30, 2015 and March 31, 2015, 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 Condensed Consolidated Statements of Operations.
27
The following tables present our Credit Facility carried at fair value as of September 30, 2015 and March 31, 2015, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and a roll-forward of the changes in fair value during the three and six months ended September 30, 2015 and 2014:
Level 3 Borrowings | ||||||||
Recurring Fair Value Measurement Reported in Condensed Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3) |
||||||||
September 30, 2015 | March 31, 2015 | |||||||
Credit Facility |
$ | 103,500 | $ | 118,800 | ||||
|
|
|
|
Fair Value Measurements of Borrowings Using Significant Unobservable Inputs (Level 3) Reported in Consolidated Statements of Assets and Liabilities |
||||
Credit Facility |
||||
Three months ended September 30, 2015: |
||||
Fair value at June 30, 2015 |
$ | 89,750 | ||
Borrowings |
27,000 | |||
Repayments |
(13,250 | ) | ||
|
|
|||
Fair value at September 30, 2015 |
$ | 103,500 | ||
|
|
|||
Six months ended September 30, 2015: |
||||
Fair value at March 31, 2015 |
$ | 118,800 | ||
Borrowings |
65,500 | |||
Repayments |
(80,800 | ) | ||
|
|
|||
Fair value at September 30, 2015 |
$ | 103,500 | ||
|
|
|||
Fair Value Measurements of Borrowings Using Significant Unobservable Inputs (Level 3) Reported in Consolidated Statements of Assets and Liabilities |
||||
Credit Facility |
||||
Three months ended September 30, 2014: |
||||
Fair value at June 30, 2014 |
$ | 62,950 | ||
Borrowings |
30,500 | |||
Repayments |
(5,700 | ) | ||
|
|
|||
Fair value at September 30, 2014 |
$ | 87,750 | ||
|
|
|||
Six months ended September 30, 2014: |
||||
Fair value at March 31, 2014 |
$ | 61,701 | ||
Borrowings |
36,800 | |||
Repayments |
(10,300 | ) | ||
Net unrealized depreciation(A) |
(451 | ) | ||
|
|
|||
Fair value at September 30, 2014 |
$ | 87,750 | ||
|
|
(A) | Included in net unrealized depreciation of other on our accompanying Condensed Consolidated Statement of Operations for the periods ended September 30, 2014. |
28
The fair value of the collateral under our Credit Facility was $470.6 million and $435.9 million as of September 30, 2015 and March 31, 2015, respectively.
NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK
In May, 2015, we completed a public offering of 1,610,000 shares of 6.50% Series C Cumulative Term Preferred Stock (our Series C Term Preferred Stock or Series C) at a public offering price of $25.00 per share. Gross proceeds totaled $40.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $38.6 million. We incurred $1.6 million in total offering costs related this offering, which have been recorded as deferred financing costs on our accompanying Condensed Consolidated Statements of Assets and Liabilities and are being amortized over the period ending May 31, 2022, the mandatory redemption date.
The shares of Series C Term Preferred Stock are traded under the ticker symbol GAINN on the NASDAQ Global Select Market (NASDAQ). Our Series C Term Preferred Stock is not convertible into our common stock or any other security. Our Series C Term Preferred Stock provides for a fixed dividend equal to 6.50% per year, payable monthly. We are required to redeem all shares of our outstanding Series C Term Preferred Stock on May 31, 2022, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series C Term Preferred Stock, and (2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of our outstanding Series C Term Preferred Stock or otherwise cure the ratio redemption trigger. We may also voluntarily redeem all or a portion of our Series C Term Preferred Stock at our sole option at the redemption price in order to have an asset coverage ratio of up to and including 215.0% and at any time on or after May 31, 2018. The asset coverage on our senior securities that are stock (our Series A, B, and C Term Preferred Stock) as of September 30, 2015 was 214.3%, calculated pursuant to Section 18(h) of the 1940 Act. The asset coverage on our senior securities that are stock as of October 13, 2015, when our Board of Directors declared a distribution on our common stock and mandatorily redeemable preferred stock dividends, was 213.1%, in compliance with requirements under Section 18 of the 1940 Act.
The following tables summarize our 7.125% Series A Cumulative Term Preferred Stock (our Series A Term Preferred Stock or Series A), 6.75% Series B Cumulative Term Preferred Stock (our Series B Term Preferred Stock or Series B), and Series C Term Preferred Stock outstanding as of September 30, 2015 and March 31, 2015:
As of September 30, 2015:
Class of Term Preferred Stock |
Ticker Symbol |
Date Issued |
Redemption Date |
Interest Rate |
Shares Outstanding |
Liquidation Preference per Share |
Total Liquidation Preference |
|||||||||||||
Series A |
GAINP | March 6, 2012 |
February 28, 2017 |
7.125% | 1,600,000 | $ | 25.00 | $ | 40,000 | |||||||||||
Series B |
GAINO | November 13, 2014 |
December 31, 2021 |
6.750% | 1,656,000 | 25.00 | 41,400 | |||||||||||||
Series C |
GAINN | May 12, 2015 |
May 31, 2022 |
6.500% | 1,610,000 | 25.00 | 40,250 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total as of September 30, 2015 |
4,866,000 | $ | 25.00 | $ | 121,650 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
As of March 31, 2015: | ||||||||||||||||||||
Class of Term Preferred Stock |
Ticker Symbol |
Date Issued |
Redemption Date |
Interest Rate |
Shares Outstanding |
Liquidation Preference per Share |
Total Liquidation Preference |
|||||||||||||
Series A |
GAINP | March 6, 2012 |
February 28, 2017 |
7.125% | 1,600,000 | $ | 25.00 | $ | 40,000 | |||||||||||
Series B |
GAINO | November 13, 2014 |
December 31, 2021 |
6.750% | 1,656,000 | 25.00 | 41,400 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total as of March 31, 2015 |
3,256,000 | $ | 25.00 | $ | 81,400 | |||||||||||||||
|
|
|
|
|
|
29
The following tables summarize dividends declared by our Board of Directors and paid by us on each of our series of cumulative preferred stock during the six months ended September 30, 2015 and 2014:
For the Six Months Ended September 30, 2015:
Declaration Date |
Record Date |
Payment Date | Dividend per Series A Term Preferred Share |
Dividend per Series B Term Preferred Share |
Dividend per Series C Term Preferred Share |
|||||||||||
April 14, 2015 |
April 24, 2015 | May 5, 2015 | $ | 0.1484375 | $ | 0.140625 | $ | | ||||||||
April 14, 2015 |
May 19, 2015 | May 29, 2015 | 0.1484375 | 0.140625 | | |||||||||||
April 14, 2015 |
June 19, 2015 | June 30, 2015 | 0.1484375 | 0.140625 | | |||||||||||
May 14, 2015(A) |
June 19, 2015 | June 30, 2015 | | | 0.221181 | |||||||||||
July 14, 2015 |
July 24, 2015 | August 4, 2015 | 0.1484375 | 0.140625 | 0.1354170 | |||||||||||
July 14, 2015 |
August 20, 2015 | August 31, 2015 | 0.1484375 | 0.140625 | 0.1354170 | |||||||||||
July 14, 2015 |
September 21, 2015 | September 30, 2015 | 0.1484375 | 0.140625 | 0.1354170 | |||||||||||
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|
|
|
|
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Total |
$ | 0.8906250 | $ | 0.843750 | $ | 0.6274320 | ||||||||||
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(A) | Represents a combined dividend for a prorated month of May 2015, based upon the issuance date of our Series C Term Preferred Stock, combined with a full month of June 2015. |
For the Six months Ended September 30, 2014:
Declaration Date |
Record Date | Payment Date | Dividend per Series A Term Preferred Share |
|||||
April 8, 2014 |
April 21, 2014 | April 30, 2014 | $ | 0.1484375 | ||||
April 8, 2014 |
May 20, 2014 | May 30, 2014 | 0.1484375 | |||||
April 8, 2014 |
June 19, 2014 | June 30, 2014 | 0.1484375 | |||||
July 15, 2014 |
July 25, 2014 | August 5, 2014 | 0.1484375 | |||||
July 15, 2014 |
August 20, 2014 | August 29, 2014 | 0.1484375 | |||||
July 15, 2014 |
September 19, 2014 | September 30, 2014 | 0.1484375 | |||||
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|||||||
Total |
$ | 0.8906250 | ||||||
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The tax character of dividends paid by us to 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 at cost as of September 30, 2015 and March 31, 2015. The related dividend payments to preferred stockholders are treated as dividend expense on our accompanying Condensed Consolidated Statements of Operations at the ex-dividend date.
The following table summarizes the fair value of each of our series of cumulative preferred stock, each of which we consider to be a Level 1 liability within the fair value hierarchy, based on the last reported closing sale price as of September 30, 2015 and March 31, 2015:
Level 1 Borrowings | ||||||||
Recurring Fair Value Measurement Reported in Condensed Consolidated Statements of Assets and Liabilities |
||||||||
September 30, 2015 | March 31, 2015 | |||||||
Series A Term Preferred Stock |
$ | 40,560 | $ | 41,472 | ||||
Series B Term Preferred Stock |
41,864 | 42,228 | ||||||
Series C Term Preferred Stock |
40,089 | | ||||||
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|
|
|||||
Total |
$ | 122,513 | $ | 83,700 | ||||
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30
NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS
Registration Statement
On June 16, 2015, we filed a registration statement on Form N-2 (File No. 333-204996) with the SEC and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 28, 2015, which the SEC declared effective on July 29, 2015. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through concurrent, separate offerings of such securities. We currently have the ability to issue up to $300.0 million in securities under the registration statement. No securities have been issued to date under the registration statement.
Common Equity Offering
On March 13, 2015, we completed a public offering of 3.3 million shares of our common stock at a public offering price of $7.40 per share, which was below our then current NAV per share. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $23.0 million, which was used to repay borrowings under our Credit Facility. In April 2015, the underwriters exercised their option to purchase an additional 495,000 shares at the public offering price of $7.40 per share to cover over-allotments, which resulted in gross proceeds of $3.7 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, of approximately $3.4 million.
NOTE 8. NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER WEIGHTED AVERAGE COMMON SHARE
The following table sets forth the computation of basic and diluted net (decrease) increase in net assets resulting from operations per weighted average common share for the three and six months ended September 30, 2015 and 2014:
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Numerator: net (decrease) increase in net assets resulting from operations |
$ | (110 | ) | $ | 2,697 | $ | 8,449 | $ | 13,467 | |||||||
Denominator: basic and diluted weighted average common shares |
30,270,958 | 26,475,958 | 30,265,548 | 26,475,958 | ||||||||||||
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Basic and diluted net (decrease) increase in net assets resulting from operations per weighted average common share |
$ | | $ | 0.10 | $ | 0.28 | $ | 0.51 | ||||||||
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31
NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify to be taxed as a RIC, we are required to distribute to our common stockholders 90% of our investment company taxable income. The amount to be paid out as distributions to our common stockholders is determined by our Board of Directors quarterly and is based on managements estimate of the investment company taxable income. Based on that estimate, our Board of Directors declares three monthly distributions to common stockholders each quarter.
The federal income tax characteristics of all distributions (including preferred stock dividends) will be reported to stockholders on the Internal Revenue Service Form 1099 at the end of each calendar year. For calendar years ended December 31, 2014 and 2013, 100% of our common distributions during these periods were deemed to be paid from ordinary income for 1099 stockholder reporting purposes.
We paid the following monthly distributions to our common stockholders for the six months ended September 30, 2015 and 2014:
Fiscal |
Declaration Date | Record Date | Payment Date | Distribution per Common Share | ||||
2016 |
April 14, 2015 | April 24, 2015 | May 5, 2015 | $0.0625 | ||||
April 14, 2015 | May 19, 2015 | May 29, 2015 | 0.0625 | |||||
April 14, 2015 | June 19, 2015 | June 30, 2015 | 0.0625 | |||||
July 14, 2015 | July 24, 2015 | August 4, 2015 | 0.0625 | |||||
July 14, 2015 | August 20, 2015 | August 31, 2015 | 0.0625 | |||||
July 14, 2015 | September 21, 2015 | September 30, 2015 | 0.0625 | |||||
| ||||||||
Six months ended September 30, 2015: |
$0.3750 | |||||||
| ||||||||
Fiscal |
Declaration Date | Record Date | Payment Date | Distribution per Common Share | ||||
2015 |
April 8, 2014 | April 21, 2014 | April 30, 2014 | $0.06 | ||||
April 8, 2014 | May 20, 2014 | May 30, 2014 | 0.06 | |||||
April 8, 2014 | June 19, 2014 | June 30, 2014 | 0.06 | |||||
July 15, 2014 | July 25, 2014 | August 5, 2014 | 0.06 | |||||
July 15, 2014 | August 20, 2014 | August 29, 2014 | 0.06 | |||||
July 15, 2014 | September 19, 2014 | September 30, 2014 | 0.06 | |||||
| ||||||||
Six months ended September 30, 2014: | $0.36 | |||||||
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Aggregate distributions to common stockholders declared quarterly and paid for the six months ended September 30, 2015 and 2014 were approximately $11.4 million and $9.5 million, respectively, and were declared based on estimates of net investment income for the respective fiscal years. We determine the tax characterization of our distributions to common stockholders as of the end of our fiscal year based upon our taxable income for the full year and distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year. If we determined the tax attributes of our distributions as of September 30, 2015, 100% would be from ordinary income and 0% would be a return of capital. For the six months ended September 30, 2015, we recorded a $0.4 million adjustment for estimated book-tax differences which decreased Capital in excess of par value and increased Net investment income in excess of distributions. For the fiscal year ended March 31, 2015, taxable income available for common distributions exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $4.0 million of the first common distributions paid in fiscal year 2016, as having been paid in the prior year.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of September 30, 2015, we have not established reserves for such loss contingencies.
Escrow Holdbacks
From time to time, we will enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow 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 Condensed Consolidated Statements of Assets and Liabilities. We establish
32
a contingent liability 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. The aggregate contingent liability recorded against the escrow amounts was $0 as of both September 30, 2015 and March 31, 2015.
Financial Commitments and Obligations
We have lines of credit and other uncalled capital commitments to certain of our portfolio companies that have not been fully drawn. Since these lines of credit and other uncalled capital commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and other uncalled capital commitment amounts do not necessarily represent future cash requirements. In February 2015, we executed a capital call commitment with Tread and its senior credit facility lender, which expires in February 2018. Under the terms of the agreement, we may be required to fund additional capital up to $10.0 million in Tread, with such commitment limited at all times to the actual amount outstanding under Treads senior credit facility. The actual amount outstanding under Treads senior credit facility as of September 30, 2015 and March 31, 2015 was $4.6 million and $4.4 million, respectively. We estimate the fair value of the combined unused line of credit and other uncalled capital commitments as of September 30, 2015 and March 31, 2015 to be immaterial.
In addition to the lines of credit and other uncalled capital commitments to our portfolio companies, we have also extended certain guaranties on behalf of some our portfolio companies. During the three and six months ended September 30, 2015, we have not been required to make any payments on any of the guaranties, and we consider the credit risks to be remote and the fair value of the guaranties as of September 30, 2015 and March 31, 2015 to be immaterial.
As of September 30, 2015, the following guaranties were outstanding:
| In February 2010, we executed a guarantee of a wholesale financing facility agreement (the Floor Plan Facility) between Agricredit Acceptance, LLC (Agricredit) and Country Club Enterprises, LLC (CCE). The Floor Plan Facility provides CCE with financing of up to $2.0 million to bridge the time and cash flow gap between the order and delivery of golf carts to customers. The guarantee was renewed in February of each subsequent year through February 2015 and expires in February 2016, unless it is renewed again by us, CCE and Agricredit. |
| In April 2010, we executed a guarantee of vendor recourse for up to $0.5 million in individual customer transactions (the Recourse Facility) between Wells Fargo Financial Leasing, Inc. and CCE. The Recourse Facility provides CCE with the ability to provide vendor recourse up to a limit of $0.5 million on transactions with long-time customers who lack the financial history to qualify for third-party financing. The terms to maturity of these individual transactions range from October 2015 to October 2016. |
The following table summarizes the dollar balance of unused line of credit and other uncalled capital commitments and guaranties as of September 30 and March 31, 2015, which are not reflected as liabilities in the accompanying Condensed Consolidated Statements of Assets and Liabilities:
September 30, 2015 | March 31, 2015 | |||||||
Unused line of credit and other uncalled capital commitments |
$ | 9,629 | $ | 10,031 | ||||
Guarantees |
2,459 | 2,593 | ||||||
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|
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Total |
$ | 12,088 | $ | 12,624 | ||||
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NOTE 11. FINANCIAL HIGHLIGHTS
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Per Common Share Data: |
||||||||||||||||
Net asset value at beginning of period(A) |
$ | 9.24 | $ | 8.57 | $ | 9.18 | $ | 8.34 | ||||||||
Income from investment operations(B) |
||||||||||||||||
Net investment income |
0.20 | 0.16 | 0.37 | 0.34 | ||||||||||||
Realized loss on sale of investments and other |
(0.09 | ) | | (0.08 | ) | | ||||||||||
Net unrealized (depreciation) appreciation of investments and other |
(0.11 | ) | (0.06 | ) | | 0.17 | ||||||||||
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Total from investment operations |
| 0.10 | 0.29 | 0.51 | ||||||||||||
Effect of equity capital activity(B) |
||||||||||||||||
Cash distributions to common stockholders(C) |
(0.19 | ) | (0.18 | ) | (0.38 | ) | (0.36 | ) | ||||||||
Shelf registration offering costs |
| | (0.01 | ) | | |||||||||||
Net dilutive effect of equity offering(D) |
| | (0.03 | ) | | |||||||||||
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|
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|
|
|
|||||||||
Total from equity capital activity |
(0.19 | ) | (0.18 | ) | (0.42 | ) | (0.36 | ) | ||||||||
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Net asset value at end of period(A) |
$ | 9.05 | $ | 8.49 | $ | 9.05 | $ | 8.49 | ||||||||
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Per common share market value at beginning of period |
$ | 7.95 | $ | 7.40 | $ | 7.40 | 8.27 | |||||||||
Per common share market value at end of period |
7.04 | 7.11 | 7.04 | 7.11 | ||||||||||||
Total return(E) |
(9.20 | )% | (1.55 | )% | (0.06 | )% | (9.82 | )% | ||||||||
Common stock outstanding at end of period(A) |
30,270,958 | 26,475,958 | 30,270,958 | 26,475,958 | ||||||||||||
Statement of Assets and Liabilities Data: |
||||||||||||||||
Net assets at end of period |
$ | 273,968 | $ | 224,773 | $ | 273,968 | $ | 224,773 | ||||||||
Average net assets(F) |
277,021 | 227,307 | 277,884 | 225,013 | ||||||||||||
Senior Securities Data: |
||||||||||||||||
Total borrowings, at cost |
$ | 108,596 | $ | 92,846 | $ | 108,596 | $ | 92,846 | ||||||||
Mandatorily redeemable preferred stock |
121,650 | 40,000 | 121,650 | 40,000 | ||||||||||||
Ratios/Supplemental Data: |
||||||||||||||||
Ratio of expenses to average net assets - annualized(G) |
14.85 | % | 11.67 | % | 14.56 | % | 11.67 | % | ||||||||
Ratio of net expenses to average net assets - annualized(H)(I) |
11.14 | 8.56 | 10.98 | 8.75 | ||||||||||||
Ratio of net investment income to average net assets - annualized(J) |
8.70 | 7.40 | 8.05 | 8.06 |
(A) | Based on actual common shares outstanding at the end of the corresponding period. |
(B) | Based on weighted average per basic common share data. |
(C) | Distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP. For the three and six months ended September 30, 2015 and 2014, distributions were deemed to be made from net investment income. |
(D) | During the six months ended September 30, 2015, the dilution is the result of issuing common shares at a price below then current NAV. |
(E) | Total return equals the change in the market value of our common stock from the beginning of the period, taking into account dividends 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, please refer to Note 9Distributions to Common Stockholders. |
(F) | Calculated using the average balance of net assets at the end of each month of the reporting period. |
(G) | Ratio of expenses to average net assets is computed using expenses before any credits from the Adviser. |
(H) | Ratio of net expenses to average net assets is computed using total expenses, net of credits to the base management fee for the loan servicing fee and other credits from the Adviser |
(I) | Had we not received any voluntary, unconditional, and irrevocable credits of fees due to the Adviser, the ratio of expenses to average net assets would have been 14.84% and 11.67% for the three months ended September 30, 2015 and 2014, and 14.56% and 11.67% for the six months ended September 30, 2015 and 2014, respectively. |
(J) | Had we not received any voluntary, unconditional, and irrevocable credits of fees due to the Adviser, the ratio of net investment income to average net assets would have been 4.99% and 1.07% for the three months ended September 30, 2015 and 2014, and 4.47% and 2.57% for the six months ended September 30, 2015 and 2014, respectively. |
34
NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES
In accordance with the SECs Regulation S-X and GAAP, we are not permitted to consolidate any subsidiary or other entity that is not an investment company, including those in which we have a controlling interest. We have one unconsolidated subsidiary, Galaxy Tool Holdings, Inc. (Galaxy), which met at least one of the significance conditions under Rule 1-02(w) of the SECs Regulation S-X as of September 30, 2015 and 2014 and for the six months ended September 30, 2015 and 2014. Accordingly, summarized, comparative financial information, is presented below for our significant unconsolidated subsidiary, Galaxy, which is a designer and manufacturer of precision tools for the business jet industry and of injection and blow molds for the plastics industry.
For the Six Months Ended September 30, | ||||||||
Income Statement |
2015 | 2014 | ||||||
Net sales |
$ | 13,080 | $ | 12,182 | ||||
Gross profit |
20 | 1,135 | ||||||
Net loss |
(2,980 | ) | (1,765 | ) |
NOTE 13. SUBSEQUENT EVENTS
The Companys management has evaluated subsequent events through the date of issuance of the condensed consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the condensed consolidated financial statements as of and for the three and six months ended September 30, 2015, except as disclosed below:
Distributions
In October 2015, our Board of Directors declared the following monthly distributions to common stockholders and dividends to holders of our Series A, B and C Term Preferred Stock:
Record Date |
Payment Date |
Distribution per Common Share |
Dividend per Series A Term Preferred Share |
Dividend per Series B Term Preferred Share |
Dividend per Series C Term Preferred Share |
|||||||||||||
October 26, 2015 |
November 4, 2015 | $ | 0.0625 | $ | 0.1484375 | $ | 0.140625 | $ | 0.135417 | |||||||||
November 17, 2015 |
November 30, 2015 | 0.0625 | 0.1484375 | 0.140625 | 0.135417 | |||||||||||||
December 18, 2015 |
December 31, 2015 | 0.0625 | 0.1484375 | 0.140625 | 0.135417 | |||||||||||||
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|
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Total for the Quarter: | $ | 0.1875 | $ | 0.4453125 | $ | 0.421875 | $ | 0.406250 | ||||||||||
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35
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
All statements contained herein, other than historical facts, may constitute forward-looking statements. These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as estimate, may, might, believe, will, provided, anticipate, future, could, growth, plan, project, intend, expect, should, would, if, seek, possible, potential, likely or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: (1) the recurrence of adverse events in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; 4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates, regulation or the general economy; (7) the degree and nature of our competition; (8) our ability to maintain our qualification as a regulated investment company and as a business development company; and (9) those factors described in Item 1A. Risk Factors herein and the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2015, filed with the Securities and Exchange Commission (SEC) on May 20, 2015. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
In this Quarterly Report on Form 10-Q, the Company, we, us, and our refer to Gladstone Investment Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. Dollar amounts are in thousands unless otherwise indicated.
The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015, filed with the SEC on May 20, 2015. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods.
General
We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. On June 22, 2005, we completed our initial public offering and commenced operations. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). For federal income tax purposes, we have elected to be treated as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). In order to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.
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 businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, generally in combination with the aforementioned debt securities, of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.
36
To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $5 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We seek to avoid investments in high-risk, early stage enterprises. We expect that our investment portfolio over time will consist of approximately 75.0% in debt securities and 25.0% in equity securities, at cost. As of September 30, 2015, our investment allocation was 73.0% in debt securities and 27.0% in equity securities, at cost.
We focus on investing in small and medium-sized private U.S. businesses that meet certain criteria, including, but not limited to, the following: the sustainability of the business free cash flow and its ability to grow it over time, the adequacy of the portfolio companys assets for loan collateral, experienced management teams with a significant ownership interest in the portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio companys stock or by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We generally invest in portfolio companies that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises.
We invest by ourselves or jointly with other funds or management of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.
In July 2012, the Securities and Exchange Commission (SEC) granted us an exemptive order that expanded our ability to co-invest with certain of our affiliates under certain circumstances and any future business development company or closed-end management investment company that is advised (or sub-advised if it controls the fund) by our external investment adviser, or any combination of the foregoing, subject to the conditions in the SECs order. We believe this ability to co-invest will continue to enhance our ability to further our investment objectives and strategies.
We are externally managed by our investment advisor, Gladstone Management Corporation (the Adviser), an SEC registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the Advisory Agreement). The Adviser manages our investment activities. We have also entered into an administration agreement (the Administration Agreement) with Gladstone Administration, LLC (the Administrator), an affiliate of ours and the Adviser, whereby we pay separately for administrative services.
Our shares of common stock, 7.125% Series A Cumulative Term Preferred Stock (Series A Term Preferred Stock), 6.75% Series B Cumulative Term Preferred Stock (Series B Term Preferred Stock) and 6.50% Series C Cumulative Term Preferred Stock (Series C Term Preferred Stock) are traded on the NASDAQ Global Select Market (NASDAQ) under the trading symbols GAIN, GAINP, GAINO, and GAINN, respectively.
Business
Portfolio Activity
While conditions remain challenging, we are seeing many new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and sponsor-led buyouts of small and medium-sized companies in the U.S. During the three months ended September 30, 2015, we invested $20.9 million in one new deal, exited one existing deal with a fair value of $3.3 million as of June 30, 2015, and obtained a $13.0 million investment in one additional company as part of a restructuring, resulting in a net increase of one portfolio company, which was 35 at September 30, 2015, and a net increase quarter over quarter of 2.0% in our portfolio at fair value. These new investments, along with our capital raising efforts discussed below, have allowed us to invest $470.4 million in 28 new debt and equity deals since October 2010. For the three months ended September 30, 2015, our new investments consisted of approximately 46.5% secured first lien loans, 38.3% secured second lien loans and 15.2% equity investments, based on the originating principal balances.
Generally, the majority of the debt securities in our portfolio have a success fee component, which enhances the yield on our debt investments. Unlike paid-in-kind (PIK) income, we generally do not recognize success fees as income until they are received in cash. Due to their contingent nature, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of such collections. As a result, as of September 30, 2015, we had unrecognized success fees of $29.6 million, or $0.98 per common share. Consistent with accounting principles generally accepted in the U.S. (GAAP), we generally have not recognized our success fee receivable and related income in our accompanying Condensed Consolidated Financial Statements.
37
The improved investing environment following the recent recession has presented us with an opportunity to realize gains and other income from six management-supported buyout liquidity events since June 2010, and in the aggregate, the six liquidity events have generated $51.9 million in net realized gains and $14.6 million in other income, for a total increase to our net assets of $66.5 million. We believe each of these transactions was an equity-oriented investment success and exemplifies our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. With the six liquidity events that resulted in net realized gains since June 2010, we have nearly overcome our cumulative realized losses since inception that were primarily incurred during the recession and in connection with the sale of performing loans at a realized loss to pay off a former lender. These successful exits, in part, enabled us to increase the monthly distribution by 56.3% since March 2011, and allowed us to declare and pay a $0.03 per common share one-time special distribution in fiscal year 2012, a $0.05 per common share one-time special distribution in November 2013, and a $0.05 per common share one-time special distribution in December 2014.
Capital Raising Efforts
Despite the challenges that have existed in the economy for the past several years, we have been able to meet our capital needs through extensions of and increases to our revolving line of credit (the Credit Facility) and by accessing the capital markets in the form of public offerings of common and preferred stock. We have successfully extended our Credit Facilitys revolving period multiple times, most recently to June 2017, and increased the commitment from $60.0 million to $185.0 million (with a total commitment of $250.0 million through additional commitments of new or existing lenders). Additionally, we issued approximately 1.7 million shares of our Series B Term Preferred Stock for gross proceeds of $41.4 million in November 2014, approximately 3.8 million shares of common stock for gross proceeds of $28.1 million in March 2015, inclusive of the April 2015 overallotment, and approximately 1.6 million shares of our Series C Term Preferred Stock for gross proceeds of approximately $40.3 million in May 2015. Refer to Liquidity and Capital Resources Equity Common Stock and Liquidity and Capital Resources Equity Term Preferred Stock for further discussion of our common stock and mandatorily redeemable preferred stock and Liquidity and Capital Resources Revolving Credit Facility for further discussion of our Credit Facility.
Although we were able to access the capital markets during 2014 and 2015, we believe market conditions continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of additional equity. On October 27, 2015, the closing market price of our common stock was $7.49 per share, which represented a 17.2% discount to our net asset value (NAV) of $9.05 per share as of September 30, 2015. When our common stock trades below NAV, our ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibit the issuance and sale of our common stock at an issuance price below the then current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering.
At our 2015 Annual Meeting of Stockholders held on August 6, 2015, our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then current NAV per share, subject to certain limitations, including that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each such sale, provided that our board of directors (our Board of Directors) makes certain determinations prior to any such sale. This August 2015 stockholder authorization is in effect for one year from the date of stockholder approval. We sought and obtained stockholder approval concerning a similar proposal at the Annual Meeting of Stockholders held in August 2014, and with our Board of Directors subsequent approval, we issued shares of our common stock in March and April 2015 at a price per share below the then current NAV per share. We also sought and obtained stockholder approval concerning a similar proposal at the Annual Meeting of Stockholders held in August 2012, and with our Board of Directors subsequent approval, we issued shares of our common stock in October and November 2012 at a price per share below the then current NAV per share. The resulting proceeds, in part, have allowed us to grow the portfolio by making new investments, generate additional income through these new investments, provide us additional equity capital to help ensure continued compliance with regulatory tests and increase our debt capital while still complying with our applicable debt-to-equity ratios. Refer to Liquidity and Capital Resources Equity Common Stock for further discussion of our common stock.
Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage ratio (as defined in Section 18(h) of the 1940 Act), of at least 200.0% on our senior securities representing indebtedness. Furthermore, to issue additional senior securities that are stock (such as our series of term preferred stock) Section 18 of the 1940 Act requires that we must have an asset coverage ratio of at least 200% on our senior securities that are stock
38
Investment Highlights
During the six months ended September 30, 2015, we disbursed $37.2 million in new debt and equity investments, obtained a $13.0 million new debt investment as part of a restructuring, and extended $2.9 million of investments to existing portfolio companies through revolver draws or additions to equity. From our initial public offering in June 2005 through September 30, 2015, we have made 244 investments in 116 companies for a total of approximately $1.2 billion, before giving effect to principal repayments and divestitures.
Investment Activity
During the six months ended September 30, 2015, the following significant transactions occurred:
| In May 2015, we invested $16.3 million in Brunswick Bowling Products, Inc., (Brunswick) through a combination of secured first lien debt and equity. Brunswick, headquartered in Muskegon, Michigan, is a leader in the recreation industry and provides industry expertise, products, installation and maintenance for the development and renovation of new and existing centers as well as mixed-use facilities across the entertainment industry. |
| In June 2015, we sold our investment in Roanoke Industries Corp. (Roanoke). As a result of the sale, we received net cash proceeds of $0.3 million, resulting in a net realized gain of $0.2 million. In addition, we received full repayment of our debt investment of $1.7 million. |
| In July 2015, we invested $20.9 million in GI Plastek, Inc. (GI Plastek) through a combination of secured first lien debt and equity. GI Plastek, headquartered in Wolfeboro, New Hampshire, is a value-added provider of advanced manufacturing solutions for various non-automotive end markets. |
| In August 2015, NDLI, Inc. (NDLI) was acquired by Diligent Delivery Systems (Diligent). As part of this acquisition, we restructured our investment in NDLI, which resulted in the termination of our debt investments in NDLI. We received cash proceeds of $1.9 million and a $13.0 million secured second lien debt investment in Diligent, which resulted in a net realized loss of $2.7 million. Diligent, headquartered in Houston, Texas, has provided professional delivery services since 1994. |
| In September 2015, we sold our investment in Cavert II Holding Corp. (Cavert). As a result of the sale, we received cash proceeds of $3.4 million, resulting in dividend income of $1.5 million and repayment of our equity investment at its cost basis of $1.8 million. |
Recent Developments
Registration Statement
On June 16, 2015, we filed a registration statement on Form N-2 with the SEC and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 28, 2015, which the SEC declared effective on July 29, 2015. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through concurrent, separate offerings of such securities. Currently, we have not issued any securities pursuant to the registration statement and are able to issue up to $300.0 million in securities under the registration statement.
Term Preferred Stock Offerings
In May 2015, we completed a public offering of 1,610,000 shares of our Series C Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $38.6 million. Refer to Liquidity and Capital Resources Equity Term Preferred Stock for further discussion of our recently issued mandatorily redeemable preferred stock.
Common Stock Offering
In March 2015, we completed a public offering of 3.3 million shares of our common stock. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $23.0 million. In April 2015, the underwriters fully exercised their overallotment option to purchase 495,000 additional shares of our common stock, resulting in net proceeds, after deducting underwriting discounts and offering costs borne by us, of approximately $3.4 million.
39
Executive Officers
On July 14, 2015, our Board of Directors appointed Julia Ryan, formerly the Companys chief accounting officer, as the Companys chief financial officer and treasurer. Ms. Ryan replaced Melissa Morrison, Gladstone Capital Corporations chief financial officer and treasurer, who had also been acting as chief financial officer and treasurer of the Company since January 13, 2015.
On October 13, 2015, our Board of Directors announced that Ms. Ryan had taken a temporary family medical leave of absence and that Ms. Morrison will serve as the Companys acting principal financial officer during Ms. Ryans temporary family medical leave of absence. Ms. Ryan will return to her position as chief financial officer and treasurer of the Company in December 2015.
40
Comparison of the Three Months Ended September 30, 2015, to the Three Months Ended September 30, 2014
For the Three Months Ended September 30, | ||||||||||||||||
2015 | 2014 | $ Change | % Change | |||||||||||||
INVESTMENT INCOME |
||||||||||||||||
Interest income |
$ | 11,945 | $ | 8,570 | $ | 3,375 | 39.4 | % | ||||||||
Other income |
1,795 | 501 | 1,294 | 258.3 | ||||||||||||
|
|
|
|
|
|
|
|
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Total investment income |
13,740 | 9,071 | 4,669 | 51.5 | ||||||||||||
|
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|
|
|
|
|
|
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EXPENSES |
||||||||||||||||
Base management fee |
2,510 | 1,744 | 766 | 43.9 | ||||||||||||
Loan servicing fee |
1,707 | 1,158 | 549 | 47.4 | ||||||||||||
Incentive fee |
1,505 | 1,051 | 454 | 43.2 | ||||||||||||
Administration fee |
270 | 209 | 61 | 29.2 | ||||||||||||
Interest and dividend expense |
3,146 | 1,432 | 1,714 | 119.7 | ||||||||||||
Amortization of deferred financing costs |
483 | 282 | 201 | 71.3 | ||||||||||||
Other |
664 | 755 | (91 | ) | (12.1 | ) | ||||||||||
|
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|
|
|
|
|
|
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Expenses before credits from Adviser |
10,285 | 6,631 | 3,654 | 55.1 | ||||||||||||
Credits to fees from Adviser |
(2,568 | ) | (1,764 | ) | (804 | ) | 45.6 | |||||||||
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|
|
|
|
|
|
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Total expenses, net of credits to fees |
7,717 | 4,867 | 2,851 | 58.6 | ||||||||||||
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|
|
|
|
|
|
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NET INVESTMENT INCOME |
6,023 | 4,204 | 1,819 | 43.3 | ||||||||||||
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|
|
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REALIZED AND UNREALIZED GAIN (LOSS) |
||||||||||||||||
Net realized loss on investments |
(2,740 | ) | (12 | ) | (2,728 | ) | NM | |||||||||
Net unrealized depreciation of investments |
(3,393 | ) | (1,495 | ) | (1,898 | ) | 127.0 | |||||||||
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|
|
|
|
|
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Net realized and unrealized loss |
(6,133 | ) | (1,507 | ) | (4,626 | ) | 307.6 | |||||||||
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|
|
|||||||||
NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | (110 | ) | $ | 2,697 | $ | (2,807 | ) | (104.1 | )% | ||||||
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BASIC AND DILUTED PER COMMON SHARE: |
||||||||||||||||
Net investment income |
$ | 0.20 | $ | 0.16 | $ | 0.04 | 25.0 | % | ||||||||
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|
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Net increase in net assets resulting from operations |
$ | | $ | 0.10 | $ | (0.10 | ) | (100.0 | )% | |||||||
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|
NM = Not Meaningful
Investment Income
Total investment income increased by 51.5% for the three months ended September 30, 2015, as compared to the prior year period. This increase was due to an increase in both interest income and other income, which largely resulted from an increase in the size of our portfolio during the three months ended September 30, 2015.
Interest income from our investments in debt securities increased 39.4% for the three months ended September 30, 2015, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period, multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended September 30, 2015, was approximately $375.9 million, compared to approximately $270.9 million for the prior year period. This increase was primarily due to approximately $107.4 million in new debt investments originated after September 30, 2014, including Old World Christmas, Inc. (Old World), B+T Group Acquisition, Inc. (B+T), Logo Sportswear, Inc. (Logo), Counsel Press, Inc. (Counsel Press), Brunswick, GI Plastek, and Diligent.
At September 30, 2015 and 2014, our loans to one portfolio company, Tread Corporation (Tread), were on non-accrual status, with an aggregate debt cost basis of $11.7 million and $12.0 million, respectively. The weighted average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as other income, was 12.7% and 12.6% for the three months ended September 30, 2015 and 2014, respectively. The weighted average yield varies from period to period, based on the current stated interest rate on interest-bearing investments.
Other income for the three months ended September 30, 2015 increased by 258.3% from the prior year period. During the three months ended September 30, 2015, other income consisted of $1.6 million of dividend income resulting from payments from Cavert and Funko, LLC (Funko) and a $0.2 million dividend receivable from Funko. For the three months ended September 30, 2014, other income consisted of $0.5 million of success fees received from Auto Safety House LLC (ASH), Frontier Packaging, Inc. (Frontier), and Mathey Investments, Inc. (Mathey).
41
The following table lists the investment income for our five largest portfolio company investments based on fair value during the respective periods:
As of September 30, 2015 | Three months ended September 30, 2015 | |||||||||||||||
Portfolio Company |
Fair Value | % of Portfolio | Investment Income |
% of Total Investment Income |
||||||||||||
SOG Specialty Knives & Tools, LLC |
$ | 31,855 | 6.5 | % | $ | 670 | 4.9 | % | ||||||||
Acme Cryogenics, Inc. |
29,331 | 6.0 | 426 | 3.1 | ||||||||||||
Cambridge Sound Management, Inc. |
28,218 | 5.8 | 498 | 3.6 | ||||||||||||
Counsel Press, Inc. |
27,707 | 5.6 | 803 | 5.8 | ||||||||||||
Funko, LLC |
26,814 | 5.5 | 481 | 3.5 | ||||||||||||
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Subtotalfive largest investments |
143,925 | 29.4 | 2,878 | 20.9 | ||||||||||||
Other portfolio companies |
346,710 | 70.6 | 10,862 | 79.1 | ||||||||||||
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|
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Total investment portfolio |
$ | 490,635 | 100.0 | % | $ | 13,740 | 100.0 | % | ||||||||
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As of September 30, 2014 | Three months ended September 30, 2014 | |||||||||||||||
Portfolio Company |
Fair Value | % of Portfolio | Investment Income | % of Total Investment Income |
||||||||||||
Acme Cryogenics, Inc. |
$ | 27,139 | 7.8 | % | $ | 426 | 4.7 | % | ||||||||
SOG Specialty Knives & Tools, LLC |
23,989 | 6.9 | 670 | 7.4 | ||||||||||||
Cambridge Sound Management, LLC (A) |
20,175 | 5.8 | 6 | 0.1 | ||||||||||||
Jackrabbit, Inc. |
19,327 | 5.6 | 380 | 4.2 | ||||||||||||
Edge Adhesives Holdings, Inc. |
18,074 | 5.2 | 440 | 4.9 | ||||||||||||
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Subtotalfive largest investments |
108,704 | 31.3 | 1,922 | 21.3 | ||||||||||||
Other portfolio companies |
238,197 | 68.7 | 7,149 | 78.7 | ||||||||||||
|
|
|
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|
|
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Total investment portfolio |
$ | 346,901 | 100.0 | % | $ | 9,071 | 100.0 | % | ||||||||
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|
(A) | New investment during the applicable period. |
Expenses
Total expenses, net of any voluntary, unconditional, and irrevocable credits from the Adviser, increased 58.6% for the three months ended September 30, 2015, as compared to the prior year period, primarily due to an increase in interest and dividend expense, the net base management fee, and amortization of deferred financing costs as compared to the prior year period.
The net base management fee increased for the three months ended September 30, 2015, as compared to the prior year period, as a result of the increased size of our portfolio over the respective periods.
The base management fee, loan servicing fee, incentive fee, and their related voluntary, unconditional, and irrevocable credits are computed quarterly, as described under Transactions with our Adviser in Note 4 Related Party Transactions of the notes to our accompanying Condensed Consolidated Financial Statements and are summarized in the following table:
42
Three Months Ended September 30, | ||||||||
2015 | 2014 | |||||||
Average total assets subject to base management fee(A) |
$ | 502,000 | $ | 348,800 | ||||
Multiplied by prorated annual base management fee of 2.0% |
0.5 | % | 0.5 | % | ||||
|
|
|
|
|||||
Base management fee(B) |
2,510 | 1,744 | ||||||
Credits to fees from Adviser - other(B)(C) |
(861 | ) | (606 | ) | ||||
|
|
|
|
|||||
Net base management fee |
$ | 1,649 | $ | 1,138 | ||||
|
|
|
|
|||||
Loan servicing fee(B) |
$ | 1,707 | $ | 1,158 | ||||
Credits to base management fee - loan servicing fee(B) |
(1,707 | ) | (1,158 | ) | ||||
|
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|
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Net loan servicing fee |
$ | | $ | | ||||
|
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|
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Incentive fee(B) |
$ | 1,505 | $ | 1,051 | ||||
Credits to fees from Adviser - other(B) |
| | ||||||
|
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|
|
|||||
Net incentive fee |
$ | 1,505 | $ | 1,051 | ||||
|
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|
|
(A) | Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. |
(B) | Reflected as a line item on our accompanying Condensed Consolidated Statement of Operations. |
(C) | Pursuant to the requirements of the 1940 Act, we make available significant managerial assistance to our portfolio companies through the personnel of the Adviser. The Adviser may also provide other services to our portfolio companies under other agreements and may receive fees for services other than managerial assistance. At the end of each quarter, the Advisor credits 100.0% 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, primarily for valuation of portfolio companies, is retained by the Adviser in the form of reimbursement at cost for certain tasks completed by personnel of the Adviser. |
Interest and dividend expense increased 119.7% for the three months ended September 30, 2015, as compared to the prior year period, primarily due to increased average borrowings under our Credit Facility and newly issued Series B Term Preferred Stock and Series C Term Preferred Stock. The weighted average balance outstanding on our Credit Facility during the three months ended September 30, 2015, was $98.7 million, as compared to $64.9 million in the prior year period. Dividend expense increased due to the offering of our Series B Term Preferred Stock in November 2014 and our Series C Term Preferred Stock in May 2015. We paid dividends on both the Series B Term Preferred Stock and the Series C Term Preferred Stock for July, August and September 2015, which dividends represented a $1.4 million increase from the prior year period, when the Series B Term Preferred Stock and Series C Term Preferred Stock were not yet outstanding.
Amortization of deferred financing costs increased 71.3% for the three months ended September 30, 2015, as compared to the prior year period, due to the addition of new lenders to our Credit Facility through joinder agreements in September 2014 and the issuance of our Series B Term Preferred Stock and C Term Preferred Stock in November 2014 and May 2015, respectively.
Realized and Unrealized Loss
Realized Loss on Investments
During the three months ended September 30, 2015, we recorded realized losses of $2.7 million, primarily related to the restructuring of NDLI, compared to realized losses of $12 during the prior year period related to post-closing adjustments on previous exits.
43
Unrealized Depreciation of Investments
During the three months ended September 30, 2015, we recorded net unrealized depreciation of investments in the aggregate amount of approximately $3.4 million. The realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended September 30, 2015, were as follows:
Three Months Ended September 30, 2015 | ||||||||||||||||
Portfolio Company |
Realized (Loss) Gain |
Unrealized Appreciation (Depreciation) |
Reversal of Unrealized Depreciation (Appreciation) |
Net (Loss) Gain |
||||||||||||
Acme Cryogenics, Inc. |
$ | | $ | 3,762 | $ | | $ | 3,762 | ||||||||
D.P.M.S., Inc. |
| 3,571 | | 3,571 | ||||||||||||
Drew Foam Company, Inc. |
| 2,829 | | 2,829 | ||||||||||||
SOG Specialty Knives & Tools, LLC |
| 2,089 | | 2,089 | ||||||||||||
Cambridge Sound Management, Inc. |
| 2,038 | | 2,038 | ||||||||||||
Frontier Packaging, Inc. |
| 1,957 | | 1,957 | ||||||||||||
Jackrabbit, Inc. |
| 1,845 | | 1,845 | ||||||||||||
Behrens Manufacturing, LLC |
| 1,173 | | 1,173 | ||||||||||||
Tread Corporation |
| 1,038 | | 1,038 | ||||||||||||
NDLI, Inc. |
(2,740 | ) | | 3,480 | 740 | |||||||||||
Head Country, Inc. |
| 478 | | 478 | ||||||||||||
Country Club Enterprises, LLC |
| 444 | | 444 | ||||||||||||
Mitchell Rubber Products, Inc. |
| 400 | | 400 | ||||||||||||
Precision Southeast, Inc. |
| 352 | | 352 | ||||||||||||
Ginsey Home Solutions, Inc. |
| 306 | | 306 | ||||||||||||
B-Dry LLC |
| (259 | ) | | (259 | ) | ||||||||||
Channel Technologies Group, LLC |
| (305 | ) | | (305 | ) | ||||||||||
Logo Sportswear, Inc. |
| (613 | ) | | (613 | ) | ||||||||||
Brunswick Bowling Products, Inc. |
| (1,074 | ) | | (1,074 | ) | ||||||||||
Cavert II Holdings Corp. |
(1 | ) | | (1,483 | ) | (1,484 | ) | |||||||||
Edge Adhesives Holdings, Inc. |
| (1,538 | ) | 9 | (1,529 | ) | ||||||||||
Counsel Press, Inc. |
| (1,906 | ) | | (1,906 | ) | ||||||||||
Meridian Rack & Pinion, Inc. |
| (2,072 | ) | | (2,072 | ) | ||||||||||
SBS Industries, LLC |
| (2,119 | ) | | (2,119 | ) | ||||||||||
Old World Christmas, Inc. |
| (2,452 | ) | | (2,452 | ) | ||||||||||
Mathey Investments, Inc. |
| (2,483 | ) | | (2,483 | ) | ||||||||||
Alloy Die Casting Co. |
| (3,017 | ) | | (3,017 | ) | ||||||||||