NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2018
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
NOTE 1. ORGANIZATION
Gladstone Capital Corporation was
incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 2001. The terms the Company, we, our and us all refer to
Gladstone Capital Corporation and its consolidated subsidiaries. We are an externally managed,
closed-end,
non-diversified
management investment company that has elected
to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act), and is applying the guidance of the Financial Accounting Standards Board (the FASB)
Accounting Standards Codification (ASC) Topic 946
Financial Services-Investment Companies
(ASC 946). In addition, we have elected to be treated for tax purposes as a regulated investment company (RIC) under
the Internal Revenue Code of 1986, as amended (the Code). We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (U.S.). Our investment
objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and
amortization (EBITDA) of $3 million to $15 million) in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make
distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to
permit us to sell our equity investments for capital gains.
Gladstone Business Loan, LLC (Business Loan), a wholly-owned subsidiary of ours,
was established on February 3, 2003, for the sole purpose of owning a portion of our portfolio of investments in connection with our line of credit. The financial statements of Business Loan are consolidated with those of Gladstone Capital
Corporation. 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 12
Unconsolidated Significant Subsidiaries
for additional information regarding our unconsolidated significant subsidiaries.
We are externally managed by Gladstone Management Corporation (the Adviser), a Delaware corporation and an SEC registered investment adviser and
an affiliate of ours, pursuant to an investment advisory and management agreement (the Advisory Agreement). Administrative services are provided by our affiliate, Gladstone Administration, LLC (the Administrator), a Delaware
limited liability company, pursuant to an administration agreement (the Administration Agreement). Refer to Note 4
Related Party Transactions
for additional information regarding these arrangements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 Regulation
S-X.
Accordingly, we have not included in this
quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying
Consolidated Financial Statements
include our accounts and those of our wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation
S-X,
we do not consolidate portfolio company investments. Under the investment company rules and regulations
pursuant to the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946
provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring
accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and nine months ended June 30, 2018, are not necessarily indicative of results that
ultimately may be achieved for the fiscal year or any future interim periods. 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 September 30, 2017, as filed with the SEC on November 20, 2017.
Use of
Estimates
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying
Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation in the Consolidated Financial Statements and the accompanying
notes. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities or total net assets, or Statement of Changes in Net Assets and Statement of Cash Flows classifications.
17
Investment Valuation Policy
Accounting Recognition
We record our investments at fair
value in accordance with the FASB ASC Topic 820,
Fair Value Measurements and Disclosures
(ASC 820) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are generally
measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the
period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
Board Responsibility
In accordance with the 1940 Act,
our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our investment valuation policy (which has been approved by our Board of Directors) (the
Policy). Such review occurs in three phases. First, prior to its quarterly meetings, the Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and
Administrator with oversight and direction from the chief valuation officer (the Valuation Team). Second, the Valuation Committee of our Board of Directors (comprised entirely of independent directors) meets to review the valuation
recommendations and supporting materials presented by the chief valuation officer. Third, after the Valuation Committee concludes its meeting, it and the chief valuation officer present the Valuation Committees findings to the entire
Board of Directors so that the full Board of Directors may review and approve the fair value of our investments in accordance with the Policy.
There is no
single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the
Valuation Team, led by the chief valuation officer, uses the Policy and each quarter the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and also review whether the Valuation Team has
applied the Policy consistently.
Use of Third Party Valuation Firms
The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments. ICE, Data Pricing and
Reference Data, LLC (ICE) (formerly Standard and Poors Securities Evaluations, Inc.), a valuation specialist, generally provides estimates of fair value on our proprietary debt investments. The Valuation Team generally assigns
ICEs 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 ICEs 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 ICEs. 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 (TEV) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the valuation of our significant equity investments,
which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a
recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value, and whether it is reasonable in light of the Policy, and other relevant facts and circumstances
and then votes to accept or reject the Valuation Teams recommended fair value.
Valuation Techniques
In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:
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Total Enterprise Value
In determining the fair value using a 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 EBITDA); EBITDA obtained from our indexing methodology whereby the original transaction EBITDA at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA
from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The Valuation Team generally reviews industry statistics and may use
outside experts when gathering this information. Once the TEV is determined for a portfolio company,
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the Valuation Team generally allocates the TEV to the portfolio companys securities based on the facts and circumstances of the securities, which typically results in the allocation of fair
value to securities based on the order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a
portfolio company, our debt investments.
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TEV is primarily calculated using EBITDA; however, TEV may also be calculated
using revenue multiples or 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 a DCF analysis 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.
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Yield Analysis
The Valuation Team generally determines the fair value of our debt investments (where we do not have the ability to effectuate a sale of a portfolio company) using the yield analysis, which
includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique
develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to
corroborate both estimates of value provided by ICE and market quotes.
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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. For securities that are publicly traded, we generally base
fair value on the closing market price of our shares as of the reporting date. For restricted securities that are publicly traded, we generally base fair value on the closing market price of our shares as of the reporting date less a discount for
the restriction, which includes consideration of the nature and term to expiration of the restriction.
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Investments in Funds
For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our
invested capital at the Net Asset Value (NAV) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.
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In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments,
including, but not limited to: the nature and realizable value of the collateral, including external parties guaranties, any relevant offers or letters of intent to acquire the portfolio company, timing of expected loan repayments, and the
markets in which the portfolio company operates. New and
follow-on
debt and equity investments made during the current reporting quarter are generally valued at our original cost basis, as appropriate, as
near-measurement date transaction value generally is a reasonable indicator of fair value.
Fair value measurements of our investments may involve
subjective judgments and estimates and due to the uncertainty inherent in valuing these securities, the determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready
market for these securities existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities.
Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further,
such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize
significantly less than the value at which it is recorded.
Refer to Note 3
Investments
for additional information regarding fair value
measurements and our application of ASC 820.
19
Revenue Recognition
Interest Income Recognition
Interest income, including
the amortization of premiums, acquisition costs and amendment fees, the accretion of original issue discounts (OID), and
paid-in-kind
(PIK)
interest, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due or if our qualitative assessment indicates that the debtor is unable to service its debt
or other obligations, we will place the loan on
non-accrual
status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent
to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on
non-accrual
loans may be recognized as income or applied to the cost basis depending
upon managements judgment. Generally,
non-accrual
loans are restored to accrual status when past due principal and interest are paid and, in managements judgment, are likely to remain current, or
due to a restructuring such that the interest income is deemed to be collectible. At June 30, 2018, certain loans to one portfolio company, Sunshine Media Holdings, were on
non-accrual
status with an
aggregate debt cost basis of approximately $22.6 million, or 5.5% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $1.0 million, or 0.3% of the fair value of all debt investments in
our portfolio. At September 30, 2017, certain loans to two portfolio companies, Sunshine Media Holdings and Alloy Die Casting Co., were on
non-accrual
status with an aggregate debt cost basis of
approximately $27.9 million, or 7.5% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $5.6 million, or 1.7% of the fair value of all debt investments in our portfolio.
We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally
issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and
recorded as income over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both OID and PIK
non-cash
income amounts in the form of distributions, even though we have not yet collected the cash on either.
As of
June 30, 2018 and September 30, 2017, we had seven and six OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $12 and $122 for the three and nine months ended June 30, 2018,
respectively, and $57 and $144 during the three and nine months ended June 30, 2017, respectively. The unamortized balance of OID investments as of June 30, 2018 and September 30, 2017 totaled $0.5 million and $0.4 million,
respectively. As of each of June 30, 2018 and September 30, 2017, we had six investments which had a PIK interest component. We recorded PIK interest income of $1.1 million and $3.5 million during the three and nine months ended
June 30, 2018, respectively, as compared to $1.3 million and $3.8 million during the three and nine months ended June 30, 2017, respectively. We collected $0 and $0.8 million in PIK interest in cash during the three and nine
months ended June 30, 2018, respectively, as compared to $0 and $1.0 million during the three and nine months ended June 30, 2017, respectively.
Success Fee Income Recognition
We record success fees as
income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically resulting from an exit or sale.
Dividend Income Recognition
We accrue dividend income on
preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration. During the year ended September 30, 2017, we recharacterized
$0.2 million of dividend income from our investment in Behrens Manufacturing, LLC recorded during our fiscal year ended September 30, 2016 as a return of capital.
Deferred Financing and Offering Costs
Deferred financing
and offering costs consist of costs incurred to obtain financing, including lender fees and legal fees. Certain costs associated with our revolving line of credit are deferred and amortized using the straight-line method, which approximates the
effective interest method, over the term of the revolving line of credit. Costs associated with the issuance of our mandatorily redeemable preferred stock are presented as discounts to the liquidation value of the mandatorily redeemable preferred
stock and are amortized using the straight-line method, which approximates the effective interest method, over the terms of the respective financings. Refer to Note 5
Borrowings
and
Note 6
Mandatorily Redeemable
Preferred Stock
for further discussion.
Related Party Fees
In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee.
Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms of our Fifth Amended and Restated Credit Agreement with KeyBank National Association (KeyBank), as administrative agent,
lead arranger and a lender (our Credit Facility). These fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter.
20
We pay separately for administrative services pursuant to the Administration Agreement. These administrative fees
are accrued at the end of the quarter when the services are performed and generally paid the following quarter. Refer to Note 4
Related Party Transactions
for additional information regarding these related party fees and agreements.
Recent Accounting Pronouncements
In November 2016, the
FASB issued Accounting Standards Update
2016-18,
Restricted Cash (a consensus of the Emerging Issues Task Force) (ASU
2016-18),
which requires
that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. We have assessed the impact of ASU
2016-18
and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU
2016-18
is effective for annual reporting periods
beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.
In August 2016, the FASB
issued Accounting Standards Update
2016-15,
Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (ASU
2016-15),
which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. We have assessed the impact of ASU
2016-15
and do not anticipate a material impact on our cash flows. ASU
2016-15
is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within those fiscal years, with early adoption permitted.
In March 2016, the FASB issued Accounting Standards Update
2016-06,
Contingent Put and Call Options in Debt Instruments
(ASU
2016-06),
which clarifies the requirements for assessing whether contingent
call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related. ASU
2016-06
is effective for annual reporting periods beginning after December 15,
2016, including interim periods within those fiscal years, and we adopted ASU
2016-06
effective October 1, 2017. The adoption of ASU
2016-06
did not have a material
impact on our financial position, results of operations or cash flows.
In January 2016, the FASB issued Accounting Standards Update
2016-01,
Financial InstrumentsOverall: Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU
2016-01),
which
changes how entities measure certain equity investments and how entities present changes in the fair value of financial liabilities measured under the fair value option that are attributable to instrument-specific credit risk. We are currently
assessing the impact of ASU
2016-01
and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU
2016-01
is effective for
annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for certain aspects of ASU
2016-01
relating to the
recognition of changes in fair value of financial liabilities when the fair value option is elected.
In February 2015, the FASB issued Accounting
Standards Update
2015-02,
Amendments to the Consolidation Analysis
(ASU
2015-02),
which amends or supersedes the scope and consolidation
guidance under existing GAAP. The adoption of ASU
2015-02
did not have a material impact on our financial position, results of operations or cash flows. ASU
2015-02
is
effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU
2015-02
effective April 1, 2016. In October 2016, the FASB issued
Accounting Standards Update
2016-17,
Interests Held through Related Parties That Are under Common Control
(ASU
2016-17),
which amends the
consolidation guidance in ASU
2015-02
regarding the treatment of indirect interests held through related parties that are under common control. ASU
2016-17
is effective
for annual reporting periods beginning after December 15, 2016 and interim periods within those years, and we adopted ASU
2015-02
effective October 1, 2017. The adoption of ASU
2016-17
did not have a material impact on our financial position, results of operations or cash flows.
In May 2014, the
FASB issued Accounting Standards Update
2014-09,
Revenue from Contracts with Customers
(ASU
2014-09),
which was amended in March 2016 by
FASB Accounting Standards Update
2016-08,
Principal versus Agent Considerations
(ASU
2016-08),
in April 2016 by FASB Accounting Standards
Update
2016-10,
Identifying Performance Obligations and Licensing
(ASU
2016-10),
in May 2016 by FASB Accounting Standards Update
2016-12,
Narrow-Scope Improvements and Practical Expedients
(ASU
2016-12),
and in December 2016 by FASB Accounting Standards Update
2016-20,
Technical Corrections and Improvements to Topic 606
(ASU
2016-20).
ASU
2014-09,
as amended,
supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will
expand disclosures about revenue. In July 2015, the FASB issued Accounting Standards Update
2015-14,
Deferral of the Effective Date,
which deferred the effective date of ASU
2014-09.
ASU
2014-09,
as amended by ASU
2015-14,
ASU
2016-08,
ASU
2016-10,
ASU
2016-12,
and ASU
2016-20,
is now effective for annual reporting periods beginning after December 15, 2017 and interim
periods within those years, with early adoption permitted for annual reporting periods beginning after December 15, 2016 and interim periods within those years. We continue to assess the impact of ASU
2014-09,
as amended, and expect to identify similar performance obligations as compared to existing guidance. As a result, we do not anticipate a material change in the timing of revenue recognition or a
material impact on our financial position, results of operations, or cash flows from adopting this standard.
21
NOTE 3. INVESTMENTS
Fair Value
In accordance with ASC 820, the fair value of
each investment is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit
price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
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Level
1
inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;
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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
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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.
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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. Investments in funds measured
using net asset value as a practical expedient are not categorized within the fair value hierarchy.
As of June 30, 2018, all of our investments were
valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko, which was valued using Level 2 inputs and our investments in FedCap and Leeds, which were valued using net asset value as a practical
expedient. As of September 30, 2017, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investments in FedCap and Leeds, which were valued using net asset value as a practical
expedient.
We transfer investments in and out of Level 1, 2, and 3 of the valuation hierarchy as of the beginning balance sheet date, based on
changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the nine months ended June 30, 2018, we transferred our investment in Funko from Level 3 to Level 2 as a result of the
initial public offering of Funko, Inc. in November 2017 due to convertibility of our investment into shares of Funko, Inc. During the three and nine months ended June 30, 2017, there were no investments transferred into or out of Levels 1, 2 or
3 of the valuation hierarchy.
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As of June 30, 2018 and September 30, 2017, our investments, by security type, at fair value were
categorized as follows within the ASC 820 fair value hierarchy:
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Fair Value Measurements
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Fair Value
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Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
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Significant
Other
Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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As of June 30, 2018:
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Secured first lien debt
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$
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199,496
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$
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$
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$
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199,496
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Secured second lien debt
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175,089
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175,089
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Unsecured debt
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3,612
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3,612
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Preferred equity
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7,241
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7,241
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Common equity/equivalents
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16,311
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(B)
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712
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(A)
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15,599
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Total Investments at June 30, 2018
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$
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401,749
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$
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$
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712
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$
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401,037
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Fair Value Measurements
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Fair Value
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Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
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Significant
Other
Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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As of September 30, 2017:
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|
|
|
|
|
|
Secured first lien debt
|
|
$
|
173,896
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
173,896
|
|
Secured second lien debt
|
|
|
155,249
|
|
|
|
|
|
|
|
|
|
|
|
155,249
|
|
Unsecured debt
|
|
|
3,324
|
|
|
|
|
|
|
|
|
|
|
|
3,324
|
|
Preferred equity
|
|
|
6,561
|
|
|
|
|
|
|
|
|
|
|
|
6,561
|
|
Common equity/equivalents
|
|
|
10,947
|
(B)
|
|
|
|
|
|
|
|
|
|
|
10,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments at September 30, 2017
|
|
$
|
349,977
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
349,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into shares of Funko, Inc.) at the reporting
date less a discount for lack of marketability as our investment was subject to certain restrictions.
|
(B)
|
Excludes our investments in FedCap and Leeds with fair values of $0.6 million and $2.5 million, respectively, as of June 30, 2018 and fair values of
$0.8 million and $1.6 million, respectively, as of September 30, 2017. FedCap and Leeds were valued using net asset value as a practical expedient.
|
23
The following table presents our portfolio investments, valued using Level 3 inputs within the ASC 820 fair
value hierarchy, and carried at fair value as of June 30, 2018 and September 30, 2017, by caption on our accompanying
Consolidated Statements of Assets and Liabilities,
and by security type:
|
|
|
|
|
|
|
|
|
|
|
Total Recurring Fair Value Measurements
Reported in
|
|
|
|
Consolidated
Statements
of
Assets
and
Liabilities
Using Significant Unobservable Inputs
(Level 3)
|
|
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Non-Control/Non-Affiliate
Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
|
|
$
|
174,149
|
|
|
$
|
147,447
|
|
Secured second lien debt
|
|
|
145,698
|
|
|
|
129,890
|
|
Unsecured debt
|
|
|
3,531
|
|
|
|
3,324
|
|
Preferred equity
|
|
|
3,812
|
|
|
|
5,735
|
|
Common equity/equivalents
|
|
|
5,731
|
(A)
|
|
|
2,068
|
(B)
|
|
|
|
|
|
|
|
|
|
Total
Non-Control/Non-Affiliate
Investments
|
|
$
|
332,921
|
|
|
$
|
288,464
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
|
|
$
|
19,788
|
|
|
$
|
18,821
|
|
Secured second lien debt
|
|
|
21,326
|
|
|
|
17,294
|
|
Unsecured debt
|
|
|
81
|
|
|
|
|
|
Preferred equity
|
|
|
3,429
|
|
|
|
826
|
|
Common equity/equivalents
|
|
|
7,268
|
|
|
|
5,707
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
$
|
51,892
|
|
|
$
|
42,648
|
|
|
|
|
|
|
|
|
|
|
Control Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
|
|
$
|
5,559
|
|
|
$
|
7,628
|
|
Secured second lien debt
|
|
|
8,065
|
|
|
|
8,065
|
|
Common equity/equivalents
|
|
|
2,600
|
|
|
|
3,172
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
$
|
16,224
|
|
|
$
|
18,865
|
|
|
|
|
|
|
|
|
|
|
Total Investments at Fair Value Using Level 3 Inputs
|
|
$
|
401,037
|
|
|
$
|
349,977
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Excludes our investments in FedCap, Leeds, and Funko with fair values of $0.6 million, $2.5 million, and $0.7 million, respectively, as of
June 30, 2018. FedCap and Leeds were valued using net asset value as a practical expedient and Funko was valued using Level 2 inputs.
|
(B)
|
Excludes our investments in FedCap and Leeds with fair values of $0.8 million and $1.6 million, respectively, as of September 30, 2017, which were
valued using net asset value as a practical expedient.
|
24
In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair
value measurements of our investments as of June 30, 2018 and September 30, 2017. The table below is not intended to be
all-inclusive,
but rather provides information on the significant Level 3
inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the
particular input.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range / Weighted Average as of
|
|
|
|
June 30,
2018
|
|
|
September 30,
2017
|
|
|
Valuation
Techniques/
Methodologies
|
|
Unobservable
Input
|
|
June 30,
2018
|
|
|
September 30,
2017
|
|
Secured first lien debt
(A)
|
|
$
|
191,787
|
|
|
$
|
136,272
|
|
|
Yield Analysis
|
|
Discount Rate
|
|
|
6.8% - 23.7%
/
12.2%
|
|
|
|
8.0% - 25.0% /
12.5%
|
|
|
|
|
7,709
|
|
|
|
37,624
|
|
|
TEV
|
|
EBITDA multiple
|
|
|
3.3x 3.3x
/3.3x
|
|
|
|
3.2x 10.1x /
8.2x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
$1,467 - $1,467
/ $1,467
|
|
|
|
$1,378 - $9,420 /
$6,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue multiple
|
|
|
0.3x 0.5x
/ 0.3x
|
|
|
|
0.3x 0.4x /
0.3x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
$4,574 - $7,698
/$7,482
|
|
|
|
$6,934 - $12,094 /
$11,733
|
|
Secured second lien debt
(B)
|
|
|
140,724
|
|
|
|
122,165
|
|
|
Yield Analysis
|
|
Discount Rate
|
|
|
10.5% - 22.2%
/13.8%
|
|
|
|
10.8% - 23.3% /
14.0%
|
|
|
|
|
24,555
|
|
|
|
22,607
|
|
|
Market Quote
|
|
IBP
|
|
|
90.0% - 102.0%
/ 98.3%
|
|
|
|
84.5% - 101.5% /
97.2%
|
|
|
|
|
9,810
|
|
|
|
10,477
|
|
|
TEV
|
|
EBITDA multiple
|
|
|
4.7x 6.5x
/5.3x
|
|
|
|
4.8x 6.6x /5.4x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
$2,954 - $72,564
/ $27,196
|
|
|
|
$3,000 - $73,650 /
$26,424
|
|
Unsecured debt
|
|
|
3,612
|
|
|
|
3,324
|
|
|
Yield Analysis
|
|
Discount Rate
|
|
|
9.9% - 14.3% /
10.0%
|
|
|
|
10.0% - 10.0% /
10.0%
|
|
Preferred and common
equity / equivalents
(C)(D)
|
|
|
22,709
|
|
|
|
17,370
|
|
|
TEV
|
|
EBITDA multiple
|
|
|
3.3x 9.7x /
6.4x
|
|
|
|
3.2x 10.1x /
6.1x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
$374 -$30,047
/$14,271
|
|
|
|
$890 -$84,828/
$12,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue multiple
|
|
|
0.3x 1.7x /
0.5x
|
|
|
|
0.3x 6.5 x /0.7x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
$2,973 - $529,389
/$155,219
|
|
|
|
$2,317 - $503,620/
$128,819
|
|
|
|
|
131
|
|
|
|
138
|
|
|
Market Quotes
|
|
IBP
|
|
|
26.2% - 26.2%
/26.2%
|
|
|
|
27.9% - 27.9% /
27.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 Investments, at Fair Value
|
|
$
|
401,037
|
|
|
$
|
349,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Fair value as of June 30, 2018 includes two proprietary debt investments totaling $12.9 million,
which were valued at the expected payoff amount as the unobservable input. Fair value as of September 30, 2017 includes one new proprietary debt investment totaling $12.0 million, which was valued at cost, using the transaction price as
the unobservable input, and one proprietary debt investment totaling $7.8 million, which was valued at the expected payoff amount as the unobservable input.
|
(B)
|
Fair value as of June 30, 2018 includes one syndicated debt investment totaling $3.7 million, which
was valued at the expected payoff amount as the unobservable input. Fair value as of September 30, 2017 includes one proprietary debt investment totaling $3.5 million, which was valued at the expected payoff amount as the unobservable
input.
|
(C)
|
Fair value as of September 30, 2017 includes two new proprietary investments totaling $1.0 million,
which were valued at cost, using the transaction price as the unobservable input, and one proprietary investment totaling $1.4 million, which was valued at the expected payoff amount as the unobservable input.
|
(D)
|
Fair value as of June 30, 2018 excludes our investments in FedCap, Leeds and Funko with fair values of
$0.6 million, $2.5 million, and $0.7 million, respectively, as of June 30, 2018. FedCap and Leeds were valued using net asset value as a practical expedient and Funko was valued using Level 2 inputs as of June 30, 2018.
Fair value as of September 30, 2017 excludes our investments in FedCap and Leeds with fair values of $0.8 million and $1.6 million, respectively, as of September 30, 2017, which were valued using net asset value as a practical
expedient.
|
25
Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount
rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in market yields, discount rates, or an increase/(decrease) in EBITDA
or EBITDA multiples (or revenue or revenue multiples) may result in a corresponding increase/(decrease), respectively, 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 nine months ended June 30, 2018 and 2017 for all
investments for which the Adviser determines fair value using unobservable (Level 3) factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
|
Secured
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
Three months ended June 30, 2018
|
|
First Lien
Debt
|
|
|
Second
Lien Debt
|
|
|
Unsecured
Debt
|
|
|
Preferred
Equity
|
|
|
Equity/
Equivalents
|
|
|
Total
|
|
Fair Value as of March 31, 2018
|
|
$
|
195,793
|
|
|
$
|
180,045
|
|
|
$
|
3,540
|
|
|
$
|
6,175
|
|
|
$
|
13,447
|
|
|
$
|
399,000
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (depreciation)
appreciation
(B)
|
|
|
(1,544
|
)
|
|
|
3,922
|
|
|
|
(13
|
)
|
|
|
1,066
|
|
|
|
2,152
|
|
|
|
5,583
|
|
Reversal of prior period net appreciation on realization
(B)
|
|
|
|
|
|
|
(440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(440
|
)
|
New investments, repayments and settlements:
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances/originations
|
|
|
7,106
|
|
|
|
13,925
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
21,116
|
|
Settlements/repayments
|
|
|
(1,859
|
)
|
|
|
(22,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2018
|
|
$
|
199,496
|
|
|
$
|
175,089
|
|
|
$
|
3,612
|
|
|
$
|
7,241
|
|
|
$
|
15,599
|
|
|
$
|
401,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
|
Secured
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
Nine Months Ended June 30, 2018
|
|
First Lien
Debt
|
|
|
Second
Lien Debt
|
|
|
Unsecured
Debt
|
|
|
Preferred
Equity
|
|
|
Equity/
Equivalents
|
|
|
Total
|
|
Fair Value as of September 30, 2017
|
|
$
|
173,896
|
|
|
$
|
155,249
|
|
|
$
|
3,324
|
|
|
$
|
6,561
|
|
|
$
|
10,947
|
|
|
$
|
349,977
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain
(A)
|
|
|
(3
|
)
|
|
|
37
|
|
|
|
|
|
|
|
597
|
|
|
|
(31
|
)
|
|
|
600
|
|
Net unrealized (depreciation)
appreciation
(B)
|
|
|
(1,434
|
)
|
|
|
6,775
|
|
|
|
(5
|
)
|
|
|
2,138
|
|
|
|
3,132
|
|
|
|
10,606
|
|
Reversal of prior period net appreciation on realization
(B)
|
|
|
|
|
|
|
(545
|
)
|
|
|
|
|
|
|
(725
|
)
|
|
|
|
|
|
|
(1,270
|
)
|
New investments, repayments and settlements:
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances/originations
|
|
|
56,427
|
|
|
|
41,084
|
|
|
|
293
|
|
|
|
125
|
|
|
|
1,521
|
|
|
|
99,450
|
|
Settlements/repayments
|
|
|
(19,230
|
)
|
|
|
(37,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,866
|
)
|
Sales
|
|
|
3
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
(1,296
|
)
|
|
|
30
|
|
|
|
(1,301
|
)
|
Transfers
|
|
|
(10,163
|
)
|
|
|
10,163
|
|
|
|
|
|
|
|
(159
|
)
|
|
|
|
|
|
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2018
|
|
$
|
199,496
|
|
|
$
|
175,089
|
|
|
$
|
3,612
|
|
|
$
|
7,241
|
|
|
$
|
15,599
|
|
|
$
|
401,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
|
Secured
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
First Lien
Debt
|
|
|
Second
Lien Debt
|
|
|
Unsecured
Debt
|
|
|
Preferred
Equity
|
|
|
Equity/
Equivalents
|
|
|
Total
|
|
Fair Value as of March 31, 2017
|
|
$
|
174,033
|
|
|
$
|
121,097
|
|
|
$
|
3,185
|
|
|
$
|
4,666
|
|
|
$
|
7,968
|
|
|
$
|
310,949
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss
(A)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
(23
|
)
|
Net unrealized appreciation
(depreciation)
(B)
|
|
|
387
|
|
|
|
(1,280
|
)
|
|
|
(50
|
)
|
|
|
963
|
|
|
|
672
|
|
|
|
692
|
|
New investments, repayments and
settlements:
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances/originations
|
|
|
3,001
|
|
|
|
33,128
|
|
|
|
80
|
|
|
|
890
|
|
|
|
|
|
|
|
37,099
|
|
Settlements/repayments
|
|
|
(6,052
|
)
|
|
|
(84
|
)
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
(6,102
|
)
|
Sales
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
1
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2017
|
|
$
|
171,369
|
|
|
$
|
152,861
|
|
|
$
|
3,249
|
|
|
$
|
6,519
|
|
|
$
|
8,640
|
|
|
$
|
342,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
|
Secured
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
Nine Months Ended June 30, 2017
|
|
First Lien
Debt
|
|
|
Second
Lien Debt
|
|
|
Unsecured
Debt
|
|
|
Preferred
Equity
|
|
|
Equity/
Equivalents
|
|
|
Total
|
|
Fair Value as of September 30, 2016
|
|
$
|
198,721
|
|
|
$
|
100,320
|
|
|
$
|
3,012
|
|
|
$
|
10,262
|
|
|
$
|
7,755
|
|
|
$
|
320,070
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain
(A)
|
|
|
(4,913
|
)
|
|
|
1
|
|
|
|
|
|
|
|
1,465
|
|
|
|
21
|
|
|
|
(3,426
|
)
|
Net unrealized appreciation
(depreciation)
(B)
|
|
|
1,253
|
|
|
|
(3,262
|
)
|
|
|
(43
|
)
|
|
|
2,016
|
|
|
|
(2,679
|
)
|
|
|
(2,715
|
)
|
Reversal of prior period depreciation (appreciation) on realization
(B)
|
|
|
2,114
|
|
|
|
180
|
|
|
|
|
|
|
|
(1,059
|
)
|
|
|
370
|
|
|
|
1,605
|
|
New investments, repayments and
settlements:
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances/originations
|
|
|
33,130
|
|
|
|
63,264
|
|
|
|
241
|
|
|
|
1,644
|
|
|
|
345
|
|
|
|
98,624
|
|
Settlements/repayments
|
|
|
(54,909
|
)
|
|
|
(8,361
|
)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
(63,231
|
)
|
Sales
|
|
|
(87
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(7,809
|
)
|
|
|
(392
|
)
|
|
|
(8,289
|
)
|
Transfers
|
|
|
(3,940
|
)
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
3,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2017
|
|
$
|
171,369
|
|
|
$
|
152,861
|
|
|
$
|
3,249
|
|
|
$
|
6,519
|
|
|
$
|
8,640
|
|
|
$
|
342,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Included in net realized gain (loss) on investments on our accompanying
Consolidated Statements of Operations
for the three and nine months ended June 30,
2018 and 2017.
|
(B)
|
Included in net unrealized appreciation (depreciation) on investments on our accompanying
Consolidated Statements of Operations
for the three and nine months ended June 30, 2018 and 2017.
|
(C)
|
Includes increases in the cost basis of investments resulting from new portfolio investments, accretion of discounts, PIK, and other
non-cash
disbursements to portfolio companies,
as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.
|
27
Investment Activity
Proprietary Investments
As of June 30, 2018 and
September 30, 2017, we held 38 and 35 proprietary investments with an aggregate fair value of $366.8 million and $318.6 million, or 90.6% and 90.4% of the total aggregate portfolio, respectively. The following significant proprietary
investment transactions occurred during the nine months ended June 30, 2018:
|
|
|
In October 2017, we sold our investment in Flight Fit N Fun LLC for a realized gain of $0.6 million. In connection with the sale, we received net cash proceeds of approximately $9.4 million, including the
repayment of our debt investment of $7.8 million at par.
|
|
|
|
In October 2017, we invested $11.0 million in Applied Voice & Speech Technologies, Inc. through secured first lien debt.
|
|
|
|
In November 2017, we invested $7.5 million in Arc Drilling Holdings LLC through a combination of secured first lien debt and equity.
|
|
|
|
In November 2017, we invested $7.5 million in Gray Matter Systems, LLC through secured second lien debt. In March 2018, we invested an additional $3.6 million in Gray Matter Systems, LLC, through secured
second lien debt.
|
|
|
|
In December 2017, we invested $20.0 million in Impact! Chemical Technologies, Inc. through secured first lien debt.
|
|
|
|
In January 2018, we invested $8.1 million in XMedius Solutions Inc. through secured first lien debt.
|
|
|
|
In February 2018, we invested an additional $4.0 million in an existing portfolio company, Lignetics, Inc., through secured first lien debt.
|
|
|
|
In March 2018, an existing portfolio company, EL Academies, Inc., drew an additional $1.4 million on the unused portion of its secured first lien delayed draw term loan.
|
|
|
|
In May 2018, our investment in TapRoot Partners, Inc. paid off, which resulted in prepayment fees of $0.5 million and success fee income of $0.4 million. In connection with the pay off, we received net cash
proceeds of $22.9 million, including the repayment of our debt investment of $22.0 million at par.
|
|
|
|
In May 2018, we invested an additional $10.0 million in an existing portfolio company, Merlin International, Inc., through secured second lien debt.
|
|
|
|
In June 2018, we invested an additional $7.0 million in an existing portfolio company, IA Tech, LLC, through secured first lien debt.
|
Syndicated Investments
As of each of June 30, 2018
and September 30, 2017, we held 12 syndicated investments with an aggregate fair value of $38.1 million and $33.8 million, or 9.4% and 9.6% of the total portfolio at fair value, respectively. The following significant syndicated
investment transactions occurred during the nine months ended June 30, 2018:
|
|
|
In October 2017, PSC Industrial Holdings, LLC paid off at par for net cash proceeds of $3.5 million.
|
|
|
|
In November 2017, DataPipe, Inc. paid off at par for net cash proceeds of $2.0 million.
|
|
|
|
In November 2017, we invested $5.0 million in DigiCert Holdings, Inc. through secured second lien debt. In March 2018, we sold $2.0 million of this investment for net cash proceeds of $2.0 million.
|
|
|
|
In November 2017, we invested $4.0 million in Red Ventures, LLC through secured second lien debt.
|
|
|
|
In November 2017, we invested $1.0 million in ABG Intermediate Holdings 2, LLC through secured second lien debt. In January 2018, we sold this investment for net cash proceeds of $1.0 million.
|
|
|
|
In March 2018, we sold our $1.0 million investment in Neustar, Inc. for net cash proceeds of $1.0 million.
|
28
|
|
|
In April 2018, we invested $3.0 million in CHA Holdings, Inc. through secured second lien debt.
|
Investment Concentrations
As of June 30, 2018, our
investment portfolio consisted of investments in 50 portfolio companies located in 25 states in 18 different industries, with an aggregate fair value of $404.9 million. The five largest investments at fair value totaled $120.9 million, or
29.9% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2017 totaling $110.9 million, or 31.5% of our total investment portfolio. As of June 30, 2018 and
September 30, 2017, our average investment by obligor was $9.1 million and $8.8 million at cost, respectively.
The following table
outlines our investments by security type at June 30, 2018 and September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Secured first lien debt
|
|
$
|
223,942
|
|
|
|
49.4
|
%
|
|
$
|
199,496
|
|
|
|
49.3
|
%
|
|
$
|
198,942
|
|
|
|
48.4
|
%
|
|
$
|
173,896
|
|
|
|
49.4
|
%
|
Secured second lien debt
|
|
|
183,893
|
|
|
|
40.5
|
|
|
|
175,089
|
|
|
|
43.2
|
|
|
|
168,247
|
|
|
|
40.9
|
|
|
|
155,249
|
|
|
|
44.1
|
|
Unsecured debt
|
|
|
3,618
|
|
|
|
0.8
|
|
|
|
3,612
|
|
|
|
0.9
|
|
|
|
3,324
|
|
|
|
0.8
|
|
|
|
3,324
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt investments
|
|
|
411,453
|
|
|
|
90.7
|
|
|
|
378,197
|
|
|
|
93.4
|
|
|
|
370,513
|
|
|
|
90.1
|
|
|
|
332,469
|
|
|
|
94.4
|
|
|
|
|
|
|
|
|
|
|
Preferred equity
|
|
|
18,052
|
|
|
|
4.0
|
|
|
|
7,241
|
|
|
|
1.8
|
|
|
|
18,794
|
|
|
|
4.5
|
|
|
|
6,561
|
|
|
|
1.9
|
|
Common equity/equivalents
|
|
|
24,153
|
|
|
|
5.3
|
|
|
|
19,450
|
|
|
|
4.8
|
|
|
|
22,128
|
|
|
|
5.4
|
|
|
|
13,343
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity investments
|
|
|
42,205
|
|
|
|
9.3
|
|
|
|
26,691
|
|
|
|
6.6
|
|
|
|
40,922
|
|
|
|
9.9
|
|
|
|
19,904
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
453,658
|
|
|
|
100.0
|
%
|
|
$
|
404,888
|
|
|
|
100.0
|
%
|
|
$
|
411,435
|
|
|
|
100.0
|
%
|
|
$
|
352,373
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investments at fair value consisted of the following industry classifications at June 30, 2018 and September 30,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Industry Classification
|
|
Fair Value
|
|
|
Percentage of
Total
Investments
|
|
|
Fair Value
|
|
|
Percentage of
Total
Investments
|
|
Diversified/Conglomerate Service
|
|
$
|
78,714
|
|
|
|
19.4
|
%
|
|
$
|
80,723
|
|
|
|
22.9
|
%
|
Oil and gas
|
|
|
62,451
|
|
|
|
15.4
|
|
|
|
34,712
|
|
|
|
9.9
|
|
Healthcare, education and childcare
|
|
|
53,823
|
|
|
|
13.3
|
|
|
|
46,288
|
|
|
|
13.1
|
|
Telecommunications
|
|
|
48,594
|
|
|
|
12.0
|
|
|
|
31,350
|
|
|
|
8.9
|
|
Diversified/Conglomerate Manufacturing
|
|
|
44,756
|
|
|
|
11.0
|
|
|
|
40,843
|
|
|
|
11.6
|
|
Diversified natural resources, precious metals and minerals
|
|
|
23,046
|
|
|
|
5.7
|
|
|
|
18,949
|
|
|
|
5.4
|
|
Automobile
|
|
|
18,524
|
|
|
|
4.6
|
|
|
|
20,082
|
|
|
|
5.7
|
|
Cargo Transportation
|
|
|
14,433
|
|
|
|
3.6
|
|
|
|
13,081
|
|
|
|
3.7
|
|
Beverage, food and tobacco
|
|
|
13,986
|
|
|
|
3.5
|
|
|
|
14,103
|
|
|
|
4.0
|
|
Machinery
|
|
|
11,694
|
|
|
|
2.9
|
|
|
|
5,114
|
|
|
|
1.4
|
|
Home and Office Furnishings, Housewares and Durable Consumer Products
|
|
|
10,200
|
|
|
|
2.5
|
|
|
|
10,100
|
|
|
|
2.9
|
|
Textiles and leather
|
|
|
6,415
|
|
|
|
1.6
|
|
|
|
4,879
|
|
|
|
1.4
|
|
Hotels, Motels, Inns, and Gaming
|
|
|
6,213
|
|
|
|
1.5
|
|
|
|
7,136
|
|
|
|
2.0
|
|
Personal and
non-durable
consumer products
|
|
|
5,107
|
|
|
|
1.3
|
|
|
|
7,035
|
|
|
|
2.0
|
|
Printing and publishing
|
|
|
2,309
|
|
|
|
0.6
|
|
|
|
3,628
|
|
|
|
1.0
|
|
Leisure, Amusement, Motion Pictures, Entertainment
|
|
|
|
|
|
|
|
|
|
|
9,225
|
|
|
|
2.6
|
|
Other, < 2.0%
|
|
|
4,623
|
|
|
|
1.1
|
|
|
|
5,125
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
404,888
|
|
|
|
100.0
|
%
|
|
$
|
352,373
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investments at fair value were included in the
following U.S. geographic regions and other countries at June 30, 2018 and September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Location
|
|
Fair Value
|
|
|
Percentage of
Total
Investments
|
|
|
Fair Value
|
|
|
Percentage of
Total Investments
|
|
South
|
|
$
|
183,797
|
|
|
|
45.4
|
%
|
|
$
|
150,727
|
|
|
|
42.8
|
%
|
West
|
|
|
111,103
|
|
|
|
27.5
|
|
|
|
116,302
|
|
|
|
33.0
|
|
Midwest
|
|
|
64,502
|
|
|
|
15.9
|
|
|
|
58,915
|
|
|
|
16.7
|
|
Northeast
|
|
|
37,772
|
|
|
|
9.3
|
|
|
|
26,429
|
|
|
|
7.5
|
|
Canada
|
|
|
7,714
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
404,888
|
|
|
|
100.0
|
%
|
|
$
|
352,373
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic composition is determined by the location of the headquarters of our portfolio companies. A portfolio company
may have a number of other business locations in other geographic locations.
29
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 June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
For the remaining three months ending September 30:
|
|
2018
|
|
$
|
31,683
|
|
For the fiscal years ending September 30:
|
|
2019
|
|
|
49,042
|
|
|
|
2020
|
|
|
82,731
|
|
|
|
2021
|
|
|
55,769
|
|
|
|
2022
|
|
|
39,387
|
|
|
|
Thereafter
|
|
|
158,592
|
|
|
|
|
|
|
|
|
|
|
Total contractual repayments
|
|
$
|
417,204
|
|
|
|
Adjustments to cost basis of debt investments
|
|
|
(5,751
|
)
|
|
|
Investments in equity securities
|
|
|
42,205
|
|
|
|
|
|
|
|
|
|
|
Investments held as of June 30, 2018 at Cost:
|
|
$
|
453,658
|
|
|
|
|
|
|
|
|
Receivables from Portfolio Companies
Receivables from portfolio companies represent
non-recurring
costs incurred on behalf of such portfolio companies and
are included in other assets on our accompanying
Consolidated Statements of Assets and Liabilities
. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more
past due or if it is determined, based upon managements judgment, that the portfolio company is unable to pay its obligations. We
write-off
accounts receivable when we have exhausted collection efforts
and have deemed the receivables uncollectible. As of June 30, 2018 and September 30, 2017, we had gross receivables from portfolio companies of $0.1 million and $0.5 million, respectively. The allowance for uncollectible
receivables was $21 and $44 at June 30, 2018 and September 30, 2017, respectively.
NOTE 4. RELATED PARTY TRANSACTIONS
Transactions with the Adviser
We have been externally
managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay the Adviser a base management fee and an incentive fee for its services. The Advisory Agreement originally included administrative
services; however, it was amended and restated on October 1, 2006. Simultaneously, we entered into the Administration Agreement with the Administrator (discussed further below) to provide those services. With the unanimous approval of our Board
of Directors, the Advisory Agreement was later amended in October 2015 to reduce the base management fee payable thereunder from 2.0% per annum to 1.75% per annum, effective July 1, 2015, with all other terms remaining unchanged. On
July 10, 2018, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, unanimously approved the annual renewal of the Advisory Agreement through
August 31, 2019.
We also pay the Adviser a loan servicing fee for its role of servicer pursuant to our Credit Facility. The entire loan servicing
fee paid to the Adviser by Business Loan is
non-contractually,
unconditionally and irrevocably credited against the base management fee otherwise payable to the Adviser, since Business Loan is a consolidated
subsidiary of ours, and overall, the base management fee (including any loan servicing fee) cannot exceed 1.75% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year pursuant to the Advisory
Agreement.
Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief
operating officer) serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. Robert Marcotte (our president) also serves as an executive managing director of the Adviser.
30
The following table summarizes the base management fee, incentive fee, and loan servicing fee and associated
non-contractual,
unconditional and irrevocable credits reflected in our accompanying
Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Nine Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Average total assets subject to base management
fee
(A)
|
|
$
|
411,657
|
|
|
$
|
338,286
|
|
|
$
|
400,838
|
|
|
$
|
321,295
|
|
Multiplied by prorated annual base management fee of 1.75%
|
|
|
0.4375
|
%
|
|
|
0.4375
|
%
|
|
|
1.3125
|
%
|
|
|
1.3125
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management fee
(B)
|
|
$
|
1,801
|
|
|
$
|
1,480
|
|
|
$
|
5,261
|
|
|
$
|
4,217
|
|
Portfolio company fee credit
|
|
|
(170
|
)
|
|
|
(261
|
)
|
|
|
(1,001
|
)
|
|
|
(1,344
|
)
|
Syndicated loan fee credit
|
|
|
(92
|
)
|
|
|
(100
|
)
|
|
|
(276
|
)
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Base Management Fee
|
|
$
|
1,539
|
|
|
$
|
1,119
|
|
|
$
|
3,984
|
|
|
$
|
2,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fee
(B)
|
|
|
1,294
|
|
|
|
1,071
|
|
|
|
3,754
|
|
|
|
3,009
|
|
Credit to base management fee - loan servicing
fee
(B)
|
|
|
(1,294
|
)
|
|
|
(1,071
|
)
|
|
|
(3,754
|
)
|
|
|
(3,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loan Servicing Fee
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive fee
(B)
|
|
|
1,499
|
|
|
|
1,116
|
|
|
|
4,082
|
|
|
|
3,479
|
|
Incentive fee credit
|
|
|
|
|
|
|
(914
|
)
|
|
|
(856
|
)
|
|
|
(2,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Incentive Fee
|
|
$
|
1,499
|
|
|
$
|
202
|
|
|
$
|
3,226
|
|
|
$
|
1,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio company fee credit
|
|
|
(170
|
)
|
|
|
(261
|
)
|
|
|
(1,001
|
)
|
|
|
(1,344
|
)
|
Syndicated loan fee credit
|
|
|
(92
|
)
|
|
|
(100
|
)
|
|
|
(276
|
)
|
|
|
(122
|
)
|
Incentive fee credit
|
|
|
|
|
|
|
(914
|
)
|
|
|
(856
|
)
|
|
|
(2,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credits to Fees From Adviser - other
(B)
|
|
$
|
(262
|
)
|
|
$
|
(1,275
|
)
|
|
$
|
(2,133
|
)
|
|
$
|
(3,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued
at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
|
(B)
|
Reflected, on a gross basis, as a line item, on our accompanying
Consolidated Statements of Operations
.
|
Base Management Fee
The base management fee is payable
quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current
quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period.
Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The
Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining,
sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the
portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in
connection with adding and retaining key portfolio company management team members. The Adviser
non-contractually,
unconditionally, and irrevocably credits 100% of these fees against the base management fee
that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $18 and $42 for the three and nine months ended June 30, 2018,
respectively, and $11 and $57 for the three and nine months ended June 30, 2017, respectively, was retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser primarily for the valuation of
portfolio companies.
Our Board of Directors accepted a
non-contractual,
unconditional and irrevocable credit from
the Adviser to reduce the annual base management fee on syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations, for each of the three and nine months
ended June 30, 2018 and 2017.
Incentive Fee
The incentive fee consists of two parts: an income-based incentive fee and a capital gains incentive fee. The income-based incentive fee rewards the Adviser if
our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the hurdle rate). The income-based incentive fee with respect to our
pre-incentive
fee net investment income is generally payable quarterly to the Adviser and is computed as follows:
|
|
no incentive fee in any calendar quarter in which our
pre-incentive
fee net investment income does not exceed the hurdle rate (7.0% annualized);
|
|
|
100.0% of our
pre-incentive
fee net investment income with respect to that portion of such
pre-incentive
fee net investment income, if any,
that exceeds the hurdle rate but is less than 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized); and
|
31
|
|
20.0% of the amount of our
pre-incentive
fee net investment income, if any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases
during the period, in any calendar quarter (8.75% annualized).
|
The second part of the incentive fee is a capital gains-based incentive fee
that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our net realized capital gains (as defined herein) as of the
end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate net realized capital gains at the end of each applicable year by subtracting the sum of our cumulative aggregate realized
capital losses and our entire portfolios aggregate unrealized capital depreciation from our cumulative aggregate realized capital gains. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences
between the net sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when
sold, is less than the original cost of such investment since inception. The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of the difference, between the valuation of each investment as of the applicable
calculation date and the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate
realized capital gains less cumulative aggregate realized capital losses, less the entire portfolios aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based
incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since
our inception through June 30, 2018, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
In accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and
aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal
to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee
accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such
unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded from our inception through June 30, 2018.
Our Board of Directors accepted
non-contractual,
unconditional and irrevocable credits from the Adviser to reduce the
income-based incentive fee to the extent net investment income did not 100.0% cover distributions to common stockholders for the six months ended March 31, 2018 and the nine months ended June 30, 2017. There was no incentive fee credit
during the three months ended June 30, 2018.
Loan Servicing Fee
The Adviser also services the loans held by Business Loan (the borrower under the Credit Facility), in return for which the Adviser receives a 1.5% annual fee
payable monthly based on the aggregate outstanding balance of loans pledged under our Credit Facility. As discussed in the notes to the table above, we treat payment of the loan servicing fee pursuant to our line of credit as a
pre-payment
of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100%
non-contractually,
unconditionally and irrevocably
credited back to us by the Adviser.
Transactions with the Administrator
We pay the Administrator pursuant to the Administration Agreement for the portion of expenses the Administrator incurs while performing services for us. The
Administrators expenses are primarily rent and the salaries, benefits and expenses of the Administrators employees, including, but not limited to, our chief financial officer and treasurer, chief compliance officer, chief valuation
officer, and general counsel and secretary (who also serves as the Administrators president, general counsel and secretary) and their respective staffs. Two of our executive officers, David Gladstone (our chairman and chief executive officer)
and Terry Lee Brubaker (our vice chairman and chief operating officer) serve as members of the board of managers and executive officers of the Administrator, which is 100% indirectly owned and controlled by Mr. Gladstone.
Our portion of the Administrators expenses are generally derived by multiplying the Administrators total expenses by the approximate percentage of
time during the current quarter the Administrators employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. These administrative fees are accrued at the end of the
quarter when the services are performed and recorded on our accompanying
Consolidated Statements of Operations
and generally paid the following quarter to the Administrator. On July 10, 2018, our Board of Directors, including a majority
of the directors who are not parties to the Administration Agreement or interested persons of such party, approved the annual renewal of the Administration Agreement through August 31, 2019.
32
Other Transactions
Gladstone Securities, LLC (Gladstone Securities), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and
insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence
services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the
non-contractual,
unconditional and irrevocable credits against the base management fee or incentive fee. Gladstone Securities received fees from portfolio companies totaling $0.2 million and
$0.8 million during the three and nine months ended June 30, 2018, respectively, and $0.3 million and $0.7 million during the three and nine months ended June 30, 2017, respectively.
Related Party Fees Due
Amounts due to related parties on
our accompanying
Consolidated Statements of Assets and Liabilities
were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Base management fee due to Adviser
|
|
$
|
244
|
|
|
$
|
45
|
|
Loan servicing fee due to Adviser
|
|
|
261
|
|
|
|
242
|
|
Incentive fee due to Adviser
|
|
|
1,499
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
Total fees due to Adviser
|
|
|
2,004
|
|
|
|
1,292
|
|
|
|
|
|
|
|
|
|
|
Fee due to Administrator
|
|
|
310
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
Total Related Party Fees Due
|
|
$
|
2,314
|
|
|
$
|
1,536
|
|
|
|
|
|
|
|
|
|
|
In addition to the above fees, other operating expenses due to the Adviser as of June 30, 2018 and September 30,
2017, totaled $10 and $12, respectively. In addition, net expenses payable to Gladstone Investment Corporation (for reimbursement purposes), which includes certain
co-investment
expenses, totaled $15 and $55
as of June 30, 2018 and September 30, 2017, respectively. These amounts are generally settled in the quarter subsequent to being incurred and have been included in other liabilities on the accompanying
Consolidated Statements of Assets
and Liabilities
as of June 30, 2018 and September 30, 2017.
NOTE 5. BORROWINGS
Revolving Credit Facility
On March 9, 2018, we,
through Business Loan, entered into Amendment No. 4 to our Credit Facility with KeyBank, which increased the commitment amount from $170.0 million to $190.0 million, extended the revolving period end date by approximately two years to
January 15, 2021, decreased the marginal interest rate added to
30-day
LIBOR from 3.25% to 2.85% per annum, and changed the unused commitment fee from 0.50% of the total unused commitment amount to 0.50%
when the average unused commitment amount for the reporting period is less than or equal to 50%, 0.75% when the average unused commitment amount for the reporting period is greater than 50% but less than or equal to 65%, and 1.00% when the average
unused commitment amount for the reporting period is greater than 65%. If our Credit Facility is not renewed or extended by January 15, 2021, all principal and interest will be due and payable on or before April 15, 2022 (fifteen months
after the revolving period end date). Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of $265.0 million through additional commitments of new or existing lenders. We incurred fees of approximately
$1.2 million in connection with this amendment, which are being amortized through our Credit Facilitys revolving period end date of January 15, 2021.
The following tables summarize noteworthy information related to our Credit Facility (at cost):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Commitment amount
|
|
$
|
190,000
|
|
|
$
|
170,000
|
|
Borrowings outstanding, at cost
|
|
|
117,000
|
|
|
|
93,000
|
|
Availability
(A)
|
|
|
67,239
|
|
|
|
58,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended June 30,
|
|
|
For the Nine Months
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted average borrowings outstanding, at cost
|
|
$
|
121,664
|
|
|
$
|
72,555
|
|
|
$
|
115,962
|
|
|
$
|
51,398
|
|
Weighted average interest rate
(B)
|
|
|
5.1
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.3
|
%
|
Commitment (unused) fees incurred
|
|
$
|
86
|
|
|
$
|
123
|
|
|
$
|
237
|
|
|
$
|
449
|
|
(A)
|
Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether
such repayments are prepayments or made as contractually required.
|
(B)
|
Includes unused commitment fees and excludes the impact of deferred financing fees.
|
33
Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly
by the borrower into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once a month. Amounts collected in the lockbox account with KeyBank are presented as Due from
administrative agent on the accompanying
Consolidated Statement of Assets and Liabilities
as of June 30, 2018 and September 30, 2017.
Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate
transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders consent. Our Credit Facility also generally limits distributions to our
stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain
limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations,
loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain
certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.
Additionally, we are
subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $205.0 million plus 50.0% of all equity and subordinated debt
raised after May 1, 2015 less 50% of any equity and subordinated debt retired or redeemed after May 1, 2015, which equates to $228.7 million as of June 30, 2018, (ii) asset coverage with respect to senior securities
representing indebtedness of at least 200%, in accordance with Sections 18 and 61 of the 1940 Act, and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.
As of June 30, 2018, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $293.4 million, asset coverage on our
senior securities representing indebtedness of 350.1%, calculated in compliance with the requirements of Section 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 33 obligors in our Credit
Facilitys borrowing base as of June 30, 2018. As of June 30, 2018, we were in compliance with all of our Credit Facility covenants.
Fair Value
We elected to apply the fair value option of
ASC 825,
Financial Instruments
, specifically for the Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis
which includes a DCF calculation and the assumptions that the Valuation Team believes market participants would use, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate
spreads of similar securities as of the measurement date. As of June 30, 2018, the discount rate used to determine the fair value of our Credit Facility was
30-day
LIBOR, plus 2.85% per annum, plus a
0.50% unused fee. As of September 30, 2017, the discount rate used to determine the fair value of our Credit Facility was
30-day
LIBOR, plus 3.15% per annum, plus a 0.50% unused fee. Generally, an
increase or decrease in the discount rate used in the DCF calculation may result in a corresponding increase or decrease, respectively, in the fair value of our Credit Facility. As of June 30, 2018 and September 30, 2017, our Credit
Facility was valued using Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying
Consolidated Statements of Operations
.
34
The following tables present our Credit Facility carried at fair value as of June 30, 2018 and
September 30, 2017, on our accompanying
Consolidated Statements of Assets and Liabilities
for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three and nine months
ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
Total Recurring Fair Value Measurement Reported in
|
|
|
|
Consolidated
Statements
of
Assets
and
Liabilities
Using
Significant Unobservable
Inputs (Level 3)
|
|
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
Credit Facility
|
|
$
|
117,000
|
|
|
$
|
93,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
Unobservable Data Inputs (Level 3)
Reported in Consolidated Statements of
Assets and Liabilities
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Fair value as of March 31, 2018 and 2017, respectively
|
|
$
|
127,800
|
|
|
$
|
53,989
|
|
Borrowings
|
|
|
22,200
|
|
|
|
37,700
|
|
Repayments
|
|
|
(33,000
|
)
|
|
|
(9,600
|
)
|
Net unrealized appreciation
(A)
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2018 and 2017, respectively
|
|
$
|
117,000
|
|
|
$
|
82,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Fair value as of September 30, 2017 and 2016, respectively
|
|
$
|
93,115
|
|
|
$
|
71,300
|
|
Borrowings
|
|
|
109,600
|
|
|
|
108,000
|
|
Repayments
|
|
|
(85,600
|
)
|
|
|
(97,100
|
)
|
Net unrealized (depreciation) appreciation
(A)
|
|
|
(115
|
)
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2018 and 2017, respectively
|
|
$
|
117,000
|
|
|
$
|
82,271
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Included in net unrealized appreciation (depreciation) of other on our accompanying
Consolidated Statements of Operations
for the three and nine months ended June 30, 2018 and 2017.
|
The fair value of the collateral under our Credit Facility totaled approximately $348.0 million and $317.4 million as of June 30, 2018 and
September 30, 2017, respectively.
NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK
In September 2017, we completed a public offering of approximately 2.1 million shares of 6.00% Series 2024 Term Preferred Stock, par value $0.001 per
share (Series 2024 Term Preferred Stock), at a public offering price of $25.00 per share. Gross proceeds totaled $51.8 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us,
were approximately $49.8 million. We incurred approximately $1.9 million in total underwriting discounts and offering costs related to the issuance of the Series 2024 Term Preferred Stock, which have been recorded as discounts to the
liquidation value on our accompanying
Consolidated Statements of Assets and Liabilities
and are being amortized from issuance through September 30, 2024, the mandatory redemption date. The offering proceeds plus borrowings under our
Credit Facility were used to voluntarily redeem all 2.4 million outstanding shares of our then existing 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share (Series 2021 Term Preferred Stock). In connection with the
voluntary redemption of our Series 2021 Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.3 million during the three months ended September 30, 2017, which is primarily comprised of the unamortized deferred issuance
costs at the time of redemption.
The shares of our Series 2024 Term Preferred Stock are traded under the ticker symbol GLADN on the Nasdaq
Global Select Market. Our Series 2024 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.00% per year, payable monthly (which equates in total to approximately
$3.1 million per year). We are required to redeem all of the outstanding Series 2024 Term Preferred Stock on September 30, 2024 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and
distributions per share accumulated to (but excluding) the date of redemption (the Redemption Price). We may additionally be required to mandatorily redeem some or all of the shares of our Series 2024 Term Preferred Stock early, at the
Redemption Price, in the event of the following: (1) upon the occurrence of certain events that would constitute a change in control, or (2) if we fail to maintain an asset coverage of at least 200% on our senior securities that are
stock (which is currently only our Series 2024 Term Preferred Stock) and the failure remains for a period of 30 days following the filing date of our next SEC quarterly or annual report. The asset coverage on our senior securities that
are stock as of June 30, 2018 was 242.9%, calculated in accordance with Sections 18 and 61 of the 1940 Act.
35
We may also voluntarily redeem all or a portion of the Series 2024 Term Preferred Stock at our option at the
Redemption Price at any time after September 30, 2019. If we fail to redeem our Series 2024 Term Preferred Stock pursuant to the mandatory redemption date of September 30, 2024, or in any other circumstance in which we are required to
mandatorily redeem our Series 2024 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of June 30, 2018, we have not redeemed, nor have we been required to redeem, any shares of our
outstanding Series 2024 Term Preferred Stock.
In May 2014, we completed a public offering of approximately 2.4 million shares of Series 2021 Term
Preferred Stock, at a public offering price of $25.00 per share. Gross proceeds totaled $61.0 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were approximately
$58.5 million, a portion of which was used to voluntarily redeem all 1.5 million outstanding shares of our then existing 7.125% Series 2016 Term Preferred Stock, par value $0.001 per share and the remainder was used to repay a portion of
outstanding borrowings under our Credit Facility. We incurred $2.5 million in total offering costs related to the issuance of our Series 2021 Term Preferred Stock, which were recorded as discounts to the liquidation value on our accompanying
Consolidated Statements of Assets and Liabilities
and were amortized over the redemption period ending June 30, 2021. In September 2017, when we voluntarily redeemed all of our outstanding Series 2021 Term Preferred Stock, the remaining
unamortized costs were fully written off as part of the realized loss discussed above.
We paid the following monthly distributions on our Series 2024
Term Preferred Stock for the nine months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Declaration Date
|
|
|
Record Date
|
|
Payment Date
|
|
Distribution per
Series 2024 Term
Preferred
Share
(A)
|
|
2018
|
|
|
October 10, 2017
|
|
|
October 20, 2017
|
|
October 31, 2017
|
|
$
|
0.141667
|
|
|
|
|
October 10, 2017
|
|
|
November 20, 2017
|
|
November 30, 2017
|
|
|
0.125
|
|
|
|
|
October 10, 2017
|
|
|
December 19, 2017
|
|
December 29, 2017
|
|
|
0.125
|
|
|
|
|
January 9, 2018
|
|
|
January 22, 2018
|
|
January 31, 2018
|
|
|
0.125
|
|
|
|
|
January 9, 2018
|
|
|
February 16, 2018
|
|
February 28, 2018
|
|
|
0.125
|
|
|
|
|
January 9, 2018
|
|
|
March 20, 2018
|
|
March 30, 2018
|
|
|
0.125
|
|
|
|
|
April 10, 2018
|
|
|
April 20, 2018
|
|
April 30, 2018
|
|
|
0.125
|
|
|
|
|
April 10, 2018
|
|
|
May 22, 2018
|
|
May 31, 2018
|
|
|
0.125
|
|
|
|
|
April 10, 2018
|
|
|
June 20, 2018
|
|
June 29, 2018
|
|
|
0.125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2018:
|
|
$
|
1.141667
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
The dividend paid on October 31, 2017 included the
pro-rated
period from and including the issuance date of September 27, 2017 to and including September 30, 2017,
and the full month of October 2017.
|
We paid the following monthly distributions on our Series 2021 Term Preferred Stock for the nine months
ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Declaration Date
|
|
|
Record Date
|
|
Payment Date
|
|
Dividend per Series
2021 Term Preferred
Share
|
|
2017
|
|
|
October 11, 2016
|
|
|
October 21, 2016
|
|
October 31, 2016
|
|
$
|
0.1406250
|
|
|
|
|
October 11, 2016
|
|
|
November 17, 2016
|
|
November 30, 2016
|
|
|
0.1406250
|
|
|
|
|
October 11, 2016
|
|
|
December 20, 2016
|
|
December 30, 2016
|
|
|
0.1406250
|
|
|
|
|
January 10, 2017
|
|
|
January 20, 2017
|
|
January 31, 2017
|
|
|
0.1406250
|
|
|
|
|
January 10, 2017
|
|
|
February 16, 2017
|
|
February 28, 2017
|
|
|
0.1406250
|
|
|
|
|
January 10, 2017
|
|
|
March 22, 2017
|
|
March 31, 2017
|
|
|
0.1406250
|
|
|
|
|
April 11, 2017
|
|
|
April 21, 2017
|
|
April 28, 2017
|
|
|
0.1406250
|
|
|
|
|
April 11, 2017
|
|
|
May 19, 2017
|
|
May 31, 2017
|
|
|
0.1406250
|
|
|
|
|
April 11, 2017
|
|
|
June 21, 2017
|
|
June 30, 2017
|
|
|
0.1406250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2017:
|
|
$
|
1.2656250
|
|
|
|
|
|
|
|
|
|
|
|
|
The federal income tax characteristics of dividends paid to our preferred stockholders generally constitute ordinary income to
the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year. Estimates of tax characterization made on a quarterly basis may not be
representative of the actual tax characterization of dividends for the full year. Estimates made on a quarterly basis are updated as of each interim reporting date. The tax characterization of dividends paid to our preferred stockholders during the
calendar years ended December 31, 2017 and 2016 was 100% from ordinary income.
In accordance with ASC 480,
Distinguishing Liabilities from
Equity
, mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet and we have recorded our mandatorily redeemable preferred stock as a liability at cost, as of June 30, 2018 and
September 30, 2017. The related dividend payments to our mandatorily redeemable preferred stockholders are treated as dividend expense on our statement of operations as of the
ex-dividend
date. Aggregate
preferred stockholder dividends declared and paid on our Series 2024 Term Preferred Stock for the three and nine months ended June 30, 2018 were $0.8 million and $2.3 million, respectively. Aggregate preferred stockholder dividends
declared and paid on our Series 2021 Term Preferred Stock for the three and nine months ended June 30, 2017 were $1.0 million and $3.1 million, respectively.
36
For disclosure purposes, the fair value, based on the last quoted closing price, for our Series 2024 Term
Preferred Stock as of June 30, 2018 and September 30, 2017 was approximately $52.8 million and $52.7 million, respectively. We consider our mandatorily redeemable preferred stock to be a Level 1 liability within the ASC 820
hierarchy.
NOTE 7. REGISTRATION STATEMENT, COMMON EQUITY OFFERINGS AND SHARE REPURCHASES
We filed Post-Effective Amendment No. 5 to our current universal shelf registration statement on Form
N-2
(our
Registration Statement) (File
No. 333-208637)
with the SEC on December 19, 2017, which was declared effective by the SEC on February 1, 2018. Our Registration Statement permits us to
issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt
securities. As of June 30, 2018, we had the ability to issue up to $210.7 million in securities under the Registration Statement.
Common
Stock Offerings
Pursuant to our Registration Statement, in October 2016, we completed a public offering of 2.0 million shares of our common stock
at a public offering price of $7.98 per share, which was below our then current NAV per share. In November 2016, the underwriters partially exercised their overallotment option to purchase an additional 173,444 shares of our common stock. Gross
proceeds totaled $17.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $16.4 million.
In February 2015, we entered into equity distribution agreements (commonly referred to as
at-the-market
agreements or the Sales Agreements) with KeyBanc Capital Markets Inc. and Cantor Fitzgerald & Co., each a Sales
Agent, under which we had the ability to issue and sell, from time to time, through the Sales Agents, up to an aggregate offering price of $50.0 million shares of our common stock. In May 2017, we terminated the Sales Agreement with
KeyBanc Capital Markets Inc. and amended the Sales Agreement with Cantor Fitzgerald & Co. to reference our current registration statement. All other material terms of the Sales Agreement with Cantor Fitzgerald & Co. remained
unchanged. During the nine months ended June 30, 2018, we sold 1,499,748 shares of our common stock under the Sales Agreement with Cantor Fitzgerald & Co., at a weighted-average price of $9.26 per share and raised $13.9 million of
gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $13.7 million. As of June 30, 2018, we had a remaining capacity to sell up to $28.6 million of common stock under
the Sales Agreement with Cantor Fitzgerald & Co. During the nine months ended June 30, 2017, we sold 362,600 shares at a weighted-average price of $9.89 per share and raised $3.6 million of gross proceeds. Net proceeds, after
deducting commissions and offering costs borne by us, were approximately $3.5 million.
NOTE 8. NET INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net increase in net assets
resulting from operations per weighted average common share for the three and nine months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Nine Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator for basic and diluted net increase in net assets resulting from operations per common
share
|
|
$
|
12,093
|
|
|
$
|
6,163
|
|
|
$
|
28,557
|
|
|
$
|
11,735
|
|
Denominator for basic and diluted weighted average common shares
|
|
|
27,134,305
|
|
|
|
25,576,149
|
|
|
|
26,788,172
|
|
|
|
25,288,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net increase in net assets resulting from operations per common
share
|
|
$
|
0.45
|
|
|
$
|
0.24
|
|
|
$
|
1.07
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify to be taxed as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90% of our
taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (Investment Company Taxable Income). The amount to be paid out as distributions to our stockholders is determined by our Board
of Directors quarterly and is based on managements estimate of Investment Company Taxable Income. Based on that estimate, our Board of Directors declares three monthly distributions to common stockholders each quarter.
The federal income tax characteristics of all distributions will be reported to stockholders on the IRS Form 1099 at the end of each calendar year. For
calendar years ended December 31, 2017 and 2016, 100% of distributions to common stockholders during these periods were deemed to be paid from ordinary income for 1099 stockholder reporting purposes.
37
We paid the following monthly distributions to common stockholders for the nine months ended June 30, 2018
and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Declaration
Date
|
|
|
Record Date
|
|
Payment Date
|
|
Distribution
per Common
Share
|
|
2018
|
|
|
October 10, 2017
|
|
|
October 20, 2017
|
|
October 31, 2017
|
|
$
|
0.07
|
|
|
|
|
October 10, 2017
|
|
|
November 20, 2017
|
|
November 30, 2017
|
|
|
0.07
|
|
|
|
|
October 10, 2017
|
|
|
December 19, 2017
|
|
December 29, 2017
|
|
|
0.07
|
|
|
|
|
January 9, 2018
|
|
|
January 22, 2018
|
|
January 31, 2018
|
|
|
0.07
|
|
|
|
|
January 9, 2018
|
|
|
February 16, 2018
|
|
February 28, 2018
|
|
|
0.07
|
|
|
|
|
January 9, 2018
|
|
|
March 20, 2018
|
|
March 30, 2018
|
|
|
0.07
|
|
|
|
|
April 10, 2018
|
|
|
April 20, 2018
|
|
April 30, 2018
|
|
|
0.07
|
|
|
|
|
April 10, 2018
|
|
|
May 22, 2018
|
|
May 31, 2018
|
|
|
0.07
|
|
|
|
|
April 10, 2018
|
|
|
June 20, 2018
|
|
June 29, 2018
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2018:
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
October 11, 2016
|
|
|
October 21, 2016
|
|
October 31, 2016
|
|
$
|
0.07
|
|
|
|
|
October 11, 2016
|
|
|
November 17, 2016
|
|
November 30, 2016
|
|
|
0.07
|
|
|
|
|
October 11, 2016
|
|
|
December 20, 2016
|
|
December 30, 2016
|
|
|
0.07
|
|
|
|
|
January 10, 2017
|
|
|
January 20, 2017
|
|
January 31, 2017
|
|
|
0.07
|
|
|
|
|
January 10, 2017
|
|
|
February 16, 2017
|
|
February 28, 2017
|
|
|
0.07
|
|
|
|
|
January 10, 2017
|
|
|
March 22, 2017
|
|
March 31, 2017
|
|
|
0.07
|
|
|
|
|
April 11, 2017
|
|
|
April 21, 2017
|
|
April 28, 2017
|
|
|
0.07
|
|
|
|
|
April 11, 2017
|
|
|
May 19, 2017
|
|
May 31, 2017
|
|
|
0.07
|
|
|
|
|
April 11, 2017
|
|
|
June 21, 2017
|
|
June 30, 2017
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2017:
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate distributions declared and paid to our common stockholders were approximately $16.9 million and
$15.9 million for the nine months ended June 30, 2018 and 2017, respectively, and were declared based on estimates of Investment Company Taxable Income for the respective fiscal years. For the fiscal year ended September 30, 2017, our
current and accumulated earnings and profits (after taking into account our mandatorily redeemable preferred stock dividends), exceeded common stock distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected
to treat $0.3 million of the first common distributions paid in fiscal year 2018 as having been paid in the respective prior year.
For the nine
months ended June 30, 2018 and the fiscal year ended September 30, 2017, we recorded the following adjustments for
book-tax
differences to reflect tax character.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
June 30, 2018
|
|
|
Year Ended
September 30, 2017
|
|
Over distributed net investment income
|
|
$
|
(385
|
)
|
|
$
|
(4,416
|
)
|
Accumulated net realized losses
|
|
|
725
|
|
|
|
6,541
|
|
Capital in excess of par value
|
|
|
(340
|
)
|
|
|
(2,125
|
)
|
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to certain legal
proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both
probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our
financial condition, results of operations or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of June 30, 2018 and September 30, 2017, we
have not established reserves for such loss contingencies.
Escrow Holdbacks
From time to time, we will enter into arrangements as it relates to exits of certain investments whereby specific amounts of the proceeds are held in escrow in
order to be used to satisfy potential obligations as stipulated in the sales agreements. We record escrow amounts in restricted cash and cash equivalents on our accompanying
Consolidated Statements of Assets and Liabilities
. We establish a
reserve against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. There were no aggregate reserves recorded against the escrow
amounts as of June 30, 2018 and September 30, 2017.
38
Financial Commitments and Obligations
We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn.
Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the
unused delayed draw term loans and the uncalled capital commitment as of June 30, 2018 and September 30, 2017 to be immaterial.
The following
table summarizes the amounts of our unused lines of credit, delayed draw term loans and uncalled capital commitment, at cost, as of June 30, 2018 and September 30, 2017, which are not reflected as liabilities in the accompanying
Consolidated Statements of Assets and Liabilities
:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Unused line of credit commitments
|
|
$
|
5,222
|
|
|
$
|
7,517
|
|
Delayed draw term loans
|
|
|
11,460
|
|
|
|
10,900
|
|
Uncalled capital commitment
|
|
|
843
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,525
|
|
|
$
|
19,784
|
|
|
|
|
|
|
|
|
|
|
39
NOTE 11. FINANCIAL HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Per Common Share Data
(A)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of
period
(A)
|
|
$
|
8.62
|
|
|
$
|
8.33
|
|
|
$
|
8.40
|
|
|
$
|
8.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
(B)
|
|
|
0.22
|
|
|
|
0.21
|
|
|
|
0.64
|
|
|
|
0.63
|
|
Net realized and unrealized gain (loss) on investments
|
|
|
0.23
|
|
|
|
0.04
|
|
|
|
0.43
|
|
|
|
(0.17
|
)
|
Net realized and unrealized gain (loss) on other
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from operations
|
|
|
0.45
|
|
|
|
0.24
|
|
|
|
1.07
|
|
|
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to common stockholders
from
(B)(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
(0.21
|
)
|
|
|
(0.21
|
)
|
|
|
(0.63
|
)
|
|
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.21
|
)
|
|
|
(0.21
|
)
|
|
|
(0.63
|
)
|
|
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounts, commissions, and offering costs
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
(0.04
|
)
|
Net dilutive effect of equity
offering
(D)
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital share transactions
|
|
|
|
|
|
|
0.02
|
|
|
|
0.02
|
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
(B)(E)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
(A)
|
|
$
|
8.86
|
|
|
$
|
8.38
|
|
|
$
|
8.86
|
|
|
$
|
8.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share market value at beginning of period
|
|
$
|
8.60
|
|
|
$
|
9.49
|
|
|
$
|
9.50
|
|
|
$
|
8.13
|
|
Per common share market value at end of period
|
|
|
9.00
|
|
|
|
9.83
|
|
|
|
9.00
|
|
|
|
9.83
|
|
Total return
(F)
|
|
|
7.13
|
%
|
|
|
5.82
|
%
|
|
|
1.52
|
%
|
|
|
29.46
|
%
|
Common stock outstanding at end of
period
(A)
|
|
|
27,660,432
|
|
|
|
25,880,466
|
|
|
|
27,660,432
|
|
|
|
25,880,466
|
|
Statement of Assets and Liabilities Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
244,951
|
|
|
$
|
216,983
|
|
|
$
|
244,951
|
|
|
$
|
216,983
|
|
Average net assets
(G)
|
|
|
237,811
|
|
|
|
214,391
|
|
|
|
230,426
|
|
|
|
213,862
|
|
Senior Securities Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Credit Facility, at cost
|
|
|
117,000
|
|
|
|
82,200
|
|
|
|
117,000
|
|
|
|
82,200
|
|
Mandatorily redeemable preferred stock, at liquidation preference
|
|
|
51,750
|
|
|
|
59,624
|
|
|
|
51,750
|
|
|
|
59,624
|
|
Ratios/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net expenses to average net assets annualized
(H)(I)
|
|
|
10.74
|
%
|
|
|
7.93
|
%
|
|
|
9.92
|
%
|
|
|
7.76
|
%
|
Ratio of net investment income to average net assets annualized
(J)
|
|
|
10.08
|
%
|
|
|
10.04
|
%
|
|
|
9.94
|
%
|
|
|
9.94
|
%
|
(A)
|
Based on actual shares outstanding at the end of the corresponding period.
|
(B)
|
Based on weighted average basic per share data.
|
(C)
|
The tax character of distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.
|
(D)
|
During the three and nine months ended June 30, 2018, the anti-dilution was a result of issuing common shares during the period at a price above the then-current NAV per share. During the nine months ended
June 30, 2017, the dilution was a result of issuing common shares during the period at a price below the then-current NAV per share. During the three months ended June 30, 2017, the anti-dilution was a result of issuing common shares
during the period at a price above the then-current NAV per share, which partially offset the dilution during the nine months ended June 30, 2017.
|
(E)
|
Represents the impact of the different share amounts (weighted average shares outstanding during the fiscal year and shares outstanding at the end of the fiscal year) in the per share data calculations and rounding
impacts.
|
(F)
|
Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, taking into account distributions reinvested in
accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common
stockholders, refer to Note 9
Distributions to Common Stockholders
.
|
(G)
|
Computed using net assets at the end of each month of the reporting period.
|
(H)
|
Ratio of net expenses to average net assets is computed using total expenses, net of credits from the Adviser, to the base management, loan servicing and incentive fees.
|
(I)
|
Had we not received any voluntary, unconditional and irrevocable credits of the incentive fee due to the Adviser, the ratio of net expenses to average net assets
would have been 10.42% for the nine months ended June 30, 2018, and 9.65% and 9.04% for the three and nine months ended June 30, 2017, respectively. We did not receive any voluntary, unconditional and irrevocable credits of the incentive
fee due to the Adviser during the three months ended June 30, 2018.
|
(J)
|
Had we not received any voluntary, unconditional and irrevocable credits of the incentive fee due to the Adviser, the ratio of net investment income to average net
assets would have been 9.45% for the nine months ended June 30, 2018, and 8.34% and 8.69% for the three and nine months ended June 30, 2017, respectively. We did not receive any voluntary, unconditional and irrevocable credits of the
incentive fee due to the Adviser during the three months ended June 30, 2018.
|
40
NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES
In accordance with the SECs Regulation
S-X,
we do not consolidate portfolio company investments. Further, in
accordance with ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to
the investment company or its consolidated subsidiaries.
As of or during the nine month periods ended June 30, 2018 and 2017, we did not have any
unconsolidated subsidiaries that met any of the significance conditions under Rule
1-02(w)
of the SECs Regulation
S-X.
NOTE 13. SUBSEQUENT EVENTS
Distributions and
Dividends
In July 2018, our Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to preferred
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
|
Distribution
per Common
Share
|
|
|
Distribution per
Series 2024
Term Preferred
Share
|
|
July 20, 2018
|
|
|
July 31, 2018
|
|
|
$
|
0.07
|
|
|
$
|
0.125
|
|
August 21, 2018
|
|
|
August 31, 2018
|
|
|
|
0.07
|
|
|
|
0.125
|
|
September 19, 2018
|
|
|
September 28, 2018
|
|
|
|
0.07
|
|
|
|
0.125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the Quarter:
|
|
|
$
|
0.21
|
|
|
$
|
0.375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Activity
In
July 2018, our investment in NetSmart Technologies, Inc. paid off for net cash proceeds of $3.7 million.
In July 2018, an existing portfolio
company, EL Academies, Inc., drew an additional $4.4 million on the unused portion of its secured first lien delayed draw term loan.
41