NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2016
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
NOTE 1. ORGANIZATION
Gladstone Capital Corporation was
incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 2001. The terms the Company, we, our and us all refer to
Gladstone Capital Corporation and its consolidated subsidiaries. We are an externally managed,
closed-end,
non-diversified
management investment company that has elected
to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act), and is applying the guidance of the Financial Accounting Standards Board (the FASB)
Accounting Standards Codification (ASC) Topic 946
Financial Services-Investment Companies
(ASC 946). In addition, we have elected to be treated for tax purposes as a regulated investment company (RIC) under
the Internal Revenue Code of 1986, as amended (the Code). We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (U.S). Our investment
objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and
amortization of $3 million to $15 million) in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that
grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity
investments for capital gains.
Gladstone Business Loan, LLC (Business Loan), a wholly-owned subsidiary of ours, was established on
February 3, 2003, for the sole purpose of owning a portion of our portfolio of investments in connection with our Credit Facility (defined in Note 5
Borrowings
).
Gladstone Financial Corporation (Gladstone Financial), a wholly-owned subsidiary of ours, was established on November 21, 2006, for the
purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial acquired this license in February 2007. The license enables us to make investments in accordance with the United States Small Business
Administration guidelines for specialized small business investment companies. As of December 31, 2016 and September 30, 2016, we held no investments in portfolio companies through Gladstone Financial.
The financial statements of Business Loan and Gladstone Financial are consolidated with ours. We also have significant subsidiaries whose financial statements
are not consolidated with ours. Refer to Note 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 a U.S. Securities and Exchange Commission
(the SEC) registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the Advisory Agreement). Administrative services are provided by our affiliate, Gladstone
Administration, LLC (the Administrator), a Delaware limited liability company, pursuant to an administration agreement (the Administration Agreement). Refer to Note 4
Related Party Transactions
for additional
information regarding these arrangements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (AICPA) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company,
except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of
normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three months ended December 31, 2016, are not necessarily indicative of results
that ultimately may be achieved for the fiscal year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form
10-K
for the fiscal year ended September 30, 2016, as filed with the SEC on November 21, 2016.
Our
accompanying fiscal
year-end
Consolidated Statement of Assets and Liabilities
was derived from audited financial statements, but does not include all disclosures required by GAAP.
17
Use of Estimates
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated
Financial Statements and accompanying notes. Actual results may differ from those estimates.
Reclassifications
Certain amounts have been reclassified to conform to the current year presentation.
In April 2015, the FASB issued Accounting Standards Update
2015-03,
Simplifying the Presentation of Debt
Issuance Costs
(ASU
2015-03),
which simplifies the presentation of debt issuance costs. ASU
2015-03
requires the presentation of debt issuance
costs as a deduction from the carrying amount of the related debt liability instead of as a deferred financing cost asset on the balance sheet. In August 2015, the FASB issued Accounting Standards Update
2015-15,
Interest Imputation of Interest (Subtopic
835-30):
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit
Arrangements
(ASU
2015-15),
which codifies an SEC staff announcement that entities are permitted
to defer and present debt issuance costs related to line of credit arrangements as assets. ASU
2015-03
was effective for annual reporting periods beginning after December 15, 2015 and interim periods
within those years, and we adopted ASU
2015-03
during the three months ended December 31, 2016. ASU
2015-15
was effective immediately and we opted to continue to
present debt issuance costs related to line of credit arrangements as assets.
As of December 31, 2016 and September 30, 2016, we had
unamortized deferred financing costs related to our mandatorily redeemable preferred stock of $1.6 million. These costs have been reclassified from Deferred financing costs, net, to Mandatorily redeemable preferred stock, net. All periods
presented have been retrospectively adjusted.
The following table summarizes the retrospective adjustment and the overall impact on the previously
reported consolidated financial statements:
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|
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|
|
|
|
|
September 30, 2016
|
|
|
|
As Previously
Reported
|
|
|
Retrospective
Application
|
|
Deferred financing costs, net
|
|
$
|
3,161
|
|
|
$
|
1,521
|
|
Mandatorily redeemable preferred stock, net
|
|
|
61,000
|
|
|
|
59,360
|
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Investment Valuation Policy
Accounting Recognition
We record our investments at fair
value in accordance with the FASB Accounting Standards Codification Topic 820,
Fair Value Measurements and Disclosures
(ASC 820) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains
or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized depreciation or appreciation previously recognized, and include investments charged
off during the period, net of recoveries. Unrealized depreciation or appreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized depreciation or appreciation when gains or losses are
realized.
Board Responsibility
In accordance with
the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our investment valuation policy, which has been approved by our Board of Directors (the
Policy). Such review occurs in three phases. First, prior to its quarterly meetings, our Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and
Administrator with oversight and direction from our chief valuation officer, who reports directly to our Board of Directors (the Valuation Team). Second, the Valuation Committee of our Board of Directors, comprised entirely of
independent directors, meets to review the valuation recommendations and supporting materials. Third, after the Valuation Committee concludes its meeting, it and our chief valuation officer present the Valuation Committees findings to the
entire Board of Directors and, after discussion, the Board of Directors ultimately approves the value of our portfolio of investments in accordance with the Policy.
There is no single method for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and
circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by our chief valuation officer, uses the Policy and each quarter the Valuation Committee and Board of Directors reviews the
Policy to determine if changes are advisable and also reviews whether the Valuation Team has applied the Policy consistently.
Use of Third Party
Valuation Firms
The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.
18
Standard & Poors Securities Evaluation, Inc. (SPSE), a valuation specialist, generally
provides estimates of fair value on our proprietary debt investments. The Valuation Team, in accordance with the Policy, generally assigns SPSEs estimates of fair value to our debt investments where we do not have the ability to effectuate a
sale of the applicable portfolio company. The Valuation Team corroborates SPSEs estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Teams estimate of value on a specific debt investment
may significantly differ from SPSEs. When this occurs, the Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Teams recommended fair value is reasonable in light
of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Teams recommended fair value.
We may engage other
independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we
engage an independent valuation firm to value or review our valuation of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our total
enterprise value, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors
reviews the recommended fair value, whether it is reasonable in light of the Policy, as well as other relevant facts and circumstances and then votes to accept or reject the Valuation Teams recommended fair value.
Valuation Techniques
In accordance with ASC 820, the
Valuation Team uses the following techniques when valuing our investment portfolio:
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Total Enterprise Value
In determining the fair value using a total enterprise value (TEV), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of
the following factors: the portfolio companys ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes,
depreciation and amortization (EBITDA)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of
comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, inputs provided by an independent
valuation firm, if any, and other pertinent factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team then
allocates the TEV to the portfolio companys securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to
effectuate a sale of a portfolio company, our debt investments.
|
TEV is primarily calculated using EBITDA or revenue
multiples; however, TEV may also be calculated using a discounted cash flow (DCF) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount
rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses the DCF to calculate the TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate
a sale of a portfolio company or for debt of credit impaired portfolio companies.
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Yield Analysis
The Valuation Team generally determines the fair value of our debt investments using the yield analysis, which includes a DCF calculation and the Valuation Teams own assumptions,
including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased
probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes.
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Market Quotes
For our syndicate investments for which a limited market exists, fair value is generally based on readily available and reliable market quotations which are corroborated by the Valuation Team
(generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar syndicated investments and evaluates variances in quotations and other market insights to determine if any available
quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (IBP) in the
bid-to-ask
price range obtained from the
respective originating syndication agents trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy.
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Investments in Funds
For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our
invested capital at the net asset value (NAV) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.
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19
In addition to the above valuation techniques, the Valuation Team may also consider other factors when
determining fair values of our investments, including, but not limited to: the nature and realizable value of the collateral, including external parties guaranties; any relevant offers or letters of intent to acquire the portfolio company;
timing of expected loan repayments; and the markets in which the portfolio company operates. If applicable, new and
follow-on
proprietary debt and equity investments made during the current reporting quarter
(the quarter ended December 31, 2016) are generally valued at original cost basis.
Fair value measurements of our investments may involve subjective
judgments and estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market
for these securities existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our exit of such securities. Additionally,
changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such
investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize
significantly less than the value at which it is recorded.
Refer to Note 3
Investments
for additional information regarding fair value
measurements and our application of ASC 820.
Revenue Recognition Policy
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, the interest income is deemed to be collectible. At December 31, 2016, one portfolio company, Sunshine Media Holdings, was partially on
non-accrual
status with an aggregate debt
cost basis of approximately $19.1 million, or 6.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $3.0 million, or 1.1% of the fair value of all debt investments in our portfolio.
At September 30, 2016, two portfolio companies were either fully or partially on
non-accrual
status with an aggregate debt cost basis of approximately $26.5 million, or 7.7% of the cost basis of all
debt investments in our portfolio, and an aggregate fair value of approximately $5.9 million, or 1.9% of the fair value of all debt investments in our portfolio.
We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally
issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and
recorded as income over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both of our OID and PIK
non-cash
income amounts in the form of distributions, even though we have not yet collected the cash on either.
As of
December 31, 2016 and September 30, 2016, we had 10 and 12 OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $20 during the three months ended December 31, 2016 and
$0.1 million during the three months ended December 31, 2015. The unamortized balance of OID investments as of December 31, 2016 and September 30, 2016 totaled $0.6 million and $0.5 million, respectively. As of
December 31, 2016 and September 30, 2016, we had eight and seven investments which had a PIK interest component, respectively. We recorded PIK interest income of $1.2 million during the three months ended December 31, 2016 and
$0.1 million during the three months ended December 31, 2015. We collected $1.0 million and $0 in PIK interest in cash during the three months ended December 31, 2016 and 2015, respectively.
Other Income Recognition
We generally record success
fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company, typically from an exit or sale. We recorded $1.5 million and $0.8 million in success fee income during the three months ended
December 31, 2016 and 2015, respectively.
Dividend income on equity investments is accrued to the extent that such amounts are expected to be
collected and if we have the option to collect such amounts in cash. We recorded $0 and $0.1 million of dividend income during the three months ended December 31, 2016 and 2015, respectively.
During the three months ended December 31, 2016, we recharacterized $0.2 million of dividend income from our investment in Behrens Manufacturing,
LLC (Behrens) recorded during our fiscal year ended September 30, 2016 as a return of capital.
20
We generally record prepayment fees upon receipt of cash. Prepayment fees are contractually due at the time of an
investments exit, based on the prepayment fee schedule. We recorded $20 and $0.1 million in prepayment fees during the three months ended December 31, 2016 and 2015, respectively.
Success fees, prepayment fees, dividend income, and any other income amounts are all recorded in other income in our accompanying
Consolidated Statements
of Operations
.
Recent Accounting Pronouncements
In November 2016, the FASB issued Accounting Standards Update
2016-18,
Restricted Cash (a consensus of the
Emerging Issues Task Force) (ASU
2016-18),
which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. We are currently assessing the impact of ASU
2016-18
and do not anticipate a material impact on our financial position, results of operations
or cash flows. ASU
2016-18
is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.
In August 2016, the FASB issued Accounting Standards Update
2016-15,
Classification of Certain Cash Receipts and
Cash Payments (a consensus of the Emerging Issues Task Force) (ASU
2016-15),
which is intended to reduce diversity in practice in how certain transactions are classified in the statement of
cash flows. We are currently assessing the impact of ASU
2016-15
and do not anticipate a material impact on our cash flows. ASU
2016-15
is effective for annual
reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.
In 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 March 2016, the FASB issued Accounting Standards Update 2016-06,
Contingent Put and Call Options in Debt Instruments
(ASU 2016-06), which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related. We are currently assessing the impact
of ASU 2016-06 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-06 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those
fiscal years, with early adoption permitted.
In February 2015, the FASB issued Accounting Standards Update
2015-02,
Amendments to the Consolidation Analysis
(ASU
2015-02),
which amends or supersedes the scope and consolidation guidance under
existing GAAP. The adoption of ASU
2015-02
did not have a material impact on our financial position, results of operations or cash flows. ASU
2015-02
is effective for
annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU
2015-02
effective April 1, 2016. In October 2016, the FASB issued Accounting
Standards Update
2016-17,
Interests Held through Related Parties That Are under Common Control
(ASU
2016-17),
which amends the
consolidation guidance in ASU
2015-02
regarding the treatment of indirect interests held through related parties that are under common control. We are currently assessing the impact of ASU
2016-17
and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU
2016-17
is effective for annual reporting periods beginning
after December 15, 2016 and interim periods within those years, with early adoption permitted.
In August 2014, the FASB issued Accounting Standards
Update 201415,
Presentation of Financial Statements Going Concern (Subtopic 205 40): Disclosure of Uncertainties About an Entitys Ability to Continue as a Going Concern
(ASU
2014-15).
ASU
2014-15
requires management to evaluate whether there are conditions or events that raise substantial doubt about the entitys ability to continue as
a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. Since this guidance focuses on
certain disclosures to the financial statements, we anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. We are currently assessing the additional disclosure requirements, if any, of ASU
2014-15.
ASU
2014-15
is effective for annual periods ending after December 31, 2016 and interim periods thereafter, with early adoption permitted.
21
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. We are currently assessing the impact of ASU
2014-09,
as amended, and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. In July 2015, the FASB issued Accounting Standards Update
2015-14,
Deferral of the Effective Date,
which deferred the effective date of ASU
2014-09.
ASU
2014-09,
as amended
by ASU
2015-14,
ASU
2016-08,
ASU
2016-10,
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.
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. As of December 31, 2016
and September 30, 2016, all of our investments were valued using Level 3 inputs and during the three months ended December 31, 2016 and 2015, there were no investments transferred into or out of Levels 1, 2 or 3. The following table
presents our investments carried at fair value as of December 31, 2016 and September 30, 2016, by caption on our accompanying
Consolidated Statements of Assets and Liabilities
and by security type, all of which are valued using
level 3 inputs:
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Total Recurring Fair Value Measurements Reported in
|
|
|
|
Consolidated Statements of Assets and Liabilities
Using
Significant Unobservable Inputs (Level
3)
|
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
Non-Control/Non-Affiliate
Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
|
|
$
|
125,798
|
|
|
$
|
134,067
|
|
Secured second lien debt
|
|
|
94,506
|
|
|
|
80,446
|
|
Unsecured debt
|
|
|
3,091
|
|
|
|
3,012
|
|
Preferred equity
|
|
|
3,788
|
|
|
|
7,051
|
|
Common equity/equivalents
|
|
|
3,806
|
|
|
|
1,825
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Control/Non-Affiliate
Investments
|
|
$
|
230,989
|
|
|
$
|
226,401
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
|
|
$
|
20,903
|
|
|
$
|
54,620
|
|
Secured second lien debt
|
|
|
13,370
|
|
|
|
13,650
|
|
Preferred equity
|
|
|
627
|
|
|
|
3,211
|
|
Common equity/equivalents
|
|
|
3,091
|
|
|
|
3,992
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
$
|
37,991
|
|
|
$
|
75,473
|
|
|
|
|
|
|
|
|
|
|
Control Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
|
|
$
|
9,629
|
|
|
$
|
10,034
|
|
Secured second lien debt
|
|
|
6,145
|
|
|
|
6,224
|
|
Common equity/equivalents
|
|
|
3,492
|
|
|
|
3,982
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
$
|
19,266
|
|
|
$
|
20,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments, at Fair Value
|
|
$
|
288,246
|
|
|
$
|
322,114
|
|
|
|
|
|
|
|
|
|
|
22
In accordance with ASU
2011-04,
Fair Value Measurement (Topic
820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Reporting Standards (IFRS)
, (ASU
2011-04),
the following table
provides quantitative information about our Level 3 fair value measurements of our investments as of December 31, 2016 and September 30, 2016. The table below is not intended to be
all-inclusive,
but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the
principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
Range / Weighted Average as of
|
|
|
|
December 31,
2016
|
|
|
September 30,
2016
|
|
|
Valuation
Technique/
Methodology
|
|
|
Unobservable
Input
|
|
|
December 31,
2016
|
|
|
September 30,
2016
|
|
Secured first lien debt
(A)
|
|
|
$133,163
|
|
|
|
$141,550
|
|
|
|
Yield Analysis
|
|
|
|
Discount Rate
|
|
|
|
8.7% -18.1% / 12.3%
|
|
|
|
8.1% -18.5% / 12.1%
|
|
|
|
|
23,167
|
|
|
|
54,630
|
|
|
|
TEV
|
|
|
|
EBITDA multiples
|
|
|
|
3.3x 4.4x / 2.7x
|
|
|
|
3.2x - 5.5x / 2.3x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
$1,309 -$4,911 / $2,476
|
|
|
|
$1,262 - $20,269 / $4,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue multiples
|
|
|
|
0.4x 0.4x / 0.4x
|
|
|
|
0.2x 0.4x / 0.4x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
$8,101 -$14,073 / $13,705
|
|
|
|
$4,696 - $15,083 / $14,139
|
|
|
|
|
|
|
|
|
2,541
|
|
|
|
Market Quotes
|
|
|
|
IBP
|
|
|
|
|
|
|
|
64.5% - 64.5% / 64.5%
|
|
Secured second lien debt
(B)
|
|
|
81,805
|
|
|
|
72,678
|
|
|
|
Yield Analysis
|
|
|
|
Discount Rate
|
|
|
|
10.9% - 22.2% / 14.5%
|
|
|
|
12.0% - 22.0% / 15.1%
|
|
|
|
|
26,071
|
|
|
|
21,417
|
|
|
|
Market Quotes
|
|
|
|
IBP
|
|
|
|
40.0% - 99.3% / 87.6%
|
|
|
|
40.0% - 98.3% / 83.7%
|
|
|
|
|
6,145
|
|
|
|
6,225
|
|
|
|
TEV
|
|
|
|
EBITDA multiples
|
|
|
|
4.9x 4.9x / 4.9x
|
|
|
|
4.7x 4.7x / 4.7x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
$2,368 - $2,368 / $2,368
|
|
|
|
$2,759 -$2,759 / $2,759
|
|
Unsecured debt
|
|
|
3,091
|
|
|
|
3,012
|
|
|
|
Yield Analysis
|
|
|
|
Discount Rate
|
|
|
|
9.9% - 9.9% / 9.9%
|
|
|
|
9.9% -9.9% / 9.9%
|
|
Preferred and common equity / equivalents
(C)
|
|
|
11,098
|
|
|
|
18,017
|
|
|
|
TEV
|
|
|
|
EBITDA multiples
|
|
|
|
3.3x 7.8x / 6.1x
|
|
|
|
3.2x 7.5x / 5.8x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
$791 - $92,069 / $7,296
|
|
|
|
$1,132 - $86,041 / $7,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue multiple
|
|
|
|
0.4x 0.4x / 0.4x
|
|
|
|
0.4x 0.4x / 0.4x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
$8,101 - $14,073 / $13,204
|
|
|
|
$7,708 - $15,083 / $14,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
|
12.4% - 12.4% / 12.4%
|
|
|
|
11.7% - 11.7% / 11.7%
|
|
|
|
|
1,187
|
|
|
|
|
|
|
|
Market Quotes
|
|
|
|
IBP
|
|
|
|
39.3% - 39.3% / 39.3%
|
|
|
|
|
|
|
|
|
2,519
|
|
|
|
2,044
|
|
|
|
Investments in
Funds
(D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments, at Fair Value
|
|
|
$288,246
|
|
|
|
$322,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Fair value as of September 30, 2016 includes one new proprietary debt investment and two restructured proprietary debt investments totaling $12.6 million,
which were valued at cost, and two proprietary debt investments totaling $38.8 million, which were valued at the expected exit amount.
|
(B)
|
Fair value as of December 31, 2016 includes two new proprietary debt investments totaling $12.0 million, which were valued at cost. Fair value as of
September 30, 2016 includes one new proprietary debt investment for $10.0 million which was valued at cost.
|
(C)
|
Fair value as of December 31, 2016 includes one new proprietary investment totaling $0.2 million, which was valued at cost. Fair value as of
September 30, 2016 includes one new proprietary investment and one restructured proprietary investment totaling $0.5 million, which were valued at cost, and two proprietary investments for $7.3 million, which were valued at the
expected payoff amount.
|
(D)
|
Fair value as of December 31, 2016 and September 30, 2016 is based on net asset value as a practical expedient and is not subject to leveling within the
fair value hierarchy.
|
23
Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in market
yields, discounts rates, leverage, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase or decrease in market yields, discount rates or
leverage or a decrease in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a corresponding decrease or increase, respectively, in the fair value of certain of our investments.
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 months ended December 31, 2016 and 2015 for all
investments for which the Adviser determines fair value using unobservable (Level 3) factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
|
|
FISCAL YEAR TO DATE 2017:
|
|
Secured
|
|
|
Secured
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
Three Months Ended December 31, 2016
|
|
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
|
|
|
$
|
9,799
|
|
|
$
|
322,114
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain
(A)
|
|
|
(4,899
|
)
|
|
|
25
|
|
|
|
|
|
|
|
1,426
|
|
|
|
|
|
|
|
(3,448
|
)
|
Net unrealized
(depreciation) appreciation
(B)
|
|
|
2,656
|
|
|
|
(3,220
|
)
|
|
|
1
|
|
|
|
1,116
|
|
|
|
(3,195
|
)
|
|
|
(2,642
|
)
|
Reversal of prior period net depreciation (appreciation) on realization
(B)
|
|
|
2,210
|
|
|
|
66
|
|
|
|
|
|
|
|
(1,059
|
)
|
|
|
370
|
|
|
|
1,587
|
|
New investments, repayments and
settlements:
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances/originations
|
|
|
548
|
|
|
|
19,358
|
|
|
|
75
|
|
|
|
394
|
|
|
|
768
|
|
|
|
21,143
|
|
Settlements/repayments
|
|
|
(38,865
|
)
|
|
|
(3,426
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
(42,288
|
)
|
Net proceeds from sales
|
|
|
(101
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
(7,724
|
)
|
|
|
(370
|
)
|
|
|
(8,220
|
)
|
Transfers
|
|
|
(3,940
|
)
|
|
|
923
|
|
|
|
|
|
|
|
|
|
|
|
3,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2016
|
|
$
|
156,330
|
|
|
$
|
114,021
|
|
|
$
|
3,091
|
|
|
$
|
4,415
|
|
|
$
|
10,389
|
|
|
$
|
288,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
|
|
FISCAL YEAR TO DATE 2016:
|
|
Secured
|
|
|
Secured
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Preferred
|
|
|
Equity/
|
|
|
|
|
Three Months Ended December 31, 2015
|
|
Lien Debt
|
|
|
Lien Debt
|
|
|
Equity
|
|
|
Equivalents
|
|
|
Total
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2015
|
|
$
|
206,840
|
|
|
$
|
120,303
|
|
|
$
|
24,315
|
|
|
$
|
14,433
|
|
|
$
|
365,891
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain
(A)
|
|
|
(1,060
|
)
|
|
|
(174
|
)
|
|
|
17,000
|
|
|
|
(384
|
)
|
|
|
15,382
|
|
Net unrealized depreciation
(B)
|
|
|
(8,617
|
)
|
|
|
(3,465
|
)
|
|
|
(469
|
)
|
|
|
(3,187
|
)
|
|
|
(15,738
|
)
|
Reversal of prior period net depreciation (appreciation) on realization
(B)
|
|
|
2,374
|
|
|
|
147
|
|
|
|
(16,009
|
)
|
|
|
383
|
|
|
|
(13,105
|
)
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
|
|
FISCAL YEAR TO DATE 2016:
|
|
Secured
|
|
|
Secured
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Preferred
|
|
|
Equity/
|
|
|
|
|
Three Months Ended December 31, 2015
|
|
Lien Debt
|
|
|
Lien Debt
|
|
|
Equity
|
|
|
Equivalents
|
|
|
Total
|
|
New investments, repayments and
settlements:
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances/originations
|
|
|
7,725
|
|
|
|
111
|
|
|
|
187
|
|
|
|
|
|
|
|
8,023
|
|
Settlements/repayments
|
|
|
(29,799
|
)
|
|
|
(11,087
|
)
|
|
|
|
|
|
|
|
|
|
|
(40,886
|
)
|
Net proceeds from sales
|
|
|
(1,831
|
)
|
|
|
|
|
|
|
(18,045
|
)
|
|
|
|
|
|
|
(19,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2015
|
|
$
|
175,632
|
|
|
$
|
105,835
|
|
|
$
|
6,979
|
|
|
$
|
11,245
|
|
|
$
|
299,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Included in net realized gain (loss) on our accompanying
Consolidated Statements of Operations
for the three months ended December 31, 2016 and 2015.
|
(B)
|
Included in net unrealized appreciation (depreciation) of investments on our accompanying
Consolidated Statements of Operations
for the three months ended December 31, 2016 and 2015.
|
(C)
|
Includes increases in the cost basis of investments resulting from new portfolio investments, the accretion of discounts, and PIK, 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.
|
Investment Activity
Proprietary Investments
As of December 31, 2016 and
September 30, 2016, we held 32 proprietary investments with an aggregate fair value of $254.1 million and $291.3 million, or 88.2% and 90.4% of the total aggregate portfolio, respectively. The following significant proprietary
investment transactions occurred during the three months ended December 31, 2016:
|
|
|
In November 2016, we completed the sale of substantially all the assets of RBC Acquisition Corp. for net proceeds of $36.3 million, which resulted in a realized loss of $2.3 million. In connection with the
sale, we received success fee income of $1.1 million and net receivables of $1.5 million, which are recorded within Other assets, net.
|
|
|
|
In November 2016, we invested $5.2 million in Sea Link International IRB, Inc. through secured second lien debt and equity.
|
|
|
|
In December 2016, we sold our investment in Behrens Manufacturing, LLC (Behrens), which resulted in success fee income of $0.4 million and a realized gain of $2.5 million. In connection with the
sale, we received net cash proceeds of $8.2 million, including the repayment of our debt investment of $4.3 million at par.
|
|
|
|
In December 2016, we invested $7.0 million in Vacation Rental Pros Property Management, LLC through secured second lien debt.
|
Syndicated Investments
As of December 31, 2016 and
September 30, 2016, we held 12 and 13 syndicated investments with an aggregate fair value of $34.1 million and $30.8 million, or 11.8% and 9.6% of the total portfolio at fair value, respectively. The following significant syndicated
investment transactions occurred during the three months ended December 31, 2016:
|
|
|
In October 2016, RP Crown Parent, LLC paid off at par for proceeds of $2.0 million.
|
|
|
|
In October 2016, our $3.9 million secured first lien debt investment in Vertellus Specialties, Inc. was restructured. As a result of the restructure, we received a new $1.1 million secured second lien debt
investment in Vertellus Holdings LLC and common equity with a cost basis of $3.0 million.
|
|
|
|
In December 2016, Autoparts Holdings Limited paid off at par for proceeds of $0.7 million.
|
|
|
|
In December 2016, we invested $5.0 million in LDiscovery, LLC through secured second lien debt.
|
Investment Concentrations
As of December 31, 2016,
our investment portfolio consisted of investments in 44 portfolio companies located in 21 states and in 21 different industries, with an aggregate fair value of $288.2 million. The five largest investments at fair value as of December 31,
2016 totaled $86.9 million, or 30.2% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2016 totaling $112.1 million, or 34.8% of our total investment portfolio. As of
December 31, 2016, our average investment by obligor was $7.9 million at cost, as compared to $8.5 million at cost as of September 30, 2016.
25
The following table outlines our investments by security type at December 31, 2016 and September 30,
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
|
|
Cost
|
|
|
Percentage
of Total
Investments
|
|
|
Fair Value
|
|
|
Percentage
of Total
Investments
|
|
|
Cost
|
|
|
Percentage
of Total
Investments
|
|
|
Fair Value
|
|
|
Percentage
of Total
Investments
|
|
Secured first lien debt
|
|
$
|
180,182
|
|
|
|
51.6
|
%
|
|
$
|
156,330
|
|
|
|
54.2
|
%
|
|
$
|
227,439
|
|
|
|
59.6
|
%
|
|
$
|
198,721
|
|
|
|
61.7
|
%
|
Secured second lien debt
|
|
|
130,650
|
|
|
|
37.4
|
|
|
|
114,021
|
|
|
|
39.6
|
|
|
|
113,796
|
|
|
|
29.8
|
|
|
|
100,320
|
|
|
|
31.2
|
|
Unsecured debt
|
|
|
3,073
|
|
|
|
0.9
|
|
|
|
3,091
|
|
|
|
1.1
|
|
|
|
2,995
|
|
|
|
0.8
|
|
|
|
3,012
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Investments
|
|
|
313,905
|
|
|
|
89.9
|
|
|
|
273,442
|
|
|
|
94.9
|
|
|
|
344,230
|
|
|
|
90.2
|
|
|
|
302,053
|
|
|
|
93.8
|
|
|
|
|
|
|
|
|
|
|
Preferred equity
|
|
|
17,085
|
|
|
|
4.9
|
|
|
|
4,415
|
|
|
|
1.5
|
|
|
|
22,988
|
|
|
|
6.0
|
|
|
|
10,262
|
|
|
|
3.2
|
|
Common equity/equivalents
|
|
|
17,998
|
|
|
|
5.2
|
|
|
|
10,389
|
|
|
|
3.6
|
|
|
|
14,583
|
|
|
|
3.8
|
|
|
|
9,799
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Investments
|
|
|
35,083
|
|
|
|
10.1
|
|
|
|
14,804
|
|
|
|
5.1
|
|
|
|
37,571
|
|
|
|
9.8
|
|
|
|
20,061
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
348,988
|
|
|
|
100.0
|
%
|
|
$
|
288,246
|
|
|
|
100.0
|
%
|
|
$
|
381,801
|
|
|
|
100.0
|
%
|
|
$
|
322,114
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Our investments at fair value consisted of the following industry classifications at December 31, 2016 and
September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
Industry Classification
|
|
Fair Value
|
|
|
Percentage
of Total
Investments
|
|
|
Fair Value
|
|
|
Percentage
of Total
Investments
|
|
Diversified/Conglomerate Service
|
|
$
|
53,572
|
|
|
|
18.6
|
%
|
|
$
|
48,898
|
|
|
|
15.2
|
%
|
Diversified/Conglomerate Manufacturing
|
|
|
42,802
|
|
|
|
14.8
|
|
|
|
50,106
|
|
|
|
15.6
|
|
Healthcare, education, and childcare
|
|
|
34,933
|
|
|
|
12.1
|
|
|
|
70,577
|
|
|
|
21.9
|
|
Oil and gas
|
|
|
27,615
|
|
|
|
9.6
|
|
|
|
31,279
|
|
|
|
9.7
|
|
Automobile
|
|
|
19,283
|
|
|
|
6.7
|
|
|
|
14,837
|
|
|
|
4.6
|
|
Beverage, food and tobacco
|
|
|
15,092
|
|
|
|
5.2
|
|
|
|
15,022
|
|
|
|
4.7
|
|
Diversified natural resources, precious metals and minerals
|
|
|
13,809
|
|
|
|
4.8
|
|
|
|
14,821
|
|
|
|
4.6
|
|
Cargo Transportation
|
|
|
13,130
|
|
|
|
4.6
|
|
|
|
13,000
|
|
|
|
4.0
|
|
Buildings and real estate
|
|
|
11,391
|
|
|
|
4.0
|
|
|
|
11,223
|
|
|
|
3.5
|
|
Leisure, Amusement, Motion Pictures, Entertainment
|
|
|
8,532
|
|
|
|
3.0
|
|
|
|
8,769
|
|
|
|
2.7
|
|
Personal and
non-durable
consumer products
|
|
|
7,733
|
|
|
|
2.7
|
|
|
|
7,858
|
|
|
|
2.4
|
|
Hotels, motels, inns, and gaming
|
|
|
7,000
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
|
5,865
|
|
|
|
2.0
|
|
|
|
5,790
|
|
|
|
1.8
|
|
Machinery
|
|
|
5,828
|
|
|
|
2.0
|
|
|
|
5,597
|
|
|
|
1.7
|
|
Printing and publishing
|
|
|
5,629
|
|
|
|
2.0
|
|
|
|
6,033
|
|
|
|
1.9
|
|
Broadcast and entertainment
|
|
|
4,997
|
|
|
|
1.7
|
|
|
|
4,682
|
|
|
|
1.5
|
|
Textiles and leather
|
|
|
3,757
|
|
|
|
1.3
|
|
|
|
3,836
|
|
|
|
1.2
|
|
Finance
|
|
|
3,250
|
|
|
|
1.1
|
|
|
|
3,000
|
|
|
|
0.9
|
|
Electronics
|
|
|
510
|
|
|
|
0.2
|
|
|
|
2,980
|
|
|
|
0.9
|
|
Other, < 2.0%
|
|
|
3,518
|
|
|
|
1.2
|
|
|
|
3,806
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
288,246
|
|
|
|
100.0
|
%
|
|
$
|
322,114
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investments at fair value were included in the following U.S. geographic regions at December 31, 2016 and
September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
Geographic Region
|
|
Fair Value
|
|
|
Percentage of
Total
Investments
|
|
|
Fair Value
|
|
|
Percentage of
Total
Investments
|
|
South
|
|
$
|
139,549
|
|
|
|
48.4
|
%
|
|
$
|
131,181
|
|
|
|
40.8
|
%
|
West
|
|
|
56,121
|
|
|
|
19.5
|
|
|
|
57,786
|
|
|
|
17.9
|
|
Midwest
|
|
|
55,547
|
|
|
|
19.3
|
|
|
|
100,142
|
|
|
|
31.1
|
|
Northeast
|
|
|
37,029
|
|
|
|
12.8
|
|
|
|
33,005
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
288,246
|
|
|
|
100.0
|
%
|
|
$
|
322,114
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic region indicates the location of the headquarters of our portfolio companies. A portfolio company may also have
a number of other business locations in other geographic regions.
27
Investment Principal Repayments
The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments,
as of December 31, 2016:
|
|
|
|
|
|
|
|
|
Amount
|
|
For the remaining nine months ending September 30:
|
|
2017
|
|
$
|
21,008
|
|
For the fiscal years ending September 30:
|
|
2018
|
|
|
53,949
|
|
|
|
2019
|
|
|
44,496
|
|
|
|
2020
|
|
|
78,593
|
|
|
|
2021
|
|
|
60,831
|
|
|
|
Thereafter
|
|
|
60,593
|
|
|
|
|
|
|
|
|
|
|
Total contractual repayments
|
|
$
|
319,470
|
|
|
|
Equity investments
|
|
|
35,083
|
|
|
|
Adjustments to cost basis on debt investments
|
|
|
(5,565
|
)
|
|
|
|
|
|
|
|
|
|
Investments Held as of December 31, 2016, at Cost:
|
|
$
|
348,988
|
|
|
|
|
|
|
|
|
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
. As of December 31, 2016 and September 30, 2016, we had gross receivables from portfolio companies of $0.3 million. The
allowance for uncollectible receivables was $0 at both December 31, 2016 and September 30, 2016. In addition, as of December 31, 2016 and September 30, 2016, we had an allowance for uncollectible interest receivables of
$0.1 million and $0, respectively, which is reflected in interest receivable, net on our accompanying
Consolidated Statements of Assets and Liabilities
. We generally maintain an allowance for uncollectible receivables from portfolio
companies when the receivable balance becomes 90 days or more past due or if it is determined based upon managements judgment that the portfolio company is unable to pay its obligations.
NOTE 4. RELATED PARTY TRANSACTIONS
Transactions with
the Adviser
We have been externally managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay the
Adviser a base management fee and an incentive fee for its services. The Advisory Agreement originally included administrative services; however, it was amended and restated on October 1, 2006. Simultaneously, we entered into the Administration
Agreement with the Administrator (discussed further below) to provide those services. With the unanimous approval of our Board of Directors, the Advisory Agreement was later amended in October 2015 to reduce the base management fee payable under the
agreement from 2.0% per annum to 1.75% per annum, effective July 1, 2015, with all other terms remaining unchanged. On July 12, 2016, our Board of Directors unanimously approved the annual renewal of the Advisory Agreement through
August 31, 2017.
We also pay the Adviser a loan servicing fee for its role of servicer pursuant to our Credit Facility (defined in Note 5
Borrowings
). The entire loan servicing fee paid to the Adviser by Business Loan is voluntarily, irrevocably and unconditionally 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 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.
28
The following table summarizes fees paid to the Adviser, including the base management fee, incentive fee, and
loan servicing fee and associated unconditional,
non-contractual
and irrevocable voluntary credits reflected in our accompanying
Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Average total assets subject to base management
fee
(A)
|
|
$
|
315,000
|
|
|
$
|
349,300
|
|
Multiplied by prorated annual base management fee of 1.75%
|
|
|
0.4375
|
%
|
|
|
0.4375
|
%
|
|
|
|
|
|
|
|
|
|
Base management fee
(B)
|
|
$
|
1,378
|
|
|
$
|
1,528
|
|
Portfolio company fee credit
|
|
|
(649
|
)
|
|
|
(65
|
)
|
Senior syndicated loan fee credit
|
|
|
(13
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
Net Base Management Fee
|
|
$
|
716
|
|
|
$
|
1,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fee
(B)
|
|
|
983
|
|
|
|
1,088
|
|
Credit to base management fee - loan servicing
fee
(B)
|
|
|
(983
|
)
|
|
|
(1,088
|
)
|
|
|
|
|
|
|
|
|
|
Net Loan Servicing Fee
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive fee
(B)
|
|
|
1,293
|
|
|
|
1,118
|
|
Incentive fee credit
|
|
|
(37
|
)
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
Net Incentive Fee
|
|
$
|
1,256
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
Portfolio company fee credit
|
|
|
(649
|
)
|
|
|
(65
|
)
|
Senior syndicated loan fee credit
|
|
|
(13
|
)
|
|
|
(33
|
)
|
Incentive fee credit
|
|
|
(37
|
)
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
Credits to Fees From Adviser -
other
(B)
|
|
$
|
(699
|
)
|
|
$
|
(386
|
)
|
|
|
|
|
|
|
|
|
|
(A)
|
Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued
at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
|
(B)
|
Reflected, on a gross basis, as a line item on our accompanying
Consolidated Statements of Operations
.
|
Base Management Fee
The base management fee is payable
quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current
quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period.
Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The
Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining,
sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the
portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in
connection with adding and retaining key portfolio company management team members. The Adviser voluntarily, unconditionally, and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to
the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $28 and $40 for the three months ended December 31, 2016 and 2015, respectively, was retained by the Adviser in the form
of reimbursement, at cost, for tasks completed by personnel of the Adviser primarily for the valuation of portfolio companies.
Our Board of Directors
accepted an unconditional,
non-contractual
and irrevocable voluntary credit from the Adviser to reduce the annual base management fee on senior syndicated loan participations to 0.5%, to the extent that
proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for each of the three months ended December 31, 2016 and 2015.
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);
|
29
|
|
|
100.0% of our
pre-incentive
fee net investment income with respect to that portion of such
pre-incentive
fee net investment income, if any,
that exceeds the hurdle rate but is less than 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized); and
|
|
|
|
20.0% of the amount of our
pre-incentive
fee net investment income, if any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases
during the period, in any calendar quarter (8.75% annualized).
|
The second part of the incentive fee is a capital gains-based incentive fee
that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our realized capital gains as of the end of the fiscal year. In
determining the capital gains-based incentive fee payable to the Adviser, we calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the entire portfolios aggregate
unrealized capital depreciation, if any and excluding any unrealized capital appreciation, as of the date of the calculation. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net
sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than
the original cost of such investment since inception. The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of the difference, between the valuation of each investment as of the applicable calculation date and
the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains
less cumulative aggregate realized capital losses, less the entire portfolios aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such
year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since our inception through
December 31, 2016, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and
losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive
fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based
incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that
such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded or paid since our inception through December 31, 2016.
Our Board of Directors accepted an unconditional,
non-contractual
and irrevocable voluntary credit 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 three months ended December 31, 2016, and 2015.
Loan Servicing Fee
The Adviser also services the loans
held by Business Loan (the borrower under the Credit Facility), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the aggregate outstanding balance of loans pledged under our Credit Facility (defined in Note 5
Borrowings
). As discussed in the notes to the table above, we treat payment of the loan servicing fee pursuant to our line of credit as a
pre-payment
of the base management fee under the Advisory
Agreement. Accordingly, these loan servicing fees are 100% voluntarily, irrevocably and unconditionally 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 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.
30
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 12,
2016, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2017.
Other Transactions
Gladstone Securities, LLC (Gladstone Securities), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and
insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence
services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the unconditional,
non-contractual
and irrevocable voluntary credits against the base management fee or incentive fee. Gladstone Securities received fees from portfolio companies totaling $0.1 million and $0 during the three
months ended December 31, 2016 and 2015, respectively.
Related Party Fees Due
Amounts due to related parties on our accompanying
Consolidated Statements of Assets and Liabilities
were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
Base management fee due (from) to Adviser
|
|
$
|
(267
|
)
|
|
$
|
162
|
|
Loan servicing fee due to Adviser
|
|
|
222
|
|
|
|
236
|
|
Incentive fee due to Adviser
|
|
|
1,256
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
Total fees due to Adviser
|
|
|
1,211
|
|
|
|
1,222
|
|
|
|
|
|
|
|
|
|
|
Fee due to Administrator
|
|
|
300
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
Total Related Party Fees Due
|
|
$
|
1,511
|
|
|
$
|
1,504
|
|
|
|
|
|
|
|
|
|
|
In addition to the above fees, other operating expenses due to the Adviser as of December 31, 2016 and September 30,
2016, totaled $25 and $10, respectively. In addition, other net
co-investment
expenses payable to Gladstone Investment (for reimbursement purposes) totaled $2 and $8 as of December 31, 2016 and
September 30, 2016, respectively. These amounts were received or paid in full in the quarter subsequent to being incurred and have been included in other assets, net and other liabilities, as appropriate, on the accompanying
Consolidated
Statements of Assets and Liabilities
as of December 31, 2016 and September 30, 2016, respectively
.
NOTE 5. BORROWINGS
Revolving Credit Facility
On May 1, 2015, we,
through Business Loan, entered into a Fifth Amended and Restated Credit Agreement with KeyBank National Association (KeyBank), as administrative agent, lead arranger and a lender (our Credit Facility), which increased the
commitment amount from $137.0 million to $140.0 million, extended the revolving period end date by three years to January 19, 2019, decreased the marginal interest rate added to
30-day
LIBOR
from 3.75% to 3.25% per annum, set the unused commitment fee at 0.50% on all undrawn amounts, expanded the scope of eligible collateral, and amended certain other terms and conditions. If our Credit Facility is not renewed or extended by
January 19, 2019, all principal and interest will be due and payable on or before April 19, 2020 (fifteen months after the revolving period end date). Subject to certain terms and conditions, our Credit Facility may be expanded up to a
total of $250.0 million through additional commitments of new or existing lenders. We incurred fees of approximately $1.1 million in connection with this amendment, which are being amortized through our Credit Facilitys revolving
period end date of January 19, 2019.
On June 19, 2015, we through Business Loan, entered into certain joinder and assignment agreements with
three new lenders to increase borrowing capacity under our Credit Facility by $30.0 million to $170.0 million. We incurred fees of approximately $0.6 million in connection with this expansion, which are being amortized through our
Credit Facilitys revolving period end date of January 19, 2019.
On October 9, 2015 and August 18, 2016, we entered into Amendments
No. 1 and 2 to our Credit Facility, respectively, each of which clarified various constraints on available borrowings.
31
The following tables summarize noteworthy information related to our Credit Facility (at cost) as of
December 31, 2016 and September 30, 2016 and during the three months ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
Commitment amount
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Borrowings outstanding, at cost
|
|
|
28,200
|
|
|
|
71,300
|
|
Availability
(A)
|
|
|
84,227
|
|
|
|
31,053
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Weighted average borrowings outstanding, at cost
|
|
$
|
39,278
|
|
|
$
|
74,132
|
|
Weighted average interest
rate
(B)
|
|
|
5.7
|
%
|
|
|
4.2
|
%
|
Commitment (unused) fees incurred
|
|
$
|
166
|
|
|
$
|
121
|
|
(A)
|
Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether
such repayments are prepayments or made as contractually required.
|
(B)
|
Includes unused commitment fees and excludes the impact of deferred financing fees.
|
Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower
into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once a month.
Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate
transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders consent. Our Credit Facility also generally limits distributions to our
stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts deemed 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 20 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 $223.2 million as of December 31, 2016, (ii) asset coverage with respect to senior
securities representing indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act, and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.
As of December 31, 2016, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $273.0 million, asset coverage on
our senior securities representing indebtedness of 1,058.3%, calculated in compliance with the requirements of Section 18 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 32 obligors in our Credit
Facilitys borrowing base as of December 31, 2016. As of December 31, 2016, 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 also takes into account the Valuation Teams own assumptions, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar
securities as of the measurement date. As of December 31, 2016, the discount rate used to determine the fair value of our Credit Facility was
30-day
LIBOR, plus 3.15% per annum, plus a 0.64% unused fee.
As of September 30, 2016, the discount rate used to determine the fair value of our Credit Facility was
30-day
LIBOR, plus 3.25% per annum, plus a 0.50% unused fee. Generally, an increase or decrease in
the discount rate used in the DCF calculation may result in a corresponding increase or decrease, respectively, in the fair value of our Credit Facility. As of December 31, 2016 and September 30, 2016, our Credit Facility was valued using
Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying
Consolidated Statements of Operations
.
The following tables present our Credit Facility carried at fair value as of
December 31, 2016 and September 30, 2016, on our accompanying
Consolidated Statements of Assets and Liabilities
for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the
three months ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Total Recurring Fair Value Measurement Reported in
|
|
|
|
Consolidated Statements of
Assets and Liabilities
Using Significant
Unobservable Inputs
(Level 3)
|
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
Credit Facility
|
|
$
|
27,987
|
|
|
$
|
71,300
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
Unobservable Data Inputs (Level 3)
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Fair value as of September 30, 2016 and 2015, respectively
|
|
$
|
71,300
|
|
|
$
|
127,300
|
|
Borrowings
|
|
|
24,200
|
|
|
|
14,500
|
|
Repayments
|
|
|
(67,300
|
)
|
|
|
(84,300
|
)
|
Net unrealized depreciation
(A)
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2016 and 2015, respectively
|
|
$
|
27,987
|
|
|
$
|
57,500
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Included in net unrealized appreciation (depreciation) of other on our accompanying
Consolidated Statements of Operations
for the three months ended December 31, 2016 and 2015.
|
The fair value of the collateral under our Credit Facility was $250.7 million and $282.0 million as of December 31, 2016 and September 30,
2016, respectively.
NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK
In May 2014, we completed a public offering of approximately 2.4 million shares of 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share
(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 are recorded as deferred financing fees on our
accompanying
Consolidated Statements of Assets and Liabilities
and are being amortized over the period ending June 30, 2021, the mandatory redemption date.
The shares of our Series 2021 Term Preferred Stock are traded under the ticker symbol GLADO on the NASDAQ Global Select Market. Our Series 2021
Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.75% per year, payable monthly (which equates in total to approximately $4.1 million per year). We are required to
redeem all of the outstanding Series 2021 Term Preferred Stock on June 30, 2021 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions on such share accumulated to (but excluding)
the date of redemption (the Redemption Price). We may additionally be required to mandatorily redeem some or all of the shares of our Series 2021 Term Preferred Stock early, at the Redemption Price, in the event of the following:
(1) upon the occurrence of certain events that would constitute a change in control, and (2) if we fail to maintain an asset coverage ratio of at least 200% on our senior securities that are stock (which is currently only our
Series 2021 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. We may also voluntarily redeem all or a portion of the Series 2021 Term Preferred Stock at our
option at the Redemption Price at any time on or after June 30, 2017.
The asset coverage on our senior securities that are stock as of
December 31, 2016 was 335.5%, calculated in accordance with Section 18 of the 1940 Act. If we fail to redeem our Series 2021 Term Preferred Stock pursuant to the mandatory redemption required on June 30, 2021, or in any other
circumstance in which we are required to mandatorily redeem our Series 2021 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of December 31, 2016, we have not redeemed, nor have
we been required to redeem, any shares of our outstanding Series 2021 Term Preferred Stock.
We paid the following monthly distributions on our Series
2021 Term Preferred Stock for the three months ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Distribution per
Series 2021 Term
Preferred Share
|
|
2016
|
|
October 13, 2015
|
|
October 26, 2015
|
|
November 4, 2015
|
|
$
|
0.1406250
|
|
|
|
October 13, 2015
|
|
November 17, 2015
|
|
November 30, 2015
|
|
|
0.1406250
|
|
|
|
October 13, 2015
|
|
December 18, 2015
|
|
December 31, 2015
|
|
|
0.1406250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2015:
|
|
$
|
0.4218750
|
|
|
|
|
|
|
|
|
|
|
|
|
33
We paid the following monthly distributions on our Series 2021 Term Preferred Stock for the three months ended
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Distribution per
Series 2021 Term
Preferred Share
|
|
2017
|
|
October 11, 2016
|
|
October 21, 2016
|
|
October 31, 2016
|
|
$
|
0.1406250
|
|
|
|
October 11, 2016
|
|
November 17, 2016
|
|
November 30, 2016
|
|
|
0.1406250
|
|
|
|
October 11, 2016
|
|
December 20, 2016
|
|
December 30, 2016
|
|
|
0.1406250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2016:
|
|
$
|
0.4218750
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2016 and September 30, 2016. The related distribution payments
to our mandatorily redeemable preferred stockholders are treated as dividend expense on our statement of operations as of the
ex-dividend
date. For disclosure purposes, the fair value, based on the last quoted
closing price, for our Series 2021 Term Preferred Stock as of December 31, 2016 and September 30, 2016, was approximately $62.2 million and $62.4 million, respectively. We consider our mandatorily redeemable preferred stock to be
a Level 1 liability within the ASC 820 hierarchy.
Aggregate preferred stockholder dividends declared and paid on our Series 2021 Term Preferred
Stock for the three months ended December 31, 2016 and 2015, was $1.0 million. For federal income tax purposes, distributions paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and
accumulated earnings and profits.
NOTE 7. REGISTRATION STATEMENT, COMMON EQUITY OFFERINGS AND SHARE REPURCHASES
Registration Statement
We filed Post-Effective Amendment
No. 2 to our current universal shelf registration statement (our Registration Statement) on Form
N-2
(File
No. 333-208637)
with the SEC on
December 22, 2016, which was declared effective by the SEC on February 6, 2017. Our Registration Statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common
stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt securities. After our common stock offering in October 2016, we currently have the ability to issue up to $282.7 million
in securities under the Registration Statement.
Common Stock Offerings
Pursuant to our current registration statement, in October 2016, we completed a public offering of 2.0 million shares of our common stock at a public
offering price of $7.98 per share, which was below our then current NAV per share. In November 2016, the underwriters partially exercised their overallotment option to purchase an additional 173,444 shares of our common stock. Gross proceeds totaled
$17.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $16.4 million.
Pursuant to our prior registration statement, on October 27, 2015, we completed a public offering of 2.0 million shares of our common stock at a
public offering price of $8.55 per share, which was below our then current NAV per share. In November 2015, the underwriters exercised their option to purchase an additional 300,000 shares. Gross proceeds totaled $19.7 million and net proceeds,
after deducting underwriting discounts and offering costs borne by us, were approximately $18.4 million.
Pursuant to our prior registration
statement, on February 27, 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 may 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. We did not sell any shares under the Sales Agreements during the year ended September 30, 2016 or the three months ended December 31, 2016.
Share Repurchases
In January 2016, our Board of
Directors authorized a share repurchase program for up to an aggregate of $7.5 million of the Companys common stock. The repurchases are intended to be implemented through open market transactions on U.S. exchanges or in privately
negotiated transactions, in accordance with applicable securities laws, and any market purchases will be made during open trading window periods or pursuant to any applicable Rule
10b5-1
trading plans. The
timing, prices, and amounts of repurchases will depend upon prevailing market prices, general economic and market conditions and other considerations. The repurchase program does not obligate us to acquire any particular number of shares of common
stock. The termination date was the earlier of repurchasing the total authorized amount of $7.5 million or January 31, 2017. During the year ended September 30, 2016, we repurchased 87,200
34
shares of our common stock at an average share price of $6.53, resulting in gross purchases of $0.6 million. We did not repurchase any shares during the three months ended December 31,
2016 and there were no repurchases through the termination date of the program on January 31, 2017.
35
NOTE 8. NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted average common
share for the three months ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Numerator for basic and diluted net (decrease) increase in net assets resulting from operations
per common share
|
|
$
|
916
|
|
|
$
|
(8,704
|
)
|
Denominator for basic and diluted weighted average common shares
|
|
|
24,778,970
|
|
|
|
22,687,057
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net increase (decrease) in net assets resulting from operations per common
share
|
|
$
|
0.04
|
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify to be taxed as a RIC, we are required to distribute to our stockholders 90.0% of our investment company taxable income. The amount to be paid out as
distributions to our stockholders is determined by our Board of Directors quarterly and is based on managements estimate of the fiscal year earnings. Based on that estimate, our Board of Directors declares three monthly distributions to common
stockholders each quarter.
The federal income tax characteristics of all distributions will be reported to stockholders on the Internal Revenue Service
Form 1099 at the end of each calendar year.
We paid the following monthly distributions to common stockholders for the three months ended
December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Declaration
Date
|
|
Record Date
|
|
Payment Date
|
|
Distribution per
Common Share
|
|
2017
|
|
October 11, 2016
|
|
October 21, 2016
|
|
October 31, 2016
|
|
$
|
0.07
|
|
|
|
October 11, 2016
|
|
November 17, 2016
|
|
November 30, 2016
|
|
|
0.07
|
|
|
|
October 11, 2016
|
|
December 20, 2016
|
|
December 30, 2016
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2016:
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
October 13, 2015
|
|
October 26, 2015
|
|
November 4, 2015
|
|
$
|
0.07
|
|
|
|
October 13, 2015
|
|
November 17, 2015
|
|
November 30, 2015
|
|
|
0.07
|
|
|
|
October 13, 2015
|
|
December 18, 2015
|
|
December 31, 2015
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2015:
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
Aggregate distributions declared and paid to our common stockholders for the three months ended December 31, 2016 and
2015, were each approximately $5.2 million and $4.8 million, respectively, and were declared based on estimates of investment company taxable income for the respective periods. For our federal income tax reporting purposes, we determine
the tax characterization of our common stockholder distributions at fiscal
year-end
based upon our investment company taxable income for the full fiscal year and distributions paid during the full fiscal year.
Therefore, a determination of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of distributions for the full year. If we determined the tax characterization of our distributions as of
December 31, 2016, 100% would be from ordinary income and 0% would be a return of capital. For the fiscal year ended September 30, 2016, 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 $5.5 million of the first common distributions paid in fiscal year 2016 as having been
paid in the respective prior year.
For the three months ended December 31, 2016 and the fiscal year ended September 30, 2016, we recorded the
following adjustments for
book-tax
differences to reflect tax character.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
2016
|
|
|
Year Ended
September 30,
2016
|
|
Under (over) distributed net investment income
|
|
$
|
(4,821
|
)
|
|
$
|
5,818
|
|
Accumulated net realized losses
|
|
|
5,020
|
|
|
|
(7,754
|
)
|
Capital in excess of par value
|
|
|
(199
|
)
|
|
|
1,936
|
|
36
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 December 31, 2016 and September 30,
2016, we have not established reserves for such loss contingencies.
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 loan and the uncalled capital commitment as of December 31, 2016 and September 30, 2016 to be immaterial.
The
following table summarizes the amounts of our unused lines of credit, delayed draw term loans and uncalled capital commitment, at cost, as of December 31, 2016 and September 30, 2016, which are not reflected as liabilities in the
accompanying
Consolidated Statements of Assets and Liabilities
:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
Unused line of credit commitments
|
|
$
|
6,692
|
|
|
$
|
6,397
|
|
Delayed draw term loans
|
|
|
3,200
|
|
|
|
1,300
|
|
Uncalled capital commitment
|
|
|
1,581
|
|
|
|
2,004
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,473
|
|
|
$
|
9,701
|
|
|
|
|
|
|
|
|
|
|
37
NOTE 11. FINANCIAL HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Per Common Share
Data
(A)
:
|
|
|
|
|
|
|
|
|
Net asset value at beginning of
period
(A)
|
|
$
|
8.62
|
|
|
$
|
9.06
|
|
|
|
|
|
|
|
|
|
|
Net investment income
(B)
|
|
|
0.21
|
|
|
|
0.21
|
|
Net realized and unrealized (loss)
(B)
|
|
|
(0.17
|
)
|
|
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
Total from operations
|
|
|
0.04
|
|
|
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
Distributions to common
stockholders
(A)(C)
|
|
|
(0.21
|
)
|
|
|
(0.21
|
)
|
Offering costs for issuance of common stock
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
Dilutive effect of common stock
issuance
(D)
|
|
|
(0.06
|
)
|
|
|
(0.05
|
)
|
Other, net
(E)
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of
period
(A)
|
|
$
|
8.36
|
|
|
$
|
8.38
|
|
|
|
|
|
|
|
|
|
|
Market value at beginning of period
|
|
$
|
8.13
|
|
|
$
|
8.13
|
|
Market value at end of period
|
|
|
9.39
|
|
|
|
7.31
|
|
Total return
(F)
|
|
|
18.4
|
%
|
|
|
(7.76
|
)%
|
Common shares outstanding at end of period
|
|
|
25,517,866
|
|
|
|
23,431,622
|
|
Statement of Assets and Liabilities Data:
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
213,385
|
|
|
$
|
196,470
|
|
Average net assets
(G)
|
|
|
214,052
|
|
|
|
205,123
|
|
Senior Securities Data:
|
|
|
|
|
|
|
|
|
Borrowings under Credit Facility, at cost
|
|
$
|
28,200
|
|
|
$
|
57,500
|
|
Mandatorily redeemable preferred stock, at liquidation preference
|
|
|
61,000
|
|
|
|
61,000
|
|
Ratios/Supplemental Data:
|
|
|
|
|
|
|
|
|
Ratio of net expenses to average net assets-annualized
(H)(I)
|
|
|
8.91
|
%
|
|
|
10.34
|
%
|
Ratio of net investment income to average net assets-annualized
(J)
|
|
|
9.73
|
|
|
|
9.28
|
|
(A)
|
Based on actual common shares outstanding at the end of the corresponding period.
|
(B)
|
Based on weighted average basic common share data for the corresponding period.
|
(C)
|
Distributions to common stockholders are determined based on taxable income calculated in accordance with income tax regulations which may differ from income amounts determined under GAAP.
|
(D)
|
During the fiscal quarters ended December 31, 2016 and 2015, the dilution was a result of issuing common shares during the respective periods at a price below
the then current NAV per share.
|
(E)
|
Represents the impact of the different share amounts (weighted average basic common shares outstanding for the corresponding period and actual common shares outstanding at the end of the corresponding period) in the Per
Common 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 period, taking into account common stockholder distributions reinvested in accordance with the terms of the
dividend reinvestment plan. Total return does not take into account common stockholder distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders,
please refer to Note 9
Distributions to Common Stockholders
.
|
(G)
|
Average net assets are computed using the average of the balance of 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 credits to the incentive fee due to the Adviser, the ratio of net expenses to average net assets would have been 8.98% and 10.9% for the fiscal quarters ended December 31, 2016 and 2015.
|
(J)
|
Had we not received any credits to the incentive fee due to the Adviser, the ratio of net investment income to average net assets would have been 9.66% and 8.72% for the fiscal quarters ended December 31, 2016 and
2015.
|
38
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.
We had three unconsolidated subsidiaries, Defiance Integrated Technologies, Inc., PIC 360, LLC,
and Sunshine Media Holdings, that met at least one of the significance conditions under Rule
1-02(w)
of the SECs Regulation
S-X
as of or during at least one of the
three month periods ended December 31, 2016 and 2015. Accordingly, summarized, comparative financial information, in aggregate, is presented below for the three months ended December 31, 2016 and 2015 for our unconsolidated significant
subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Income Statement
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
8,648
|
|
|
$
|
10,566
|
|
Gross profit
|
|
|
2,172
|
|
|
|
2,696
|
|
Net loss
|
|
|
(702
|
)
|
|
|
(258
|
)
|
NOTE 13. SUBSEQUENT EVENTS
Portfolio Activity
In February 2017, we invested
$10.0 million in Belnick, Inc. through secured second lien debt.
Distributions to Stockholders
In January 2017, our Board of Directors declared the following monthly cash distributions to common and preferred stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
|
Distribution
per Common
Share
|
|
|
Distribution per
Series 2021
Term Preferred
Share
|
|
January 20, 2017
|
|
|
January 31, 2017
|
|
|
$
|
0.07
|
|
|
$
|
0.140625
|
|
February 16, 2017
|
|
|
February 28, 2017
|
|
|
|
0.07
|
|
|
|
0.140625
|
|
March 22, 2017
|
|
|
March 31, 2017
|
|
|
|
0.07
|
|
|
|
0.140625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the Quarter:
|
|
|
$
|
0.21
|
|
|
$
|
0.421875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39