Table of Contents

Filed pursuant to Rule 497
File No. 333-208637

 

The information in this preliminary prospectus supplement is not complete and may be changed. A registration statement relating to these securities has been filed with and declared effective by the Securities and Exchange Commission. This preliminary prospectus supplement and the accompanying prospectus are not an offer to sell and are not soliciting offers to buy these securities in any state where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED OCTOBER 25, 2016

PRELIMINARY PROSPECTUS SUPPLEMENT

(to Prospectus dated March 29, 2016)

             Shares

 

Common Stock

 

 

We are offering              shares of our common stock. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended. Our common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “GLAD.” Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

These shares will be offered at a discount from our most recently estimated net asset value (“NAV”) per share pursuant to authority granted for twelve months by our common stockholders at our annual meeting of stockholders held on February 11, 2016, and as subsequently approved by our Board of Directors. Our current authority to offer shares at a price below NAV per share ends on the one year anniversary of our 2016 annual meeting of stockholders, unless our stockholders vote to extend this authority at our 2017 annual meeting of stockholders. Our stockholders did not specify a maximum discount below NAV at which we are able to issue our common stock, although the number of shares sold in each offering may not exceed 25% of our outstanding common stock immediately prior to such sale. The last reported closing price of our common stock on October 24, 2016 was $8.33 per share. The estimated NAV per share of our common stock at October 24, 2016 was $8.10, which represents the midpoint in our estimated NAV per share range of $8.05 and $8.15. Sales of common stock at prices below NAV per share dilute the interest of existing stockholders, having the effect of reducing our NAV per share and may reduce our market price per share. See “Risk Factors” beginning on page S-12 of this prospectus supplement and on page 13 of the accompanying prospectus and “Sales of Common Stock Below Net Asset Value” beginning on page S-18 of this prospectus supplement and page 62 of the accompanying prospectus.

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

 

 

Investing in our common stock involves a high degree of risk including, among other things, risks relating to investments in securities of small, private and developing businesses. You could lose some or all of your investment. You should carefully consider each of the factors described under “Risk Factors” beginning on page S-12 of this prospectus supplement and beginning on page 13 of the accompanying prospectus before you invest in our common stock.

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

 

 

 

		Per Share				Total(2)
Public offering price		$				$
Underwriting discounts and commissions (sales load)		$				$
Proceeds to Gladstone Capital Corporation, before expenses(1)		$				$

 

(1)	Total expenses of the offering payable by us, excluding underwriting discounts and commissions, are estimated to be $240,000.

(2)

We have granted the underwriters a 30-day option to purchase an additional              shares of common stock at the public offering price less the sales load payable by us solely to cover overallotments, if any. If such option is exercised in full, the total underwriting discounts and commissions will be $            , and the total proceeds, before expenses, to us would be $            . See “Underwriting” on page S-66 of this prospectus supplement.

The underwriters are expected to deliver the shares on or about October     , 2016.

 

 

Joint Book-Running Managers

 

Janney Montgomery Scott						D.A. Davidson & Co.
Ladenburg Thalmann								Wunderlich

Prospectus Supplement dated October    , 2016

---

Table of Contents

ABOUT THIS PROSPECTUS SUPPLEMENT

This prospectus supplement, together with the accompanying prospectus, sets forth the information that you should know before investing in our common stock.

We also file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended, or the Exchange Act. You may inspect such reports, proxy statements and other information, as well as this prospectus supplement, and the accompanying prospectus and the exhibits and schedules to the registration statement of which the accompanying prospectus is a part, at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SEC’s website is www.sec.gov. You may also obtain copies of such material from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates.

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

This prospectus supplement, which describes the specific terms of this offering, also adds to and updates information contained in the accompanying prospectus. The accompanying prospectus gives more general information, some of which may not apply to this offering. If the description of this offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in this prospectus supplement. However, if any statement in one of these documents is inconsistent with a statement in another document having a later date, the statement in the document having the later date modifies or supersedes the earlier statement.

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus in making an investment decision. Neither we, nor the underwriters, have authorized any other person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell shares of our common stock in any jurisdiction where such an offer or sale is not permitted. The information appearing in this prospectus supplement and in the accompanying prospectus is accurate only as of the dates on their respective covers, regardless of the time of delivery or any sale of the common stock.

---

Table of Contents

TABLE OF CONTENTS

 

		PAGE
Prospectus Supplement
Prospectus Supplement Summary			S-1
The Offering			S-6
Fees and Expenses			S-8
Risk Factors			S-12
Special Note Regarding Forward-Looking Statements			S-15
Use of Proceeds			S-16
Capitalization			S-17
Sales of Common Stock Below Net Asset Value			S-18
Distributions			S-23
Share Price Data			S-23
Consolidated Selected Financial Data			S-25
Selected Quarterly Financial Data			S-27
Management’s Discussion and Analysis of Financial Condition and Results of Operations			S-28
Underwriting			S-66
Additional Material U.S. Federal Income Tax Considerations			S-69
Custodian, Transfer Agent, Dividend Disbursing Agent and Paying Agent			S-70
Where You Can Find More Information			S-70
Legal Matters			S-70
Experts			S-70
Index to Consolidated Financial Statements			S-F-1
Prospectus
Prospectus Summary			1
The Offering			5
Fees and Expenses			8
Additional Information			12
Risk Factors			13
Special Note Regarding Forward-Looking Statements			37
Use of Proceeds			37
Price Range of Common Stock and Distributions			37
Common Share Price Data			38
Ratios of Earnings to Fixed Charges			39
Consolidated Selected Financial Data			40
Selected Quarterly Data (Unaudited)			42
Management’s Discussion and Analysis of Financial Condition and Results of Operations			43
Sales of Common Stock Below Net Asset Value			62
Senior Securities			67
Business			69
Portfolio Companies			89
Management			97
Control Persons and Principal Stockholders			114
Dividend Reinvestment Plan			117
Material U.S. Federal Income Tax Considerations			118
Regulation as a Business Development Company			121
Description of Our Securities			124
Certain Provisions of Maryland Law and of Our Articles of Incorporation and Bylaws			129
Share Repurchases			133
Plan of Distribution			134
Custodian, Transfer and Dividend Paying Agent and Registrar			136
Brokerage Allocation and Other Practices			137
Proxy Voting Policies and Procedures			138
Legal Matters			139
Experts			139
Index to Consolidated Financial Statements			F-1

---

Table of Contents

 

S-1

---

Table of Contents

 

S-2

---

Table of Contents

 

S-3

---

Table of Contents

 

S-4

---

Table of Contents

 

S-5

---

Table of Contents

 

S-6

---

Table of Contents

 

S-7

---

Table of Contents

FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus supplement contains a reference to fees or expenses paid by “us” or “Gladstone Capital,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Gladstone Capital. The following percentages are annualized and have been calculated based on actual expenses incurred in the quarter ended June 30, 2016, and average net assets attributable to common stockholders for the quarter ended June 30, 2016.

 

Stockholder Transaction Expenses:
Sales load (as a percentage of offering price)(1)			4.0	%
Offering expenses (as a percentage of offering price)(2)
Dividend reinvestment plan expenses(3)			None
Total stockholder transaction expenses
Annual expenses (as a percentage of net assets attributable to common stock)(4) :
Base Management fee(5)			2.95	%
Loan servicing fee(6)			1.93	%
Incentive fee (20.0% of realized capital gains and 20.0% of pre-incentive fee net investment income)(7)			2.55	%
Interest payments on borrowed funds(8)			1.79	%
Dividend expense on mandatorily redeemable preferred stock(9)			2.40	%
Other expenses(10)			1.99	%
Total annual expenses(11)			13.61	%

 

(1)	This amount represents the expected underwriting discount with respect to shares of our common stock sold by us in this offering.

(2)

The expenses of this offering payable by us (other than the underwriting discount) are estimated to be approximately $240,000. The amount of offering expenses, as a percentage of the offering price of shares to be sold in this offering, was based on an assumed public offering price of $8.33 per share, the last reported sales price of our common stock on NASDAQ on October 24, 2016. If the underwriters exercise their overallotment option in full, the offering expenses borne by our stockholders (as a percentage of the offering price) will be approximately         . See “Underwriting” for additional information on our underwriting arrangements for this offering.

(3)

The expenses of the reinvestment plan are included in stock record expenses, a component of “Other expenses.” The participants in the dividend reinvestment plan will bear a pro rata share of brokerage commissions incurred with respect to open market purchases, if any. See “Dividend Reinvestment Plan” in the accompanying prospectus for information on the dividend reinvestment plan.

(4)	The percentages presented in this table are gross of credits to any fees.

(5)

In accordance with the Advisory Agreement, our annual base management fee is 1.75% (0.4375% quarterly) of our average gross assets, which are defined as total assets of Gladstone Capital, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. In accordance with the requirements of the SEC, the table above shows Gladstone Capital’s base management fee as a percentage of average net assets attributable to common shareholders. For purposes of the table, the gross base management fee has been converted to 2.95% of the average net assets as of June 30, 2016 by dividing the total dollar amount of the management fee by Gladstone Capital’s average net assets. The base management fee for the quarter ended June 30, 2016 before application of any credits was $1.4 million.

Under the Advisory Agreement, the Adviser has provided and continues to provide managerial assistance to our portfolio companies. It may also provide services other than managerial assistance to our portfolio companies and receive fees therefor. 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

 

S-8

---

Table of Contents

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. Generally, at the end of each quarter, 100.0% of these fees are voluntarily, irrevocably and unconditionally credited against the base management fee that we would otherwise be required to pay to the Adviser; however, a small percentage of certain of such fees, primarily for valuation of the portfolio company, is retained by the Adviser in the form of reimbursement at cost for certain tasks completed by personnel of the Adviser. For the quarter ended June 30, 2016, the base management fee credit was $0.3 million. See “Management—Certain Transactions” in the accompanying prospectus.

 

(6)

In addition, the Adviser services, administers and collects on the loans held by Business Loan, in return for which the Adviser receives a 1.5% annual loan servicing fee payable monthly by Business Loan based on the monthly aggregate balance of loans held by Business Loan in accordance with our Credit Facility. For the three months ended June 30, 2016, the total loan servicing fee was $0.9 million. The entire loan servicing fee paid to the Adviser by Business Loan is generally voluntarily, irrevocably and unconditionally credited against the base management fee otherwise payable to the Adviser since Business Loan is a consolidated subsidiary of the Company, 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. See “Management—Certain Transactions—Investment Advisory and Management Agreement” in the accompanying prospectus and footnote 7 below.

(7)

In accordance with our Advisory Agreement, the incentive fee consists of two parts: an income-based fee and a capital gains-based fee. The income-based fee is payable quarterly in arrears, and equals 20.0% of the excess, if any, of our pre-incentive fee net investment income that exceeds a 1.75% quarterly (7.0% annualized) hurdle rate of our net assets, subject to a “catch-up” provision measured as of the end of each calendar quarter. The “catch-up” provision requires us to pay 100.0% of our pre-incentive fee net investment income with respect to that portion of such income, if any, that exceeds the hurdle rate but is less than 125.0% of the quarterly hurdle rate (or 2.1875%) in any calendar quarter (8.75% annualized). The catch-up provision is meant to provide the Adviser with 20.0% of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 125.0% of the quarterly hurdle rate in any calendar quarter (8.75% annualized). The income-based incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash. Our preincentive fee net investment income used to calculate this part of the income-based incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee (see footnote 5 above). The capital gains-based incentive fee equals 20.0% of our net realized capital gains since our inception, if any, computed net of all realized capital losses and unrealized capital depreciation since our inception, less any prior payments, and is payable at the end of each fiscal year. We have not recorded any capital gains-based incentive fee from our inception through June 30, 2016. The income-based incentive fee for the quarter ended June 30, 2016 was $1.2 million.

From time to time, the Adviser has voluntarily, irrevocably and unconditionally agreed to waive a portion of the incentive fees, to the extent net investment income did not cover 100.0% of the distributions to common stockholders during the period. For the quarter ended June 30, 2016, the incentive fee credit was $0.2 million. There can be no guarantee that the Adviser will continue to credit any portion of the fees under the Advisory Agreement in the future.

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

 

•

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

 

S-9

---

Table of Contents

•

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

= 100% × (2.00% - 1.75%)

= 0.25%

 

•

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

= (100% × (“catch-up”: 2.1875% - 1.75%)) + (20% × (2.30% - 2.1875%))

= (100% × 0.4375%) + (20% × 0.1125%)

= 0.4375% + 0.0225%

= 0.46%

 

•

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

= 20% × (6% - 1%)

= 20% × 5%

= 1%

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

 

(8)	Includes interest payments and amortization of deferred financing costs related to the Credit Facility. As of June 30, 2016, we had $73.3 million in borrowings outstanding on our Credit Facility.

(9)

Includes amortization of deferred financing costs related to our Series 2021 Term Preferred Stock, as well as amounts paid to preferred stockholders during the three months ended June 30, 2016. See “Description of Our Securities—Preferred Stock—Series 2021 Term Preferred Stock” in the accompanying prospectus for additional information.

(10)

Includes our overhead expenses, including payments under the administration agreement based on our projected allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement. See “Management—Certain Transactions—Administration Agreement” in the accompanying prospectus.

(11)

Total annualized gross expenses, based on actual amounts incurred for the quarter ended June 30, 2016, would be $25.3 million. After all voluntary credits described in footnote 5 above, footnote 6 and footnote 7 above are applied to the base management fee, the loan servicing fee and the incentive fee, total annualized expenses after fee credits, based on actual amounts incurred for the quarter ended June 30, 2016, would be $19.7 million, or 10.62% as a percentage of net assets.

 

S-10

---

Table of Contents

Example

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

 

		1 Year				3 Years				5 Years				10 Years
You would pay the following expenses on a $1,000 investment:
assuming a 5.00% annual return consisting entirely of ordinary income(1)(2)		$	120			$	335			$	521			$	884
assuming a 5.00% annual return consisting entirely of capital gains(2)(3)		$	129			$	356			$	550			$	915

 

(1)

While the example assumes, as required by the SEC, a 5.00% annual return, our performance will vary and may result in a return greater or less than 5.00%. For purposes of this example, we have assumed that the entire amount of such 5.00% annual return would constitute ordinary income as we have not historically realized positive capital gains (computed net of all realized capital losses) on our investments. Because the assumed 5.00% annual return is significantly below the hurdle rate of 7.00% (annualized) that we must achieve under the Advisory Agreement to trigger the payment of an income-based incentive fee, we have assumed, for purposes of this example, that no income-based incentive fee would be payable if we realized a 5.00% annual return on our investments.

(2)

While the example assumes reinvestment of all distributions at NAV, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the distribution payable to a participant by the weighted average price of all shares of our common stock purchase on the open market by the plan agent on such trade date or dates. See “Dividend Reinvestment Plan” in the accompanying prospectus for additional information regarding our distribution reinvestment plan.

(3)	For purposes of this example, we have assumed that the entire amount of such 5.00% annual return would constitute capital gains and that no accumulated capital losses or unrealized depreciation exist that would have to be overcome first before a capital gains based incentive fee is payable.

 

S-11

---

Table of Contents

RISK FACTORS

There are material limitations with making preliminary estimates of our financial results for the three months and year ended September 30, 2016 prior to the completion of our and our auditors’ financial review procedures for such period.

The preliminary financial estimates contained in “Prospectus Supplement Summary—Recent Developments” are not a comprehensive statement of our financial results for the three months and year ended September 30, 2016 and have not been audited by our independent registered public accounting firm. Our consolidated financial statements for the year ended September 30, 2016 will not be available until after this offering is completed and, consequently, will not be available to you prior to investing in this offering. Our actual financial results for the three months and year ended September 30, 2016 may differ materially from the preliminary financial estimates we have provided as a result of the completion of our financial closing procedures, final adjustments and other developments arising between now and the time that our financial results for the three months and year ended September 30, 2016 are finalized. The preliminary financial data included herein have been prepared by, and are the responsibility of, management. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has not audited, reviewed, compiled or performed any procedures with respect to such preliminary estimates. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.

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

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

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

Delays in investing the net proceeds of this offering or redeploying amounts repaid under the Credit Facility may impair our performance. We cannot assure you that we will be able to identify investments that meet our investment objectives or that any investment we make will produce a positive return. We may be unable to invest the net proceeds of this offering on acceptable terms within the time period that we anticipate or at all, which could adversely affect our financial condition and operating results.

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

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

Our NAV may change significantly since our last valuation at June 30, 2016.

Generally, our Board of Directors reviews and approves the fair value of our portfolio of investments on a quarterly basis. The last such quarterly review occurred as of June 30, 2016. Further, our financial statements

 

S-12

---

Table of Contents

have not been audited by our independent registered public accounting firm for any periods since September 30, 2015. The fair value of various individual investments in our portfolio and/or the aggregate fair value of our investments may have changed significantly since that time. We are currently in the process of determining the fair value of our portfolio as of September 30, 2016 and based on the preliminary assessment of our Board of Directors, the fair value has increased since June 30, 2016. If our Board of Directors makes a final determination that the fair value of our investment portfolio at September 30, 2016 was less than such fair value at June 30, 2016, then we will record an unrealized loss on our investment portfolio and report a lower NAV per share than is reflected in the Consolidated Selected Financial Data and the financial statements included elsewhere in this prospectus supplement. If our Board of Directors determines that the fair value of our investment portfolio at September 30, 2016 was greater than such fair value at June 30, 2016, we will record an unrealized gain on our investment portfolio and report a greater NAV per share than so reflected elsewhere in this prospectus supplement. Upon publication of this information in connection with our announcement of operating results for our quarter and fiscal year ended September 30, 2016, the market price of our common stock may fluctuate materially, and may be substantially less than the price per share you pay for our common stock in this offering.

Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their NAV.

Shares of closed-end investment companies, including BDCs, frequently trade at a discount from NAV. This characteristic of closed-end investment companies and BDCs is separate and distinct from the risk that our NAV per share may decline. We cannot predict whether our common stock will trade at, above or below NAV, however our common stock has generally traded below NAV in the last three years. In addition, if our common stock trades below NAV, we will generally not be able to issue additional common stock at the market price without the approval of our stockholders and Board of Directors, including a majority of our independent directors. At our Annual Stockholders Meeting on February 11, 2016, our stockholders voted to allow us to issue common stock at a price below NAV per share for a one-year period. Our stockholders did not specify a maximum discount below NAV at which we are able to issue our common stock but we are unable to issue and sell more than 25% of our then outstanding common stock immediately prior to any offering below NAV. For instance, we have in the past and may in the future issue shares of our common stock below NAV.

Stockholders who do not participate in this offering may experience immediate dilution in an amount that may be material.

We have obtained approval from our stockholders for us to be able to sell an unlimited number of shares of our common stock at any level of discount from NAV per share in certain circumstances during a one-year period ending in February 2017 (subject to a limitation on issuing and selling in a single offering more than 25% of the shares of our common stock outstanding immediately prior to such offering). If we issue or sell shares of our common stock at a discount to NAV, and we may do so in this offering, it will pose a risk of dilution to our existing stockholders. In particular, stockholders who do not purchase additional shares at or below the discounted price in proportion to their current ownership will experience an immediate decrease in NAV per share (as well as in the aggregate NAV of their shares if they do not participate at all). These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we experience in our assets, potential earning power and voting interests from such issuance or sale. In addition, such sales may adversely affect the price at which our common stock trades. For additional information and hypothetical examples of these risks, see “Sales of Common Stock Below Net Asset Value” in this prospectus supplement and in the accompanying prospectus.

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

In May 2014, we completed a public offering of the Series 2021 Term Preferred Stock, at a public offering price of $25.00 per share. In such offering, we issued 2.4 million shares of Series 2021 Term Preferred Stock. The shares of Series 2021 Term Preferred Stock have dividend, distribution and liquidation rights that are senior to

 

S-13

---

Table of Contents

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

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

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

 

S-14

---

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, financial condition or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to:

 

•

the recurrence or impact of adverse events in the economy and the capital markets, including stock price volatility;

 

•

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

 

•

the loss of one or more of our executive officers, in particular David Gladstone, Robert L. Marcotte or Terry Lee Brubaker;

 

•

changes in our investment objectives and strategy;

 

•

actual and potential conflicts of interest with our Adviser and other affiliates of the Company;

 

•

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

 

•

our business prospects and the prospects of our portfolio companies;

 

•

the degree and nature of our competition;

 

•

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

 

•

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

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus supplement or the accompanying prospectus, except as otherwise required by applicable law. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).

 

S-15

---

Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds from the sale of the                      shares of our common stock that we are offering, after deducting underwriting discounts and commissions and expenses of this offering payable by us, will be approximately $             million (or $             million, if the underwriters exercise their overallotment option in full) based on an assumed public offering price of $8.33 per share, which was the last reported sales price of our common stock on NASDAQ on October 24, 2016.

We intend to use the net proceeds from this offering to help repay borrowings under the Credit Facility and for other general corporate purposes. Amounts repaid under the Credit Facility remain available for future borrowings and we may use the proceeds of future borrowings under the Credit Facility to make investments in accordance with our investment strategy and for other general corporate purposes. As of June 30, 2016, we had $73.3 million of borrowings outstanding under our Credit Facility. We currently have $65.7 million outstanding under the Credit Facility. Indebtedness under our Credit Facility currently accrues interest at the rate of 30-day LIBOR plus 3.25% (or 3.72% as of June 30, 2016) and the revolving period ends in January 2019 and is due and payable on or before April 19, 2020. We anticipate that substantially all of the net proceeds of the offering will be utilized in the manner described above within three months of the completion of this offering. Pending such utilization, we intend to invest the net proceeds of the offering primarily in cash, cash equivalents, U.S. government securities, and other high-quality debt investments that mature in one year or less from the date of investment, consistent with the requirements for continued qualification as a RIC for federal income tax purposes.

 

S-16

---

Table of Contents

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2016:

 

•

on an actual basis; and

 

•

on an as adjusted basis to give effect to the sale of                      shares of common stock in this offering at a per share public offering price of $8.33 per share after deducting underwriters’ discounts and commissions and estimated offering expenses payable by us (and assuming the underwriters’ overallotment option is not exercised). See “Use of Proceeds.”

 

		As of June 30, 2016
		Actual				As Adjusted
		(Unaudited) (Dollars in thousands)
Borrowings
Borrowings at fair value (cost: $73,300, actual; $            , as adjusted)(1)(2)		$	73,300			$
Total Borrowings		$	73,300			$
Preferred Stock
6.75% Series 2021 Cumulative Term Preferred Stock, $0.001 par value per share; $25 liquidation preference per share; 2,460,118 shares authorized and 2,440,000 issued and outstanding, actual and as adjusted(3)		$	61,000			$	61,000
Total Preferred Stock (4,000,000 shares authorized and 2,440,000 issued and outstanding, actual and as adjusted)		$	61,000			$	61,000
Net Assets Applicable to Common Stockholders
Common stock, $0.001 par value per share, 46,000,000 shares authorized, actual and as adjusted; 23,344,422 shares issued and outstanding, actual and                      shares issued and outstanding, as adjusted(3)		$	23			$
Capital in excess of par value			327,697
Cumulative net unrealized depreciation on investments			(78,100	)
Net investment income in excess of distributions			4,599
Accumulated net realized losses			(68,705	)
Total Net Assets Available to Common Stockholders		$	185,514			$
Total Capitalization		$	319,814			$

 

(1)	Our borrowings have not been fair-value adjusted for the as adjusted presentation as of June 30, 2016.

(2)	Does not include approximately $7.6 million in net repayments made subsequent to June 30, 2016.

(3)	None of these outstanding shares are held by us or for our account.

The following are our outstanding classes of securities as of October 24, 2016:

 

TITLE OF CLASS		AMOUNT AUTHORIZED				AMOUNT HELD BY US OR FOR OUR ACCOUNT				AMOUNT OUTSTANDING (EXCLUSIVE OF AMOUNTS HELD BY US OR FOR OUR ACCOUNT)
Common Stock			46,000,000				—				23,344,422
6.75% Series 2021 Term Preferred Stock			2,460,118				—				2,440,000

 

S-17

---

Table of Contents

SALES OF COMMON STOCK BELOW NET ASSET VALUE

At our 2016 annual stockholders meeting on February 11, 2016, our stockholders approved our ability to issue and sell shares of our common stock at a price below the then current NAV per common share during a period beginning on February 11, 2016 and expiring on the first anniversary of such date (the “Stockholder Approval”). The offering of common stock being made pursuant to this prospectus supplement will be at a price below our most recently estimated NAV per share range on October 24, 2016 of $8.05 to $8.15 per share. To sell shares of common stock at a price below NAV per share, pursuant to the Stockholder Approval, the 1940 Act mandates that a majority of our directors who have no financial interest in the sale and a majority of our independent directors have determined (i) that such sale and issuance is in our best interests and in the best interests of our stockholders and (ii) as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares, or immediately prior to the issuance of such shares, and in good faith and in consultation with the underwriters of the offering, that the price at which such shares of common stock are to be sold is not less than a price which closely approximates the market value of those shares of common stock, less any distributing commission or discount.

In addition to the mandates of the 1940 Act pertaining to issuances and sales of common stock at a price below NAV per share, our Stockholder Approval requires that in any offering of common stock at a price below NAV per share the total number of shares issued and sold pursuant to such Stockholder Approval may not exceed 25% of our currently outstanding common stock immediately prior to each such sale. This offering meets this additional requirement.

This offering of common stock will be conducted below its NAV per share and is designed to raise capital to help repay outstanding borrowings under the Credit Facility and for other general corporate purposes.

In making a determination that an offering of common stock below its NAV per share is in our and our stockholders’ best interests, our Board of Directors has considered a variety of factors including:

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

the leverage available to us, both before and after the offering and other borrowing terms; and

 

•

the potential investment opportunities available relative to the potential dilutive effect of additional capital at the time of the offering.

Our Board of Directors has also considered the fact that sales of shares of common stock at a discount will benefit the Adviser as the Adviser will ultimately earn additional investment management fees on the proceeds of such offerings, as it would from the offering of any other securities of the Company or from the offering of common stock at a premium to NAV per share.

 

S-18

---

Table of Contents

We will not sell shares of our common stock under this prospectus pursuant to the Stockholder Approval without first filing a new post-effective amendment to the registration statement if the cumulative dilution to our net asset value per share from offerings under the registration statement, as amended by any post-effective amendments, exceeds 15%. This would be measured separately for each offering pursuant to the registration statement, as amended, by calculating the percentage dilution or accretion to aggregate net asset value from that offering and then summing the percentage from each offering. We do not expect dilution from this offering to exceed 15%.

In addition, the maximum number of shares issuable below NAV per share that could result in such dilution is limited to 25% of our then outstanding common stock immediately prior to each such offering. Sales by us of our common stock at a discount from NAV per share pose potential risks for our existing stockholders whether or not they participate in this offering, as well as for new investors who participate in this offering. Any sale of common stock at a price below NAV per share results in an immediate dilution to existing common stockholders who do not participate in such sale on at least a pro-rata basis. See “Risk Factors—Stockholders who do not participate in this offering will experience immediate dilution in an amount that may be material” in this prospectus supplement and “Risk Factors—Risks Related to an Investment in Our Securities” in the accompanying prospectus.

The following three headings and accompanying tables explain and provide hypothetical examples on the impact of this offering of our common stock at a price less than NAV per share on three different types of investors:

 

•

existing stockholders who do not purchase any shares in the offering;

 

•

existing stockholders who purchase a relatively small amount of shares in the offering or a relatively large amount of shares in the offering; and

 

•

new investors who become stockholders by purchasing shares in the offering.

Impact on Existing Stockholders Who Do Not Participate in the Offering

Our existing common stockholders who do not participate in this offering or who do not buy additional shares in the secondary market at the same or lower price we obtain in this offering (after expenses and commissions) face the greatest potential risks. These stockholders will experience an immediate dilution in the NAV of the common shares they hold and their NAV per common share. These common stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we will experience in our assets, potential earning power and voting interests due to this offering. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential increases and decreases in NAV per common share. This decrease could be more pronounced as the size of the offering and level of discounts increase.

 

S-19

---

Table of Contents

The following table illustrates the level of NAV dilution that could be experienced by an existing common stockholder that does not participate in this offering. It is not possible to predict the level of market price decline that may occur. The table below is based upon financial information as of June 30, 2016 except NAV per share, which is based on the midpoint of the estimated range of NAV per share as of October 24, 2016. The following example assumes a sale of 2,500,000 shares of common stock at an assumed public offering price of $8.33 per share, which was the closing price of our common stock on October 24, 2016, with a 4.00% underwriting discount and commission and $240,000 of estimated offering expenses ($0.10 per share, net). The numbers in this table have been rounded to the nearest hundredth of one percent.

 

		PRIOR TO SALE BELOW NAV				FOLLOWING SALE				% CHANGE
Offering Price
Price per common share to public			—			$	8.33				—
Net proceeds per common share to us			—			$	7.90				—
Decrease to NAV
Total common shares outstanding			23,344,422				25,844,422				10.71
NAV per common share		$	8.10			$	8.08				(0.24	)
Dilution to Stockholder
Common shares held by common stockholder			23,344				23,344				—
Percentage held by common stockholder			0.10	%			0.09	%			(9.67	)
Total Asset Values
Total NAV held by common stockholder		$	189,090			$	188,640				(0.24	)
Total investment by common stockholder (Assumed to be $8.10 per common share on common shares held prior to sale)		$	189,090			$	189,090				—
Total dilution to common stockholder (Total NAV less total investment)			—			$	(450	)			—
Per Share Amounts
NAV per share held by common stockholder		$	8.10			$	8.08				(0.24	)
Investment per share held by common stockholder (Assumed to be $8.10 per common share on common shares held prior to sale)		$	8.10			$	8.10				—
Dilution per common share held by stockholder (NAV per common share less investment per share)			—			$	(0.02	)			—
Percentage dilution to common stockholder (Dilution per common share divided by investment per common share)			—				—				(0.24	)

Impact on Existing Stockholders Who Do Participate in the Offering

Our existing common stockholders who participate in this offering or who buy additional shares in the secondary market at the same or lower price as we obtain in the offering (after expenses and commissions) will experience the same types of NAV dilution as the nonparticipating common stockholders, albeit at a lower level, to the extent they purchase less than the same percentage of the discounted offering as their interest in our common shares immediately prior to the offering. The level of NAV dilution will decrease as the number of common shares such stockholders purchase increases. Existing common stockholders who buy more than such percentage will experience NAV dilution but will, in contrast to existing common stockholders who purchase less than their proportionate share of this offering, experience accretion in NAV per common share over their investment per share and will also experience a disproportionately greater increase in their participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests due to this offering. The level of accretion will increase as the excess number of shares such common stockholder purchases increases. Even a common stockholder who over-participates will, however, be subject to the risk that we may make additional discounted offerings in which such common stockholder does not participate, in which case such a stockholder will experience NAV dilution as described above in such subsequent offerings. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced

 

S-20

---

Table of Contents

or potential increases and decreases in NAV per share. This decrease could be more pronounced as the size of the offering and level of discount to NAV increases.

The following table illustrates the level of dilution and accretion for a common stockholder that acquires shares equal to (1) 50% of its proportionate share of the offering (i.e., 1,250 shares, which is 0.05% of the offering rather than its 0.10% proportionate share) and (2) 150% of such percentage (i.e., 3,750 shares, which is 0.15% of the offering rather than its 0.10% proportionate share). The table below is shown based upon financial information as of June 30, 2016 except NAV per share, which is based on the midpoint of the estimated range of NAV per share as of October 24, 2016. The following example assumes a sale of 2,500,000 shares of common stock at an assumed public offering price of $8.33 per share, with a 4.00% underwriting discount and commission and $240,000 of estimated offering expenses ($0.10 per share, net). The numbers in this table have been rounded to the nearest hundredth of one percent.

 

		PRIOR TO SALE BELOW NAV				50% PARTICIPATION								150% PARTICIPATION
						FOLLOWING SALE				% CHANGE				FOLLOWING SALE				% CHANGE
Offering Price
Price per common share to public			—			$	8.33				—			$	8.33				—
Net Proceeds per common share to issuer			—			$	7.90				—			$	7.90				—
Decrease to NAV
Total common shares outstanding			23,344,422				25,844,422				10.71				25,844,422				10.71
NAV per common share		$	8.10			$	8.08				(0.24	)		$	8.08				(0.24	)
Dilution/Accretion to Common Stockholder
Common shares held by stockholder			23,344				24,594				5.35				27,094				16.06
Percentage held by common stockholder			0.10	%			0.10	%			(4.84	)			0.10	%			4.84
Total Asset Values
Total NAV held by common stockholder		$	189,090			$	198,741				5.10			$	218,943				15.79
Total investment by common stockholder (Assumed to be $8.10 per common share on common shares held prior to sale)		$	189,090			$	199,502				5.51			$	220,327				16.52
Total dilution to common stockholder (Total NAV less total investment)			—			$	(761	)			—			$	(1,385	)			—
Per Common Share Amounts
NAV per common share held by stockholder		$	8.10			$	8.08				(0.24	)		$	8.08				(0.24	)
Investment per common share held by stockholder (Assumed to be $8.10 per common share on common shares held prior to sale)		$	8.10			$	8.11				0.14			$	8.13				0.39
Dilution per common share held by stockholder (NAV per common share less investment per common share)			—			$	(0.03	)			—			$	(0.05	)			—
Percentage dilution to stockholder (Dilution per common share divided by investment per common share)			—				—				(0.38	)			—				(0.63	)

 

S-21

---

Table of Contents

Impact on New Investors

Investors who are not currently stockholders, but who participate in an offering below NAV and whose investment per common share is greater than the resulting NAV per share (due to selling compensation and expenses paid by us) will experience an immediate decrease in the NAV of their shares and their NAV per share compared to the price they pay for their shares of common stock. Investors who are not currently stockholders and who participate in this offering and whose investment per common share is also less than the resulting NAV per common share due to selling compensation and expenses paid by the issuer being significantly less than the discount per common share will experience an immediate increase in the NAV of their shares and their NAV per share compared to the price they pay for their shares of common stock. These investors will experience a disproportionately greater participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests. These investors will, however, be subject to the risk that we may make additional discounted offerings in which such new common stockholder does not participate, in which case such new stockholder will experience dilution as described above in such subsequent offerings. These investors may also experience a decline in the market price of their shares of, which often reflects to some degree announced or potential increases and decreases in NAV per share. This decrease could be more pronounced as the size of the offering and level of discounts increases.

The following table illustrates the level of dilution or accretion for new investors that would be experienced by a new investor in the same percentage (0.10%) of the common shares in the offering as the common stockholder in the prior examples held immediately prior to the offering. These stockholders may also experience a decline in the market price of their shares of common stock, which often reflects to some degree announced or potential increases and decreases in NAV per share. This decrease could be more pronounced as the size of the offering and level of discount to NAV increases. It is not possible to predict the level of market price decline that may occur. The table below is shown based upon financial information as of June 30, 2016 except NAV per share, which is based on the midpoint of the estimated range of NAV per share as of October 24, 2016. The following example assumes a sale of 2,500,000 shares of common stock at an assumed public offering price of $8.33 per share, with a 4.00% underwriting discount and commission and $240,000 of estimated offering expenses ($0.10 per share, net). The numbers in this table have been rounded to the nearest hundredth of one percent.

 

		PRIOR TO SALE BELOW NAV				FOLLOWING SALE				% CHANGE
Offering Price
Price per common share to public			—			$	8.33				—
Net proceeds per common share to issuer			—			$	7.90				—
Decrease to NAV
Total common shares outstanding			23,344,422				25,844,422				10.71
NAV per common share		$	8.10			$	8.08				(0.24	)
Accretion to New Investor
Common shares held by new investor			—				2,500				—
Percentage held by new investor			—	%			0.01	%			—
Total Asset Values
Total NAV held by new investor			—			$	20,202				—
Total investment by new investor (At price to public)			—			$	20,825				—
Total dilution to new investor (Total NAV less total investment)			—			$	(623	)			—
Per Common Share Amounts
NAV per common share held by new investor			—			$	8.08				—
Investment per share held by new investor (At price to public)			—			$	8.33				—
Dilution per common share held by new investor (NAV per common share less investment per common share)			—			$	(0.25	)			—
Percentage dilution to new investor (accretion per common share divided by investment per common share)			—				—				(2.99	)

 

S-22

---

Table of Contents

DISTRIBUTIONS

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

SHARE PRICE DATA

Our common stock is traded on the NASDAQ under the symbol “GLAD.” The following table reflects, by quarter, the high and low sales prices per share of our common stock on the NASDAQ, the high and low sales prices as a percentage of NAV per share and quarterly distributions declared per share for each quarter since October 1, 2013.

 

						SALES PRICE												(DISCOUNT) OR PREMIUM OF HIGH SALES PRICE TO NAV(2)				(DISCOUNT) OR PREMIUM OF LOW SALES PRICE TO NAV(2)
		NAV(1)				HIGH				LOW				DISTRIBUTIONS DECLARED
Fiscal Year ending September 30, 2014(3)
First Quarter		$	10.10			$	9.92			$	8.60			$	0.21				(1.8	)%			(14.9	)%
Second Quarter			9.79				10.37				9.27				0.21				5.9				(5.3	)
Third Quarter			8.62				10.21				9.41				0.21				18.4				9.2
Fourth Quarter			9.51				10.27				8.06				0.21				8.0				(15.2	)
Fiscal Year ending September 30, 2015(4)
First Quarter			9.31				9.41				8.02				0.21				1.1				(13.9	)
Second Quarter			9.55				9.10				7.25				0.21				(4.7	)			(24.1	)
Third Quarter			9.49				8.99				7.84				0.21				(5.3	)			(17.4	)
Fourth Quarter			9.06				9.25				7.58				0.21				2.1				(16.3	)
Fiscal Year ending September 30, 2016(5)
First Quarter			8.38				9.09				6.39				0.21				8.5				(23.8	)
Second Quarter			7.92				7.59				4.71				0.21				(4.2	)			(40.5	)
Third Quarter			7.95				7.67				6.80				0.21				(3.5	)			(14.5	)
Fourth Quarter			*				8.75				7.24				0.21				*				*
Fiscal Year ending September 30, 2017(6)
First Quarter (through October 24, 2016)			*				8.65				8.02				0.21				*				*

 

S-23

---

Table of Contents

(1)	NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low intraday sale prices. The NAV per shares shown are based on outstanding shares at the end of each period.

(2)

The (discounts) premiums to NAV per share set forth in these columns represent the high or low, as applicable, intraday sale price per share for the relevant quarter minus the NAV per share as of the end of such quarter, and therefore may not reflect the (discount) premium to NAV per share on the date of the high and low intraday sale prices.

(3)

For the fiscal year ended September 30, 2014, common stockholder distributions declared and paid exceeded our accumulated earnings and profits (after taking into account term preferred stock distributions), which resulted in a partial return of capital of approximately $15.2 million, or approximately $0.72 per share. The return of capital for the year ended September 30, 2014 primarily resulted from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

(4)

For the fiscal year ended September 30, 2015, our current and accumulated earnings and profits (after taking into account mandatorily redeemable preferred stock dividends) exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $1.7 million of the first common distributions paid in fiscal year 2016 as having been paid in the respective prior year.

(5)	The characterization of the common stockholder distributions declared and paid for the fiscal year ended September 30, 2016 will be determined based upon taxable income for the full fiscal year and distributions paid during the full fiscal year.

(6)	The characterization of the common stockholder distributions declared and paid for the fiscal year ending September 30, 2017 will be determined at fiscal year-end based upon taxable income for the full fiscal year and distributions paid during the full fiscal year.

*	Not yet available, as the NAV per share as of the end of this quarter has not yet been determined.

As of October 24, 2016, there were 42 record owners of our common stock. The last reported sales price of our common stock on NASDAQ on October 24, 2016 was $8.33 per share, representing a 2.8% premium to our estimated NAV per share of $8.10, which is based on the midpoint of the estimated range of NAV per share as of October 21, 2016.

 

S-24

---

Table of Contents

CONSOLIDATED SELECTED FINANCIAL DATA

The following consolidated selected financial data for the fiscal years ended September 30, 2015, 2014, 2013, 2012 and 2011 are derived from our audited consolidated financial statements. The consolidated selected financial data for the nine months ended June 30, 2016 and 2015 are derived from our unaudited consolidated financial statements included in this prospectus supplement. The “other unaudited data” included at the bottom of the table is also unaudited. The data should be read in conjunction with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus supplement.

 

		Nine Months Ended June 30,								Year Ended September 30,
		(Dollar amounts in thousands, except per share data)
		2016				2015				2015				2014				2013				2012				2011
Statement of Operations Data:
Total Investment Income		$	29,362			$	27,884			$	38,058			$	36,585			$	36,154			$	40,322			$	35,211
Total Expenses, Net of Credits from Adviser			14,778				15,664				20,358				18,217				17,768				21,278				16,799
Net Investment Income			14,584				12,220				17,700				18,368				18,386				19,044				18,412
Net Realized and Unrealized Gain (Loss) on Investments, Borrowings and Other			(23,912	)			960				(9,216	)			(7,135	)			13,833				(27,052	)			(39,511	)
Net Increase (Decrease) in Net Assets Resulting from Operations		$	(9,328	)		$	13,180			$	8,484			$	11,233			$	32,219			$	(8,008	)		$	(21,099	)
Per Share Data:
Net Investment Income per Common Share—Basic and Diluted(A)		$	0.63			$	0.58			$	0.84			$	0.87			$	0.88			$	0.91			$	0.88
Net Increase (Decrease) in Net Assets Resulting from Operations per Common Share—Basic and Diluted(A)			(0.40	)			0.63				0.40				0.53				1.53				(0.38	)			(1.00	)
Cash Distributions Declared Per Common Share			0.63				0.63				0.84				0.84				0.84				0.84				0.84
Statement of Assets and Liabilities Data:
Total Assets		$	325,550			$	369,261			$	382,482			$	301,429			$	295,091			$	293,402			$	317,624
Net Assets			185,514				200,643				191,444				199,660				205,992				188,564				213,721
Net Asset Value Per Common Share			7.95				9.49				9.06				9.51				9.81				8.98				10.16
Common Shares Outstanding			23,344,422				21,131,622				21,131,622				21,000,160				21,000,160				21,000,160				21,039,242
Weighted Common Shares Outstanding—Basic and Diluted			23,363,952				21,123,202				21,066,844				21,000,160				21,000,160				21,011,123				21,039,242
Senior Securities Data:
Borrowings under Credit Facility, at cost(B)		$	73,300			$	104,600			$	127,300			$	36,700			$	46,900			$	58,800			$	99,400
Mandatorily redeemable preferred stock(B)			61,000				61,000				61,000				61,000				38,497				38,497				—
Other Unaudited Data:
Number of Portfolio Companies at Year End			43				46				48				45				47				50				59
Average Size of Portfolio Company Investment at Cost		$	8,984			$	8,719			$	8,547			$	7,762			$	7,069			$	7,300			$	6,488
Principal Amount of New Investments			54,300				65,348				102,299				81,731				80,418				45,050				110,903
Proceeds from Loan Repayments and Investments Sold			98,425				28,601				40,273				72,560				117,048				73,857				50,002
Weighted Average Yield on Investments(C)			11.1	%			10.8	%			10.9	%			11.5	%			11.6	%			11.3	%			11.2	%
Total Return(D)			(3.04	)			(5.40	)			2.40				9.62				9.90				41.39				(33.77	)

 

S-25

---

Table of Contents

(A)	Per share data is based on the weighted average common stock outstanding for both basic and diluted.

(B)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding our level of indebtedness.

(C)	Weighted average yield on investments equals interest income on investments divided by the weighted average interest-bearing principal balance throughout the fiscal year or fiscal period as noted.

(D)

Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9— Distributions to Common Stockholders to our consolidated financial statements included elsewhere in this prospectus supplement.

 

S-26

---

Table of Contents

SELECTED QUARTERLY FINANCIAL DATA

The following tables set forth certain quarterly financial information for each of the eight quarters in the two fiscal years ended September 30, 2015 and September 30, 2014 and the first three quarters of the fiscal year ending September 30, 2016. The information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the entire fiscal year or for any future quarter.

 

		Year ending September 30, 2016
		Quarter Ended December 31, 2015				Quarter Ended March 31, 2016				Quarter Ended June 30, 2016
		(in thousands, except per share data)
Total investment income		$	10,060			$	9,456			$	9,844
Net investment income			4,759				4,917				4,907
Net increase (decrease) in net assets resulting from operations			(8,704	)			(6,139	)			5,516
Net increase (decrease) in net assets resulting from operations per weighted average common share (basic and diluted)		$	(0.38	)		$	(0.26	)		$	0.24

 

		Year Ended September 30, 2015
		Quarter Ended December 31, 2014				Quarter Ended March 31, 2015				Quarter Ended June 30, 2015				Quarter Ended September 30, 2015
		(in thousands, except per share data)
Total investment income		$	8,726			$	9,223			$	9,935			$	10,174
Net investment income			3,691				3,693				4,836				5,480
Net increase (decrease) in net assets resulting from operations			331				9,542				3,307				(4,696	)
Net increase (decrease) in net assets resulting from operations per weighted average common share (basic and diluted)		$	0.02			$	0.45			$	0.16			$	(0.22	)
		Year Ended September 30, 2014
		Quarter Ended December 31, 2013				Quarter Ended March 31, 2014				Quarter Ended June 30, 2014				Quarter Ended September 30, 2014
		(in thousands, except per share data)
Total investment income		$	8,392			$	9,331			$	10,180			$	8,682
Net investment income			4,410				4,485				5,063				4,410
Net increase (decrease) in net assets resulting from operations			10,506				(2,102	)			(20,175	)			23,004
Net increase (decrease) in net assets resulting from operations per weighted average common share (basic and diluted)		$	0.50			$	(0.10	)		$	(0.96	)		$	1.09

 

S-27

---

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

General

We were incorporated under the Maryland General Corporation Law on May 30, 2001. We were established for the purpose of investing in debt and equity securities of established private businesses in the U.S. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for federal income tax purposes we have elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). As a BDC and RIC, we are subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our primary investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We intend for our investment portfolio to consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of June 30, 2016, our investment portfolio was made up of approximately 90.2% debt investments and 9.8% equity investments, at cost.

We focus on investing in small and medium-sized middle market private businesses in the U.S. that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the business, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital, to finance acquisitions, or recapitalize or refinance their existing debt facilities. We typically avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds or management of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

In July 2012, the SEC granted us an exemptive order that expanded our ability, under certain circumstances, to co-invest with Gladstone Investment Corporation (“Gladstone Investment”) and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser or any combination of the foregoing subject to the conditions in the SEC’s order. We believe this has enhanced and will continue to enhance our ability to further our investment objectives and strategies.

 

S-28

---

Table of Contents

We are externally managed by Gladstone Management Corporation (the “Adviser”), an investment adviser registered with the SEC and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). The Adviser manages our investment activities. We have also entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services.

Additionally, since February 2011, 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.

Our shares of common stock and 6.75% Series 2021 Term Preferred Stock (our “Series 2021 Term Preferred Stock”) are traded on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbols “GLAD” and “GLADO,” respectively.

Business

Portfolio and Investment Activity

During the nine months ended June 30, 2016, we invested $54.3 million in five new portfolio companies and extended $5.6 million of investments to existing portfolio companies. In addition, during the nine months ended June 30, 2016, we exited 10 portfolio companies through sales and early payoffs. We received a total of $98.4 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits as well as existing portfolio companies during the nine months ended June 30, 2016. This activity resulted in a net reduction in our overall portfolio of five portfolio companies to 43 and a net decrease of 5.8% in our portfolio at cost since September 30, 2015. Our continued focus throughout 2016 will be to rebuild our investment portfolio by making new investments and to exit challenged and non-strategic investments in our portfolio in an orderly manner over the next several quarters. Since our initial public offering in August 2001, we have made 423 different loans to, or investments in, 201 companies for a total of approximately $1.5 billion, before giving effect to principal repayments on investments and divestitures.

During the nine months ended June 30, 2016, the following significant transactions occurred:

 

•

In October 2015, Allison Publications, LLC paid off at par for proceeds of $8.2 million.

 

•

In October 2015, we sold our investment in Funko, LLC (“Funko”), which resulted in dividend and prepayment fee income of $0.3 million and a realized gain of $16.9 million. In connection with the sale, we received net cash proceeds of $15.3 million, full repayment of our debt investment of $9.5 million, receivables of $3.1 million, recorded within other assets, net on the accompanying Consolidated Statement of Assets and Liabilities, and a continuing preferred and common equity investment in Funko Acquisition Holdings, LLC, with a combined cost basis and fair value of $0.3 million at the close of the transaction. Additionally, we recorded a tax liability for the net unrealized built-in gain of $9.8 million that was realized upon the sale, of which $6.3 million has been subsequently paid. The remaining tax liability of $3.5 million is included within other liabilities on the accompanying Consolidated Statement of Assets and Liabilities as of June 30, 2016.

 

•

In October 2015, Ameriqual Group, LLC paid off at par for proceeds of $7.4 million.

 

•

In October 2015, we sold our investment in First American Payment Systems, L.P. for net proceeds of $4.0 million, which resulted in a net realized loss of $0.2 million.

 

•

In November 2015, we restructured our investment in Legend Communications of Wyoming, LLC (“Legend”) resulting in a $2.7 million pay down on the existing loan and a new $3.8 million investment in Drumcree, LLC, which is listed separately on the accompanying Consolidated Statement of Investments as of December 31, 2015. In March 2016, Legend paid off at par for proceeds of $4.0 million.

 

S-29

---

Table of Contents

•

In December 2015, we sold our investment in Heartland Communications Group (“Heartland”) for net proceeds of $1.5 million, which resulted in a realized loss of $2.4 million. Heartland was on non-accrual status at the time of the sale.

 

•

In January 2016, we invested $8.5 million in LCR Contractors, Inc. through secured first lien debt.

 

•

In February 2016, our investment in Targus Group International, Inc. (“Targus”) was restructured, which resulted in a realized loss of $5.5 million and a new investment in Targus Cayman HoldCo Limited, which is listed on the accompanying Consolidated Statement of Investments as of June 30, 2016.

 

•

In March 2016, we invested $10.0 million in Travel Sentry, Inc. through secured first lien debt.

 

•

In March 2016, J. America paid off at par for proceeds of $5.1 million.

 

•

In April 2016, we received net proceeds of $8.0 million related to the sale of Ashland Acquisition LLC, which resulted in a realized gain of approximately $0.1 million.

 

•

In May 2016, we invested $2.0 million in Netsmart Technologies, Inc. through secured second lien debt.

 

•

In June 2016, we invested $30.0 million in IA Tech, LLC through secured first lien debt.

 

•

In June 2016, Vision Solutions, Inc. paid off at par for proceeds of $8.0 million.

 

•

In June 2016, GTCR Valor Companies, Inc. paid off at par for proceeds of $3.0 million.

Refer to Note 13—Subsequent Events in the accompanying Consolidated Financial Statements included elsewhere in this prospectus supplement for portfolio activity occurring subsequent to June 30, 2016.

Capital Raising

We issued shares of our common stock in an overnight offering in October 2015 with the overallotment closing in November 2015 at a public offering price of $8.55 per share, which was below the then current net asset value (“NAV”) of $9.06 per share. The resulting proceeds, in part, provided us with additional equity capital to help ensure continued compliance with regulatory tests and will allow us to grow the portfolio and generate additional income through new investments. Refer to “Liquidity and Capital Resources — Equity — Common Stock” for further discussion of our common stock offerings.

Although we were able to access the capital markets over the last year, uncertain market conditions continue to affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity. The current volatility in the credit market and the uncertainty surrounding the U.S. economy have led to significant stock market fluctuations, particularly with respect to the stock of financial services companies like ours. During times of increased price volatility, our common stock may be more likely to continue to trade at a price below our NAV per share, which is not uncommon for BDCs like us.

On August 2, 2016, the closing market price of our common stock was $7.91, a 0.5% discount to our June 30, 2016 NAV per share of $7.95. When our stock trades below NAV per common share, as it has consistently traded over the last several years, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering. At our annual meeting of stockholders held on February 11, 2016, our stockholders approved a proposal which authorizes us to sell shares of our common stock at a price below our then current NAV per common share subject to certain limitations (including, but not limited to, that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each such sale) for a period of one year from the date of approval, provided that our board of directors (our “Board of Directors”) makes certain determinations prior to any such sale.

 

S-30

---

Table of Contents

Regulatory Compliance

Challenges in the current market are intensified for us by certain regulatory limitations under the Code and the 1940 Act that may further constrain our ability to access the capital markets. To qualify to be taxed as a RIC, we must distribute on an annual basis at least 90.0% of our investment company taxable income, which is generally our net ordinary income plus the excess of our net short-term capital gains over net long-term capital losses. Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act that require us to have an asset coverage ratio (as defined in Section 18 of the 1940 Act) of at least 200% on our “senior securities representing indebtedness” and our “senior securities that are stock.”

We expect that, given these regulatory and contractual constraints in combination with current market conditions, the debt and equity capital available may be limited in the near term. However, we believe that the recent amendments to our Credit Facility to decrease the interest rate on advances and extend its revolving period end date until 2019, and our syndication and expansion of our Credit Facility in June 2015 has increased our ability to make investments in middle market businesses that we believe will help us achieve attractive long-term returns for our stockholders.

Recent Developments

Registration Statement

We filed a universal shelf registration statement (our “Registration Statement”) on Form N-2 (File No. 333-208637) with the SEC on December 18, 2015, and subsequently filed Pre-Effective Amendment No. 1 on March 17, 2016 and Pre-Effective Amendment No. 2 on March 29, 2016, which the SEC declared effective on March 29, 2016. Our Registration Statement registered 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. No securities have been issued under the registration statement as of June 30, 2016.

Common Stock Share Repurchase Program

In January 2016, our Board of Directors authorized a share repurchase program for up to an aggregate of $7.5 million of the Company’s 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 is the earlier of repurchasing the total authorized amount of $7.5 million or January 31, 2017. During the three months ended June 30, 2016, we repurchased 41,414 shares of our common stock at an average share price of $6.95, resulting in gross purchases of $0.3 million. During the nine months ended June 30, 2016, we repurchased 87,200 shares of our common stock at an average share price of $6.53, resulting in gross purchases of $0.6 million.

 

S-31

---

Table of Contents

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2016, to the Three Months Ended June 30, 2015

 

		Three Months Ended June 30,
		2016				2015				$ Change				% Change
INVESTMENT INCOME
Interest income, net		$	8,253			$	9,107			$	(854	)			(9.4	)%
Other income			1,591				828				763				92.1
Total investment income			9,844				9,935				(91	)			(0.9	)
EXPENSES
Base management fee			1,369				1,859				(490	)			(26.4	)
Loan servicing fee			896				1,015				(119	)			(11.7	)
Incentive fee			1,187				1,021				166				16.3
Administration fee			287				235				52				22.1
Interest expense on borrowings			648				1,033				(385	)			(37.3	)
Dividend expense on mandatorily redeemable preferred stock			1,029				1,029				—				—
Amortization of deferred financing fees			273				253				20				7.9
Other expenses			640				537				103				19.2
Expenses, before credits from Adviser			6,329				6,982				(653	)			(9.4	)
Credit to base management fee—loan servicing fee			(896	)			(1,015	)			119				11.7
Credits to fees from Adviser—other			(496	)			(868	)			372				42.9
Total expenses, net of credits			4,937				5,099				(162	)			(3.2	)
NET INVESTMENT INCOME			4,907				4,836				71				1.5
NET REALIZED AND UNREALIZED GAIN (LOSS)
Net realized loss on investments			(84	)			(1,143	)			1,059				92.7
Net realized gain on other			—				68				(68	)			(100.0	)
Net unrealized appreciation (depreciation) of investments			693				(1,147	)			1,840				NM
Net unrealized depreciation of other			—				693				(693	)			(100.0	)
Net gain (loss) from investments and other			609				(1,529	)			2,138				NM
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS		$	5,516			$	3,307			$	2,209				66.8	%

NM = Not Meaningful

Investment Income

Total investment income decreased slightly by 0.9% for the three months ended June 30, 2016, as compared to the prior year period. This decrease was primarily due to a decrease in interest income, which resulted from a decrease in the size of our interest-bearing portfolio for the three months ended June 30, 2016 as compared to the prior year period, partially offset by an increase in other income.

Interest income, net decreased by 9.4% for the three months ended June 30, 2016, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended June 30, 2016, was $303.6 million, compared to $330.6 million for the prior year period, a decrease of 8.2%. This decrease was due primarily to exits that occurred during the first quarter of fiscal year 2016. The weighted average yield on our interest-bearing investment portfolio is based on the current stated interest rate on

 

S-32

---

Table of Contents

interest-bearing investments which decreased to 10.9% for the three months ended June 30, 2016, compared to 11.1% for the three months ended June 30, 2015, inclusive of any allowances on interest receivables made during those periods.

As of June 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 7.5% of the cost basis of all debt investments in our portfolio. As of June 30, 2015, four portfolio companies were either fully or partially on non-accrual status, with an aggregate debt cost basis of approximately $49.2 million, or 13.4%, of the cost basis of all debt investments in our portfolio.

For the three months ended June 30, 2016, other income increased by 92.1% as compared to the prior year period. For the three months ended June 30, 2016, other income consisted primarily of $1.5 million in success fees recognized and $0.1 million in prepayment fees received. Other income for the three months ended June 30, 2015, consisted primarily of $0.5 million in dividend income received and $0.3 million in success fees recognized.

The following tables list the investment income for our five largest portfolio company investments at fair value during the respective periods:

 

		As of June 30, 2016								Three Months Ended June 30, 2016
Company		Fair Value				% of Portfolio				Investment Income				% of Total Income
IA Tech, LLC(A)		$	30,000				9.7	%		$	40				0.4	%
RBC Acquisition Corp.			22,090				7.2				658				6.7
WadeCo Specialties, Inc.			19,630				6.4				528				5.4
United Flexible, Inc.			17,304				5.6				556				5.6
Lignetics, Inc.			15,499				5.0				425				4.3
Subtotal—five largest investments			104,523				33.9				2,207				22.4
Other portfolio companies			203,703				66.1				7,637				77.6
Total Investment Portfolio		$	308,226				100.0	%		$	9,844				100.0	%
		As of June 30, 2015								Three Months Ended June 30, 2015
Company		Fair Value				% of Portfolio				Investment Income				% of Total Income
Funko, LLC(B)		$	31,221				9.0	%		$	444				4.5	%
RBC Acquisition Group			22,416				6.5				633				6.4
WadeCo Specialties, Inc.			22,173				6.4				527				5.3
Francis Drilling Fluids, Ltd.			21,708				6.2				617				6.2
United Flexible, Inc.(A)			21,335				6.1				487				4.9
Subtotal—five largest investments			118,853				34.2				2,708				27.3
Other portfolio companies			228,363				65.8				7,226				72.7
Other non-portfolio company revenue			—				—				1				—
Total Investment Portfolio		$	347,216				100.0	%		$	9,935				100.0	%

 

(A)	New investment during the applicable period.

(B)	Investment exited subsequent to June 30, 2015.

Expenses

Expenses, net of any voluntary, irrevocable and non-contractual credits to fees from the Adviser, decreased by 3.2% for the three months ended June 30, 2016, as compared to the prior year period. This decrease was primarily due to a decrease in interest expense on borrowings and a decrease in net base management fees, partially offset by an increase in net incentive fee and other expenses.

 

S-33

---

Table of Contents

Interest expense on borrowings decreased by $0.4 million, or 37.3%, during the three months ended June 30, 2016, as compared to the prior year period, due primarily to a decrease in the borrowings outstanding under our Credit Facility during the period due to the sales and payoffs discussed above. The weighted average balance outstanding under our Credit Facility during the three months ended June 30, 2016, was $52.5 million, as compared to $109.8 million in the prior year period, a decrease of 52.2%.

Net base management fee earned by the Adviser decreased by $0.7 million, or 14.3%, during the three months ended June 30, 2016, as compared to the prior year period, resulting from a decrease in the average total assets outstanding. Our Board of Directors accepted an unconditional, non-contractual and irrevocable voluntary credit of $0.2 million from the Adviser to reduce the income-based incentive fee to the extent net investment income for the quarter ended June 30, 2016 did not cover 100.0% of the distributions to common stockholders during the period. The credit granted for the quarter ended June 30, 2015, was $0.8 million.

The base management, loan servicing and incentive fees, and associated unconditional, non-contractual, and irrevocable voluntary credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4—Related Party Transactions of the notes accompanying our Consolidated Financial Statements included elsewhere in this prospectus supplement and are summarized in the following table:

 

		Three Months Ended June 30,
		2016				2015
Average total assets subject to base management fee(A)		$	312,914			$	371,800
Multiplied by prorated annual base management fee of 1.75%—2.0%			0.4375	%			0.5	%
Base management fee(B)		$	1,369			$	1,859
Portfolio company fee credit			(319	)			(73	)
Senior syndicated loan fee credit			(17	)			(41	)
Net Base Management Fee		$	1,033			$	1,745
Loan servicing fee(B)			896				1,015
Credit to base management fee—loan servicing fee(B)			(896	)			(1,015	)
Net Loan Servicing Fee		$	—			$	—
Incentive fee(B)			1,187				1,021
Incentive fee credit			(160	)			(754	)
Net Incentive Fee		$	1,027			$	267
Portfolio company fee credit			(319	)			(73	)
Senior syndicated loan fee credit			(17	)			(41	)
Incentive fee credit			(160	)			(754	)
Credits to Fees From Adviser—other(B)		$	(496	)		$	(868	)

 

(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 Consolidated Statements of Operations included elsewhere in this prospectus supplement.

 

S-34

---

Table of Contents

Net Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

We had no significant realized gains (losses) on investments for the three months ended June 30, 2016. For the three months ended June 30, 2015, we recorded a net realized loss on investments of $1.1 million, which resulted primarily from the exit of our investment in Sunburst during the three months ended June 30, 2015.

Net Unrealized Appreciation (Depreciation) of Investments

During the three months ended June 30, 2016, we recorded net unrealized appreciation of investments of $0.7 million. The realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2016, were as follows:

 

		Three Months Ended June 30, 2016
Portfolio Company		Realized Gain (Loss)				Unrealized Appreciation (Depreciation)				Reversal of Unrealized Depreciation (Appreciation)				Net Gain (Loss)
Southern Petroleum Laboratories, Inc.		$	—			$	1,906			$	—			$	1,906
RBC Acquisition Corp.			—				1,232				—				1,232
Vision Solutions, Inc.			—				777				—				777
Westland Technologies, Inc.			—				683				—				683
Flight Fit N Fun LLC			—				633				—				633
Precision Acquisition Group Holdings, Inc.			—				597				—				597
Behrens Manufacturing, LLC			—				588				—				588
Vitera Healthcare Solutions, LLC			—				449				—				449
Vertellus Specialties Inc.			—				368				—				368
Targus Cayman HoldCo, Ltd.			—				(338	)			—				(338	)
SourceHOV, LLC			—				(358	)			—				(358	)
Ashland Acquisitions, LLC			72				—				(572	)			(500	)
New Trident Holdcorp, Inc.			—				(600	)			—				(600	)
Lignetics, Inc.			—				(622	)			—				(622	)
Sunshine Media Holdings			—				(1,301	)			—				(1,301	)
LWO Acquisitions Company LLC			—				(1,478	)			—				(1,478	)
Francis Drilling Fluids, Ltd.			—				(1,565	)			—				(1,565	)
Other, net (<$250)			(156	)			294				—				138
Total:		$	(84	)		$	1,265			$	(572	)		$	609

The primary driver of net unrealized appreciation of $0.7 million for the three months ended June 30, 2016, was an improvement in the performance of certain portfolio companies and an increase in comparable multiples used to estimate the fair value of our investments, which more than offset the decreased performance of several of our portfolio companies.

 

S-35

---

Table of Contents

The net realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2015, were as follows:

 

		Three Months Ended June 30, 2015
Portfolio Company		Realized Gain (Loss)				Unrealized Appreciation (Depreciation)				Reversal of Unrealized Depreciation (Appreciation)				Net Gain (Loss)
Funko, LLC		$	—			$	6,213			$	—			$	6,213
Sunburst Media – Louisiana, LLC			(1,333	)			—				2,295				962
Francis Drilling Fluids, Ltd.			—				735				—				735
Ameriqual Group, LLC			—				727				—				727
Southern Petroleum Laboratories, Inc.			—				661				—				661
Precision Acquisition Group Holdings, Inc.			—				461				—				461
WadeCo Specialties, Inc.			—				458				—				458
Sunshine Media Holdings			—				332				—				332
LWO Acquisitions Company LLC			—				311				—				311
AG Transportation Holdings, LLC			—				301				—				301
Behrens Manufacturing, LLC			—				294				—				294
Vertellus Specialties, Inc.			—				254				—				254
PLATO Learning, Inc.			—				(301	)			—				(301	)
Leeds Novamark Capital I, L.P.			—				(309	)			—				(309	)
FedCap Partners, LLC			—				(350	)			—				(350	)
SourceHOV LLC			—				(407	)			—				(407	)
GFRC Holdings, LLC			—				(425	)			—				(425	)
Meridian Rack & Pinion, Inc.			—				(531	)			—				(531	)
Alloy Die Casting Co.			—				(583	)			—				(583	)
Saunders & Associates			—				(1,036	)			—				(1,036	)
Edge Adhesive Holdings, Inc.			—				(1,409	)			—				(1,409	)
Defiance Integrated Technologies, Inc.			—				(1,491	)			—				(1,491	)
B+T Group Acquisition Inc.			—				(1,992	)			—				(1,992	)
RBC Acquisition Corp.			—				(5,867	)			—				(5,867	)
Other, net (<$250)			258				651				(139	)			770
Total:		$	(1,075	)		$	(3,303	)		$	2,156			$	(2,222	)

The largest driver of our net unrealized depreciation for the three months ended June 30, 2015, excluding reversals, was a decline in financial and operational performance on several portfolio companies, most notably RBC Acquisition Corp. (“RBC”) of $5.9 million. This depreciation was partially offset by the improvement in financial and operational performance and the increase in comparable multiples used in the valuation of Funko of $6.2 million.

Net Unrealized Depreciation of Other

During the three months ended June 30, 2015, we recorded $0.7 million of net unrealized depreciation on our Credit Facility recorded at fair value whereas no such amounts were incurred in the current period.

 

S-36

---

Table of Contents

Comparison of the Nine Months Ended June 30, 2016, to the Nine Months Ended June 30, 2015

 

		For the Nine Months Ended June 30,
		2016				2015				$ Change				% Change
INVESTMENT INCOME
Interest income, net		$	26,107			$	25,495			$	612				2.4	%
Other income			3,255				2,389				866				36.2
Total investment income			29,362				27,884				1,478				5.3
EXPENSES
Base management fee			4,258				5,257				(999	)			(19.0	)
Loan servicing fee			2,876				2,802				74				2.6
Incentive fee			3,369				2,866				503				17.6
Administration fee			900				784				116				14.8
Interest expense on borrowings			2,066				2,735				(669	)			(24.5	)
Dividend expense on mandatorily redeemable preferred stock			3,088				3,087				1				0.0
Amortization of deferred financing fees			802				857				(55	)			(6.4	)
Other expenses			2,031				1,792				239				13.3
Expenses, before credits from Adviser			19,390				20,180				(790	)			(3.9	)
Credits to base management fee – loan servicing fee			(2,876	)			(2,802	)			(74	)			2.6
Credits to fees from Adviser – other			(1,736	)			(1,714	)			(22	)			1.3
Total expenses, net of credits			14,778				15,664				(886	)			(5.7	)
NET INVESTMENT INCOME			14,584				12,220				2,364				19.3
NET REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on investments			9,837				(14,024	)			23,861				NM
Net realized loss on other			(64	)			(491	)			427				87.0
Net unrealized (depreciation) appreciation of investments			(33,747	)			14,162				(47,909	)			NM
Net unrealized depreciation of other			62				1,313				(1,251	)			(95.3	)
Net (loss) gain from investments and other			(23,912	)			960				(24,872	)			(2,591	)
NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS		$	(9,328	)		$	13,180			$	(22,508	)			(171	)%

NM = Not Meaningful

Investment Income

Total investment income increased by 5.3% for the nine months ended June 30, 2016, as compared to the prior year period driven by increases in other income and interest income.

Interest income, net increased by 2.4% for the nine months ended June 30, 2016, as compared to the prior year period. The increase in interest income was primarily driven by a reserve recorded on certain interest receivables totaling $0.9 million during the prior year period, which reduced interest income for the nine months ended June 30, 2015. There was no reserve recorded during the nine months ended June 30, 2016. The weighted average principal balance of our interest-bearing investment portfolio was relatively flat when comparing the current and prior year period at $313.5 million during the nine months ended June 30, 2016, compared to $315.8 million for the prior year period. The weighted average yield on our interest-bearing investment portfolio increased to 11.1% for the nine months ended June 30, 2016, compared to 10.8% for the nine months ended June 30, 2015, inclusive of any allowances on interest receivables made during those periods.

 

S-37

---

Table of Contents

Other income increased by 36.2% during the nine months ended June 30, 2016, as compared to the prior year period. For the nine months ended June 30, 2016, other income consisted primarily of $2.8 million in success fees recognized, $0.3 million in dividend income received, and $0.2 million in prepayment fees received. For the nine months ended June 30, 2015, other income consisted primarily of $1.7 million in success fees recognized and $0.6 million in dividend income.

The following tables list the investment income for our five largest portfolio company investments at fair value during the respective periods:

 

		As of June 30, 2016								Nine Months Ended June 30, 2016
Company		Fair Value				% of Portfolio				Investment Income				% of Total Income
IA Tech, LLC(A)		$	30,000				9.7	%		$	40				0.1	%
RBC Acquisition Corp.			22,090				7.2				2,159				7.3
WadeCo Specialties, Inc.			19,630				6.4				1,563				5.3
United Flexible, Inc.			17,304				5.6				1,544				5.3
Lignetics, Inc.			15,499				5.0				1,279				4.4
Subtotal—five largest investments			104,523				33.9				6,585				22.4
Other portfolio companies			203,703				66.1				22,777				77.6
Total Investment Portfolio		$	308,226				100.0	%		$	29,362				100.0	%
		As of June 30, 2015								Nine Months Ended June 30, 2015
Company		Fair Value				% of Portfolio				Investment Income				% of Total Income
Funko, LLC(B)		$	31,221				9.0	%		$	914				3.3	%
RBC Acquisition Group			22,416				6.5				1,543				5.5
WadeCo Specialties, Inc.			22,173				6.4				1,368				4.9
Francis Drilling Fluids, Ltd.			21,708				6.2				2,301				8.3
United Flexible, Inc.(A)			21,335				6.1				749				2.7
Subtotal—five largest investments			118,853				34.2				6,875				24.7
Other portfolio companies			228,363				65.8				21,005				75.3
Other non-portfolio company revenue			—				—				4				—
Total Investment Portfolio		$	347,216				100.0	%		$	27,884				100.0	%

 

(A)	New investment during the applicable period.

(B)	Investment exited subsequent to June 30, 2015.

Expenses

Expenses, net of any voluntary, irrevocable and non-contractual credits to fees from the Adviser, decreased for the nine months ended June 30, 2016, by 5.7%, as compared to the prior year period. This decrease was primarily due to a decrease in interest expense on borrowings and a decrease in net base management fee, partially offset by an increase in net incentive fee and an increase in other expenses.

Interest expense decreased by $0.7 million, or 24.5%, during the nine months ended June 30, 2016, as compared to the prior year period, primarily due to decreased borrowings outstanding throughout the period on our Credit Facility. The weighted average balance outstanding under our Credit Facility during the nine months ended June 30, 2016, was approximately $59.8 million, as compared to $84.7 million in the prior year period, a decrease of 29.4%.

 

S-38

---

Table of Contents

Net base management fee earned by the Adviser decreased by $0.7 million, or 15.5%, during the nine months ended June 30, 2016, as compared to the prior year period, resulting from a decrease in the average total assets outstanding. Our Board of Directors accepted unconditional, non-contractual and irrevocable voluntary credits totaling $1.1 million from the Adviser to reduce the income-based incentive fee to the extent that net investment income did not cover 100.0% of the distributions to common stockholders during the nine months ended June 30, 2016. The credits granted during the nine months ended June 30, 2015 totaled $0.8 million. Base management, loan servicing and incentive fees and associated unconditional, non-contractual, and irrevocable voluntary credits are computed quarterly, as described under “Investment Advisory and Management Agreement” in Note 4—Related Party Transactions of the notes accompanying our Consolidated Financial Statements included elsewhere in this prospectus supplement and are summarized in the following table:

 

		Nine Months Ended June 30,
		2016				2015
Average total assets subject to base management fee(A)		$	324,419			$	350,450
Multiplied by prorated annual base management fee of 1.75-2.0%			1.3125	%			1.5	%
Base management fee(B)		$	4,258			$	5,257
Portfolio company fee credit			(553	)			(840	)
Senior syndicated loan fee credit			(73	)			(120	)
Net Base Management Fee		$	3,632			$	4,297
Loan servicing fee(B)			2,876				2,802
Credits to base management fee—loan servicing fee(B)			(2,876	)			(2,802	)
Net Loan Servicing Fee		$	—			$	—
Incentive fee(B)			3,369				2,866
Incentive fee credit			(1,110	)			(754	)
Net Incentive Fee		$	2,259			$	2,112
Portfolio company fee credit			(553	)			(840	)
Senior syndicated loan fee credit			(73	)			(120	)
Incentive fee credit			(1,110	)			(754	)
Credit to Fees From Adviser—other(B)		$	(1,736	)		$	(1,714	)

 

(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 Consolidated Statements of Operations included elsewhere in this prospectus supplement.

Net Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

For the nine months ended June 30, 2016, we recorded a net realized gain on investments of $9.8 million, which resulted primarily from a realized gain of $16.9 million from the sale of Funko, partially offset by a realized loss of $5.5 million recognized from the restructure of Targus and a realized loss of $2.4 million from our sale of Heartland during the period.

For the nine months ended June 30, 2015, we recorded a net realized loss on investments of $14.5 million, which primarily consisted of realized losses of $15.8 million resulting from the sales of Midwest Metal and Sunburst Media-Louisiana, LLC (“Sunburst”) during the period. This was partially offset by a realized gain of $1.6 million related to the early payoff of North American Aircraft Services, LLC (“NAAS”).

 

S-39

---

Table of Contents

Net Unrealized Appreciation (Depreciation) of Investments

During the nine months ended June 30, 2016, we recorded net unrealized depreciation of investments of $33.7 million. The net realized gain (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended June 30, 2016, were as follows:

 

		Nine Months Ended June 30, 2016
Portfolio Company		Realized Gain (Loss)				Unrealized Appreciation (Depreciation)				Reversal of Unrealized Depreciation (Appreciation)				Net Gain (Loss)
Legend Communications of Wyoming, LLC		$	—			$	2,857			$	27			$	2,884
Behrens Manufacturing, LLC			—				2,008				—				2,008
Funko, LLC			16,887				66				(16,009	)			944
Southern Petroleum Laboratories, Inc.			—				871				—				871
Westland Technologies, Inc.			—				622				—				622
J. America, Inc.			—				482				—				482
Triple H Food Processors			—				450				—				450
Mikawaya			—				(282	)			—				(282	)
Ashland Acquisitions, LLC			72				183				(572	)			(317	)
United Flexible, Inc.			—				(329	)			—				(329	)
FedCap Partners, LLC			—				(381	)			—				(381	)
Vitera Healthcare Solutions, LLC			—				(475	)			—				(475	)
New Trident Holdcorp, Inc.			—				(561	)			—				(561	)
Lignetics, Inc.			—				(573	)			—				(573	)
AG Transportation Holdings, LLC			—				(584	)			—				(584	)
Vertellus Specialties Inc.			—				(882	)			—				(882	)
Vision Government Solutions, Inc.			—				(986	)			—				(986	)
WadeCo Specialties, Inc.			—				(1,082	)			—				(1,082	)
Precision Acquisition Group Holdings, Inc.			—				(1,282	)			—				(1,282	)
SourceHOV LLC			—				(1,722	)			—				(1,722	)
RBC Acquisition Corp.			1,207				(3,183	)			—				(1,976	)
Sunshine Media Holdings			—				(2,593	)			—				(2,593	)
LWO Acquisitions Company LLC			—				(3,474	)			—				(3,474	)
Targus Cayman HoldCo, Ltd.			(5,500	)			(2,530	)			4,198				(3,832	)
Defiance Integrated Technologies, Inc.			—				(4,348	)			—				(4,348	)
Francis Drilling Fluids, Ltd.			—				(5,840	)			—				(5,840	)
Other, net (<$250)			(2,829	)			(727	)			2,904				(652	)
Total:		$	9,837			$	(24,295	)		$	(9,452	)		$	(23,910	)

The largest driver of our net unrealized depreciation for the nine months ended June 30, 2016 was derived from a decline in financial and operation performance of certain portfolio companies and, to a lesser extent, decreases in comparable multiples used in valuations, most notably Francis Drilling Fluids, Ltd. (“FDF”) of $5.8 million and Defiance Integrated Technologies, Inc. (“Defiance”) of $4.3 million. The change was also driven by the reversal of $16.0 million of previously recorded unrealized appreciation on our investment in Funko upon exit. This depreciation was partially offset by the unrealized appreciation resulting from an increase in performance on certain portfolio companies, most notably Behrens Manufacturing, LLC of $2.9 million and the reversal of $4.1 million of previously recorded unrealized depreciation on our investment in Targus upon restructure.

 

S-40

---

Table of Contents

The net realized gain (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended June 30, 2015, were as follows:

 

		Nine Months Ended June 30, 2015
Portfolio Company		Realized (Loss) Gain				Unrealized Appreciation (Depreciation)				Reversal of Unrealized Depreciation (Appreciation)				Net Gain (Loss)
Funko, LLC		$	—			$	15,858			$	—			$	15,858
Precision Acquisition Group Holdings, Inc.			—				3,392				—				3,392
Sunburst Media – Louisiana, LLC			(1,333	)			2,130				2,295				3,092
Ameriqual Group, LLC			—				708				—				708
Behrens Manufacturing, LLC			—				608				—				608
Midwest Metal Distribution, Inc.			(14,980	)			—				15,578				598
Southern Petroleum Laboratories, Inc.			—				501				—				501
Sunshine Media Holdings			—				421				—				421
Ashland Acquisitions, LLC			—				405				—				405
AG Transportation Holdings, LLC			—				395				—				395
Westland Technologies, Inc.			—				385				—				385
Heartland Communications Group			—				347				—				347
Defiance Integrated Technologies, Inc.			—				(355	)			—				(355	)
SourceHOV LLC			—				(416	)			—				(416	)
FedCap Partners, LLC			—				(507	)			—				(507	)
North American Aircraft Services, LLC			1,578				—				(2,216	)			(638	)
WadeCo. Specialties, Inc.			—				(649	)			—				(649	)
Targus Group International, Inc.			—				(702	)			—				(702	)
Meridian Rack & Pinion, Inc.			—				(759	)			—				(759	)
Francis Drilling Fluids, Ltd.			—				(795	)			—				(795	)
B+T Group Acquisition Inc.			—				(1,828	)			—				(1,828	)
Edge Adhesives Holdings, Inc.			—				(2,170	)			—				(2,170	)
Saunders & Associates			—				(3,255	)			—				(3,255	)
PLATO Learning, Inc.			—				(3,558	)			—				(3,558	)
GFRC Holdings, LLC			—				(5,308	)			—				(5,308	)
RBC Acquisition Corp.			—				(5,867	)			—				(5,867	)
Other, net (<$250)			220				(337	)			(139	)			(256	)
Total:		$	(14,515	)		$	(1,356	)		$	15,518			$	(353	)

The largest driver of our net unrealized depreciation (excluding reversals) for the nine months ended June 30, 2015, was due to incremental declines in the financial and operational performance of certain portfolio companies, most notably RBC of $5.9 million, GFRC Holdings, LLC (“GFRC”) of $5.3 million, Plato Learning, Inc. of $3.6 million and Saunders & Associates (“Saunders”) of $3.3 million. Partially offsetting this net unrealized depreciation for the nine months ended June 30, 2015, was the unrealized appreciation of Funko of $15.9 million due to improvements in financial and operation performance and the increase in comparable multiples used in the valuation.

Net Realized Loss on Other

During the nine months ended June 30, 2016, we recorded a net realized loss of $0.1 million, due to the expiration of our interest rate cap agreement in January 2016. For the nine months ended June 30, 2015, we recorded a net realized loss on other of $0.5 million resulting primarily from unearned escrows on the previous sale of Midwest Metal Distribution, Inc. (“Midwest Metal”) during the three months ended December 31, 2014.

 

S-41

---

Table of Contents

Net Unrealized Depreciation of Other

During the nine months ended June 30, 2016, we reversed $0.1 million of unrealized depreciation related to the expiration of our interest rate cap agreement in January 2016. During the nine months ended June 30, 2015, we recorded $1.3 million of net unrealized depreciation on our Credit Facility recorded at fair value whereas no such amounts were incurred in the current period.

Comparison of the Year Ended September 30, 2015 to the Year Ended September 30, 2014

 

		For the Year Ended September 30,
		2015				2014				$ Change				%Change
INVESTMENT INCOME
Interest income		$	34,895			$	32,170			$	2,725				8.5	%
Other income			3,163				4,415				(1,252	)			(28.4	)
Total investment income			38,058				36,585				1,473				4.0
EXPENSES
Base management fee			6,888				5,864				1,024				17.5
Loan servicing fee			3,816				3,503				313				8.9
Incentive fee			4,083				4,297				(214	)			(5.0	)
Administration fee			1,033				853				180				21.1
Interest expense on borrowings			3,828				2,628				1,200				45.7
Dividend expense on mandatorily redeemable preferred stock			4,116				3,338				778				23.3
Amortization of deferred financing fees			1,106				1,247				(141	)			(11.3	)
Other expenses			2,188				2,084				104				5.0
Expenses, before credits from Adviser			27,058				23,814				3,244				13.6
Credit to base management fee—loan servicing fee			(3,816	)			(3,503	)			(313	)			(8.9	)
Credit to fees from Adviser—other			(2,884	)			(2,094	)			(790	)			(37.7	)
Total expenses, net of credits			20,358				18,217				2,141				11.8
NET INVESTMENT INCOME			17,700				18,368				(668	)			(3.6	)
NET REALIZED AND UNREALIZED (LOSS) GAIN
Net realized loss on investments and escrows			(34,176	)			(12,113	)			(22,063	)			(182.1	)
Net realized loss on extinguishment of debt			—				(1,297	)			1,297				NM
Net unrealized appreciation of investments			23,647				7,389				16,258				220.0
Net unrealized depreciation (appreciation) of other			1,313				(1,114	)			2,427				217.9
Net loss from investments, escrows and other			(9,216	)			(7,135	)			(2,081	)			(29.2	)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS		$	8,484			$	11,233			$	(2,749	)			(24.5	)%
PER BASIC AND DILUTED COMMON SHARE
Net investment income		$	0.84			$	0.87			$	(0.03	)			(25.2	)%
Net increase in net assets resulting from operations		$	0.40			$	0.53			$	(0.13	)			(3.4	)%

NM = Not Meaningful

 

S-42

---

Table of Contents

Investment Income

Total interest income increased by 8.5% for the year ended September 30, 2015, as compared to the prior year period. This increase was due primarily to the funding of several new investments during the period, partially offset by several early payoffs at par during the prior year. The level of interest income on our investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the year, multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the year ended September 30, 2015, was $319.1 million, compared to $280.4 million for the prior year, an increase of $38.7 million, or 13.8%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments for the year ended

September 30, 2015 was 10.9% compared to 11.5% for the year ended September 30, 2014, inclusive of any allowances on interest receivables made during those periods.

As of September 30, 2015, two portfolio companies were on non-accrual status, with an aggregate debt cost basis of approximately $26.4 million, or 7.1% of the cost basis of all debt investments in our portfolio. During the quarter ended December 31, 2014, we sold our investment in Midwest Metal, which had been on non-accrual status. Effective January 1, 2015, we placed GFRC on non-accrual status and restored two tranches of Sunshine Media Holdings (“Sunshine”) debt to accrual status and effective April 1, 2015, we placed Saunders on non-accrual status. During the quarter ended September 30, 2015, we sold our investment in Saunders which was on non-accrual and restructured our investment in GFRC and restored it to accrual status. As of September 30, 2014, three portfolio companies were on non-accrual status, with an aggregate debt cost basis of approximately $51.4 million, or 16.1%, of the cost basis of all debt investments in our portfolio. Effective January 1, 2014, we placed Heartland on non-accrual status and effective June 1, 2014 we placed Midwest Metal on non-accrual status. During the quarter ended December 31, 2013, we sold our investment in LocalTel, LLC (“LocalTel”), which had been on non-accrual status. See “Overview—Business—Portfolio and Investment Activity” for more information.

For the year ended September 30, 2015, other income consisted primarily of $0.6 million in success fees related to the early payoff of NAAS at a realized gain, $0.8 million in success fees prepaid by Defiance, $0.5 million in dividend income received from Funko, $0.3 million in success fees prepaid by FDF, $0.3 million in dividend income and prepaid success fees from Southern Petroleum Laboratories, Inc. (“SPL”), $0.3 million in settlement fees received from Sunburst, $0.2 million in dividend income received from FDF and $0.2 million of success fees received related to our sale of substantially all of the assets in Lindmark Acquisition, LLC (“Lindmark”) in September 2013. For the year ended September 30, 2014, other income consisted primarily of $0.7 million in dividend income received from FedCap Partners, LLC (“FedCap”), $0.5 million in success fees received related to the early payoff of Thibaut Acquisition Co. (“Thibaut”) at par, $0.4 million in legal settlement proceeds received related to a portfolio company previously sold, $0.8 million in aggregate of prepaid success fees, dividend income and other fees received from FDF, $0.1 million in prepayment fees received from Pop Radio, LLC (“POP”), an aggregate of $0.3 million in prepayment fees from the early payoff of five syndicate investments at par and $1.4 million in success fees received related to our sale of substantially all of the assets of Lindmark in 2013.

 

S-43

---

Table of Contents

The following tables list the investment income for our five largest portfolio company investments at fair value during the respective years:

 

		As of September 30, 2015								Year Ended September 30, 2015
Portfolio Company		Fair Value				% of Portfolio				Investment Income				% of Total Investment Income
Funko, LLC		$	26,814				7.3	%		$	1,385				3.6	%
WadeCo Specialties, Inc.			21,920				6.0				1,896				5.0
RBC Acquisition Corp.			20,617				5.6				2,343				6.2
United Flexible, Inc.(A)			20,355				5.6				1,226				3.2
Francis Drilling Fluids, Ltd.			19,928				5.5				2,946				7.7
Subtotal—five largest investments			109,634				30.0				9,796				25.7
Other portfolio companies			256,257				70.0				28,257				74.3
Other non-portfolio company income			—				—				5				—
Total Investment Portfolio		$	365,891				100.0	%		$	38,058				100.0	%
		As of September 30, 2014								Year Ended September 30, 2014
Portfolio Company		Fair Value				% of Portfolio				Investment Income				% of Total Investment Income
RBC Acquisition Corp.		$	28,283				10.1	%		$	2,879				7.9	%
Francis Drilling Fluids, Ltd.			22,837				8.1				2,847				7.8
J. America, Inc.(A)			16,648				5.9				1,444				4.0
Funko, LLC			13,508				4.8				1,100				3.0
Defiance Integrated Technologies, Inc.			13,006				4.6				743				2.0
Subtotal—five largest investments			94,282				33.5				9,013				24.7
Other portfolio companies			187,004				66.5				27,557				75.3
Other non-portfolio company income			—				—				15				—
Total Investment Portfolio		$	281,286				100.0	%		$	36,585				100.0	%

 

(A)	- New investment during applicable period.

Expenses

Expenses, net of credits from the Adviser, increased for the year ended September 30, 2015, by 11.8% as compared to the prior year. This increase was primarily due to increases in our net base management fees to the Advisor, interest expense on borrowings, and dividend expense on our mandatorily redeemable preferred stock, partially offset by a decrease in the net incentive fee to the Adviser.

Interest expense increased by $1.2 million, or 45.7%, during the year ended September 30, 2015, as compared to the prior year, primarily due to increased borrowings outstanding throughout the period on our Credit Facility. The weighted average balance outstanding on our Credit Facility during the year ended September 30, 2015, was approximately $92.5 million, as compared to $41.9 million in the prior year period, an increase of 120.9%. This was partially offset by lower average borrowing rates on our Credit Facility. The weighted average borrowing rate during the year ended September 30, 2015, was approximately 4.1% compared to 6.3% in the prior year period, a decrease of 34.9%.

The increase of $0.8 million, or 23.3%, in dividend expense on our mandatorily redeemable preferred stock during the year ended September 30, 2015, as compared to the prior year, was primarily due to the higher monthly distribution amount on our Series 2021 Term Preferred Stock, which was issued in May 2014, and

 

S-44

---

Table of Contents

which was partially offset by the voluntary redemption of our Series 2016 Term Preferred Stock, which was issued in November 2011 and redeemed in May 2014. Refer to “Liquidity and Capital Resources—Equity—Term Preferred Stock” for further discussion of our term preferred stock.

The increase of $0.4 million in the net base management fee earned by the Adviser during the year ended September 30, 2015, as compared to the prior year, was due primarily to an increase in the average total assets outstanding as a result of the net growth in our investment portfolio during the period. This was partially offset by a decrease in the annual base management fee from 2.0% to 1.75% effective July 1, 2015. The base management, loan servicing and incentive fees and associated unconditional, non-contractual, and irrevocable voluntary credits are computed quarterly, as described under “Investment Advisory and Management Agreement” and “Loan Servicing Fee Pursuant to Credit Agreement” in Note 4 of the notes to our Condensed Consolidated Financial Statements in the accompanying prospectus and are summarized in the following table:

 

		Year Ended September 30,
		2015				2014
Average total assets subject to base management fee(A)		$	355,510			$	293,200
Multiplied by annual base management fee of 1.75%—2.0%			1.75% - 2.0%				2.0	%
Base management fee(B)			6,888				5,864
Portfolio fee credit			(1,399	)			(797	)
Senior syndicated loan fee credit			(118	)			(117	)
Net Base Management Fee		$	5,371			$	4,950
Loan servicing fee(B)		$	3,816			$	3,503
Credit to base management fee—loan servicing fee(B)			(3,816	)			(3,503	)
Net Loan Servicing Fee		$	—			$	—
Incentive fee(B)		$	4,083			$	4,297
Incentive fee credit			(1,367	)			(1,180	)
Net Incentive Fee		$	2,716			$	3,117
Portfolio fee credit		$	(1,399	)		$	(797	)
Senior syndicated loan fee credit			(118	)			(117	)
Incentive fee credit			(1,367	)			(1,180	)
Credit to Fees from Adviser—Other(B)		$	(2,884	)		$	(2,094	)

 

(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 four most recently completed quarters within the respective years and appropriately adjusted for any share issuances or repurchases during the applicable year.

(B)	Reflected, on a gross basis, as a line item on our Consolidated Statement of Operations contained in the accompanying prospectus.

Realized Loss and Unrealized Appreciation

Net Realized Loss on Investments and Escrows

For the year ended September 30, 2015, we recorded a net realized loss on investments and escrows of $34.2 million, which resulted primarily from the sales of Midwest Metal, Sunburst, Saunders and the restructure of GFRC for a combined realized loss of $34.1 million and net proceeds of $7.1 million. This realized loss was partially offset by the realized gain of $1.6 million we recognized on the early payoff of NAAS.

For the year ended September 30, 2014, we recorded a net realized loss on investments and escrows of $12.1 million, which primarily consisted of realized losses of $10.8 million due to our sale of LocalTel for proceeds

 

S-45

---

Table of Contents

contingent on an earn-out and $2.8 million due to our sale of BAS Broadcasting (“BAS”) for net proceeds of $4.7 million. Partially offsetting these realized losses, was the realized gain of $1.0 million we recognized on the exit of WP Evenflo Group Holdings, Inc. (“WP Evenflo”).

Net Unrealized Appreciation of Investments

Net unrealized appreciation (depreciation) of investments is the net change in the fair value of our investment portfolio during the year, including the reversal of previously recorded unrealized appreciation or depreciation when gains and losses are actually realized. During the year ended September 30, 2015, we recorded net unrealized appreciation of investments in the aggregate amount of $23.6 million, which included the reversal of an aggregate of $34.6 million in cumulative unrealized depreciation primarily related to the sales of Midwest Metal, Sunburst, Saunders and restructure of GFRC during the fiscal year. Excluding reversals, we recorded $11.0 million in net unrealized depreciation for the year ended September 30, 2015. Over our entire portfolio, the net unrealized depreciation (excluding reversals) for the year ended September 30, 2015, consisted of approximately $15.2 million of depreciation on our debt investments and approximately $4.2 million of appreciation on our equity investments.

The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2015, were as follows:

 

		Year Ended September 30, 2015
Portfolio Company		Realized (Loss) Gain				Unrealized Appreciation (Depreciation)				Reversal of Unrealized Depreciation (Appreciation)				Net Gain (Loss)
Funko, LLC		$	—			$	11,451			$	—			$	11,451
Sunburst Media—Louisiana, LLC			(1,333	)			2,130				2,295				3,092
Precision Acquisition Group Holdings, Inc.			—				2,831				—				2,831
Sunshine Media Holdings			—				1,861				—				1,861
Heartland Communications Group			—				1,123				—				1,123
Behrens Manufacturing, LLC			—				1,102				—				1,102
Ameriqual Group, LLC			—				1,063				—				1,063
Westland Technologies, Inc.			—				899				—				899
Midwest Metal Distribution, Inc.			(14,980	)			—				15,578				598
Ashland Acquisitions, LLC			—				571				—				571
AG Transportation Holdings, LLC			—				516				—				516
New Trident Holdcorp, Inc.			—				(282	)			—				(282	)
Vertellus Specialties Inc.			—				(315	)			—				(315	)
LWO Acquisitions			—				(390	)			—				(390	)
SourceHOV LLC			—				(473	)			—				(473	)
FedCap Partners, LLC			—				(507	)			—				(507	)
North American Aircraft Services, LLC			1,578				—				(2,216	)			(638	)
WadeCo. Specialties, Inc.			—				(818	)			—				(818	)
Alloy Die Casting			—				(1,251	)			—				(1,251	)
Targus Group International, Inc.			—				(1,254	)			—				(1,254	)
Meridian Rack & Pinion, Inc.			—				(1,647	)			—				(1,647	)
B+T Group Acquisition Inc.			—				(1,934	)			—				(1,934	)
Francis Drilling Fluids, Ltd.			—				(2,575	)			—				(2,575	)
PLATO Learning, Inc.			—				(2,663	)			—				(2,663	)
Edge Adhesives Holdings, Inc.			—				(3,196	)			6				(3,190	)
Saunders & Associates			(8,884	)			(3,255	)			8,680				(3,459	)
GFRC Holdings, LLC			(10,797	)			(5,308	)			10,483				(5,622	)
RBC Acquisition Corp.			—				(7,647	)			—				(7,647	)
Other, net (<$250)			240				(985	)			(226	)			(971	)
Total:		$	(34,176	)		$	(10,953	)		$	34,600			$	(10,529	)

 

S-46

---

Table of Contents

The largest driver of our net unrealized depreciation (excluding reversals) for the year ended September 30, 2015, were the decreases in comparable multiples used in valuations and a decline in the financial and operational performance of GFRC and RBC, resulting in $5.6 million and $7.6 million, respectively, of net unrealized depreciation during the year. Partially offsetting this net unrealized depreciation for the year ended September 30, 2015, was the net unrealized appreciation on Funko of $11.5 million due to increases in comparable multiples used in valuations and incremental improvements in the financial and operational performance of these portfolio companies.

During the year ended September 30, 2014, we recorded net unrealized appreciation of investments in the aggregate amount of $7.4 million, which included the reversal of an aggregate of $18.0 million in cumulative unrealized depreciation primarily related to the repayment of principal in full at par on International Junior Golf Training Acquisition Company (“Junior”) and the sales of BAS and LocalTel during the fiscal year. Excluding reversals, we recorded $10.6 million in net unrealized depreciation for the year ended September 30, 2014. Over our entire portfolio, the net unrealized depreciation (excluding reversals) for the year ended September 30, 2014, consisted of approximately $16.3 million of depreciation on our debt investments and approximately $5.7 million of appreciation on our equity investments.

The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2014, were as follows:

 

		Year Ended September 30, 2014
Portfolio Company		Realized (Loss) Gain				Unrealized Appreciation (Depreciation)				Reversal of Unrealized Depreciation (Appreciation)				Net Gain (Loss)
Defiance Integrated Technologies, Inc.		$	—			$	4,594			$	—			$	4,594
BAS Broadcasting			(2,765	)			187				6,905				4,327
Funko, LLC			—				4,162				—				4,162
Legend Communications of Wyoming, LLC			—				2,729				—				2,729
International Junior Golf Training Acquisition Company			—				(6	)			2,261				2,255
Sunshine Media Holdings			—				1,955				—				1,955
North American Aircraft Services, LLC			—				1,755				—				1,755
Francis Drilling Fluids, Ltd.			—				1,186				—				1,186
WP Evenflo Group Holdings, Inc.			988				1,105				(1,002	)			1,091
Sunburst Media—Louisiana, LLC			—				974				—				974
Edge Adhesives Holdings, Inc.			—				579				—				579
Westland Technologies, Inc.			—				405				—				405
J. America, Inc.			—				(352	)			—				(352	)
LocalTel, LLC			(10,768	)			—				10,218				(550	)
Alloy Die Casting Co.			—				(643	)			—				(643	)
Lindmark Acquisition, LLC			—				(827	)			—				(827	)
FedCap Partners, LLC			—				(827	)			—				(827	)
Ameriqual Group, LLC			—				(838	)			—				(838	)
Saunders and Associates			—				(3,945	)			—				(3,945	)
Precision Acquisition Group Holdings, Inc.			—				(4,601	)			—				(4,601	)
RBC Acquisition Corp.			—				(5,330	)			—				(5,330	)
Midwest Metal Distribution, Inc.			—				(12,892	)			—				(12,892	)
Other, net (<$250)			432				43				(406	)			69
Total:		$	(12,113	)		$	(10,587	)		$	17,976			$	(4,724	)

 

S-47

---

Table of Contents

The largest driver of our net unrealized depreciation (excluding reversals) for the year ended September 30, 2014, was the decreases in comparable multiples used in valuations and a decline in the financial and operational performance of Midwest Metal and RBC resulting in $12.9 million and $5.3 million, respectively, of net unrealized depreciation during the year. Partially offsetting this net unrealized depreciation for the year ended September 30, 2014, was the net unrealized appreciation on Defiance of $4.6 million and on Funko of $4.2 million due to increases in comparable multiples used in valuations and incremental improvements in the financial and operational performance of these portfolio companies.

As of September 30, 2015, the fair value of our investment portfolio was less than its cost basis by approximately $44.4 million and our entire investment portfolio was valued at 89.2% of cost, as compared to cumulative net unrealized depreciation of $68.0 million and a valuation of our entire portfolio at 80.5% of cost as of September 30, 2014. This decrease year over year in the cumulative unrealized depreciation on investments represents net unrealized appreciation of $23.6 million for the year ended September 30, 2015. Of our current investment portfolio, 10 portfolio companies originated before December 31, 2008, which represented 25.8% of the entire cost basis of our portfolio, were valued at 60.0% of cost and included our two investments on non-accrual status. Our 38 portfolio companies that originated after December 31, 2008, representing 74.2% of the entire cost basis of our portfolio, were valued at 99.3% of cost and none of which were on non-accrual status.

The cumulative net unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution to stockholders.

Net Unrealized (Appreciation) Depreciation of Other

Net unrealized (appreciation) depreciation of other includes the net change in the fair value of our Credit Facility and our interest rate swap during the year, including the reversal of previously recorded unrealized appreciation or depreciation when gains and losses are realized. During the year ended September 30, 2015, we recorded a net unrealized depreciation of other of $1.3 million, compared to a net unrealized appreciation of $1.1 million for the year ended September 30, 2014. Our Credit Facility was fair valued at $127.3 million and $38.0 million as of September 30, 2015 and 2014, respectively. The interest rate swap was fair valued at $0 as of September 30, 2015 and 2014.

Comparison of the Year Ended September 30, 2014 to the Year Ended September 30, 2013

 

		For the Year Ended September 30,
		2014				2013				$ Change				% Change
INVESTMENT INCOME
Interest income		$	32,170			$	33,533			$	(1,363	)			(4.1	)%
Other income			4,415				2,621				1,794				68.4
Total investment income			36,585				36,154				431				1.2
EXPENSES
Base management fee			5,864				5,622				242				4.3
Loan servicing fee			3,503				3,656				(153	)			(4.2	)
Incentive fee			4,297				4,343				(46	)			(1.1	)
Administration fee			853				647				206				31.8
Interest expense on borrowings			2,628				3,182				(554	)			(17.4	)
Dividend expense on mandatorily redeemable preferred stock			3,338				2,744				594				21.6
Amortization of deferred financing fees			1,247				1,211				36				3.0
Other expenses			2,084				1,540				544				35.3
Expenses, before credits from Adviser			23,814				22,945				869				3.8

 

S-48

---

Table of Contents

		For the Year Ended September 30,
		2014				2013				$ Change				% Change
Credit to base management fee—loan servicing fee			(3,503	)			(3,656	)			153				4.2
Credit to fees from Adviser—other			(2,094	)			(1,521	)			(573	)			(37.7	)
Total expenses, net of credits			18,217				17,768				449				2.5
NET INVESTMENT INCOME			18,368				18,386				(18	)			(0.1	)
NET REALIZED AND UNREALIZED (LOSS) GAIN
Net realized loss on investments and escrows			(12,113	)			(5,231	)			(6,882	)			(131.6	)
Net realized loss on extinguishment of debt			(1,297	)			—				(1,297	)			(100.0	)
Net unrealized appreciation of investments			7,389				15,673				(8,284	)			(52.9	)
Net unrealized (appreciation) depreciation of other			(1,114	)			3,391				(4,505	)			NM
Net (loss) gain from investments, escrows and other			(7,135	)			13,833				(20,968	)			NM
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS		$	11,233			$	32,219			$	(20,986	)			(65.1	)%
PER BASIC AND DILUTED COMMON SHARE
Net investment income		$	0.87			$	0.88			$	(0.01	)			(1.1	)%
Net increase in net assets resulting from operations		$	0.53			$	1.53			$	(1.00	)			(65.4	)%

NM = Not Meaningful

Investment Income

Total interest income decreased by 4.1% for the year ended September 30, 2014, as compared to the prior year period. This decrease was due primarily to the increase in early payoffs at par during the year, resulting in a lower weighted average principal balance of interest-bearing investments compared to the prior year, offset by new investments funding later in the current year. The level of interest income on our investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the year, multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the year ended September 30, 2014, was $280.4 million, compared to $287.3 million for the prior year, a decrease of $6.9 million, or 2.4%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments and remained consistent year over year at 11.5% for the year ended September 30, 2014 and 11.6% for the year ended September 30, 2013.

As of September 30, 2014, three portfolio companies were on non-accrual status, with an aggregate debt cost basis of approximately $51.4 million, or 16.1% of the cost basis of all debt investments in our portfolio. As of September 30, 2013, two portfolio companies were on non-accrual status, with an aggregate debt cost basis of approximately $39.5 million, or 12.6%, of the cost basis of all debt investments in our portfolio. Effective January 1, 2014, we placed Heartland on non-accrual status and effective June 1, 2014 we placed Midwest Metal on non-accrual status. During the year ended September 30, 2014, we sold our investment in LocalTel that had been on non-accrual status. During the year ended September 30, 2013, we sold our investments in three portfolio companies that had been on non-accrual status and wrote off our investment in one portfolio company that had been on non-accrual status. There were no other new non-accruals added and no non-accruals were placed on accrual during the years ended September 30, 2014 and 2013.

Other income for the year ended September 30, 2014, consisted primarily of $0.7 million in dividend income received from FedCap, $0.5 million in success fees received related to the early payoff of Thibaut at par, $0.4 million in legal settlement proceeds received related to a portfolio company previously sold, $0.8 million in aggregate of prepaid success fees, dividend income and other fees received from FDF, $0.1 million in

 

S-49

---

Table of Contents

prepayment fees received from POP, an aggregate of $0.3 million in prepayment fees from the early payoff of five syndicate investments at par and $1.4 million in success fees received related to our sale of substantially all of the assets of Lindmark and the ensuing pay down of our debt investments in Lindmark at par in September 2013. For the year ended September 30, 2013, other income consisted primarily of $1.1 million in success fees received related to the early payoff of Westlake Hardware, Inc. (“Westlake”) at par, $0.6 million in success fees related to the early payoff of CMI Acquisition, LLC (“CMI”) at par and an aggregate of $0.9 million in prepayment fees from the early payoffs of eight of our syndicate investments at par during the prior year.

The following tables list the investment income for our five largest portfolio company investments at fair value during the respective years:

 

		As of September 30, 2014								Year Ended September 30, 2014
Portfolio Company		Fair Value				% of     Portfolio				Investment Income				% of Total Investment Income
RBC Acquisition Corp.		$	28,283				10.1	%		$	2,879				7.9	%
Francis Drilling Fluids, Ltd.			22,837				8.1				2,847				7.8
J. America, Inc.(A)			16,648				5.9				1,444				4.0
Funko, LLC			13,508				4.8				1,100				3.0
Defiance Integrated Technologies, Inc.			13,006				4.6				743				2.0
Subtotal—five largest investments			94,282				33.5				9,013				24.7
Other portfolio companies			187,004				66.5				27,557				75.3
Other non-portfolio company income			—				—				15				—
Total Investment Portfolio		$	281,286				100.0	%		$	36,585				100.0	%

 

		As of September 30, 2013								Year Ended September 30, 2013
Portfolio Company		Fair Value				% of Portfolio				Investment Income				% of Total Investment Income
RBC Acquisition Corp.		$	30,991				12.1	%		$	2,416				6.7	%
Allen Edmonds Shoe Corporation(A)			19,604				7.6				1,717				4.8
Midwest Metal Distribution, Inc.			17,733				6.9				2,240				6.2
Francis Drilling Fluids, Ltd.			14,667				5.7				1,977				5.4
AG Transportation Holdings, LLC(A)			12,984				5.1				1,407				3.9
Subtotal—five largest investments			95,979				37.4				9,757				27.0
Other portfolio companies			160,899				62.6				26,265				72.6
Other non-portfolio company income			—				—				132				0.4
Total Investment Portfolio		$	256,878				100.0	%		$	36,154				100.0	%

 

(A)	New investment during applicable year.

Expenses

Expenses, net of credits from the Adviser, increased for the year ended September 30, 2014, by 2.5% as compared to the prior year. This increase was primarily due to increases in dividend expense on our mandatorily redeemable preferred stock and other expenses, which were partially offset by decreases in the net base management and incentive fees and interest expense on our Credit Facility.

The increase of $0.6 million in dividend expense on our mandatorily redeemable preferred stock during the year ended September 30, 2014, as compared to the prior year, was primarily due to the higher monthly distribution amount on our Series 2021 Term Preferred Stock, which was issued in May 2014 and voluntary redemption of

 

S-50

---

Table of Contents

our Series 2016 Term Preferred Stock, which was issued in November 2011 and redeemed in May 2014, (resulting in more shares of our Series 2021 Term Preferred Stock being issued and outstanding, partially offset by a lower rate on the new issuance). Refer to “Liquidity and Capital Resources—Equity—Term Preferred Stock” for further discussion of our mandatorily redeemable preferred stock.

The increase of $0.5 million in other expenses during the year ended September 30, 2014, as compared to the prior year, was primarily due to the receipt of certain previously reserved for reimbursable deal expenses in the prior year. Additionally, there were increased due diligence expenses related to certain prospective portfolio companies during the year ended September 30, 2014, when compared to the prior year.

Partially offsetting these increases in expenses were decreases in the net base management and incentive fees of $0.2 million each when compared to the prior year, which were due primarily to the larger credits of each of these fees during the year ended September 30, 2014. During both fiscal years ended September 30, 2014 and 2013, there were incentive fees earned during the year; however, partial incentive fee credits were provided by the Adviser to ensure distributions to stockholders were covered entirely by net investment income.

The base management fee, loan servicing fee, incentive fee and associated irrevocable, unconditional and non-contractual credits are computed quarterly, as described under “Investment Advisory and Management Agreement” and “Loan Servicing Fee Pursuant to the Credit Agreement” in Note 4 of the notes to our Consolidated Financial Statements in the accompanying prospectus and are summarized in the table below:

 

		Year Ended September 30,
		2014				2013
Average total assets subject to base management fee(A)		$	293,200			$	281,100
Multiplied by annual base management fee of 2.0%			2.0	%			2.0	%
Base management fee(B)			5,864				5,622
Portfolio fee credit			(797	)			(324	)
Senior syndicated loan fee credit			(117	)			(183	)
Net Base Management Fee		$	4,950			$	5,115
Loan servicing fee(B)		$	3,503			$	3,656
Credit to base management fee—loan servicing fee(B)			(3,503	)			(3,656	)
Net Loan Servicing Fee		$	—			$	—
Incentive fee(B)		$	4,297			$	4,343
Incentive fee credit			(1,180	)			(1,014	)
Net Incentive Fee		$	3,117			$	3,329
Portfolio fee credit		$	(797	)		$	(324	)
Senior syndicated loan fee credit			(117	)			(183	)
Incentive fee credit			(1,180	)			(1,014	)
Credit to Fees from Adviser—Other(B)		$	(2,094	)		$	(1,521	)

 

(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 four most recently completed quarters within the respective years and appropriately adjusted for any share issuances or repurchases during the applicable year.

(B)	Reflected, on a gross basis, as a line item on our Consolidated Statement of Operations located in the accompanying prospectus.

Interest expense on our Credit Facility decreased by $0.6 million for the year ended September 30, 2014, as compared to the prior year, due primarily to decreased borrowings under our Credit Facility, resulting primarily from the repayments made from proceeds on the Series 2021 Term Preferred Stock offering in May 2014. The

 

S-51

---

Table of Contents

weighted average balance outstanding on our Credit Facility decreased year over year from $53.2 million as of September 30, 2013 to $41.9 million as of September 30, 2014, a decrease of 21.2%. Additionally, the decrease in interest expense for the year ended September 30, 2014, as compared to the prior year, was due to the January 2013 amendment of our Credit Facility to remove the LIBOR minimum of 1.5% on advances.

Realized Loss and Unrealized Appreciation

Net Realized Loss on Investments and Escrows

For the year ended September 30, 2014, we recorded a net realized loss on investments and escrows of $12.1 million, which primarily consisted of realized losses of $10.8 million due to our sale of LocalTel for proceeds contingent on an earn-out and $2.8 million due to our sale of BAS for net proceeds of $4.7 million. Partially offsetting these realized losses, was the realized gain of $1.0 million we recognized on the exit of WP Evenflo.

For the year ended September 30, 2013, we recorded a net realized loss on investments and escrows of $5.2 million, which primarily consisted of realized losses of $2.9 million related to the sale of Kansas Cable Holdings, Inc. (“KCH”) for net proceeds of $0.6 million, $2.4 million related to the sale of Viapack, Inc. (“Viapack”) for net proceeds of $5.9 million and $0.9 million related to the write off of Access TV. These realized losses were partially offset by realized gains of $1.0 million, which consisted of a combined $0.5 million of escrowed proceeds and tax refunds received in connection with exits on two investments in fiscal year 2012 and an aggregate of $0.5 million of unamortized discounts related to the early payoffs at par of 12 syndicated investments during the year.

Realized Loss on Extinguishment of Debt

Realized loss on extinguishment of debt of $1.3 million for the year ended September 30, 2014, is comprised primarily of our unamortized deferred financing costs at the time of the voluntary redemption of our then existing Series 2016 Term Preferred Stock in May 2014.

Net Unrealized Appreciation of Investments

Net unrealized appreciation (depreciation) of investments is the net change in the fair value of our investment portfolio during the year, including the reversal of previously recorded unrealized appreciation or depreciation when gains and losses are actually realized. During the year ended September 30, 2014, we recorded net unrealized appreciation of investments in the aggregate amount of $7.4 million, which included the reversal of an aggregate of $18.0 million in cumulative unrealized depreciation primarily related to the repayment of principal in full at par on Junior Golf and the sales of BAS and LocalTel during the fiscal year. Excluding reversals, we recorded $10.6 million in net unrealized depreciation for the year ended September 30, 2014. Over our entire portfolio, the net unrealized depreciation (excluding reversals) for the year ended September 30, 2014, consisted of approximately $16.3 million of depreciation on our debt investments and approximately $5.7 million of appreciation on our equity investments.

 

S-52

---

Table of Contents

The net realized (loss) gain and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2014, were as follows:

 

		Year Ended September 30, 2014
Portfolio Company		Realized (Loss) Gain				Unrealized Appreciation (Depreciation)				Reversal of Unrealized Depreciation (Appreciation)				Net Gain (Loss)
Defiance Integrated Technologies, Inc.		$	—			$	4,594			$	—			$	4,594
BAS Broadcasting			(2,765	)			187				6,905				4,327
Funko, LLC			—				4,162				—				4,162
Legend Communications of Wyoming, LLC			—				2,729				—				2,729
International Junior Golf Training Acquisition Company			—				(6	)			2,261				2,255
Sunshine Media Holdings			—				1,955				—				1,955
North American Aircraft Services, LLC			—				1,755				—				1,755
Francis Drilling Fluids, Ltd.			—				1,186				—				1,186
WP Evenflo Group Holdings, Inc.			988				1,105				(1,002	)			1,091
Sunburst Media—Louisiana, LLC			—				974				—				974
Edge Adhesives Holdings, Inc.			—				579				—				579
Westland Technologies, Inc.			—				405				—				405
J. America, Inc.			—				(352	)			—				(352	)
LocalTel, LLC			(10,768	)			—				10,218				(550	)
Alloy Die Casting Co.			—				(643	)			—				(643	)
Lindmark Acquisition, LLC			—				(827	)			—				(827	)
FedCap Partners, LLC			—				(827	)			—				(827	)
Ameriqual Group, LLC			—				(838	)			—				(838	)
Saunders and Associates			—				(3,945	)			—				(3,945	)
Precision Acquisition Group Holdings, Inc.			—				(4,601	)			—				(4,601	)
RBC Acquisition Corp.			—				(5,330	)			—				(5,330	)
Midwest Metal Distribution, Inc.			—				(12,892	)			—				(12,892	)
Other, net (<$250)			432				43				(406	)			69
Total:		$	(12,113	)		$	(10,587	)		$	17,976			$	(4,724	)

The largest driver of our net unrealized depreciation (excluding reversals) for the year ended September 30, 2014, was the decreases in comparable multiples used in valuations and a decline in the financial and operational performance of Midwest Metal and RBC resulting in $12.9 million and $5.3 million, respectively, of net unrealized depreciation during the year. Partially offsetting this net unrealized depreciation for the year ended September 30, 2014, was the net unrealized appreciation on Defiance of $4.6 million and on Funko of $4.2 million due to increases in comparable multiples used in valuations and incremental improvements in the financial and operational performance of these portfolio companies.

During the year ended September 30, 2013, we recorded net unrealized appreciation of investments in the aggregate amount of $15.7 million, which included the reversal of an aggregate of $26.0 million in unrealized depreciation primarily related to the repayment of principal in full at par on Lindmark, the sales of Viapack and KCH, and the write off of Access TV. Excluding reversals, we recorded $10.4 million in net unrealized depreciation for the year ended September 30, 2013. Over our entire portfolio, the net unrealized depreciation (excluding reversals) for the year ended September 30, 2013, consisted of approximately $5.3 million of depreciation on our debt investments and approximately $5.1 million of depreciation on our equity investments.

 

S-53

---

Table of Contents

The net realized (loss) gain and unrealized (depreciation) appreciation across our investments for the year ended September 30, 2013, were as follows:

 

		Year Ended September 30, 2013
Portfolio Company		Realized (Loss) Gain				Unrealized (Depreciation) Appreciation				Reversal of Unrealized Depreciation (Appreciation)				Net Gain (Loss)
Lindmark Acquisition, LLC		$	—			$	(224	)		$	14,006			$	13,782
Viapack, Inc.			(2,407	)			—				6,660				4,253
RBC Acquisition Corp.			—				2,159				—				2,159
Sunshine Media Holdings			—				1,632				—				1,632
Westlake Hardware, Inc.			—				—				640				640
GFRC Holdings, LLC			—				572				—				572
North American Aircraft Services LLC			—				505				8				513
CMI Acquisition, LLC			—				(927	)			1,426				499
Kansas Cable Holdings, Inc.			(2,906	)			401				2,922				417
Funko, LLC			—				396				—				396
FedCap Partners, LLC			—				384				—				384
Allison Publications, LLC			—				265				—				265
Access Television Network, Inc.			(872	)			—				903				31
Saunders & Associates			—				(296	)			—				(296	)
WP Evenflo Group Holdings, Inc.			—				(443	)			3				(440	)
Francis Drilling Fluids, Ltd.			—				(718	)			—				(718	)
Westland Technologies, Inc.			—				(825	)			—				(825	)
Targus Group International, Inc.			—				(881	)			—				(881	)
Heartland Communications Group			—				(951	)			—				(951	)
AG Transportation Holdings, LLC			—				(1,078	)			—				(1,078	)
Precision Acquisition Group Holdings, Inc.			—				(1,193	)			—				(1,193	)
LocalTel, LLC			—				(1,209	)			—				(1,209	)
BAS Broadcasting			—				(1,493	)			—				(1,493	)
Legend Communications of Wyoming, LLC			—				(1,557	)			—				(1,557	)
Sunburst Media—Louisiana, LLC			—				(1,650	)			—				(1,650	)
Midwest Metal Distribution, Inc.			—				(2,101	)			—				(2,101	)
Defiance Integrated Technologies, Inc.			—				(2,246	)			—				(2,246	)
Other, net (<$250)			954				1,123				(540	)			1,537
Total:		$	(5,231	)		$	(10,355	)		$	26,028			$	10,442

The largest driver of our net unrealized depreciation (excluding reversals) for the year ended September 30, 2013, was due to a decline in financial and operational performance of Defiance and Midwest Metal resulting in $2.2 million and $2.1 million, respectively, of net unrealized depreciation during the year. Partially offsetting this net unrealized depreciation was the net unrealized appreciation on RBC of $2.2 million during the year ended September 30, 2013, due to an incremental improvement in the financial and operational performance of this portfolio company.

As of September 30, 2014, the fair value of our investment portfolio was less than its cost basis by approximately $68.0 million and our entire investment portfolio was valued at 80.5% of cost, as compared to cumulative net unrealized depreciation of $75.4 million and a valuation of our entire portfolio at 77.3% of cost as of September 30, 2013. This decrease year over year in the cumulative unrealized depreciation on investments represents net unrealized appreciation of $10.1 million for the year ended September 30, 2014. Of our current investment portfolio, 11 portfolio companies originated before December 31, 2007, which represented 39.0% of the entire cost basis of our portfolio, were valued at 54.0% of cost and included our three investments on non-accrual status. Our 34 portfolio companies that originated after December 31, 2007, representing 61.0% of the entire cost basis of our portfolio, were valued at 97.5% of cost and none of which were on non-accrual status.

 

S-54

---

Table of Contents

Net Unrealized (Appreciation) Depreciation of Other

Net unrealized (appreciation) depreciation of other includes the net change in the fair value of our Credit Facility and our interest rate swap during the year, including the reversal of previously recorded unrealized appreciation or depreciation when gains and losses are realized. During the year ended September 30, 2014, we recorded a net unrealized appreciation of other of $1.1 million, compared to a net unrealized depreciation of $3.4 million for the year ended September 30, 2013. Our Credit Facility was fair valued at $38.0 million and $47.1 million as of September 30, 2014 and 2013, respectively. The interest rate swap was fair valued at $0 and $4 as of September 30, 2014 and 2013, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility, make distributions to our stockholders, pay management fees to the Adviser, and for other operating expenses. Net cash provided by operating activities during the nine months ended June 30, 2016, was $51.9 million, as compared to net cash used in operating activities of $52.3 million for the nine months ended June 30, 2015. This change was primarily due to increased investment repayments from sales and payoffs and a decrease in purchases of new investments. Repayments and proceeds from sales of investments totaled $98.4 million during the nine months ended June 30, 2016 compared to $28.6 million during the nine months ended June 30, 2015. Purchases of investments were $59.9 million during the nine months ended June 30, 2016 compared to $93.8 million during the nine months ended June 30, 2015.

As of June 30, 2016, we had loans to, syndicated participations in, or equity investments in 43 private companies with an aggregate cost basis of approximately $386.3 million. As of June 30, 2015, we had loans to, syndicated participations in and/or equity investments in 46 private companies with an aggregate cost basis of approximately $401.1 million.

The following table summarizes our total portfolio investment activity during the nine months ended June 30, 2016 and 2015, at fair value:

 

		Nine Months Ended June 30,
		2016				2015
Beginning investment portfolio, at fair value		$	365,891			$	281,286
New investments			54,300				65,348
Disbursements to existing portfolio companies			5,562				28,417
Scheduled principal repayments			(1,169	)			(776	)
Unscheduled principal repayments			(77,427	)			(9,284	)
Net proceeds from sales			(19,829	)			(18,541	)
Net unrealized (depreciation) appreciation			(24,295	)			(1,356	)
Reversal of prior period (appreciation) depreciation			(9,452	)			15,518
Net realized gain (loss)			9,837				(14,024	)
Increase in investments due to PIK (A) or other			4,311				463
Cost adjustments on non-accrual loans			388				384
Net change in premiums, discounts and amortization			109				(219	)
Investment Portfolio, at Fair Value		$	308,226			$	347,216

 

(A)	Paid-in-kind (“PIK”) interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan.

 

S-55

---

Table of Contents

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2016:

 

				Amount(A)
For the remaining three months ending September 30:		2016		$	38,702
For the fiscal year ending September 30:		2017			43,464
		2018			28,833
		2019			45,661
		2020			91,225
		Thereafter			100,877
		Total contractual repayments		$	348,762
		Equity investments			38,036
		Adjustments to cost basis on debt investments			(472	)
		Cost basis of investments held at June 30, 2016:		$	386,326

 

(A)	Subsequent to June 30, 2016, one debt investment with a principal balance of $29.0 million which previously had a maturity date during the fiscal year ending September 30, 2016, was extended to mature during the fiscal year ended September 30, 2018.

Net cash used by operating activities for the year ended September 30, 2015, was $74.5 million as compared to net cash provided by operating activities of $0.5 million for the year ended September 30, 2014. The increase in cash used by operating activities was primarily due to the increase in purchases of investments and a decrease in repayments on investments during the year ended September 30, 2015. For the year ended September 30, 2013, net cash provided by operating activities was $32.1 million, which was primarily driven by principal repayments and net proceeds from sales of investments during fiscal year 2013.

As of September 30, 2015, we had loans to, syndicated participations in or equity investments in 48 private companies, with an aggregate cost basis of approximately $410.2 million. As of September 30, 2014, we had loans to, syndicated participations in or equity investments in 45 private companies, with an aggregate cost basis of approximately $349.3 million.

The following table summarizes our total portfolio investment activity during the years ended September 30, 2015 and 2014:

 

		Year Ended September 30,
		2015				2014
Beginning investment portfolio, at fair value		$	281,286			$	256,878
New investments			102,299				81,731
Disbursements to existing portfolio companies			33,824				20,314
Scheduled principal repayments			(1,182	)			(2,802	)
Unscheduled principal repayments			(12,559	)			(65,058	)
Net proceeds from sales of investments			(28,602	)			(4,700	)
Net unrealized depreciation of investments			(10,953	)			(10,587	)
Reversal of prior period net depreciation of investments on realization			34,600				17,976
Net realized loss on investments			(33,666	)			(12,163	)
Increase in investment balance due to PIK interest(A)			665				288
Cost adjustments on non-accrual loans			328				(717	)
Net change in premiums, discounts and amortization			(149	)			126
Ending Investment Portfolio, at Fair Value		$	365,891			$	281,286

 

(A)	PIK interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan.

 

S-56

---

Table of Contents

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, at September 30, 2015.

 

Year Ending September 30,		Amount
2016		$	102,851
2017			11,072
2018			34,499
2019			62,609
Thereafter			163,904
Total contractual repayments		$	374,935
Equity investments			36,319
Adjustments to cost basis on debt investments			(1,010	)
Investment Portfolio as of September 30, 2015, at Cost:		$	410,244

Financing Activities

Net cash used in financing activities totaled $50.7 million for the nine months ended June 30, 2016 and consisted primarily of net repayments on our Credit Facility of $54.0 million and $14.6 million of distributions to common stockholders, partially offset by $18.5 million in net proceeds from our common stock offering during the nine months ended June 30, 2016. Net cash provided by financing activities totaled $53.8 million for the nine months ended June 30, 2015 and consisted primarily of net proceeds from borrowings on our Credit Facility of $67.9 million, partially offset by $13.3 million of distributions to common stockholders.

Net cash provided by financing activities for the year ended September 30, 2015 of $72.0 million consisted primarily of $90.6 million in net borrowings on our Credit Facility and $17.7 million in distributions to common stockholders.

Net cash used in financing activities for the year ended September 30, 2014 of $8.1 million consisted primarily of $17.6 million in distributions to common stockholders and $10.2 million in net repayments on our Credit Facility. These financing activities were partially offset by the gross proceeds of $61.0 million from the issuance of our Series 2021 Term Preferred Stock, net of the voluntary redemption of $38.5 million of the then existing Series 2016 Term Preferred Stock in May 2014.

Net cash used in financing activities for the year ended September 30, 2013 of $28.1 million consisted primarily of $17.6 million in distributions to common stockholders and $11.9 million in net repayments on our Credit Facility.

Distributions to Stockholders

Common Stock Distributions

To qualify to be taxed as a RIC and thus avoid corporate-level federal income tax on the income that we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90.0% of our investment company taxable income. Additionally, our Credit Facility has a covenant that 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. In accordance with these requirements, we paid monthly cash distributions of $0.07 per common share for each of the nine months from October 2015 through June 2016, which totaled an aggregate of $14.6 million. In July 2016, our Board of Directors declared a monthly distribution of $0.07 per common share for each of July, August, and September 2016. Our Board of Directors declared these distributions to our stockholders based on our estimates of our investment company taxable income for the fiscal year ending September 30, 2016.

 

S-57

---

Table of Contents

For the fiscal year ended September 30, 2015, which includes the nine months ended June 30, 2015, our aggregate distributions to common stockholders totaled approximately $17.7 million, which were declared based on estimates of our investment company taxable income for that fiscal year. For the fiscal year ended September 30, 2015, our current and accumulated earnings and profits (after taking into account our mandatorily redeemable preferred stock distributions), exceeded common stock distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $1.7 million of the first common distributions paid in fiscal year 2016 as having been paid in the respective prior year. For each of the years ended September 30, 2014 and 2013, common stockholder distributions declared and paid exceeded our current and accumulated earnings and profits (after taking into account our mandatorily redeemable preferred dividends), which resulted in an estimated partial return of capital of approximately $15.2 million and $1.3 million, respectively. The returns of capital resulted primarily from accounting principles generally accepted in the U.S. (“GAAP”) realized losses being recognized as ordinary losses for federal income tax purposes in each of those fiscal years.

The characterization of the common stockholder distributions declared and paid for the fiscal year ending September 30, 2016 will be determined at fiscal year-end based upon our investment company taxable income for the full fiscal year and distributions paid during the full fiscal year. Such a characterization made on a quarterly basis may not be representative of the actual full fiscal year characterization.

Preferred Stock Dividends

We paid monthly cash dividends of $0.140625 per share of our Series 2021 Term Preferred Stock for each of the nine months from October 2015 through June 2016, which totaled an aggregate of $3.1 million. In July 2016, our Board of Directors declared a monthly dividend of $0.140625 per share of Series 2021 Term Preferred stock for each of July, August, and September 2016. For federal income tax purposes, dividends paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.

During the year ended September 30, 2015, we paid monthly cash dividends of $0.140625 per share of our Series 2021 Term Preferred Stock for each month, which totaled an aggregate of $4.1 million, including monthly cash dividends of $0.1484375 per share of our Series 2021 Term Preferred Stock for each of the nine months from October 2013 through May 2014, which totaled an aggregate of $2.3 million.

Equity

Registration Statement

We filed our Registration Statement on December 18, 2015, and subsequently filed Pre-Effective Amendment No. 1 on March 17, 2016 and Pre-Effective Amendment No. 2 on March 29, 2016, which the SEC declared effective on March 29, 2016. Our Registration Statement registered 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.

Common Stock

At our Annual Meeting of Stockholders held on February 11, 2016, our stockholders approved a proposal authorizing us to sell shares of our common stock at a price below our then current NAV per share subject to certain limitations (including, but not limited to, that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each such sale) for a period of one year from the date of approval, provided that our Board of Directors makes certain determinations prior to any such sale.

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

 

S-58

---

Table of Contents

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. During the year ended September 30, 2015, we sold an aggregate of 131,462 shares of our common stock under the Sales Agreements for net proceeds, net of underwriter’s commissions and other offering expenses borne by us, of approximately $1.0 million. We did not sell any shares under the Sales Agreements during the nine months ended June 30, 2016.

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. Gross proceeds totaled $17.1 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $16.0 million. In connection with the offering, in November 2015, the underwriters exercised their option to purchase an additional 300,000 shares at the public offering price to cover over-allotments, which resulted in gross proceeds of $2.6 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $2.4 million. The net proceeds of this offering were used to repay borrowings under our Credit Facility.

We may issue equity securities to obtain additional capital in the future. However, we cannot determine the terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock continues to trade at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders.

In January 2016, our Board of Directors authorized a share repurchase program for up to an aggregate of $7.5 million of the Company’s common stock. The repurchase program does not obligate the Company to acquire any particular number of shares of common stock. Refer to “Overview—Recent Developments” for further discussion of our common stock share repurchase program and purchases made during the quarter ended June 30, 2016.

Term Preferred Stock

Pursuant to our prior registration statement, in May 2014, we completed a public offering of approximately 2.4 million shares of our Series 2021 Term Preferred Stock, par value $0.001 per share, at a public offering price of $25.00 per share and a 6.75% rate. Gross proceeds totaled $61.0 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were $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.

Our Series 2021 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend rate 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, currently is only the 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” (thus, our Series 2021 Term Preferred Stock) as of September 30, 2015 and June 30, 2016 was 199.3% and 235.4%, respectively.

 

S-59

---

Table of Contents

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 June 30, 2016, we have not redeemed, nor have we been required to redeem, any shares of our outstanding Series 2021 Term Preferred Stock.

Revolving Credit Facility

On May 1, 2015, we, through Business Loan, entered into a Fifth Amended and Restated 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 London Interbank Offered Rate (“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 other terms and conditions to among other items. Our Credit Facility was arranged by KeyBank, as administrative agent, lead arranger and a lender. 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 May 1, 2020. 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 Facility’s 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 on 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 Facility’s revolving period end date of January 19, 2019.

Interest is payable monthly during the term of our Credit Facility. 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.

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 and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank, which also serves as the trustee of the account, 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’ consents. Our Credit Facility 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, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $205.0 million plus 50% 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 $214.5 million as of June 30, 2016, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Sections 18 and 61 of the 1940 Act and (iii)&nbs