10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 814-00861

 

 

Fidus Investment Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   27-5017321

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

1603 Orrington Avenue, Suite 1005

Evanston, Illinois

  60201
(Address of Principal Executive Offices)   (Zip Code)

(847) 859-3940

(Registrant’s telephone number, including area code)

n/a

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 5, 2015, the Registrant had outstanding 16,268,143 shares of common stock, $0.001 par value.

 

 

 


Table of Contents

FIDUS INVESTMENT CORPORATION

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q

 

PART I — FINANCIAL INFORMATION   

Item 1.

   Financial Statements.      3   
   Consolidated Statements of Assets and Liabilities — June 30, 2015 (unaudited) and December 31, 2014      3   
  

Consolidated Statements of Operations — Three and Six Months Ended June  30, 2015 (unaudited) and 2014 (unaudited)

    
4
  
  

Consolidated Statements of Changes in Net Assets — Six Months Ended June  30, 2015 (unaudited) and 2014 (unaudited)

     5   
  

Consolidated Statements of Cash Flows — Six Months Ended June  30, 2015 (unaudited) and 2014 (unaudited)

     6   
   Consolidated Schedules of Investments — June 30, 2015 (unaudited) and December 31, 2014      7   
   Notes to Consolidated Financial Statements (unaudited)      13   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations.      28   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk.      40   

Item 4.

   Controls and Procedures.      40   
PART II — OTHER INFORMATION   

Item 1.

   Legal Proceedings.      41   

Item 1A.

   Risk Factors.      41   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds.      41   

Item 3.

   Defaults Upon Senior Securities.      41   

Item 4.

   Mine Safety Disclosures.      41   

Item 5.

   Other Information.      41   

Item 6.

   Exhibits.      42   

Signatures

    
43
  

Exhibit Index

     44   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Assets and Liabilities

(In thousands, except shares and per share data)

 

     June 30,        
     2015     December 31,  
     (unaudited)     2014  

ASSETS

    

Investments, at fair value

    

Control investments (cost: $10,898 and $10,460, respectively)

   $ 778      $ 4,244   

Affiliate investments (cost: $92,552 and $81,979, respectively)

     99,444        86,200   

Non-control/non-affiliate investments (cost: $316,557 and $298,899, respectively)

     319,912        305,911   
  

 

 

   

 

 

 

Total investments, at fair value (cost: $420,007 and $391,338, respectively)

     420,134        396,355   

Cash and cash equivalents

     14,542        29,318   

Interest receivable

     5,025        4,460   

Deferred financing costs (net of accumulated amortization of $3,270 and $2,784, respectively)

     4,576        4,567   

Prepaid expenses and other assets

     1,270        887   
  

 

 

   

 

 

 

Total assets

   $ 445,547      $ 435,587   
  

 

 

   

 

 

 

LIABILITIES

    

SBA debentures

   $ 179,700      $ 173,500   

Borrowings under credit facility

     10,500        10,000   

Accrued interest and fees payable

     2,606        2,853   

Due to affiliates

     5,260        5,395   

Taxes payable

     —          328   

Accounts payable and other liabilities

     559        248   
  

 

 

   

 

 

 

Total liabilities

     198,625        192,324   
  

 

 

   

 

 

 

Commitments and contingencies (Note 7)

    

NET ASSETS

    

Common stock, $0.001 par value (100,000,000 shares authorized, 16,268,143 and 16,051,037 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively)

     16        16   

Additional paid-in capital

     246,612        243,008   

Undistributed net investment income

     12,101        12,433   

Accumulated net realized (loss) gain on investments, net of taxes and distributions

     (10,588     (15,999

Accumulated net unrealized appreciation (depreciation) on investments

     (1,219     3,805   
  

 

 

   

 

 

 

Total net assets

     246,922        243,263   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 445,547      $ 435,587   
  

 

 

   

 

 

 

Net asset value per common share

   $ 15.18      $ 15.16   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

3


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Operations (unaudited)

(In thousands, except shares and per share data)

 

     Three months ended June 30,     Six months ended June 30,  
     2015     2014     2015     2014  

Investment income:

        

Interest income

        

Control investments

   $ 92      $ —        $ 220      $ —     

Affiliate investments

     2,496        2,280        4,841        4,757   

Non-control/non-affiliate investments

     9,528        7,026        18,978        14,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     12,116        9,306        24,039        18,857   

Dividend income

        

Affiliate investments

     44        31        74        61   

Non-control/non-affiliate investments

     114        482        221        829   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend income

     158        513        295        890   

Fee income

        

Control investments

     10        —          10        —     

Affiliate investments

     158        —          158        388   

Non-control/non-affiliate investments

     338        783        1,102        1,005   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     506        783        1,270        1,393   

Interest on idle funds and other income

     19        (21     33        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     12,799        10,581        25,637        21,140   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Interest and financing expenses

     2,303        1,795        4,433        3,548   

Base management fee

     1,864        1,393        3,655        2,758   

Incentive fee

     1,557        853        3,156        1,695   

Administrative service expenses

     347        430        715        793   

Professional fees

     220        213        659        610   

Other general and administrative expenses

     463        376        756        753   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     6,754        5,060        13,374        10,157   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     6,045        5,521        12,263        10,983   

Income tax provision

     6        12        (5     30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     6,039        5,509        12,268        10,953   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses) on investments:

        

Realized gains on affiliate investments

     —          —          —          166   

Net realized gains on non-control/non-affiliate investments

     5,277        59        5,277        1,752   

Net change in unrealized (depreciation) appreciation on investments

     (5,070     (2,140     (4,890     (6,048

Income tax (provision) on realized gains on investments

     —          —          —          (17
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain (loss) on investments

     207        (2,081     387        (4,147
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 6,246      $ 3,428      $ 12,655      $ 6,806   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per common share data:

        

Net investment income per share-basic and diluted

   $ 0.37      $ 0.40      $ 0.76      $ 0.80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations per share-basic and diluted

   $ 0.39      $ 0.25      $ 0.78      $ 0.49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.40      $ 0.38      $ 0.78      $ 0.76   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding - basic and diluted

  

 

16,186,688

  

    13,765,954        16,123,722        13,760,623   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

4


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Changes in Net Assets (unaudited)

(In thousands, except shares)

 

                                Accumulated              
                                Net Realized     Accumulated        
                                (Loss) Gain on     Net Unrealized        
     Common Stock      Additional      Undistributed     Investments,     Appreciation        
     Number      Par      Paid in      Net Investment     net of taxes and     (Depreciation)     Total  
     of Shares      Value      Capital      Income     distributions     on Investments     Net Assets  

Balances at December 31, 2013

     13,755,232       $ 14       $ 206,123       $ 3,221      $ 11,212      $ (9,445   $ 211,125   

Public offerings of common stock, net of expenses

     —           —           —           —          —          —          —     

Shares issued under dividend reinvestment plan

     19,869         —           393         —          —          —          393   

Net increase in net assets resulting from operations

     —           —           —           10,953        1,901        (6,048     6,806   

Dividends declared

     —           —           —           (10,458     —          —          (10,458
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2014

     13,775,101       $ 14       $ 206,516       $ 3,716      $ 13,113      $ (15,493   $ 207,866   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2014

     16,051,037       $ 16       $ 243,008       $ 12,433      $ (15,999   $ 3,805      $ 243,263   

Public offerings of common stock, net of expenses

     190,623         —           3,174         —          —          —          3,174   

Shares issued under dividend reinvestment plan, net of expenses

     26,483         —           430         —          —          —          430   

Net increase in net assets resulting from operations

     —           —           —           12,268        5,411        (5,024     12,655   

Dividends declared

     —           —           —           (12,600     —          —          (12,600
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2015

     16,268,143       $ 16       $ 246,612       $ 12,101      $ (10,588   $ (1,219   $ 246,922   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

5


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

     Six months ended June 30,  
     2015     2014  

Cash Flows from Operating Activities:

  

 

Net increase in net assets resulting from operations

   $ 12,655      $ 6,806   

Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:

    

Net change in unrealized depreciation on investments

     4,890        6,048   

Net realized (gain) on investments

     (5,277     (1,918

Interest and dividend income paid-in-kind

     (2,630     (2,838

Accretion of original issue discount

     (300     (349

Accretion of loan origination fees

     (324     (223

Purchase of investments

     (67,903     (24,650

Proceeds from sales and repayments of investments

     47,388        20,269   

Proceeds from loan origination fees

     377        169   

Amortization of deferred financing costs

     486        273   

Changes in operating assets and liabilities:

    

Interest receivable

     (565     (1,397

Prepaid expenses and other assets

     (383     (442

Accrued interest and fees payable

     253        14   

Due to affiliates

     (135     (1,160

Taxes payable

     (328     (684

Accounts payable and other liabilities

     311        220   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (11,485     138   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Proceeds from stock offerings, net of expenses

     3,174        —     

Proceeds received from SBA debentures

     6,200        1,000   

Net proceeds received from borrowings under credit facility

     500        —     

Payment of deferred financing costs

     (995     (917

Dividends paid to stockholders, including expenses

     (12,170     (10,065

Taxes paid on deemed distribution

     —          (2,887
  

 

 

   

 

 

 

Net cash (used in) financing activities

     (3,291     (12,869
  

 

 

   

 

 

 

Net (decrease) in cash and cash equivalents

     (14,776     (12,731

Cash and cash equivalents:

    

Beginning of period

     29,318        53,418   
  

 

 

   

 

 

 

End of period

   $ 14,542      $ 40,687   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash payments for interest

   $ 3,694      $ 3,261   

Cash payments for taxes, net of tax refunds received

   $ 323      $ 3,618   

Non-cash financing activities:

    

Shares issued under dividend reinvestment plan

   $ 432      $ 393   

See Notes to Consolidated Financial Statements (unaudited).

 

6


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (unaudited)

June 30, 2015

(In thousands, except shares)

 

Portfolio Company(1) (2)   Industry   Investment Type (3)   Rate (4)
Cash/PIK
  Maturity   Principal
Amount
    Cost     Fair
Value
   

Percent
of Net

Assets

 

Control Investments (5)

               

Paramount Building Solutions, LLC

  Retail Cleaning   Subordinated Note (11)   7.0%/3.0%   12/31/2017   $ 1,132      $ 1,132      $ 778     
    Subordinated Note (11)   7.0%/7.0%   12/31/2017     2,927        2,927        —       
    Warrant (1,086,035 units) (7)           —          —       
    Preferred Equity
(5,000,000 units) (7)
          5,339        —       
    Common Equity (107,143 units) (7)           1,500        —       
           

 

 

   

 

 

   
              10,898        778        0
           

 

 

   

 

 

   

Total Control Investments

              10,898        778        0
           

 

 

   

 

 

   

 

 

 

Affiliate Investments (5)

               

Apex Microtechnology, Inc.

  Electronic   Warrant (2,293 units)           220        285     
  Components Supplier   Common Equity (11,690 shares)           1,169        1,482     
           

 

 

   

 

 

   
              1,389        1,767        1

FAR Research Inc.

  Specialty Chemicals   Senior Secured Loan (10)   11.8%/0.0%   3/31/2019     7,600        7,571        7,600     
    Revolving Loan ($1,750 commitment) (9)   11.8%/0.0%   3/31/2019     136        129        136     
    Common Equity (10 units)           1,000        444     
           

 

 

   

 

 

   
              8,700        8,180        3

Inflexxion, Inc.

  Business Services   Senior Secured Loan   12.5%/0.0%   12/16/2019     3,950        3,929        3,950     
    Revolving Loan ($1,000 commitment) (8)(9)   12.5%/0.0%   12/16/2019     —          (4     —       
    Preferred Equity (1,400 units)           1,400        1,277     
           

 

 

   

 

 

   
              5,325        5,227        2

Malabar International

  Aerospace & Defense   Subordinated Note (10)   12.5%/2.5%   5/21/2017     7,356        7,336        7,356     
  Manufacturing   Preferred Equity (1,494 shares) (6)   6.0%/0.0%         1,992        4,336     
           

 

 

   

 

 

   
              9,328        11,692        5

Medsurant Holdings, LLC

  Healthcare Services   Subordinated Note   9.5%/4.5%   7/12/2016     10,361        10,031        10,361     
    Preferred Equity (126,662 units) (7)           1,346        1,259     
    Warrant (505,176 units) (7)           4,516        4,556     
           

 

 

   

 

 

   
              15,893        16,176        7

Microbiology Research Associates, Inc.

  Healthcare Services   Senior Secured Loan   6.0%/0.0%   5/13/2020     3,750        3,732        3,732     
    Revolving Loan ($500 commitment) (8)(9)   6.0%/0.0%   5/13/2020     —          (2     (2  
    Subordinated Note   12.5%/0.0%   11/13/2020     6,250        6,219        6,219     
    Common Equity (1,000,000 units) (9)           1,000        1,000     
           

 

 

   

 

 

   
              10,949        10,949        4

Pfanstiehl, Inc.

  Healthcare Products   Subordinated Note   12.0%/1.5%   9/29/2018     6,208        6,173        6,208     
    Common Equity (8,500 units) (9)           850        4,077     
           

 

 

   

 

 

   
              7,023        10,285        4

Safety Products Group, LLC

  Safety Products   Subordinated Note   12.0%/1.5%   12/30/2018     10,000        9,969        10,000     
 

Manufacturing

  Preferred Equity (749 units) (7) (9)           749        811     
    Common Equity (676 units) (7) (9)           1        —       
           

 

 

   

 

 

   
              10,719        10,811        4

Trantech Radiator Products, Inc.

  Utility Equipment   Subordinated Note (9)   12.0%/1.8%   5/4/2017     9,602        9,586        9,602     
  Manufacturing   Common Equity (6,875 shares) (9)           688        943     
           

 

 

   

 

 

   
               
              10,274        10,545        4

Westminster Cracker Company, Inc.

  Specialty Cracker   Preferred Equity (95,798 units)           70        163     
  Manufacturing   Common Equity (1,208,197 units)           1,208        1,798     
           

 

 

   

 

 

   
              1,278        1,961        1

World Wide Packaging, LLC

  Consumer Products   Subordinated Note (9)   12.0%/1.8%   10/26/2018     10,186        10,156        10,186     
    Common Equity (1,517,573 units) (7) (9)           1,518        1,665     
           

 

 

   

 

 

   
              11,674        11,851        5
           

 

 

   

 

 

   

Total Affiliate Investments

              92,552        99,444        40
           

 

 

   

 

 

   

 

 

 

 

7


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2015

(In thousands, except shares)

Portfolio Company(1) (2)   Industry   Investment Type (3)   Rate (4)
Cash/PIK
  Maturity   Principal
Amount
    Cost     Fair
Value
   

Percent
of Net

Assets

 

Non-Control/Non-Affiliate Investments (5)

               

ACFP Management, Inc.

  Restaurants   Common Equity (1,000,000 units) (9)         $ 1,091      $ 1,755        1

Allied 100 Group, Inc.

  Healthcare Products   Subordinated Note (10)   11.5%/0.0%   5/26/2020   $ 13,000        12,942        13,000     
    Common Equity (1,250,000 units) (9)           1,250        1,267     
           

 

 

   

 

 

   
              14,192        14,267        6

Anatrace Products, LLC

  Healthcare Products   Senior Secured Loan   11.5%/1.5%   10/11/2018     9,054        9,026        9,054     
    Revolving Loan ($500 commitment) (8)   11.5%/1.5%   10/11/2018     —          (1     (1  
    Common Equity (360,000 shares) (9)           360        542     
           

 

 

   

 

 

   
              9,385        9,595        4

Brook & Whittle Limited

  Printing Services   Subordinated Note   12.0%/4.8%   12/31/2016     7,474        7,474        7,289     
    Subordinated Note   12.0%/2.0%   12/31/2016     2,273        2,273        2,135     
    Warrant (1,051 shares)           285        24     
    Common Equity - Series A (148 shares)           110        3     
    Common Equity - Series D (527 shares)           53        82     
           

 

 

   

 

 

   
              10,195        9,533        4

Caldwell & Gregory, LLC

  Laundry Services   Subordinated Note   11.5%/1.0%   11/30/2018     1,532        1,513        1,532     
    Subordinated Note   0.0%/12.0%   5/31/2019     3,838        3,639        3,837     
    Common Equity (500,000 units) (7)           500        562     
    Warrant (242,121 units) (7)           242        272     
           

 

 

   

 

 

   
              5,894        6,203        3

Carlson Systems Holdings, Inc.

  Specialty Distribution   Subordinated Note (10)   11.5%/0.0%   5/20/2020     16,000        15,928        16,000     
    Common Equity (15,000 units) (9)           1,500        1,578     
           

 

 

   

 

 

   
              17,428        17,578        7

Channel Technologies Group, LLC

 

Component

Manufacturing

  Subordinated Note   11.0%/1.3%   4/10/2019     7,000        6,958        7,000     
    Preferred Equity (612 units) (7) (9)           1,139        759     
    Common Equity (612,432 units) (7) (9)           —          —       
           

 

 

   

 

 

   
              8,097        7,759        3

Continental Anesthesia Management, LLC

  Healthcare Services   Senior Secured Loan   10.0%/4.0%   4/15/2016     10,464        10,464        10,300     
    Warrant (263 shares)           276        —       
           

 

 

   

 

 

   
              10,740        10,300        4

EBL, LLC (EbLens)

  Retail   Common Equity (750,000 units) (7) (9)           750        1,142        0

FDS Avionics Corp.

  Aerospace & Defense   Subordinated Note   12.3%/0.0%   4/1/2020     5,200        5,177        5,200     

 

(dba Flight Display Systems)

  Manufacturing   Common Equity (200 units) (9)           2,000        1,721     
           

 

 

   

 

 

   
              7,177        6,921        3

FTH Acquisition Corp. VII

  Information   Subordinated Note   13.0%/0.0%   9/30/2016     8,395        8,395        8,053     
  Technology Services   Preferred Equity (887,122 shares)           887        —       
           

 

 

   

 

 

   
              9,282        8,053        3

Grindmaster Corporation

  Consumer Products   Subordinated Note   11.5%/0.0%   10/31/2019     10,500        10,460        10,500        4

Ice House America, LLC

  Vending Equipment   Subordinated Note (9)   12.0%/2.0%   1/1/2020     5,046        4,827        4,827     
 

Manufacturing

  Warrant (1,957,895 units) (7) (9)           216        81     
           

 

 

   

 

 

   
              5,043        4,908        2

IOS Acquisitions, Inc.

  Oil & Gas Services   Common Equity (2,152 units) (9)           128        21        0

Jacob Ash Holdings, Inc.

  Apparel Distribution   Subordinated Note (10)   13.0%/4.0%   6/30/2018     4,000        3,993        4,000     
    Subordinated Note   13.0%/0.0%   6/30/2018     963        954        963     
    Preferred Equity (66,138 shares)(6)   0.0%/15.0%   6/30/2018       857        868     
    Warrant (63,492 shares)           67        —       
           

 

 

   

 

 

   
              5,871        5,831        2

K2 Industrial Services, Inc.

  Industrial Cleaning   Subordinated Note   2.9%/12.3%   5/23/2017     16,447        16,406        16,415     
 

& Coatings

  Preferred Equity - Series A (1,200 shares)           1,200        417     
    Preferred Equity - Series B (74 shares)           68        88     
           

 

 

   

 

 

   
              17,674        16,920        7

Lightning Diversion Systems, LLC

  Aerospace & Defense   Senior Secured Loan   9.5%/0.0%   12/20/2018     9,198        9,160        9,198     
 

Manufacturing

  Revolving Loan ($1,000 commitment) (8)   9.5%/0.0%   12/20/2018     —          (2     (2  
    Common Equity (600,000 units)           —          3,183     
           

 

 

   

 

 

   
              9,158        12,379        5

MedPlast, LLC

  Healthcare Products   Subordinated Note (9)   11.0%/1.5%   3/31/2019     10,261        10,210        10,261     
    Preferred Equity (188 shares) (6) (9)   0.0%/8.0%         215        215     
    Common Equity (3,728 shares) (9)           62        100     
           

 

 

   

 

 

   
              10,487        10,576        4

 

8


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2015

(In thousands, except shares)

Portfolio Company(1) (2)   Industry   Investment Type (3)   Rate (4)
Cash/PIK
  Maturity   Principal
Amount
    Cost     Fair
Value
   

Percent
of Net

Assets

 

National Truck Protection Co., Inc.

  Financial Services   Senior Secured Loan   13.5%/2.0%   9/13/2018   $ 11,989      $ 11,933      $ 11,988     
    Common Equity (1,109 shares)           758        1,801     
           

 

 

   

 

 

   
              12,691        13,789        6

Oaktree Medical Centre, P.C.

  Healthcare Services   Senior Secured Loan (9)   8.5%/0.0%   1/1/2018     700        695        728     

(dba Pain Management Associates)

    Senior Secured Loan (9)   16.0%/0.0%   1/1/2018     5,366        5,325        5,595     
    Revolving Loan ($500 commitment) (9)   8.5%/0.0%   1/1/2018     250        246        260     
           

 

 

   

 

 

   
              6,266        6,583        3

Pinnergy, Ltd.

  Oil & Gas Services   Subordinated Note (10)   10.5%/1.3%   1/24/2020     20,000        19,937        18,635        8

Plymouth Rock Energy, LLC

  Business Services   Senior Secured Loan   11.8%/0.0%   5/14/2017     6,000        5,978        6,000        2

Premium Franchise Brands, LLC

  Commercial Cleaning   Preferred Equity (1,054,619 shares)           832        668        0

Restaurant Finance Co, LLC

  Restaurants   Senior Secured Loan ($10,500 commitment) (10)   12.0%/4.0%   7/31/2020     7,111        7,088        7,111        3

Simplex Manufacturing Co.

  Aerospace & Defense   Subordinated Note   14.0%/0.0%   11/1/2015     4,550        4,545        4,550     
  Manufacturing   Warrant (24 shares)           710        1,877     
           

 

 

   

 

 

   
              5,255        6,427        3

Six Month Smiles Holdings, Inc.

  Healthcare Products   Subordinated Note (9)   12.0%/1.3%   7/31/2020     8,040        8,008        8,008        3

Stagnito Partners, LLC

(dba Stagnito Business Information)

  Business Services   Senior Secured Loan (9)   12.0%/0.0%   6/30/2018     6,361        6,276        6,276        3

The Wolf Organization, LLC

  Building Products   Subordinated Note (10)   11.8%/0.0%   11/29/2020     12,500        12,439        12,439     
  Manufacturing   Common Equity (175 shares)           1,750        1,750     
           

 

 

   

 

 

   
              14,189        14,189        6

Toledo Molding & Die, Inc.

  Component Manufacturing   Subordinated Note (9)   10.5%/0.0%   12/18/2018     10,000        9,870        10,000        4

United Biologics, LLC

  Healthcare Services   Subordinated Note   12.0%/2.0%   3/5/2017     8,436        8,206        8,436     
    Preferred Equity (98,377 units) (7) (9)           1,069        589     
    Warrant (57,469 units)           566        158     
           

 

 

   

 

 

   
              9,841        9,183        4

US GreenFiber, LLC

  Building Products   Subordinated Note (10)   12.5%/0.0%   1/2/2019     14,000        13,943        14,000     
  Manufacturing   Common Equity (1,667 units) (7) (9)           500        1,055     
           

 

 

   

 

 

   
              14,443        15,055        6

US Pack Logistics LLC

  Transportation Services   Subordinated Note   12.0%/1.8%   9/27/2020     9,042        8,999        8,999     
    Common Equity (5,000 units) (7) (9)           500        500     
           

 

 

   

 

 

   
              9,499        9,499        4

Virginia Tile Company, LLC

  Specialty Distribution   Subordinated Note (10)   12.3%/0.0%   5/19/2020     12,000        11,946        12,000     
    Common Equity (19.5 shares)           250        390     
           

 

 

   

 

 

   
              12,196        12,390        5

Worldwide Express Operations, LLC

  Transportation Services   Subordinated Note   11.5%/1.0%   8/1/2020     12,742        12,651        12,742     
    Common Equity (2,500,000 units) (7) (9)           2,500        3,131     
           

 

 

   

 

 

   
              15,151        15,873        6

X5 Opco LLC

  Telecommunication   Senior Secured Loan   11.5%/0.0%   3/24/2020     5,500        5,474        5,474     
  Services   Revolving Loan ($500 commitment) (8)   11.5%/0.0%   3/24/2020     —          —          —       
    Preferred Equity (5,000 units) (6) (7) (9)   0.0%/8.0%         511        511     
           

 

 

   

 

 

   
              5,985        5,985        2
           

 

 

   

 

 

   

Total Non-Control/Non-Affiliate Investments

              316,557        319,912        130
           

 

 

   

 

 

   

 

 

 

Total Investments

          $ 420,007      $ 420,134        170
           

 

 

   

 

 

   

 

 

 

 

(1) See Note 3 to the consolidated financial statements for portfolio composition by geographic location.
(2) Equity ownership may be held in shares or units of companies related to the portfolio companies.
(3) All debt investments are income producing, unless otherwise indicated. Equity investments are non-income producing unless otherwise noted.
(4) Rate includes the cash interest or dividend rate and paid-in-kind interest or dividend rate, if any, as of June 30, 2015. Generally, payment-in-kind interest can be paid-in-kind or all in cash.
(5) See Note 2 - Significant Accounting Policies, Investment Classification for definitions of Control and Affiliate classifications.
(6) Income producing. Maturity date, if any, represents mandatory redemption date.
(7) Investment is held by a wholly-owned subsidiary of the Company.
(8) The entire commitment was unfunded at June 30, 2015. As such, no interest is being earned on this investment.
(9) Investment pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company’s obligations under the Credit Facility (see Note 6 to the consolidated financial statements).
(10) The portion of the investment not held by the Funds is pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company’s obligations under the Credit Facility (see Note 6 to the consolidated financial statements).
(11) Investment was on non-accrual status as of June 30, 2015, meaning the Company has ceased recognizing interest income on the investment.

See Notes to Consolidated Financial Statements (unaudited).

 

9


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments

December 31, 2014

(In thousands, except shares)

 

Portfolio Company(1) (2)   Industry   Investment Type (3)   Rate (4)
Cash/PIK
  Maturity   Principal
Amount
    Cost     Fair
Value
    Percent
of Net
Assets
 

Control Investments (5)

               

Paramount Building Solutions, LLC

  Retail Cleaning   Subordinated Note   7.0%/3.0%   12/31/2017   $ 1,118      $ 1,118      $ 1,067     
    Subordinated Note   7.0%/7.0%   12/31/2017     2,842        2,842        2,687     
    Warrant (1,086,035 units) (7)           —          —       
    Preferred Equity (5,000,000 units) (7)           5,000        490     
    Common Equity (107,143 units) (7)           1,500        —       
           

 

 

   

 

 

   
              10,460        4,244        2

Total Control Investments

              10,460        4,244        2
           

 

 

   

 

 

   

 

 

 

Affiliate Investments (5)

               

Apex Microtechnology, Inc.

  Electronic   Warrant (2,293 units)           220        254     
 

Components Supplier

  Common Equity (11,690 shares)           1,169        1,302     
           

 

 

   

 

 

   
              1,389        1,556        1

FAR Research Inc.

  Specialty Chemicals   Senior Secured Loan (10)   11.8%/0.0%   3/31/2019     7,600        7,567        7,600     
    Revolving Loan ($1,750 commitment) (9)   11.8%/0.0%   3/31/2019     136        129        136     
    Common Equity (10 units)           1,000        938     
           

 

 

   

 

 

   
              8,696        8,674        4

Inflexxion, Inc.

  Business Services   Senior Secured Loan   12.5%/0.0%   12/16/2019     4,750        4,726        4,726     
    Revolving Loan ($1,000 commitment) (9)   12.5%/0.0%   12/16/2019     300        295        295     
    Preferred Equity (1,400 units)           1,400        1,400     
           

 

 

   

 

 

   
              6,421        6,421        3

Malabar International

  Aerospace & Defense   Subordinated Note (10)   12.5%/2.5%   5/21/2017     7,264        7,239        7,264     
 

Manufacturing

  Preferred Equity (1,494 shares) (6)   6.0%/0.0%         1,992        3,258     
           

 

 

   

 

 

   
              9,231        10,522        4

Medsurant Holdings, LLC

  Healthcare Services   Subordinated Note   9.5%/4.5%   7/12/2016     10,129        9,603        10,129     
    Preferred Equity (126,662 units) (7)           1,345        1,027     
    Warrant (505,176 units) (7)           4,516        3,715     
           

 

 

   

 

 

   
              15,464        14,871        6

Pfanstiehl, Inc.

  Healthcare Products   Subordinated Note   12.0%/1.5%   9/29/2018     6,208        6,168        6,208     
    Common Equity (8,500 units) (9)           850        3,088     
           

 

 

   

 

 

   
              7,018        9,296        4

Safety Products Group, LLC

  Safety Products   Subordinated Note   12.0%/1.5%   12/30/2018     10,000        9,965        10,000     
 

Manufacturing

  Preferred Equity (749 units) (7) (9)           749        812     
    Common Equity (676 units) (7) (9)           1        —       
           

 

 

   

 

 

   
              10,715        10,812        4

Trantech Radiator Products, Inc.

  Utility Equipment   Subordinated Note (9)   12.0%/1.8%   5/4/2017     9,518        9,498        9,518     
 

Manufacturing

  Common Equity (6,875 shares) (9)           688        962     
           

 

 

   

 

 

   
              10,186        10,480        4

Westminster Cracker Company, Inc.

  Specialty Cracker   Preferred Equity (95,798 units)           70        152     
 

Manufacturing

  Common Equity (1,208,197 units)           1,208        1,804     
           

 

 

   

 

 

   
              1,278        1,956        1

World Wide Packaging, LLC

  Consumer Products   Subordinated Note (9)   12.0%/1.8%   10/26/2018     10,097        10,063        10,097     
    Common Equity (1,517,573 units) (7) (9)           1,518        1,515     
           

 

 

   

 

 

   
              11,581        11,612        5
           

 

 

   

 

 

   

Total Affiliate Investments

              81,979        86,200        35
           

 

 

   

 

 

   

 

 

 

Non-Control/Non-Affiliate Investments (5)

               

Acentia, LLC

  Information   Common Units (499 units)           500        243        0
 

Technology Services

             

ACFP Management, Inc.

  Restaurants   Common Units (1,000,000 units) (9)           1,091        1,587        1

Allied 100 Group, Inc.

  Healthcare Products   Subordinated Note (10)   11.5%/0.0%   5/26/2020     13,000        12,936        12,936     
    Common Equity (1,250,000 units) (9)           1,250        1,250     
           

 

 

   

 

 

   
              14,186        14,186        6

Anatrace Products, LLC

  Healthcare Products   Senior Secured Loan   11.5%/1.5%   10/11/2018     9,500        9,469        9,500     
    Revolving Loan ($500 commitment) (8)   N/A   10/11/2018     —          (2     (2  
    Common Equity (360,000 shares) (9)           360        520     
           

 

 

   

 

 

   
              9,827        10,018        4

 

10


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (continued)

December 31, 2014

(In thousands, except shares)

Portfolio Company(1) (2)   Industry   Investment Type (3)   Rate (4)
Cash/PIK
  Maturity   Principal
Amount
    Cost     Fair
Value
    Percent
of Net
Assets
 

Brook & Whittle Limited

  Printing Services   Subordinated Note   12.0%/4.8%   12/31/2016   $ 7,297      $ 7,297      $ 7,272     
    Subordinated Note   12.0%/2.0%   12/31/2016     2,250        2,250        2,153     
    Warrant (1,051 shares)           285        134     
    Common Equity - Series A (148 shares)           110        20     
    Common Equity - Series D (527 shares)           53        71     
           

 

 

   

 

 

   
              9,995        9,650        4

Caldwell & Gregory, LLC

  Laundry Services   Subordinated Note   11.5%/1.0%   11/30/2018     1,524        1,502        1,524     
    Subordinated Note   0.0%/12.0%   5/31/2019     3,618        3,394        3,618     
    Common Equity (500,000 units) (7)           500        568     
    Warrant (242,121 units) (7)           242        275     
           

 

 

   

 

 

   
              5,638        5,985        2

Carlson Systems Holdings, Inc.

  Specialty Distribution   Subordinated Note (10)   11.5%/0.0%   5/20/2020     12,000        11,941        11,941     
    Common Equity (7,500 units) (9)           750        750     
           

 

 

   

 

 

   
              12,691        12,691        5

Channel Technologies Group, LLC

  Component   Subordinated Note   11.0%/1.3%   4/10/2019     7,000        6,952        6,619     
 

Manufacturing

  Preferred Equity (612 units) (7) (9)           1,139        686     
    Common Equity (612,432 units) (7) (9)           —          —       
           

 

 

   

 

 

   
              8,091        7,305        3

Connect-Air International, Inc.

  Specialty Distribution   Subordinated Note   12.8%/0.0%   11/5/2018     11,400        11,395        11,400     
    Common Equity           —          4,600     
           

 

 

   

 

 

   
              11,395        16,000        7

Continental Anesthesia Management, LLC

  Healthcare Services   Senior Secured Loan   8.0%/6.0%   4/15/2015     10,259        10,252        10,130     
    Warrant (263 shares)           276        —       
           

 

 

   

 

 

   
              10,528        10,130        4

EBL, LLC (EbLens)

  Retail   Subordinated Note (9)   12.0%/3.0%   2/2/2018     9,610        9,584        9,706     
    Common Equity (750,000 units)(7) (9)           750        981     
           

 

 

   

 

 

   
              10,334        10,687        4

FDS Avionics Corp.

  Aerospace & Defense   Subordinated Note   12.3%/0.0%   4/1/2020     5,200        5,175        5,175     

 

(dba Flight Display Systems)

  Manufacturing   Common Equity (200 units)(9)           2,000        2,000     
           

 

 

   

 

 

   
              7,175        7,175        3

FTH Acquisition Corp. VII

  Information   Subordinated Note   13.0%/0.0%   2/27/2015     8,395        8,395        8,350     
  Technology Services   Preferred Equity (887,122 shares)           887        621     
           

 

 

   

 

 

   
              9,282        8,971        4

Grindmaster Corporation

  Consumer Products   Subordinated Note   11.5%/0.0%   10/31/2019     10,500        10,456        10,456        4

IOS Acquisitions, Inc.

  Oil & Gas Services   Subordinated Note   12.0%/3.3%   6/26/2018     14,263        14,175        13,788     
    Common Equity (2,152 shares) (9)           500        364     
           

 

 

   

 

 

   
              14,675        14,152        6

Jacob Ash Holdings, Inc.

  Apparel Distribution   Subordinated Note (10)   13.0%/4.0%   6/30/2018     4,000        3,992        4,000     
    Subordinated Note   13.0%/0.0%   6/30/2018     963        953        963     
    Preferred Equity (66,138 shares)(6)   0.0%/15.0%   6/30/2018       798        810     
    Warrant (63,492 shares)           67        —       
           

 

 

   

 

 

   
              5,810        5,773        2

K2 Industrial Services, Inc.

  Industrial Cleaning   Subordinated Note   11.8%/2.8%   5/23/2017     15,213        15,162        15,213     
 

& Coatings

  Preferred Equity - Series A (1,200 shares)           1,200        914     
    Preferred Equity - Series B (74 shares)           68        83     
           

 

 

   

 

 

   
              16,430        16,210        7

Lightning Diversion Systems, LLC

  Aerospace & Defense   Senior Secured Loan   10.5%/0.0%   12/20/2018     12,198        12,154        12,198     
 

Manufacturing

  Revolving Loan ($1,000 commitment) (8)   N/A   12/20/2018     —          (2     (2  
    Common Equity (600,000 units)           —          2,204     
           

 

 

   

 

 

   
              12,152        14,400        6

MedPlast, LLC

  Healthcare Products   Subordinated Note (9)   11.0%/1.5%   3/31/2019     10,185        10,126        10,185     
    Preferred Equity (188 shares) (6) (9)   0.0%/8.0%         206        206     
    Common Equity (3,728 shares) (9)           62        65     
           

 

 

   

 

 

   
              10,394        10,456        4

National Truck Protection Co., Inc.

  Financial Services   Senior Secured Loan   13.5%/2.0%   9/13/2018     12,662        12,598        12,662     
    Common Units (1,109 shares)           758        1,923     
           

 

 

   

 

 

   
              13,356        14,585        6

 

11


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (continued)

December 31, 2014

(In thousands, except shares)

Portfolio Company(1) (2)   Industry   Investment Type (3)   Rate (4)
Cash/PIK
  Maturity   Principal
Amount
    Cost     Fair
Value
    Percent
of Net
Assets
 

Oaktree Medical Centre, P.C.

  Healthcare Services   Senior Secured Loan (9)   6.5%/0.0%   5/6/2019   $ 700      $ 694      $ 675     

(dba Pain Management Associates)

    Senior Secured Loan (9)   14.0%/0.0%   5/6/2019     5,300        5,254        5,000     
    Revolving Loan ($500 commitment) (9)   6.5%/0.0%   5/6/2019     250        246        250     
           

 

 

   

 

 

   
              6,194        5,925        2

Pinnergy, Ltd.

  Oil & Gas Services   Subordinated Note (10)   10.5%/0.8%   1/24/2020     20,000        19,931        19,812        8

Plymouth Rock Energy, LLC

  Business Services   Senior Secured Loan   11.8%/0.0%   5/14/2017     6,000        5,973        5,973        2

Premium Franchise Brands, LLC

  Commercial Cleaning   Preferred Equity (1,054,619 shares)           832        718        0

Restaurant Finance Co, LLC

  Restaurants  

Senior Secured Loan ($10,500

commitment) (10)

  12.0%/4.0%   7/31/2020     5,145        5,133        5,145        2

Simplex Manufacturing Co.

  Aerospace & Defense   Subordinated Note   14.0%/0.0%   11/1/2015     4,550        4,537        4,537     
 

Manufacturing

  Warrant (24 shares)           710        813     
           

 

 

   

 

 

   
              5,247        5,350        2

Toledo Molding & Die, Inc.

  Component   Subordinated Note (9)   10.5%/0.0%   12/18/2018     10,000        9,851        9,851        4
 

Manufacturing

             

United Biologics, LLC

  Healthcare Services   Subordinated Note   12.0%/2.0%   3/5/2017     8,688        8,393        8,688     
    Preferred Equity (98,377 units) (7) (9)           1,069        1,069     
    Warrant (57,469 units)           566        281     
           

 

 

   

 

 

   
              10,028        10,038        4

US GreenFiber, LLC

  Building Products   Subordinated Note (10)   12.5%/0.0%   1/2/2019     14,000        13,936        13,936     
 

Manufacturing

  Common Equity (1,667 units) (7) (9)           500        500     
           

 

 

   

 

 

   
              14,436        14,436        6

Virginia Tile Company, LLC

  Specialty Distribution   Subordinated Note (10)   12.3%/0.0%   5/19/2020     12,000        11,940        11,940     
    Common Equity (19.5 shares)           250        250     
           

 

 

   

 

 

   
              12,190        12,190        5

Worldwide Express Operations, LLC

  Transportation Services   Subordinated Note   11.5%/1.0%   8/1/2020     12,678        12,578        12,678     
    Common Equity (2,500,000 units) (7) (9)           2,500        3,135     
           

 

 

   

 

 

   
              15,078        15,813        7
           

 

 

   

 

 

   

Total Non-Control/
Non-Affiliate Investments

              298,899        305,911        126
           

 

 

   

 

 

   

 

 

 

Total Investments

            $ 391,338      $ 396,355        163
           

 

 

   

 

 

   

 

 

 

 

(1) See Note 3 to the consolidated financial statements for portfolio composition by geographic location.
(2) Equity ownership may be held in shares or units of companies related to the portfolio companies.
(3) All debt investments are income producing. Equity investments are non-income producing unless otherwise noted.
(4) Rate includes the cash interest or dividend rate and paid-in-kind interest or dividend rate, if any, as of December 31, 2014. Generally, payment-in-kind interest can be paid-in-kind or all in cash.
(5) See Note 2 - Significant Accounting Policies, Investment Classification for definitions of Control and Affiliate classifications.
(6) Income producing. Maturity date, if any, represents mandatory redemption date.
(7) Investment is held by a wholly-owned subsidiary of the Company.
(8) The entire commitment was unfunded at December 31, 2014. As such, no interest is being earned on this investment.
(9) Investment pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company’s obligations under the Credit Facility (see Note 6 to the consolidated financial statements).
(10) The portion of the investment not held by the Funds is pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company’s obligations under the Credit Facility (see Note 6 to the consolidated financial statements).

See Notes to Consolidated Financial Statements (unaudited).

 

12


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

Note 1. Organization and Nature of Business

Fidus Investment Corporation, a Maryland corporation (“FIC,” and together with its subsidiaries, the “Company”), was formed on February 14, 2011 for the purposes of (i) acquiring 100% of the limited partnership interests of Fidus Mezzanine Capital, L.P. and its consolidated subsidiaries (collectively, “Fund I”) and 100% of the membership interests of Fund I’s general partner, Fidus Mezzanine Capital GP, LLC (“FMCGP”), (ii) raising capital in an initial public offering that was completed in June 2011 (the “IPO”) and (iii) thereafter operating as an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”).

On June 20, 2011, FIC acquired 100% of the limited partnership interests in Fund I and 100% of the equity interests in FMCGP, in exchange for 4,056,521 shares of common stock in FIC (the “Formation Transactions”). Fund I became FIC’s wholly-owned subsidiary, retained its license to operate as a Small Business Investment Company (“SBIC”), and continues to hold investments and make new investments. The IPO consisted of the sale of 5,370,500 shares of the Company’s common stock, including shares purchased by the underwriters pursuant to their exercise of the over-allotment option, at a price of $15.00 per share resulting in net proceeds of $73,626, after deducting underwriting fees and commissions and offering costs totaling $6,932.

The Company provides customized debt and equity financing solutions to lower middle-market companies. Fund I commenced operations on May 1, 2007, and on October 22, 2007, was granted a license to operate as a SBIC under the authority of the U.S. Small Business Administration (“SBA”). On March 29, 2013, the Company commenced operations of a new wholly-owned subsidiary, Fidus Mezzanine Capital II, L.P. (“Fund II”) and on May 28, 2013, was granted a second license to operate Fund II as an SBIC. Collectively, Fund I and Fund II are referred to as the “Funds.” The SBIC licenses allow the Funds to obtain leverage by issuing SBA-guaranteed debentures (“SBA debentures”), subject to the issuance of leverage commitments by the SBA and other customary procedures. As SBICs, the Funds are subject to a variety of regulations and oversight by the SBA under the Small Business Investment Act of 1958, as amended (the “SBIC Act”), concerning, among other things, the size and nature of the companies in which they may invest and the structure of those investments.

Fund I has also elected to be regulated as a BDC under the 1940 Act. Fund II will not be registered under the 1940 Act and will rely on the exclusion from the definition of investment company contained in Section 3(c)(7) of the 1940 Act. In addition, for federal income tax purposes, the Company elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2011.

For all periods subsequent to the consummation of the Formation Transactions and the IPO, the Company pays a quarterly base management fee and an incentive fee to Fidus Investment Advisors, LLC (the “Investment Advisor”) under an investment advisory agreement (the “Investment Advisory Agreement”). The initial investment professionals of the Investment Advisor were previously employed by Fidus Capital, LLC, who was the investment adviser to Fund I prior to consummation of the Formation Transactions.

On September 11, 2012, the Company issued 2,472,500 shares in a follow-on public offering, including shares purchased by the underwriters pursuant to their exercise of the over-allotment option, at an offering price of $16.10 per share resulting in net proceeds of $37,952 after deducting underwriting fees and commissions and offering costs totaling $1,855.

On February 8, 2013, the Company issued 1,725,000 shares in a follow-on public offering, including shares purchased by the underwriters pursuant to their exercise of the over-allotment option, at an offering price of $17.60 per share resulting in net proceeds to the Company of $28,857, after deducting underwriting fees and commissions and offering costs totaling $1,504.

On September 30, 2014, the Company issued 2,000,000 shares in a follow-on public offering at an offering price of $17.00 per share. On October 21, 2014, the Company issued an additional 83,414 shares to the underwriters pursuant to their exercise of the over-allotment option. Such share issuances resulted in net proceeds of $33,671, after deducting underwriting fees and commissions and offering costs totaling $1,747.

On August 21, 2014, the Company entered into an equity distribution agreement with Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated through which the Company could sell, by means of at-the-market offerings from time to time, shares of the Company’s common stock having an aggregate offering price of up to $50,000 (the “ATM Program”). During the period from August 21, 2014 through December 31, 2014, 158,353 shares of the Company’s common stock were sold at an average offering price of $18.51 per share resulting in net proceeds of $2,871, after commissions to the sales agent on shares sold and offering costs of $59. During the six months ended June 30, 2015, 190,623 shares of the Company’s common stock were sold at an average offering price of $16.61 per share resulting in net proceeds of $3,100, after commissions to the sales agent on shares sold and offering costs of $66.

 

13


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

As of June 30, 2015 and December 31, 2014, the Company had 16,268,143 and 16,051,037 shares of common stock outstanding, respectively.

Note 2. Significant Accounting Policies

Basis of presentation: The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) pursuant to the requirements for reporting on Form 10-Q, Accounting Standards Codification (“ASC”) 946, Financial Services – Investment Companies (“ASC 946), and Articles 6 or 10 of Regulation S-X. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. Certain prior period amounts have been reclassified to conform to the current period presentation. The current period’s results of operation are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the unaudited financial statements and note should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2014.

Use of estimates: The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Consolidation: Pursuant to Article 6 of Regulation S-X and ASC 946, the Company will generally not consolidate its investments in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. As a result, the consolidated financial statements of the Company include only the accounts of the Company and its wholly-owned subsidiaries, including the Funds. All significant intercompany balances and transactions have been eliminated.

Fair value of financial instruments: The Company measures and discloses fair value with respect to substantially all of its financial instruments in accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. See Note 4 to the consolidated financial statements for further discussion regarding the fair value measurements and hierarchy.

Investment classification: The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in those companies where the Company owns more than 25% of the voting securities of such company or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as investments in those companies where the Company owns between 5% and 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are those that neither qualify as Control Investments nor Affiliate Investments.

Segments: In accordance with ASC Topic 280 — Segment Reporting, the Company has determined that it has a single reporting segment and operating unit structure.

Cash and cash equivalents: Cash and cash equivalents are highly liquid investments with an original maturity of three months or less at the date of acquisition. The Company places its cash in financial institutions and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits. The Company does not believe its cash balances are exposed to any significant credit risk.

Deferred financing costs: Deferred financing costs consist of fees and expenses paid in connection with the Credit Facility (as defined in Note 6) and SBA debentures. Deferred financing costs are capitalized and amortized over the term of the debt agreement using the effective interest method.

Deferred equity financing costs: Deferred equity financing costs include registration expenses related to shelf filings, including expenses related to the launch of the ATM Program. These expenses primarily consist of Securities and Exchange Commission (“SEC”) registration fees, legal fees and accounting fees incurred. These expenses are included in prepaid assets and are charged to additional paid in capital upon the receipt of proceeds from an equity offering or charged to expense if no offering is completed.

Realized gains or losses and unrealized appreciation or depreciation on investments: Realized gains or losses on investments are recorded upon the sale or disposition of a portfolio investment and are calculated as the difference between the net proceeds from the sale or disposition and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation on the consolidated statements of operations includes

 

14


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

changes in the fair value of investments from the prior period, as determined in good faith by the Company’s board of directors (the “Board”) through the application of the Company’s valuation policy, as well as reclassifications of any prior period unrealized appreciation or depreciation on exited investments to realized gains or losses on investments.

Interest, fee and dividend income: Interest and dividend income is recorded on the accrual basis to the extent that the Company expects to collect such amounts. Interest and dividend income is accrued daily based on the outstanding principal amount and the contractual terms of the debt or preferred equity investment. Dividend income is recorded on the declaration date or at the point an obligation exists for the portfolio company to make a distribution. Distributions from portfolio companies are evaluated to determine if the distribution is a distribution of earnings or a return of capital.

Certain of the Company’s investments contain a payment-in-kind (“PIK”) income provision. The PIK income, computed at the contractual rate specified in the applicable investment agreement, is added to the principal balance of the investment, rather than being paid in cash, and recorded as interest or dividend income, as applicable, on the consolidated statements of operations. PIK income is included in the Company’s taxable income and, therefore, affects the amount the Company is required to pay to shareholders in the form of dividends in order to maintain the Company’s status as a RIC and to avoid corporate federal income tax, even though the Company has not yet collected the cash.

Loans or preferred equity investments are placed on non-accrual status and the Company will generally cease recognizing interest or dividend income when principal, interest or dividend payments become materially past due, or when there is reasonable doubt that principal, interest or dividends will be collected. Interest and dividend payments received on non-accrual investments may be recognized as interest or dividend income or may be applied to the investment principal balance based on management’s judgment. Non-accrual investments are restored to accrual status when past due principal, interest or dividends are paid and, in management’s judgment, payments are likely to remain current.

In connection with the Company’s debt investments, the Company will sometimes receive warrants or other equity-related securities from the borrower (“Warrants”). The Company determines the cost basis of Warrants based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and Warrants received. Any resulting difference between the face amount of the debt and its recorded fair value resulting from the assignment of value to the Warrants is treated as original issue discount (“OID”), and accreted into interest income using the effective interest method over the term of the debt investment.

Transaction fees earned in connection with the Company’s investments are recognized as fee income. Such fees typically include fees for services, including structuring and advisory services, provided to portfolio companies. The Company recognizes income from fees for providing such structuring and advisory services when the services are rendered or the transactions are completed. Upon the prepayment of a loan or debt security, any prepayment penalties are recorded as fee income when earned.

The Company also typically receives loan origination or closing fees in connection with investments. Such loan origination and closing fees are capitalized as unearned income and offset against investment cost basis on the consolidated statements of assets and liabilities and accreted into income over the life of the investment.

Partial loan sales: The Company follows the guidance in ASC 860, Transfers and Servicing, when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest should remain on the Company’s consolidated statement of assets and liabilities and the proceeds recorded as a secured borrowing until the definition is met. Management has determined that all participations and other partial loan sale transactions entered into by the Company have met the definition of a participating interest. Accordingly, the Company uses sale treatment in accounting for such transactions.

Income taxes: The Company has elected to be treated as a RIC under Subchapter M of the Code, which will generally relieve the Company from U.S. federal income taxes with respect to all income distributed to stockholders. In order to qualify as a RIC, the Company is required to timely distribute to its stockholders at least 90.0% of “investment company taxable income,” as defined by Subchapter M of the Code, each year. Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year; however, the Company will pay a 4.0% excise tax if it does not distribute at least 98.0% of the current year’s ordinary taxable income. Any such carryover taxable income must be distributed through a dividend declared prior to the later of the date on which the final tax return related to the year in which the Company generated such taxable income is filed or the 15th day of the 9th month following the close of such taxable year. In addition, the Company will be subject to federal excise tax if it does not distribute at least 98.2% of its net capital gains realized, computed for any one year period ending October 31.

In the future, the Funds may be limited by provisions of the SBIC Act and SBA regulations governing SBICs from making certain distributions to FIC that may be necessary to enable FIC to make the minimum distributions required to qualify as a RIC.

 

15


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

The Company has certain wholly-owned taxable subsidiaries (the “Taxable Subsidiaries”), each of which generally holds one or more of the Company’s portfolio investments listed on the consolidated schedules of investments. The Taxable Subsidiaries are consolidated for financial reporting purposes, such that the Company’s consolidated financial statements reflect the Company’s investment in the portfolio companies owned by the Taxable Subsidiaries. The purpose of the Taxable Subsidiaries is to permit the Company to hold equity investments in portfolio companies that are taxed as partnerships for U.S. federal income tax purposes (such as entities organized as limited liability companies (“LLCs”) or other forms of pass through entities) while complying with the “source-of-income” requirements contained in the RIC tax provisions. The Taxable Subsidiaries are not consolidated with the Company for U.S. federal corporate income tax purposes, and each Taxable Subsidiary will be subject to U.S. federal corporate income tax on its taxable income. Any such income or expense is reflected in the consolidated statements of operations.

U.S. federal income tax regulations differ from GAAP, and as a result, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized under GAAP. Differences may be permanent or temporary. Permanent differences may arise as a result of, among other items, a difference in the book and tax basis of certain assets and nondeductible federal income taxes. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.

ASC Topic 740 — Accounting for Uncertainty in Income Taxes (“ASC Topic 740”) provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the consolidated financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be respected by the applicable tax authorities. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax provision, if any. There were no material uncertain income tax positions at June 30, 2015 and December 2014. The 2011 through 2013 tax years remain subject to examination by U.S. federal and most state tax authorities.

Distributions to stockholders: Distributions to stockholders are recorded on the record date with respect to such distributions. The amount, if any, to be distributed to stockholders, is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, may be distributed at least annually, although the Company may decide to retain such capital gains for investment.

The determination of the tax attributes for the Company’s distributions is made annually, and is based upon the Company’s taxable income and distributions paid to its stockholders for the full year. Ordinary dividend distributions from a RIC do not qualify for the preferential tax rate on qualified dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax characterization of the Company’s distributions generally includes both ordinary income and capital gains but may also include qualified dividends or return of capital.

The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the Company’s stockholders who have not “opted out” of the DRIP at least three days prior to the dividend payment date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon the final closing price of the Company’s common stock on a date determined by the Board. Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased by the DRIP plan administrator before any associated brokerage or other costs. See Note 9 to the consolidated financial statements regarding dividend declarations and distributions.

Earnings and net asset value per share: The earnings per share calculations for the three months ended June 30, 2015 and 2014, as well as the six months ended June 30, 2015 and 2014, are computed utilizing the weighted average shares outstanding for the period. Net asset value per share is calculated using the number of shares outstanding as of the end of the period.

Recent accounting pronouncements: In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016 and early application is not permitted. The Company is currently evaluating the impact this ASU will have on the Company’s consolidated financial position or disclosures.

 

16


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis, which amends the criteria for determining which entities are considered variable interest entities (“VIEs”), amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015 and early adoption is permitted. The Company is currently evaluating the impact this ASU will have on the Company’s consolidated financial position or disclosures.

Note 3. Portfolio Company Investments

The Company’s portfolio investments principally consist of secured and unsecured debt, equity warrants and direct equity investments in privately held companies. The debt investments may or may not be secured by either a first or second lien on the assets of the portfolio company. The debt investments generally bear interest at fixed rates, and generally mature between five and seven years from the original investment. In connection with a debt investment, the Company also may receive nominally priced equity warrants and/or make a direct equity investment in the portfolio company. The Company’s warrants or equity investments may be investments in a holding company related to the portfolio company. In addition, the Company periodically makes equity investments in its portfolio companies through Taxable Subsidiaries. In both situations, the investment is reported under the name of the operating company on the consolidated schedules of investments.

As of June 30, 2015, the Company had investments in 47 portfolio companies with an aggregate fair value of $420,134 and a weighted average effective yield on its debt investments of 13.3%. As of June 30, 2015, the Company held equity investments in 83.0% of its portfolio companies and the average fully diluted equity ownership in those portfolio companies was 7.9%. As of December 31, 2014, the Company had investments in 42 portfolio companies with an aggregate fair value of $396,355 and a weighted average effective yield on its debt investments of 13.4%. As of December 31, 2014, the Company held equity investments in 85.7% of its portfolio companies and the average fully diluted equity ownership in those portfolio companies was 8.7%. The weighted average yields were computed using the effective interest rates for debt investments at cost as of June 30, 2015 and December 2014, including accretion of original issue discount and loan origination fees, but excluding investments on non-accrual status, if any.

Purchases of debt and equity investments for the six months ended June 30, 2015 and 2014 totaled $67,903 and $24,650, respectively. Proceeds from sales and repayments, including principal, return of capital distributions and realized gains, of portfolio investments for the six months ended June 30, 2015 and 2014 totaled $47,388 and $20,269, respectively.

Investments by type with corresponding percentage of total portfolio investments consisted of the following:

 

     Fair Value     Cost  
     June 30, 2015     December 31, 2014     June 30, 2015     December 31, 2014  

Subordinated notes

   $ 281,531         67.0 %   $ 273,711         69.1 %   $ 285,222         67.9   $ 273,347         69.8

Senior secured loans

     87,397         20.8        74,286         18.7        87,017         20.7        74,486         19.0   

Equity

     43,953         10.5        42,886         10.8        40,670         9.7        36,623         9.4   

Warrants

     7,253         1.7        5,472         1.4        7,098         1.7        6,882         1.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 420,134         100.0 %   $ 396,355         100.0 %   $ 420,007         100.0 %   $ 391,338         100.0 %
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

All investments made by the Company as of June 30, 2015 and December 31, 2014 were made in portfolio companies located in the U.S. The following table shows portfolio composition by geographic region at fair value and cost and as a percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.

 

     Fair Value     Cost  
     June 30, 2015     December 31, 2014     June 30, 2015     December 31, 2014  

Midwest

   $ 107,611         25.7   $ 94,572         23.9 %   $ 104,784         24.9   $ 92,721         23.7

Southeast

     105,138         25.0        113,516         28.6        106,615         25.4        113,725         29.0   

Northeast

     97,979         23.3        66,900         16.9        96,407         23.0        65,248         16.7   

West

     70,994         16.9        78,904         19.9        64,203         15.3        71,975         18.4   

Southwest

     38,412         9.1        42,463         10.7        47,998         11.4        47,669         12.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 420,134         100.0   $ 396,355         100.0   $ 420,007         100.0   $ 391,338         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of June 30, 2015 and December 31, 2014, the Company had no portfolio company investments that represented more than 10% of the total investment portfolio. As of June 30, 2014, the Company had debt investments in one portfolio company on non-accrual status, which had an aggregate cost and fair value of $4,059 and $778, respectively. As of December 31, 2014, there were no debt investments on non-accrual status.

 

17


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

Note 4. Fair Value Measurements

Investments

The Board has established and documented processes and methodologies for determining the fair values of portfolio company investments on a recurring basis in accordance with ASC Topic 820 and consistent with the requirements of the 1940 Act. Fair value is the price, determined at the measurement date, that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques described below are applied. Under ASC Topic 820, portfolio investments recorded at fair value in the consolidated financial statements are classified within the fair value hierarchy based upon the level of judgment associated with the inputs used to measure their value, as defined below:

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets as of the measurement date.

Level 2 — Inputs include quoted prices for similar assets in active markets, or that are quoted prices for identical or similar assets in markets that are not active and inputs that are observable, either directly or indirectly, for substantially the full term, if applicable, of the investment.

Level 3 — Inputs include those that are both unobservable and significant to the overall fair value measurement.

An investment’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s investment portfolio is comprised entirely of debt and equity securities of privately held companies for which quoted prices falling within the categories of Level 1 and Level 2 inputs are not available. Therefore, the Company values all of its portfolio investments at fair value, as determined in good faith by the Board, using Level 3 inputs. The degree of judgment exercised by the Board in determining fair value is greatest for investments classified as Level 3 inputs. Due to the inherent uncertainty of determining the fair values of investments that do not have readily available market values, the Board’s estimate of fair values may differ significantly from the values that would have been used had a ready market for the securities existed, and those differences may be material. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the amounts ultimately realized on these investments to be materially different than the valuations currently assigned.

With respect to investments for which market quotations are not readily available, the Board undertakes a multi-step valuation process each quarter, as described below:

 

    the quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Investment Advisor responsible for the portfolio investment;

 

    preliminary valuation conclusions are then documented and discussed with the investment committee of the Investment Advisor;

 

    the Board also engages one or more independent valuation firm(s) to conduct independent appraisals of a selection of our investments for which market quotations are not readily available. The Company will consult with independent valuation firm(s) relative to each portfolio company at least once in every calendar year, and for new portfolio companies, at least once in the twelve-month period subsequent to the initial investment. In certain instances, the Company may determine that it is not cost-effective, and as a result it is not in the Company’s stockholders’ best interest, to request the valuation firm(s) to perform independent valuations on one or more portfolio companies. Such instances include, but are not limited to, situations where the fair value of the investment in the portfolio company is determined to be insignificant relative to the total investment portfolio. The Board consulted with the independent valuation firm in arriving at the Company’s determination of fair value on 12 and 9 of its portfolio company investments representing 29.1% and 20.7% of the total portfolio investments at fair value (exclusive of new portfolio company investments made during the three months ended June 30, 2015 and December 31, 2014, respectively) as of June 30, 2015 and December 31, 2014, respectively.

 

    the audit committee of the Board reviews the preliminary valuations of the Investment Advisor and of the independent valuation firm(s) and responds and supplements the valuation recommendations to reflect any comments; and

 

    the Board discusses these valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of the Investment Advisor, the independent valuation firm(s) and the audit committee.

In making the good faith determination of the value of portfolio investments, the Board starts with the cost basis of the security. The transaction price is typically the best estimate of fair value at inception. When evidence supports a subsequent change to the carrying value from the original transaction price, adjustments are made to reflect the expected exit values.

 

18


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

Consistent with the policies and methodologies adopted by the Board, the Company performs detailed valuations of its debt and equity investments, including an analysis on the Company’s unfunded loan commitments, using both the market and income approaches as appropriate. Under the market approach, the Company typically uses the enterprise value methodology to determine the fair value of an investment. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is generally best expressed as a range of values, from which the Company derives a single estimate of enterprise value. Under the income approach, the Company typically prepares and analyzes discounted cash flow models to estimate the present value of future cash flows of either an individual debt investment or of the underlying portfolio company itself.

The Company evaluates investments in portfolio companies using the most recent portfolio company financial statements and forecasts. The Company also consults with the portfolio company’s senior management to obtain further updates on the portfolio company’s performance, including information such as industry trends, new product development and other operational issues.

For the Company’s debt investments, including senior secured loans and subordinated notes, the primary valuation technique used to estimate the fair value is the discounted cash flow method. However, if there is deterioration in credit quality or a debt investment is in workout status, the Company may consider other methods in determining the fair value, including the value attributable to the debt investment from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis. The Company’s discounted cash flow models estimate a range of fair values by applying an appropriate discount rate to the future cash flow streams of its debt investments, based on future interest and principal payments as set forth in the associated loan agreements. The Company prepares a weighted average cost of capital for use in the discounted cash flow model for each investment, based on factors including, but not limited to: current pricing and credit metrics for similar proposed or executed investment transactions of private companies; the portfolio company’s historical financial results and outlook; and the portfolio company’s current leverage and credit quality as compared to leverage and credit quality as of the date the investment was made. The Company may also consider the following factors when determining the fair value of debt investments: the portfolio company’s ability to make future scheduled payments; prepayment penalties and other fees; estimated remaining life; the nature and realizable value of any collateral securing such debt investment; and changes in the interest rate environment and the credit markets that generally may affect the price at which similar investments may be made. The Company estimates the remaining life of its debt investments to generally be the legal maturity date of the instrument, as the Company generally intends to hold its loans to maturity. However, if the Company has information available to it that the loan is expected to be repaid in the near term, it would use an estimated remaining life based on the expected repayment date.

For the Company’s equity investments, including equity and warrants, the Company generally uses a market approach, including valuation methodologies consistent with industry practice, to estimate the enterprise value of portfolio companies. Typically, the enterprise value of a private company is based on multiples of EBITDA, net income, revenues, or in limited cases, book value. In estimating the enterprise value of a portfolio company, the Company analyzes various factors consistent with industry practice, including but not limited to original transaction multiples, the portfolio company’s historical and projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the nature and realizable value of any collateral, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public. Where applicable, the Company considers the Company’s ability to influence the capital structure of the portfolio company, as well as the timing of a potential exit.

The Company may also utilize an income approach when estimating the fair value of its equity securities, either as a primary methodology if consistent with industry practice or if the market approach is otherwise not applicable, or as a supporting methodology to corroborate the fair value ranges determined by the market approach. The Company typically prepares and analyzes discounted cash flow models based on projections of the future free cash flows (or earnings) of the portfolio company. The Company considers various factors, including but not limited to the portfolio company’s projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public.

The fair value of the Company’s royalty rights are calculated based on projected future cash flows and the specific provisions contained in the pertinent agreements. The determination of the fair value of such royalty rights is not a significant component of the Company’s valuation process.

The Company reviews the fair value hierarchy classifications on a quarterly basis. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. There were no transfers among Levels 1, 2, and 3 during the six months ended June 30, 2015 and 2014.

 

19


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

The following tables present a reconciliation of the beginning and ending balances for fair valued investments measured using significant unobservable inputs (Level 3) for the six months ended June 30, 2015 and 2014:

 

     Subordinated
Notes
    Senior Secured
Loans
    Equity     Warrants     Royalty
Rights
     Total  

Balance, December 31, 2013

   $ 214,400      $ 53,387      $ 32,560      $ 6,634      $ —         $ 306,981   

Realized gain on investments

     166        —          1,701        51        —           1,918   

Net change in unrealized (depreciation) appreciation on investments

     (8,225     175        2,391        (389     —           (6,048

Purchase of investments

     1,663        16,799        5,833        355        —           24,650   

Proceeds from sales and repayments of investments

     (16,737     (934     (2,547     (51     —           (20,269

Interest and dividend income paid-in-kind

     2,254        315        269        —          —           2,838   

Proceeds from loan origination fees

     (8     (138     (23     —          —           (169

Accretion of loan origination fees

     184        33        6        —          —           223   

Accretion of original issue discount

     262        84        3        —          —           349   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2014

   $ 193,959      $ 69,721      $ 40,193      $ 6,600      $ —         $ 310,473   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, December 31, 2014

   $ 273,711      $ 74,286      $ 42,886      $ 5,472      $ —         $ 396,355   

Realized gain on investments

     —          —          5,277        —          —           5,277   

Net change in unrealized (depreciation) appreciation on investments

     (4,055     580        (2,980     1,565        —           (4,890

Purchase of investments

     45,397        17,451        4,839        216        —           67,903   

Proceeds from sales and repayments of investments

     (36,019     (5,220     (6,149     —          —           (47,388

Interest and dividend income paid-in-kind

     2,155        398        77        —          —           2,630   

Proceeds from loan origination fees

     (219     (158     —          —          —           (377

Accretion of loan origination fees

     270        53        1        —          —           324   

Accretion of original issue discount

     291        7        2        —          —           300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2015

   $ 281,531      $ 87,397      $ 43,953      $ 7,253      $ —         $ 420,134   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in unrealized appreciation (depreciation) of $246 and $(807) for the three and six months ended June 30, 2015, respectively, were attributable to Level 3 investments held at June 30, 2015. Net change in unrealized (depreciation) of $(2,103) and $(4,131) for the three and six months ended June 30, 2014, respectively, were attributable to Level 3 investments held at June 30, 2014.

The following tables summarize the significant unobservable inputs by valuation technique used to determine the fair value of the Company’s Level 3 debt and equity investments as of June 30, 2015 and December 31, 2014. The tables are not intended to be all-inclusive, but instead capture the significant unobservable inputs relevant to the Company’s determination of fair values.

 

     Fair Value at
June 30, 2015
    

Valuation Techniques

   Unobservable Inputs   

Range

(weighted average)

Debt investments:

           

Subordinated notes

   $ 280,753       Discounted cash flow    Weighted average cost of capital    10.9% - 20.0% (14.0%)
     778       Enterprise value    EBITDA multiples    5.0x – 6.0x (5.5x)

Senior secured loans

     87,397       Discounted cash flow    Weighted average cost of capital    8.8% - 17.1% (14.1%)

Equity investments:

           

Equity

     43,953       Enterprise value    EBITDA multiples    4.3x – 10.4x (7.0x)

Warrants

     7,253       Enterprise value    EBITDA multiples    5.0x – 9.5x (6.6x)
     Fair Value at
December 31, 2014
    

Valuation Techniques

   Unobservable Inputs   

Range

(weighted average)

Debt investments:

           

Subordinated notes

   $ 273,711       Discounted cash flow    Weighted average cost of capital    11.4% - 18.1% (13.6 %)

Senior secured loans

     74,286       Discounted cash flow    Weighted average cost of capital    6.7% - 17.0% (14.0%)

Equity investments:

           

Equity

     42,886       Enterprise value    EBITDA multiples    4.5x – 10.4x (6.8x)

Warrants

     5,472       Enterprise value    EBITDA multiples    5.0x – 9.5x (7.0x)

 

20


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

The significant unobservable input used in determining the fair value under the discounted cash flow technique is the weighted average cost of capital of each security. Significant increases (or decreases) in this input would likely result in a significantly lower (or higher) fair value estimate.

The significant unobservable inputs used in determining fair value under the enterprise value technique are revenue and EBITDA multiples. Significant increases (or decreases) in this input could result in a significantly higher (or lower) fair value estimate.

Other Financial Assets and Liabilities

ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments such as cash and cash equivalents, receivables and payables approximate the fair value of such items due to the short maturity of such instruments. The fair value of borrowings under the Credit Facility (as defined in Note 6) are based on a market yield approach and current interest rates, which are level 3 inputs to the market yield model, and is estimated to be $10,500 and $10,000 as of June 30, 2015 and December 31, 2014, respectively, which is the same as the Company’s carrying value of the borrowings. SBA debentures are carried at cost and with their longer maturity dates, fair value is estimated by discounting remaining payments using current market rates for similar instruments and considering such factors as the legal maturity date and the ability of market participants to prepay the debentures. As of June 30, 2015 and December 31, 2014, the fair value of the Company’s SBA debentures using Level 3 inputs is estimated at $179,700 and $173,500, respectively, which is the same as the Company’s carrying value of the debentures.

Note 5. Related Party Transactions

Investment Advisory Agreement: Concurrent with the Formation Transactions, the Company entered into the Investment Advisory Agreement with the Investment Advisor. On June 3, 2015, the Board approved the renewal of the Investment Advisory Agreement through June 20, 2016. Pursuant to the Investment Advisory Agreement and subject to the overall supervision of the Board, the Investment Advisor provides investment advisory services to the Company. For providing these services, the Investment Advisor receives a fee, consisting of two components — a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.75% based on the average value of total assets (other than cash or cash equivalents but including assets purchased with borrowed amounts) at the end of the two most recently completed calendar quarters. The base management fee is payable quarterly in arrears. The base management fee under the Investment Advisory Agreement for the three months ended June 30, 2015 and 2014 totaled $1,864 and $1,393, respectively. The base management fee under the Investment Advisory Agreement for the six months ended June 30, 2015 and 2014 totaled $3,655 and $2,758, respectively.

The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the quarter. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement (defined below) and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee and any organizing and offering costs). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as market discount, debt instruments with payment-in-kind income, preferred stock with PIK dividends and zero-coupon securities), accrued income the Company has not yet received in cash. The Investment Advisor is not under any obligation to reimburse the Company for any part of the incentive fee it receives that was based on accrued interest that the Company never collects.

Pre-incentive fee net investment income does not include any realized capital gains, taxes associated with such realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter where the Company incurs a loss. For example, if the Company generates pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to a net loss on investments.

Pre-incentive fee net investment income, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 2.0% per quarter. If market interest rates rise, the

 

21


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

Company may be able to invest funds in debt instruments that provide for a higher return, which would increase the Company’s pre-incentive fee net investment income and make it easier for the Investment Advisor to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. The Company’s pre-incentive fee net investment income used to calculate this part of the incentive fee is also included in the total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts) used to calculate the 1.75% base management fee.

The Company pays the Investment Advisor an incentive fee with respect to pre-incentive fee net investment income in each calendar quarter as follows:

 

    no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle rate of 2.0%;

 

    100.0% of the Company’s pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5% in any calendar quarter. This portion of the pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 2.5%) is referred to as the “catch-up” provision. The catch-up is meant to provide the Investment Advisor with 20.0% of the pre-incentive fee net investment income as if a hurdle rate did not apply if this net investment income exceeds 2.5% in any calendar quarter; and

 

    20.0% of the amount of the Company’s pre-incentive fee net investment income, if any, that exceeds 2.5% in any calendar quarter.

The sum of the calculations above equals the income incentive fee. The income incentive fee is appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the calendar quarter. The income incentive fee for the three months ended June 30, 2015 and 2014 totaled $1,516 and $1,269, respectively. The income incentive fee for the six months ended June 30, 2015 and 2014 totaled $3,079 and $2,495, respectively.

The second part of the incentive fee is a capital gains incentive fee that is determined and paid in arrears as of the end of each fiscal year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.0% of the net capital gains as of the end of the fiscal year. In determining the capital gains incentive fee to be paid to the Investment Advisor, the Company calculates the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since the Formation Transactions, and the aggregate unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in the Company’s portfolio. At the end of the applicable year, the amount of capital gains that serves as the basis for the calculation of the capital gains incentive fee to be paid equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate unrealized capital depreciation, with respect to the Company’s portfolio of investments. If this number is positive at the end of such year, then the capital gains incentive fee to be paid for such year equals 20.0% of such amount, less the aggregate amount of any capital gains incentive fees paid in all prior years. As of both June 30, 2015 and December 31, 2014, the capital gains incentive fee payable was $0. The aggregate amount of capital gains incentive fees paid from the IPO through June 30, 2015 is $348.

In addition, the Company accrues, but does not pay, a capital gains incentive fee in connection with any unrealized capital appreciation, as appropriate. If, on a cumulative basis, the sum of net realized gains/(losses) plus net unrealized appreciation/(depreciation) decreases during a period, the Company will reverse any excess capital gains incentive fee previously accrued such that the amount of capital gains incentive fee accrued is no more than 20.0% of the sum of net realized gains/(losses) plus net unrealized appreciation/(depreciation). During the three and six months ended June 30, 2015, the Company accrued capital gains incentive fees of $41 and $77, respectively. During the three and six months ended June 30, 2014, the Company reversed previously accrued capital gains incentive fees of $416 and $800, respectively.

The sum of the income incentive fee and the capital gains incentive fee is the incentive fee and is reported in the consolidated statements of operations. Accrued management fees, income incentive fees and capital gains incentive fees are reported in the due to affiliates line in the consolidated statements of assets and liabilities.

Unless terminated earlier as described below, the Investment Advisory Agreement will continue in effect from year to year if approved annually by the Board or by the affirmative vote of the holders of a majority of the Company’s outstanding voting securities, and, in either case, if also approved by a majority of the Independent Directors. The Investment Advisory Agreement automatically terminates in the event of its assignment, as defined in the 1940 Act, by the Investment Advisor and may be terminated by either party without penalty upon not less than 60 days’ written notice to the other. The holders of a majority of the Company’s outstanding voting securities may also terminate the Investment Advisory Agreement without penalty.

Administration Agreement: Concurrent with the Formation Transactions, the Company also entered into an administration agreement (the “Administration Agreement”) with the Investment Advisor. On June 3, 2015, the Board approved the renewal of the Administrative Agreement through June 20, 2016. Under the Administration Agreement, the Investment Advisor furnishes the Company with office facilities and equipment, provides it clerical, bookkeeping and record keeping services at such facilities and

 

22


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

provides the Company with other administrative services necessary to conduct its day-to-day operations. The Company reimburses the Investment Advisor for the allocable portion of overhead expenses incurred in performing its obligations under the Administration Agreement, including rent and the Company’s allocable portion of the cost of its chief financial officer and chief compliance officer and their respective staffs. Under the Administration Agreement, the Investment Advisor also provides managerial assistance to those portfolio companies to which the Company is required to provide such assistance and the Company reimburses the Investment Advisor for fees and expenses incurred with providing such services. In addition, the Company reimburses the Investment Advisor for fees and expenses incurred while performing due diligence on the Company’s prospective portfolio companies. Under the Administration Agreement, administrative expenses for services provided for the three months ended June 30, 2015 and 2014 totaled $347 and $430, respectively. Under the Administration Agreement, administrative expenses for services provided for the six months ended June 30, 2015 and 2014 totaled $715 and $793, respectively. Accrued administrative expenses are reported in the due to affiliates line in the consolidated statements of assets and liabilities.

Note 6. Debt

Revolving Credit Facility: On June 16, 2014, FIC entered into a senior secured revolving credit agreement (the “Credit Facility”) with ING Capital LLC (“ING”), as the administrative agent, collateral agent, and lender. The Credit Facility had an initial commitment of $30,000 with an accordion feature that allows for an increase in the total commitments up to $75,000, subject to certain conditions and the satisfaction of specified financial covenants. The Credit Facility is secured by certain portfolio investments held by the Company, but portfolio investments held by the Funds are not collateral for the Credit Facility. The stated maturity date for the Credit Facility is June 16, 2018, which may be extended by mutual agreement.

On December 19, 2014, FIC amended the Credit Facility to (i) increase the commitment from $30,000 to $50,000 (ii) allow FIC to buy-back up to $10,000 of the Company’s common stock subject to the satisfaction of specified financial covenants and conditions. The Credit Facility continues to have an accordion feature which allows for an increase in the total commitment up to $75,000.

Amounts available to borrow under the Credit Facility are subject to a minimum borrowing/collateral base that applies an advance rate to certain investments held by the Company. The Company is subject to limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, payment frequency and status and collateral interests, as well as restrictions on portfolio company leverage, which may also affect the borrowing base and therefore amounts available to borrow.

Borrowings under the Credit Facility bear interest, subject to the Company’s election, on a per annum basis equal to (i) the alternate base rate plus 2.5% or (ii) the applicable LIBOR rate plus 3.5%. The alternate base rate is equal to the greater of (i) prime rate, (ii) the federal funds rate plus 0.5% or (iii) the three-month LIBOR rate plus 1.0%. The Company pays a commitment fee between 0.5% and 1.0% per annum based on the size of the unused portion of the Credit Facility.

The Company has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. As of June 30, 2015 and December 31, 2014, the Company was in compliance in all material respect with the terms of the Credit Facility.

As of June 30, 2015 and December 31, 2014, the Company had outstanding borrowings under the Credit Facility of $10,500 and $10,000, respectively. For the three months ended June 30, 2015 and 2014, interest and financing expenses related to the Credit Facility amounted to $242 and $13, respectively. For the six months ended June 30, 2015 and 2014, interest and financing expenses related to the Credit Facility amounted to $468 and $13, respectively. As of June 30, 2015 and December 31, 2014, accrued interest and fees payable related to the Credit Facility totaled $124 and $97, respectively.

SBA debentures: The Company uses debenture leverage provided through the SBA to fund a portion of its investment purchases.

Under the SBA debenture program, the SBA commits to purchase debentures issued by SBICs and such debentures are guaranteed by the SBA. The SBA has made commitments to purchase $225,000 of SBA debentures from the Company on or before September 30, 2019. Unused commitments as of June 30, 2015 and December 31, 2014 were $45,300 and $51,500, respectively. The SBA may limit the amount that may be drawn each year under these commitments, and each issuance of leverage is conditioned on the Company’s full compliance, as determined by the SBA, with the terms and conditions set forth in the SBIC Act.

 

23


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

As of June 30, 2015 and December 31, 2014, the Company’s issued and outstanding SBA debentures mature as follows:

 

Pooling Date(1)

   Maturity
Date
     Fixed
Interest Rate
    June 30, 2015      December 31, 2014  

3/26/2008

     3/1/2018         6.188 %   $ 24,750       $ 24,750   

9/24/2008

     9/1/2018         6.442        11,950         11,950   

3/25/2009

     3/1/2019         5.337        19,750         19,750   

9/23/2009

     9/1/2019         4.950        10,000         10,000   

3/24/2010

     3/1/2020         4.825        13,000         13,000   

9/22/2010

     9/1/2020         3.932        12,500         12,500   

3/29/2011

     3/1/2021         4.801        1,550         1,550   

9/21/2011

     9/1/2021         3.594        3,250         3,250   

3/21/2012

     3/1/2022         3.483        3,250         3,250   

3/21/2012

     3/1/2022         3.051        19,000         19,000   

9/19/2012

     9/1/2022         2.530        11,000         11,000   

9/19/2012

     9/1/2022         3.049        11,500         11,500   

3/27/2013

     3/1/2023         3.155        3,000         3,000   

9/24/2014

     9/1/2024         3.775        1,000         1,000   

3/25/2015

     3/1/2025         3.321        1,000         1,000   

3/25/2015

     3/1/2025         3.321        1,000         1,000   

3/25/2015

     3/1/2025         3.321        1,000         1,000   

3/25/2015

     3/1/2025         3.321        1,500         1,500   

3/25/2015

     3/1/2025         3.321        1,000         1,000   

3/25/2015

     3/1/2025         3.277        6,000         6,000   

3/25/2015

     3/1/2025         3.277        7,500         7,500   

3/25/2015

     3/1/2025         3.277        2,500         2,500   

3/25/2015

     3/1/2025         3.277        1,500         1,500   

3/25/2015

     3/1/2025         3.277        5,000         5,000   

(2)

     (2      (2     5,000         —     

(2)

     (2      (2     1,000         —     

(2)

     (2      (2     200         —     
       

 

 

    

 

 

 
        $ 179,700       $ 173,500   
       

 

 

    

 

 

 

 

(1) The SBA has two scheduled pooling dates for debentures (in March and in September). Certain debentures funded during the reporting periods may not be pooled until the subsequent pooling date.
(2) The Company issued $6,200 in SBA debentures which pool in September 2015, at which time the Company expects the current short-term interest rate will reset to a long-term fixed rate.

Interest on SBA debentures is payable semi-annually on March 1 and September 1. For the three months ended June 30, 2015 and 2014, interest and financing expenses on outstanding SBA debentures amounted to $2,061 and $1,640, respectively. For the six months ended June 30, 2015 and 2014, interest and financing expenses on outstanding SBA debentures amounted to $3,965 and $3,262, respectively. As of June 30, 2015 and December 31, 2014, accrued interest and fees payable related to the SBA debentures totaled $2,482 and $2,756, respectively.

Deferred Financing Costs

Deferred financing costs are amortized into interest and financing expenses on the consolidated statement of operations using the straight-line method, which approximates the effective interest method, over the term of the respective financing instrument. Deferred financing cost amortization for the three months ended June 30, 2015 and 2014 was $252 and $142, respectively. Deferred financing cost amortization for the six months ended June 30, 2015 and 2014 was $486 and $273, respectively. Deferred financing costs related to the Credit Facility and SBA debentures as of June 30, 2015 and December 31, 2014, were as follows:

 

     June 30,
2015
     December 31,
2014
 

SBA debenture commitment fees

   $ 2,250       $ 2,250   

SBA debenture leverage fees

     4,358         4,207   

Credit Facility upfront fees

     1,238         894   
  

 

 

    

 

 

 

Subtotal

     7,846         7,351   

Accumulated amortization

     (3,270      (2,784
  

 

 

    

 

 

 

Net deferred financing costs

   $ 4,576       $ 4,567   
  

 

 

    

 

 

 

The weighted average interest rate for all SBA debentures and borrowings outstanding under the Credit Facility as of June 30, 2015 and December 31, 2014 was 4.2% and 4.0%, respectively.

 

24


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

Note 7. Commitments and Contingencies

Commitments: As of June 30, 2015, the Company had seven unfunded revolving loan commitments totaling $5,364 to portfolio companies and two unfunded loan commitments totaling $3,586 to portfolio companies. As of December 31, 2014, the Company had five unfunded revolving loan commitments totaling $4,064 to portfolio companies and two unfunded loan commitments totaling $5,426 to a portfolio company. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with financial and nonfinancial covenants. Since commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

Indemnifications: In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide indemnifications under certain circumstances. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects the risk of future obligation under these indemnifications to be remote.

Legal proceedings: In the normal course of business, the Company may be subject to legal and regulatory proceedings that are generally incidental to its ongoing operations. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not believe these proceedings will have a material adverse effect on the Company’s consolidated financial statements.

Note 8. Financial Highlights

The following is a schedule of financial highlights for the six months ended June 30, 2015 and 2014:

 

     Six months ended June 30,  
     2015     2014  

Per share data:

    

Net asset value at beginning of period

   $ 15.16      $ 15.35   

Net investment income (1)

     0.76        0.80   

Net realized gain on investments (net of taxes) (1)

     0.32        0.13   

Net unrealized (depreciation) on investments (1)

     (0.30     (0.44
  

 

 

   

 

 

 

Total increase from investment operations (1)

     0.78        0.49   

Accretive effect of share issuance above NAV

     0.02        —     

Dividends to stockholders

     (0.78     (0.76

Other (2)

     —          0.01   
  

 

 

   

 

 

 

Net asset value at end of period

   $ 15.18      $ 15.09   
  

 

 

   

 

 

 

Market value at end of period

   $ 14.90      $ 20.54   
  

 

 

   

 

 

 

Shares outstanding at end of period

     16,268,143        13,775,101   

Weighted average shares outstanding during the period

     16,123,722        13,760,623   

Ratios to average net assets:

    

Expenses other than incentive fee (3)

     8.3 %     8.1

Incentive fee (3)

     2.6 %     1.6
  

 

 

   

 

 

 

Total expenses (3)

     10.9 %     9.7
  

 

 

   

 

 

 

Net investment income (3)

     10.0 %     10.5

Total return (4)

     5.6 %     (2.0 )%

Net assets at end of period

   $ 246,922      $ 207,866   

Average debt outstanding

   $ 187,667      $ 144,833   

Average debt per share (1)

   $ 11.64      $ 10.53   

Portfolio turnover ratio (3)

     23.1 %     13.1

 

(1) Weighted average per share data.
(2) The impact of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data on shares outstanding as of period end.
(3) Annualized for periods less than one year.
(4) The total return for the six months ended June 30, 2015 and 2014 equals the change in the ending market value of the Company’s common stock plus dividends paid per share during the period, divided by the beginning common stock price and is not annualized.

 

25


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

Note 9. Dividends and Distributions

The Company’s dividends and distributions are recorded on the record date. The following table summarizes the dividends paid during the six months ended June 30, 2015 and 2014.

 

Date Declared

   Record
Date
     Payment
Date
     Amount
Per Share
     Cash
Distribution
     DRIP
Shares
Issued
     DRIP
Shares
Value
 

Six Months Ended June 30, 2014:

                 

2/18/2014

     3/21/2014         3/31/2014       $ 0.38       $ 5,028         10,410       $ 199   

5/5/2014

     6/13/2014         6/27/2014         0.38         5,037         9,459         194   
        

 

 

    

 

 

    

 

 

    

 

 

 
         $ 0.76       $ 10,065         19,869       $ 393   
        

 

 

    

 

 

    

 

 

    

 

 

 

Six Months Ended June 30, 2015:

                 

2/17/2015

     3/12/2015         3/26/2015       $ 0.38       $ 5,886         12,922       $ 213   

5/5/2015

     6/11/2015         6/25/2015         0.38         5,968         12,833         208   

5/5/2015(1)

     6/11/2015         6/25/2015         0.02         314         678         11   
        

 

 

    

 

 

    

 

 

    

 

 

 
         $ 0.78       $ 12,168         26,483       $ 432   
        

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Special dividend of $0.02 per share.

For the six months ended June 30, 2015, $432 of the total $12,600 paid to stockholders represented DRIP participation. During this period, the Company satisfied the DRIP participation requirements with the issuance of 26,483 shares at an average value of $16.32 per share at the date of issuance. For the six months ended June 30, 2014, $393 of the total $10,458 paid to stockholders represented DRIP participation. During this period, the Company satisfied the DRIP participation requirements with the issuance of 19,869 shares at an average value of $19.76 per share at the date of issuance.

Since the Company’s IPO, dividends and distributions to stockholders total $85,714 or $6.54 per share.

Note 10. Subsequent Events

On July 30, 2015, the Company invested $7,950 in the subordinated notes and common equity of Vanguard Dealer Services, L.L.C., a provider and administrator of finance and insurance products and services to automobile dealerships. In addition, the Company extended a commitment to fund $2,500 in additional subordinated notes at a future date.

On July 31, 2015, the Company exited its equity investments in Westminster Cracker Company, Inc. in connection with the sale of the portfolio company. The Company recognized a gain of approximately $1,719 on its preferred and common equity investments.

On August 3, 2015, the Board declared a regular quarterly dividend of $0.39 per share, which is payable on September 25, 2015 to shareholders of record as of September 17, 2015.

 

26


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

Schedule 12-14

The table below represents the fair value of control and affiliate investments as of December 31, 2014 and any gross additions and reductions made to such investments, as well as the ending fair value as of June 30, 2015.

 

Portfolio Company (1)

  

Investment Type

   Credited to
Income(2)
     December 31,
2014
Fair Value
     Gross
Additions(3)
    Gross
Reductions(4)
     June 30,
2015
Fair Value
 

Control Investments

                

Paramount Building Solutions, LLC

   Subordinated Note    $ 61       $ 1,067       $ 353      $ 642       $ 778   
  

Subordinated Note

     169         2,687         84        2,771         —     
  

Warrant

     —           —           —          —           —     
  

Preferred Equity

     —           490         339        829         —     
  

Common Equity

     —           —           —          —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        230         4,244         776        4,242         778   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Control Investments

      $ 230       $ 4,244       $ 776      $ 4,242       $ 778   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Affiliate Investments

                

Apex Microtechnology, Inc.

   Warrant    $ —         $ 254       $ 31      $ —         $ 285   
  

Common Equity

     —           1,302         180        —           1,482   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        —           1,556         211        —           1,767   

FAR Research Inc.

   Senior Secured Loan      446         7,600         4        4         7,600   
  

Revolving Loan

     13         136         1        1         136   
  

Common Equity

     —           938         —          494         444   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        459         8,674         5        499         8,180   

Inflexxion, Inc.

   Senior Secured Loan      288         4,726         24        800         3,950   
  

Revolving Loan

     18         295         5        300         —     
  

Preferred Equity

     —           1,400         —          123         1,277   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        306         6,421         29        1,223         5,227   

Malabar International

   Subordinated Note      554         7,264         97        5         7,356   
  

Preferred Equity

     61         3,258         1,078        —           4,336   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        615         10,522         1,175        5         11,692   

Medsurant Holdings, LLC

   Subordinated Note      917         10,129         428        196         10,361   
  

Preferred Equity

     —           1,027         232        —           1,259   
  

Warrant

     —           3,715         841        —           4,556   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        917         14,871         1,501        196         16,176   

Microbiology Research Associates, Inc.

   Senior Secured Loan      86         —           3,732        —           3,732   
  

Revolving Loan

     8         —           (2     —           (2
  

Subordinated Note

     197         —           6,219        —           6,219   
  

Common Equity

     —           —           1,000        —           1,000   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        291         —           10,949        —           10,949   

Pfanstiehl, Inc.

   Subordinated Note      421         6,208         5        5         6,208   
  

Common Equity

     —           3,088         989        —           4,077   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        421         9,296         994        5         10,285   

Safety Products Group, LLC

   Subordinated Note      683         10,000         4        4         10,000   
  

Preferred Equity

     —           812         —          1         811   
  

Common Equity

     —           —           —          —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        683         10,812         4        5         10,811   

Trantech Radiator Products, Inc.

   Subordinated Note      664         9,518         88        4         9,602   
  

Common Equity

     —           962         —          19         943   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        664         10,480         88        23         10,545   

Westminster Cracker Company, Inc.

   Preferred Equity      —           152         11        —           163   
  

Common Equity

     —           1,804         —          6         1,798   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        —           1,956         11        6         1,961   

World Wide Packaging, LLC

   Subordinated Note      704         10,097         93        4         10,186   
  

Common Equity

     13         1,515         150        —           1,665   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
        717         11,612         243        4         11,851   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Affiliate Investments

      $ 5,073       $ 86,200       $ 15,210      $ 1,966       $ 99,444   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) The principal amount, the ownership detail for equity investments, and if the investment is income producing is shown in the consolidated schedule of investments.
(2) Represents the total amount of interest, fees or dividends included in 2015 income for the portion of the six months ended June 30, 2015 that an investment was included in Control or Affiliate categories.
(3) Gross additions include increases in the cost basis of investments resulting from a new portfolio investment, follow on investments, accrued PIK interest or dividends, and accretion of OID and loan origination fees. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation, as well as the movement of an existing portfolio company into this category and out of a different category.
(4) Gross reductions include decreases in the cost basis of investments resulting from principal repayments, if any. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category.

 

27


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Fidus Investment Corporation’s consolidated financial statements and related notes appearing in our annual report on Form 10-K for the year ended December 31, 2014, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 5, 2015. The information contained in this section should also be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q.

Except as otherwise specified, references to “we,” “us,” “our,” “Fidus” and “FIC” refer to Fidus Investment Corporation and its consolidated subsidiaries.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about Fidus Investment Corporation, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects” and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties, including statements as to:

 

    our future operating results;

 

    our business prospects and the prospects of our portfolio companies;

 

    the impact of investments that we expect to make;

 

    our contractual arrangements and relationships with third parties;

 

    the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

    the ability of our portfolio companies to achieve their objectives;

 

    our expected financing and investments;

 

    the adequacy of our cash resources and working capital; and

 

    the timing of cash flows, if any, from the operations of our portfolio companies.

These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

    an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;

 

    a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;

 

    interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy;

 

    currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than the U.S. dollars; and,

 

    the risks, uncertainties and other factors we identify in Item 1A. – Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2014, elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in Item 1.A – Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2014, and elsewhere in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.

 

28


Table of Contents

Overview

We provide customized debt and equity financing solutions to lower middle-market companies, which we define as U.S. based companies having revenues between $10.0 million and $150.0 million. Our investment objective is to provide attractive risk-adjusted returns by generating both current income from our debt investments and capital appreciation from our equity related investments. Our investment strategy includes partnering with business owners, management teams and financial sponsors by providing customized financing for ownership transactions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives. We seek to maintain a diversified portfolio of investments in order to help mitigate the potential effects of adverse economic events related to particular companies, regions or industries.

FIC was formed as a Maryland corporation on February 14, 2011. We completed our initial public offering, or IPO, in June 2011, and completed additional underwritten public offerings of our common stock in September 2012, February 2013 and September 2014 providing approximately $174.1 million in net proceeds after deducting underwriting fees and offering costs.

On June 20, 2011, FIC acquired all of the limited partnership interests of Fund I and membership interests of FMCGP through the Formation Transactions, resulting in Fund I becoming our wholly-owned SBIC subsidiary. Immediately following the Formation Transactions, we and Fund I elected to be treated as BDCs under the 1940 Act and our investment activities have been managed by Fidus Investment Advisors, LLC, our investment advisor, and supervised by our board of directors, a majority of whom are independent of us. On March 29, 2013, we commenced operations of a second wholly-owned subsidiary, Fund II. Fund I and Fund II are collectively referred to as the “Funds.”

Fund I received its SBIC license on October 22, 2007 and Fund II received its SBIC license on May 28, 2013. We plan to continue to operate the Funds as SBICs, subject to SBA approval, and to utilize the proceeds of the sale of SBA-guaranteed debentures to enhance returns to our stockholders. We have also made, and continue to make, investments directly through FIC. We believe that utilizing FIC and the Funds as investment vehicles provides us with access to a broader array of investment opportunities. Based on the current capitalization of the Funds, we have approximately $45.3 million of remaining borrowing capacity under the SBIC Debenture Program and intend to fully utilize such capacity over the ensuing 12-24 months.

In August 2014, we entered into an equity distribution agreement with Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated through which the Company could sell, by means of at-the-market offerings from time to time, shares of the Company’s common stock having an aggregate offering price of up to $50.0 million (the “ATM Program”). During the period from August 21, 2014 through December 31, 2014, 158,353 shares of our common stock were sold at an average offering price of $18.51 per share resulting in net proceeds of $2.9 million after commissions to the sales agent on shares sold and offering costs of $0.1 million. During the six months ended June 30, 2015, 190,623 shares of our common stock were sold at an average offering price of $16.61 per share resulting in net proceeds of $3.1 million after commissions to the sales agent on shares sold and offering costs of $0.1 million. We intend to continue utilizing our ATM Program for capital to fund additional investments during 2015.

Revenues: We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on equity investments. Our debt investments, whether in the form of mezzanine, senior secured or unitranche loans, typically have terms of five to seven years and bear interest at a fixed rate but may bear interest at a floating rate. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity dates. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity may reflect the proceeds of sales of securities. In some cases, our investments provide for deferred interest payments or PIK interest. The principal amount of loans and any accrued but unpaid interest generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, amendment, or structuring fees and fees for providing managerial assistance. Loan origination fees, original issue discount and market discount or premium, if any, are capitalized, and we accrete or amortize such amounts into interest income. We record prepayment premiums on loans as fee income. Interest and dividend income is recorded on the accrual basis to the extent that we expect to collect such amounts. Loans or preferred equity securities are placed on non-accrual status when principal, interest or dividend payments become materially past due, or when there is reasonable doubt that principal, interest or dividends will be collected. See “Critical Accounting Policies and Use of Estimates – Revenue Recognition.” Interest and dividend income is accrued based upon the outstanding principal amount and contractual terms of debt and preferred equity investments. Interest is accrued on a daily basis. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution. Distributions of earnings from portfolio companies are evaluated to determine if the distribution is a distribution of earnings or a return of capital.

We recognize realized gains or losses on investments based on the difference between the net proceeds from the disposition and the cost basis of the investment, without regard to unrealized gains or losses previously recognized. We record current period changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

 

29


Table of Contents

Expenses: All investment professionals of our investment advisor and/or its affiliates, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses allocable to personnel who provide these services to us, are provided and paid for by our investment advisor and not by us. We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to:

 

    organization;

 

    calculating our net asset value (including the cost and expenses of any independent valuation firm);

 

    fees and expenses incurred by our investment advisor under the Investment Advisory Agreement or payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;

 

    interest payable on debt, if any, incurred to finance our investments;

 

    offerings of our common stock and other securities;

 

    investment advisory fees and management fees;

 

    administration fees and expenses, if any, payable under the Administration Agreement (including payments under the Administration Agreement between us and our investment advisor based upon our allocable portion of our investment advisor’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our officers, including our chief compliance officer, our chief financial officer, and their respective staffs);

 

    transfer agent, dividend agent and custodial fees and expenses;

 

    federal and state registration fees;

 

    all costs of registration and listing our shares on any securities exchange;

 

    U.S. federal, state and local taxes;

 

    Independent Directors’ fees and expenses;

 

    costs of preparing and filing reports or other documents required by the SEC or other regulators including printing costs;

 

    costs of any reports, proxy statements or other notices to stockholders, including printing and mailing costs;

 

    our allocable portion of any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

    direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs;

 

    proxy voting expenses; and

 

    all other expenses reasonably incurred by us or our investment advisor in connection with administering our business.

Portfolio Composition, Investment Activity and Yield

During the six months ended June 30, 2015, we invested $67.9 million in debt and equity investments, including seven new portfolio companies. These investments consisted of subordinated notes ($45.4 million, or 66.8%), senior secured loans ($17.5 million, or 25.8%), equity securities ($4.8 million, or 7.1%), and warrants ($0.2 million, or 0.3%). During the six months ended June 30, 2015 we received proceeds from sales or repayments, including principal, return of capital dividends and net realized gains (losses), of $47.4 million. During the six months ended June 30, 2014, we invested $24.7 million in debt and equity investments, including two new portfolio companies. These investments consisted of subordinated notes ($1.7 million, or 6.9%), senior secured loans ($16.8 million, or 68.0%), equity securities ($5.8 million, or 23.5%) and warrants ($0.4 million, or 1.6%). During the six months ended June 30, 2014, we received proceeds from sales or repayments, including principal, return of capital dividends and realized gains, of $20.3 million.

As of June 30, 2015, the fair value of our investment portfolio totaled $420.1 million and consisted of 47 portfolio companies. As of June 30, 2015, our debt portfolio was entirely comprised of fixed rate investments. Overall, the portfolio had net unrealized appreciation of $0.1 million as of June 30, 2015. Our average portfolio company investment at amortized cost was $8.9 million as of June 30, 2015.

As of December 31, 2014, the fair value of our investment portfolio totaled $396.4 million and consisted of 42 portfolio companies. As of December 31, 2014, our debt portfolio was entirely comprised of fixed rate investments. Overall, the portfolio had net unrealized appreciation of $5.0 million as of December 31, 2014. Our average portfolio company investment at amortized cost was $9.3 million as of December 31, 2014.

The weighted average yield on debt investments as of June 30, 2015 and December 31, 2014 was 13.3% and 13.4%, respectively. The weighted average yields were computed using the effective interest rates for debt investments at cost as of June 30, 2015 and December 31, 2014, including the accretion of original issue discount and loan origination fees, but excluding investments on non-accrual status, if any.

 

30


Table of Contents

The following table shows the portfolio composition by investment type at fair value and cost as a percentage of total investments:

 

     Fair Value     Cost  
     June 30,
2015
    December 31,
2014
    June 30,
2015
    December 31,
2014
 

Subordinated notes

     67.0     69.1     67.9     69.8

Senior secured loans

     20.8        18.7        20.7        19.0   

Equity

     10.5        10.8        9.7        9.4   

Warrants

     1.7        1.4        1.7        1.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0 %     100.0 %
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows the portfolio composition by geographic region at fair value and cost as a percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company:

 

     Fair Value     Cost  
     June 30,
2015
    December 31,
2014
    June 30,
2015
    December 31,
2014
 

Midwest

     25.7     23.9     24.9     23.7

Southeast

     25.0        28.6        25.4        29.0   

Northeast

     23.3        16.9        23.0        16.7   

West

     16.9        19.9        15.3        18.4   

Southwest

     9.1        10.7        11.4        12.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0 %     100.0 %
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows the detailed industry composition of our portfolio at fair value and cost as a percentage of total investments:

 

     Fair Value     Cost  
     June 30,
2015
    December 31,
2014
    June 30,
2015
    December 31,
2014
 

Healthcare services

     12.7     10.3     12.7     10.8

Healthcare products

     12.5        11.2        11.7        10.6   

Aerospace & defense manufacturing

     8.9        9.4        7.4        8.6   

Specialty distribution

     7.1        10.3        7.1        9.3   

Building products manufacturing

     7.0        3.6        6.8        3.7   

Transportation services

     6.0        4.0        5.9        3.9   

Consumer products

     5.3        5.6        5.3        5.6   

Oil & gas services

     4.4        8.6        4.8        8.8   

Component manufacturing

     4.2        4.3        4.3        4.6   

Business services

     4.2        3.1        4.2        3.2   

Industrial cleaning & coatings

     4.0        4.1        4.2        4.2   

Financial services

     3.3        3.7        3.0        3.4   

Safety products manufacturing

     2.6        2.7        2.6        2.7   

Utility equipment manufacturing

     2.5        2.6        2.4        2.6   

Printing services

     2.3        2.4        2.4        2.6   

Restaurants

     2.1        1.7        1.9        1.6   

Specialty chemicals

     1.9        2.2        2.1        2.2   

Information technology services

     1.9        2.3        2.2        2.5   

Laundry services

     1.5        1.5        1.4        1.4   

Telecommunication services

     1.4        —          1.4        —     

Apparel distribution

     1.4        1.5        1.4        1.5   

Vending equipment manufacturing

     1.2        —          1.2        —     

Specialty cracker manufacturing

     0.5        0.5        0.3        0.3   

Electronic components supplier

     0.4        0.4        0.3        0.4   

Retail

     0.3        2.7        0.2        2.6   

Retail cleaning

     0.2        1.1        2.6        2.7   

Commercial cleaning

     0.2        0.2        0.2        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0 %     100.0 %
  

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

Portfolio Asset Quality

In addition to various risk management and monitoring tools, our investment advisor uses an internally developed investment rating system to characterize and monitor the credit profile and our expected level of returns on each investment in our portfolio. We use a five-level numeric rating scale. The following is a description of the conditions associated with each investment rating:

 

    Investment Rating 1 is used for investments that involve the least amount of risk in our portfolio. The portfolio company is performing above expectations and the trends and risk factors are favorable, and may include an expected capital gain.

 

    Investment Rating 2 is used for investments that involve a level of risk similar to the risk at the time of origination. The portfolio company is performing substantially within our expectations and the risk factors are neutral or favorable. Each new portfolio investment enters our portfolio with Investment Rating 2.

 

    Investment Rating 3 is used for investments performing below expectations and indicates the investment’s risk has increased somewhat since origination. The portfolio company requires closer monitoring, but we expect a full return of principal and collection of all interest and/or dividends.

 

    Investment Rating 4 is used for investments performing materially below expectations and the risk has increased materially since origination. The portfolio company has the potential for some loss of investment return, but we expect no loss of principal.

 

    Investment Rating 5 is used for investments performing substantially below our expectations and the risks have increased substantially since origination. We expect some loss of principal.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2015 and December 31, 2014:

 

     June 30, 2015     December 31, 2014  
     Investments
at Fair Value
     Percent
of Total
Portfolio
    Investments
at Fair Value
     Percent of
Total
Portfolio
 
     (dollars in thousands)  

Investment Rating

          

1

   $ 57,721         13.7 %   $ 49,499         12.5 %

2

     316,879         75.5        297,024         74.9   

3

     44,312         10.5        48,814         12.3   

4

     1,222         0.3        1,018         0.3   

5

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Totals

   $ 420,134         100.0 %   $ 396,355         100.0 %
  

 

 

    

 

 

   

 

 

    

 

 

 

Based on our investment rating system, the weighted average rating of our portfolio as of both June 30, 2015 and December 31, 2014 was 2.0.

Non-Accrual

As of June 30, 2015, we had debt investments in one portfolio company on non-accrual status, which had an aggregate cost and fair value of $4.1 million and $0.8 million, respectively. As of December 31, 2014, we had no debt investments on non-accrual status.

For the three and six months ended June 30, 2015, we recognized unrealized depreciation on non-accrual debt investments of $3.0 million and $3.1 million, respectively. For the three and six months ended June 30, 2014, we recognized unrealized depreciation on non-accrual debt investments of $5.1 million and $8.4 million, respectively.

Discussion and Analysis of Results of Operations

Comparison of three months ended June 30, 2015 and June 30, 2014

Investment Income

For the three months ended June 30, 2015, total investment income was $12.8 million, an increase of $2.2 million, or 21.0%, over the $10.6 million of total investment income for the three months ended June 30, 2014. The increase was primarily attributable to a $2.8 million increase in interest income resulting largely from higher average levels of debt investments outstanding, which was offset by a $0.4 million decrease in dividend income due to lower average levels of income producing equity investments outstanding and a $0.3 million decrease in fee income resulting from lower levels of investment activity during the three months ended June 30, 2015, as compared to the three months ended June 30, 2014.

 

32


Table of Contents

Expenses

For the three months ended June 30, 2015, total expenses, including income tax provision, were $6.8 million, an increase of $1.7 million or 33.3%, over the $5.1 million of total expenses, including income tax provision, for the three months ended June 30, 2014. Interest and financing expenses for the three months ended June 30, 2015 were $2.3 million, an increase of $0.5 million or 28.3%, compared to $1.8 million for the three months ended June 30, 2014 as a result of higher average balances of SBA debentures outstanding during 2015 and interest and commitment fees related to the Credit Facility. The base management fee increased $0.5 million, or 33.8%, to $1.9 million for the three months ended June 30, 2015 due to higher average total assets less cash and cash equivalents for the three months ended June 30, 2015 than the comparable period in 2014. The incentive fee for the three months ended June 30, 2015 was $1.6 million, a $0.7 million, or 82.5%, increase from the $0.9 million incentive fee for the three months ended June 30, 2014 which was the result of an increase of $0.2 million in the income incentive fee to $1.5 million and a capital gains incentive fee accrual of less than $0.1 million during the 2015 period compared to a capital gains incentive fee reversal of $0.4 million during the same period in 2014. The administrative service fee, professional fees and other general and administrative expenses totaled $1.0 million for both the three months ended June 30, 2015 and 2014.

Net Investment Income

Net investment income for the three months ended June 30, 2015 was $6.0 million, which was an increase of $0.5 million, or 9.6%, compared to net investment income of $5.5 million during the three months ended June 30, 2014 as a result of the $2.2 million increase in total investment income and the $1.7 million increase in total expenses, including income tax provision.

Net Increase in Net Assets Resulting From Operations

For the three months ended June 30, 2015, the total net realized gains on investments were $5.3 million and were comprised of $5.3 million in gross realized gains and less than $0.1 million in gross realized losses. Significant realized gains (losses) for the three months ended June 30, 2015 are summarized below:

 

Portfolio Company

   Realization Event    Net Realized
Gain (Loss)
(in millions)
 

Connect-Air International, Inc.

   Exit of portfolio company    $ 5.3   

Acentia, LLC

   Exit of portfolio company      < (0.1

Other

        < (0.1
     

 

 

 

Total

      $ 5.3   
     

 

 

 

For the three months ended June 30, 2014, the total net realized gains on investments were $0.1 million and were comprised of $0.1 million in gross realized gains related to escrow payments received on previously exited portfolio investments.

During the three months ended June 30, 2015, we recorded a net change in unrealized depreciation on investments of $5.1 million attributable to (i) the reversal of net unrealized appreciation on investments of $5.3 million related to the exit or sale of investments, resulting in unrealized depreciation, (ii) net unrealized depreciation of $2.3 million on debt investments and (iii) net unrealized appreciation of $2.5 million on equity investments. During the three months ended June 30, 2014, we recorded a net change in unrealized depreciation on investments of $2.1 million attributable to (i) net unrealized depreciation of $4.1 million on debt investments and (ii) net unrealized appreciation of $2.0 million on equity investments.

As a result of these events, our net increase in net assets resulting from operations during the three months ended June 30, 2015 was $6.2 million, or an increase of $2.8 million, or 82.2%, compared to a net increase in net assets resulting from operations of $3.4 million during the prior year period.

Comparison of six months ended June 30, 2015 and June 30, 2014

Investment Income

For the six months ended June 30, 2015, total investment income was $25.6 million, an increase of $4.5 million, or 21.3%, over the $21.1 million of total investment income for the six months ended June 30, 2014. The increase was primarily attributable to a $5.2 million increase in interest income resulting largely from higher average levels of debt investments outstanding, which was offset by a $0.6 million decrease in dividend income due to lower average levels of income producing equity investments outstanding during the six months ended June 30, 2015, as compared to the six months ended June 30, 2014 and a $0.1 million decrease in fee income for the six months ended June 30, 2015 compared to the prior year period.

Expenses

For the six months ended June 30, 2015, total expenses, including income tax provision, were $13.4 million, an increase of $3.2 million or 31.2%, over the $10.2 million of total expenses, including income tax provision, for the six months ended June 30,

 

33


Table of Contents

2014. Interest and financing expenses for the six months ended June 30, 2015 were $4.4 million, an increase of $0.9 million or 24.9%, compared to $3.5 million for the six months ended June 30, 2014 as a result of higher average balances of SBA debentures outstanding during 2015 and interest and commitment fees related to the Credit Facility. The base management fee increased $0.9 million, or 32.5%, to $3.7 million for the six months ended June 30, 2015 due to higher average total assets less cash and cash equivalents for the six months ended June 30, 2015 than the comparable period in 2014. The incentive fee for the six months ended June 30, 2015 was $3.2 million, a $1.5 million, or 86.2%, increase from the $1.7 million incentive fee for the six months ended June 30, 2014 which was the result of an increase of $0.6 million in the income incentive fee to $3.1 million and a capital gains incentive fee accrual of $0.1 million during the 2015 period compared to a capital gains incentive fee reversal of $0.8 million during the same period in 2014. The administrative service fee, professional fees and other general and administrative expenses totaled $2.1 million for the six months ended June 30, 2015 compared to $2.2 million for the six months ended June 30, 2014.

Net Investment Income

Net investment income for the six months ended June 30, 2015 was $12.3 million, which was an increase of $1.3 million, or 12.0%, compared to net investment income of $11.0 million during the six months ended June 30, 2014 as a result of the $4.5 million increase in total investment income and the $3.2 million increase in total expenses, including income tax provision.

Net Increase in Net Assets Resulting From Operations

For the six months ended June 30, 2015, the total net realized gains on investments were $5.3 million and were comprised of $5.3 million in gross realized gains and less than $0.1 million in gross realized losses. Significant realized gains (losses) for the six months ended June 30, 2015 are summarized below:

 

Portfolio Company

   Realization Event    Net Realized
Gain (Loss)
(in millions)
 

Connect-Air International, Inc.

   Exit of portfolio company    $ 5.3   

Acentia, LLC

   Exit of portfolio company      < (0.1

Other

        < (0.1
     

 

 

 

Total

      $ 5.3   
     

 

 

 

For the six months ended June 30, 2014, the total realized gains on investments were $1.9 million and were comprised of $1.9 million in gross realized gains. Significant realized gains for the six months ended June 30, 2014 are summarized below:

 

Portfolio Company

   Realization Event    Net Realized
Gain
(in millions)
 

Nobles Manufacturing, Inc.

   Exit of portfolio company    $ 1.7   

Apex Microtechnology, Inc.

   Repayment of debt in full      0.2   

Other

        < 0.1   
     

 

 

 

Total

      $ 1.9   
     

 

 

 

During the six months ended June 30, 2015, we recorded a net change in unrealized depreciation on investments of $4.9 million attributable to (i) the reversal of net unrealized appreciation on investments of $4.1 million related to the exit or sale of investments, resulting in unrealized depreciation, (ii) net unrealized depreciation of $3.7 million on debt investments and (iii) net unrealized appreciation of $2.9 million on equity investments. During the six months ended June 30, 2014, we recorded a net change in unrealized depreciation on investments of $6.0 million attributable to (i) the reversal of net unrealized appreciation on investments of $1.9 million related to the exit or sale of investments, resulting in unrealized depreciation, (ii) net unrealized depreciation of $7.5 million on debt investments and (iii) net unrealized appreciation of $3.4 million on equity investments.

As a result of these events, our net increase in net assets resulting from operations during the six months ended June 30, 2015 was $12.7 million, or an increase of $5.8 million, or 85.9%, compared to a net increase in net assets resulting from operations of $6.8 million during the prior year period.

Liquidity and Capital Resources

As of June 30, 2015, we had $14.5 million in cash and cash equivalents and our net assets totaled $246.9 million. We believe that our current cash and cash equivalents on hand, our continued access to SBA-guaranteed debentures, our Credit Facility and our anticipated cash flows from operations will provide adequate capital resources with which to operate and finance our investment business and make distributions to our stockholders for at least the next 12 months. We intend to generate additional cash primarily from the future offerings of securities (including the ATM Program) and future borrowings, as well as cash flows from operations, including income earned from investments in our portfolio companies. On both a short-term and long-term basis, our primary use of funds will be investments in portfolio companies and cash distributions to our stockholders.

 

34


Table of Contents

Cash Flows

For the six months ended June 30, 2015, we experienced a net decrease in cash and cash equivalents in the amount of $14.8 million. During that period, we used $11.5 million of cash for operating activities, primarily for the funding of $67.9 million of investments, which was partially offset by the proceeds from sales and repayments of investments of $47.4 million. During the same period, we used $3.3 million for financing activities resulting from cash dividends paid to stockholders of $12.2 million and payments of financing costs totaling $1.0 million, which were partially offset by proceeds received from stock offerings, net of expenses, of $3.2 million, proceeds from the issuance of SBA debentures of $6.2 million and net borrowings under the Credit Facility of $0.5 million.

For the six months ended June 30, 2014, we experienced a net decrease in cash and cash equivalents in the amount of $12.7 million. During that period, we generated $0.1 million of cash from operating activities, primarily from repayments and sales proceeds received of $20.3 million and net investment income of $11.0 million, which was partially offset by the funding of $24.7 million of investments. During the same period, we used $12.9 million for financing activities, consisting of cash dividends paid to stockholders of $10.1 million and a $2.9 million payment for taxes related to the 2013 deemed distribution which was paid on behalf of the stockholders.

Capital Resources

We anticipate that we will continue to fund our investment activities on a long-term basis through a combination of additional debt and equity capital.

The Funds are licensed SBICs, and have the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the Small Business Investment Act and the SBA rules applicable to SBICs, an SBIC can have outstanding at any time debentures guaranteed by the SBA in an amount up to twice its regulatory capital. The SBA regulations currently limit the amount that is available to be borrowed by any SBIC and guaranteed by the SBA to 200.0% of an SBIC’s regulatory capital or $150.0 million, whichever is less. For two or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $225.0 million. SBA debentures have fixed interest rates that approximate prevailing 10-year Treasury Note rates plus a spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the SBA debentures is not required to be paid before maturity but may be pre-paid at any time. As of June 30, 2015, Fund I had $150.0 million of outstanding SBA debentures. Based on its $75.0 million of regulatory capital as of June 30, 2015, Fund I cannot issue additional SBA debentures. As of June 30, 2015, Fund II had $29.7 million of outstanding SBA debentures. Based on its $37.5 million of regulatory capital as of June 30, 2015, Fund II has the current capacity to issue up to an additional $45.3 million of SBA debentures. For more information on the SBA debentures, please see Note 6 to our consolidated financial statements.

In June 2014, we entered the Credit Facility to provide additional funding for our investment and operational activities. The Credit Facility, which matures on June 16, 2018, had an initial commitment of $30.0 million and an accordion feature that allows for an increase in the total commitments up to $75.0 million, subject to certain customary conditions. The Credit Facility is secured primarily by our assets, excluding the assets of the Funds.

On December 19, 2014, FIC amended the Credit Facility to (i) increase the commitment from $30.0 million to $50.0 million (ii) allow FIC to buy-back up to $10.0 million of our common stock subject to the satisfaction of specified financial covenants and conditions. The Credit Facility continues to have an accordion feature which allows for an increase in the total commitment up to $75.0 million.

Borrowings under the Credit Facility are subject to a minimum borrowing/collateral base that applies an advance rate to certain portfolio investments. We are subject to additional limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, payment frequency and status and collateral interests, as well as restrictions on portfolio company leverage, which may also affect the borrowing base and therefore amounts available to borrow.

Borrowings under the Credit Facility bear interest, subject to our election, on a per annum basis equal to (i) the alternate base rate plus 2.5% or (ii) the applicable LIBOR rate plus 3.5%. The alternate base rate is equal to the greater of (i) prime rate, (ii) the federal funds rate plus 0.5% or (iii) the three-month LIBOR rate plus 1.0%. We pay a commitment fee ranging from 0.5% to 1.0% per annum on undrawn amounts.

We have made customary representations and warranties and are required to comply with various affirmative, negative and financial covenants, reporting requirements and other customary requirements for similar credit facilities. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. As of June 30, 2015, we are in compliance with all covenants of the Credit Facility and there was $10.5 million outstanding under the Credit Facility.

 

35


Table of Contents

As of June 30, 2015, the weighted average interest rate for all SBA debentures and borrowings outstanding under the Credit Facility was 4.2%.

As a BDC, we are generally required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200.0%. This requirement limits the amount that we may borrow. We have received exemptive relief from the Securities and Exchange Commission, or the SEC, to allow us to exclude any indebtedness guaranteed by the SBA and issued by the Funds from the 200.0% asset coverage requirements, which, in turn, will enable us to fund more investments with debt capital.

As a BDC, we are generally not permitted to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common stock if our board of directors, including Independent Directors, determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve such sale. On June 3, 2015, our stockholders voted to allow us to sell or otherwise issue common stock at a price below net asset value per share for a period of one year ending on the earlier of June 3, 2016 or the date of our 2016 Annual Meeting of Stockholders. We expect to present to our stockholders a similar proposal at our 2016 Annual Meeting of Stockholders. Our stockholders specified that the cumulative number of shares sold in each offering during the one-year period ending on the earlier of June 3, 2016 or the date of our 2016 Annual Meeting of Stockholders may not exceed 25.0% of our outstanding common stock immediately prior to each such sale.

Current Market Conditions

Though global credit and other financial market conditions have improved and stability has increased throughout the international financial system, the uncertainty surrounding the United States’ rapidly increasing national debt and continuing global economic malaise have kept markets volatile. These unstable conditions could continue for a prolonged period of time. Although we have been able to secure access to additional liquidity, including our follow-on stock offerings, the ATM Program and leverage available through the SBIC program and Credit Facility, there is no assurance that debt or equity capital will be available to us in the future on favorable terms, or at all.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions affecting amounts reported in the financial statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.

Valuation of Portfolio Investments

As a BDC, we report our assets and liabilities at fair value at all times consistent with GAAP and the 1940 Act. Accordingly, we are required to periodically determine the fair value of all of our portfolio investments.

Our investments generally consist of illiquid securities including debt and equity investments in lower middle-market companies. Investments for which market quotations are readily available are valued at such market quotations. Because we expect that there will not be a readily available market for substantially all of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors using a documented valuation policy and consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the difference could be material.

With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:

 

    our quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of our investment advisor responsible for the portfolio investment;

 

    preliminary valuation conclusions are then documented and discussed with the investment committee of our investment advisor;

 

    our board of directors also engages one or more independent valuation firms to provide an independent appraisal for each of our investments at least once in every calendar year, and for new portfolio companies, at least once in the twelve-month period subsequent to the initial investment;

 

    the audit committee of our board of directors reviews the preliminary valuations of our investment advisor and of the independent valuation firm(s) and responds and supplements the valuation recommendations to reflect any comments; and

 

    the board of directors discusses the valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of our investment advisor, the independent valuation firm(s) and the audit committee.

 

36


Table of Contents

In making the good faith determination of the value of portfolio investments, we start with the cost basis of the security. The transaction price is typically the best estimate of fair value at inception. When evidence supports a subsequent change to the carrying value from the original transaction price, adjustments are made to reflect the expected exit values.

We perform detailed valuations of our debt and equity investments, using both the market and income approaches as appropriate. Under the market approach, we typically use the enterprise value methodology to determine the fair value of an investment. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is generally best expressed as a range of values, from which we derive a single estimate of enterprise value. Under the income ap