497
Table of Contents

Filed Pursuant to Rule 497
Registration Statement No. 333-202531

PROSPECTUS SUPPLEMENT

(To Prospectus dated April 19, 2017)

$50,000,000

LOGO

Common Stock

 

 

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. 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.

We have entered into an equity distribution agreement, dated August 21, 2014, and an amendment to the equity distribution agreement, dated August 21, 2017 (collectively, the “equity distribution agreement”), with Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated, each a “Sales Agent” and, collectively, the “Sales Agents,” relating to the shares of common stock offered by this prospectus supplement and the accompanying prospectus.

The equity distribution agreement provides that we may offer and sell shares of our common stock having an aggregate offering price of up to $50,000,000 (the “ATM Program”) from time to time through the Sales Agents. For the period from August 21, 2014 (the inception of the ATM Program) through August 21, 2017, we sold 348,976 shares of our common stock under the ATM Program at an aggregate offering price of $6,097,327. Related to such sales during that period we incurred total Sales Agents’ commissions of $91,460 and offering expenses of approximately $33,000. As of the date of this prospectus supplement, we can sell shares of our common stock having an aggregate offering price of up to $43,902,673 under the ATM Program. Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities Act, including sales made directly on the NASDAQ Global Select Market, or NASDAQ, or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.

 

The Sales Agents are not required to sell any specific number or dollar amount of shares of our common stock, but as instructed by us will make all sales using commercially reasonable efforts, consistent with their normal trading and sales practices, as our Sales Agents and subject to the terms of the equity distribution agreement. From time to time during the terms of the equity distribution agreement, we may deliver a placement notice to one of the Sales Agents specifying the length of the selling period, the amount of shares to be sold and the minimum price below which sales may not be made. Shares of our common stock to which this prospectus supplement relates will be sold only through one Sales Agent on any given day. The offering of shares of common stock pursuant to the equity distribution agreement will terminate upon the earlier of (1) the sale of shares having an aggregate offering price of $50,000,000 or (2) the termination of the equity distribution agreement. Under the terms of the equity distribution agreement, the Sales Agents will receive a commission equal to 1.50% of the gross sales price of any shares of our common stock sold through the Sales Agents under the equity distribution agreement. See “Plan of Distribution” beginning on page S-14 of this prospectus supplement.

Our common stock is listed on NASDAQ under the trading symbol “FDUS.” The last sale price of our common stock, as reported on NASDAQ on August 17, 2017, was $16.36 per share. The net asset value, or NAV, per share of our common stock at June 30, 2017 (the last date prior to the date of this prospectus supplement on which we determined net asset value) was $15.87. The sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less commissions paid to the Sales Agents, will not be less than the net asset value per share of our common stock at the time of such sale.

This prospectus supplement and the accompanying prospectus contain important information about us that a prospective investor should know before investing in our common stock. Please read this prospectus supplement and the accompanying prospectus before you invest and keep it for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission, or SEC. The SEC also maintains a website at http://www.sec.gov that contains such information. This information is also available free of charge by contacting us at 1603 Orrington Avenue, Suite 1005, Evanston, Illinois 60201, Attention: Investor Relations, or by calling us at (847) 859-3940 or on our website at www.fidusinv.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus supplement and the accompanying prospectus.

 

 

Investing in our common stock involves a high degree of risk, including risks arising from our use of leverage. Before buying any shares, you should read the discussion of the material risks of investing in our common stock in “Risk Factors” beginning on page 12 of the accompanying prospectus.

Neither the SEC nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

RAYMOND JAMES     BAIRD

The date of this prospectus supplement is August 21, 2017


Table of Contents

TABLE OF CONTENTS

Prospectus Supplement

 

     Page  

Summary

     S-1  

The Offering

     S-7  

Fees and Expenses

     S-9  

Special Note Regarding Forward-Looking Statements

     S-12  

Plan of Distribution

     S-14  

Use of Proceeds

     S-16  

Capitalization

     S-17  

Price Range of Common Stock and Distributions

     S-19  

Selected Consolidated Financial Data

     S-21  

Management Discussion and Analysis of Financial Condition and Results of Operations

     S-23  

Sales of Common Stock Below Net Asset Value

     S-43  

Legal Matters

     S-44  

Independent Registered Public Accounting Firm

     S-44  

Available Information

     S-44  

Privacy Notice

     S-44  

Index to Financial Information

     SF-1  
Prospectus  

Prospectus Summary

     1  

Fees and Expenses

     9  

Risk Factors

     12  

Special Note Regarding Forward-Looking Statements

     40  

Use of Proceeds

     42  

Ratio of Earnings to Fixed Charges

     43  

Price Range of Common Stock and Distributions

     44  

Selected Consolidated Financial Data

     46  

Selected Quarterly Financial Data

     48  

Management’s Discussion and Analysis of Financial Information and Results of Operations

     49  

Senior Securities

     68  

The Company

     69  

Portfolio Companies

     79  

Management

     85  

Management and Other Agreements

     95  

Certain Relationships and Related Transactions

     102  

Control Persons and Principal Stockholders

     105  

Sales of Common Stock Below Net Asset Value

     106  

Dividend Reinvestment Plan

     111  

Material U.S. Federal Income Tax Considerations

     112  

 

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     Page  

Description of Our Capital Stock

     122  

Description of Our Preferred Stock

     129  

Description of Our Subscription Rights

     131  

Description of Our Debt Securities

     133  

Description of Our Warrants

     147  

Regulation

     149  

Plan of Distribution

     155  

Custodian, Transfer and Dividend Paying Agent and Registrar

     156  

Brokerage Allocation and Other Practices

     156  

Legal Matters

     158  

Independent Registered Public Accounting Firm

     158  

Available Information

     158  

Privacy Notice

     159  

Index to Financial Statements

     F-1  

 

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ABOUT THE PROSPECTUS SUPPLEMENT

This document is in two parts. The first part is this prospectus supplement, which describes the specific terms of the common stock we are offering and certain other matters relating to us. The second part, the accompanying prospectus, gives more general information about the securities that we may offer from time to time, some of which may not apply to the common stock offered by this prospectus supplement. For information about our common stock, see “Description of Our Capital Stock” in the accompanying prospectus.

If information varies between this prospectus supplement and the accompanying prospectus, you should rely only on such information in this prospectus supplement. The information contained in this prospectus supplement supersedes any inconsistent information included in the accompanying prospectus. In various places in this prospectus supplement and the accompanying prospectus, we refer you to other sections of such documents for additional information by indicating the caption heading of such other sections. The page on which each principal caption included in this prospectus supplement and the accompanying prospectus can be found is listed in the table of contents above. All such cross references in this prospectus supplement are to captions contained in this prospectus supplement and not in the accompanying prospectus, unless otherwise stated.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT, AND THE SALES AGENTS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE SALES AGENTS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS ACCURATE ONLY AS OF THEIR RESPECTIVE DATES, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR ANY SALES OF THE SECURITIES. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THOSE DATES.

 

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SUMMARY

This summary highlights some of the information in this prospectus supplement. It is not complete and may not contain all of the information that you may want to consider. You should read the entire prospectus supplement and the accompanying prospectus carefully, including “Risk Factors,” “Capitalization,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements contained elsewhere in this prospectus supplement and the accompanying prospectus. Together, these documents describe the specific terms of the shares we are offering.

Fidus Investment Corporation is a Maryland corporation, formed on February 14, 2011, for the purpose of acquiring 100.0% of the equity interests in Fidus Mezzanine Capital, L.P., or Fund I, and its general partner, Fidus Mezzanine Capital GP, LLC, or FMCGP, raising capital in its initial public offering, or IPO, which was completed in June 2011, and thereafter, operating as an externally managed BDC under the 1940 Act. Fund I is licensed as a small business investment company, or SBIC, by the United States Small Business Administration, or SBA. Simultaneously with the consummation of our IPO, we acquired all of the equity interests in Fund I and its former general partner as described elsewhere in this prospectus supplement under “Formation Transactions,” whereby Fund I became our wholly-owned subsidiary. On March 29, 2013, we commenced operations of a new wholly-owned investment fund, Fidus Mezzanine Capital II, L.P., or Fund II, and on May 28, 2013, were granted a second license by the SBA to operate Fund II as an SBIC. Collectively, Fund I and Fund II are referred to as the Funds. Unless otherwise noted in this prospectus supplement the terms “we,” “us,” “our,” the “Company,” “Fidus” and “FIC” refer to Fidus Investment Corporation and its consolidated subsidiaries.

As used in this prospectus supplement the term “our investment advisor” refers to Fidus Capital, LLC prior to the Formation Transactions and Fidus Investment Advisors, LLC after the Formation Transactions. The investment professionals of Fidus Investment Advisors, LLC were also the investment professionals of Fidus Capital, LLC.

Fidus Investment Corporation

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.

We invest in companies that possess some or all of the following attributes: predictable revenues; positive cash flows; defensible and/or leading market positions; diversified customer and supplier bases; and proven management teams with strong operating discipline. We target companies in the lower middle-market with annual earnings, before interest, taxes, depreciation and amortization, or EBITDA, between $3.0 million and $20.0 million; however, we may from time to time opportunistically make investments in larger or smaller companies. Our investments typically range between $5.0 million and $25.0 million per portfolio company.

 



 

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As of June 30, 2017, the fair value of our investment portfolio totaled $553.3 million and consisted of 55 active portfolio companies and five portfolio companies that have sold their underlying operations. The weighted average yield on our debt investments as of June 30, 2017 was 13.0%. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses. The weighted average yield was computed using the effective interest rates for debt investments at cost as of June 30, 2017, including the accretion of original issue discount and loan origination fees, but excluding investments on non-accrual status, if any. There can be no assurance that the weighted average yield will remain at its current level.

Market Opportunity

We believe that the limited amount of capital available to lower middle-market companies, coupled with the desire of these companies for flexible and partnership-oriented sources of capital, creates an attractive investment environment for us. From our perspective, lower middle-market companies have faced difficulty raising debt capital in both the capital markets and private markets. As a result of the difficulties in the credit markets and fewer sources of capital for lower middle-market companies, we see opportunities for improved risk-adjusted returns. Furthermore, we believe with a large pool of uninvested private equity capital seeking debt capital to complete transactions and a substantial supply of refinancing opportunities, there is an opportunity to attain appealing risk-adjusted returns on debt and equity investments. See “The Company” in the accompanying prospectus for more information.

Business Strategy

We intend to accomplish our goal of becoming the premier provider of capital to and value-added partner of lower middle-market companies by:

 

   

Leveraging the experience of our investment advisor;

 

   

Capitalizing on our strong transaction sourcing network;

 

   

Serving as a value-added partner with customized financing solutions;

 

   

Employing rigorous due diligence and underwriting processes focused on capital preservation;

 

   

Actively managing our portfolio; and

 

   

Benefiting from lower cost of capital through our SBIC subsidiaries.

Investment Criteria/Guidelines

We use the following criteria and guidelines in evaluating investment opportunities and constructing our portfolio. However, not all of these criteria and guidelines have been, or will be, met in connection with each of our investments.

Value Orientation / Positive Cash Flow. Our investment advisor places a premium on analysis of business fundamentals from an investor’s perspective and has a distinct value orientation. We focus on companies with proven business models in which we can invest at relatively low multiples of operating cash flow. We also typically invest in portfolio companies with a history of

 



 

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profitability and minimum trailing twelve month EBITDA of $3.0 million. We do not invest in start-up companies, “turn-around” situations or companies that we believe have unproven business plans.

Experienced Management Teams with Meaningful Equity Ownership. We target portfolio companies that have management teams with significant experience and/or relevant industry experience coupled with meaningful equity ownership. We believe management teams with these attributes are more likely to manage the companies in a manner that protects our debt investment and enhances the value of our equity investment.

Niche Market Leaders with Defensible Market Positions. We seek to invest in portfolio companies that have developed defensible and/or leading positions within their respective markets or market niches and are well positioned to capitalize on growth opportunities. We favor companies that demonstrate significant competitive advantages, which we believe helps to protect their market position and profitability.

Diversified Customer and Supplier Base. We prefer to invest in portfolio companies that have a diversified customer and supplier base. Companies with a diversified customer and supplier base are generally better able to endure economic downturns, industry consolidation and shifting customer preferences.

Significant Equity Value. We believe the existence of significant underlying equity value provides important support to our debt investments. With respect to our debt investments, we look for portfolio companies where management/sponsors have provided significant equity funding and where we believe aggregate enterprise value significantly exceeds aggregate indebtedness, after consideration of our investment.

Viable Exit Strategy. We invest in portfolio companies that we believe will provide steady cash flows to service our debt, ultimately repay our loans and provide working capital for their respective businesses. In addition, we seek to invest in portfolio companies whose business models and expected future cash flows offer attractive exit possibilities for our equity investments. We expect to exit our investments typically through one of three scenarios: (a) the sale of the portfolio company resulting in repayment of all outstanding debt and monetization of equity; (b) the recapitalization of the portfolio company through which our investments are replaced with debt or equity from a third party or parties; or (c) the repayment of the initial or remaining principal amount of our debt investment from cash flow generated by the portfolio company. In some investments, there may be scheduled amortization of some portion of our debt investment that would result in a partial exit of our investment prior to the maturity of the debt investment.

About our Advisor

Our investment activities are managed by Fidus Investment Advisors, LLC, our investment advisor, and supervised by our board of directors, a majority of whom are not “interested persons” of Fidus as defined in Section 2(a)(19) of the 1940 Act, and who we refer to hereafter as the Independent Directors. Pursuant to the terms of the investment advisory and management agreement, which we refer to as the Investment Advisory Agreement, between us and our investment advisor, our investment advisor is responsible for determining the composition of our portfolio, including sourcing potential investments, conducting research and diligence on potential investments and equity sponsors, analyzing investment opportunities, structuring our investments and monitoring our investments and portfolio companies on an ongoing basis. Our

 



 

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investment advisor’s investment professionals seek to capitalize on their significant deal origination and sourcing, underwriting, due diligence, investment structuring, execution, portfolio management and monitoring experience. These professionals have developed a broad network of contacts within the investment community, have gained extensive experience investing in assets that constitute our primary focus and have expertise in investing across all levels of the capital structure of lower middle-market companies. For information regarding the people who control our investment advisor and their affiliations with us, see “Certain Relationships and Related Transactions—Investment Advisory Agreement” in the accompanying prospectus.

Our relationship with our investment advisor is governed by and dependent on the Investment Advisory Agreement and may be subject to conflicts of interest. We pay our investment advisor a fee for its services under the Investment Advisory Agreement 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% of the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed amounts). The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20.0% of our “pre-incentive fee net investment income” for the immediately preceding quarter, subject to a 2.0% preferred return, or “hurdle,” and a “catch up” feature. The second part is determined and payable in arrears as of the end of each fiscal year in an amount equal to 20.0% of our realized capital gains, if any, on a cumulative basis from inception through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any capital gain incentive fees paid in prior years. We accrue, but do not pay, a capital gains incentive fee in connection with any unrealized capital appreciation, as appropriate. For more information about how we compensate our investment advisor and the related conflicts of interest, see “Management and Other Agreements—Investment Advisory Agreement” and “Certain Relationships and Related Transactions—Conflicts of Interest” in the accompanying prospectus.

Among other things, our board of directors is charged with protecting our interests by monitoring how our investment advisor addresses conflicts of interest associated with its management services and compensation. Our board of directors is not expected to review or approve each borrowing or incurrence of leverage. However, our board of directors periodically reviews our investment advisor’s portfolio management decisions and portfolio performance. In addition, our board of directors at least annually reviews the services provided by and fees paid to our investment advisor. In connection with these reviews, our board of directors, including a majority of our Independent Directors, considers whether the fees and expenses (including those related to leverage) that we pay to our investment advisor are fair and reasonable in relation to the services provided. Renewal of our Investment Advisory Agreement must be approved each year by our board of directors, including a majority of our Independent Directors.

With respect to the administrative agreement with our investment advisor, which also serves as our administrator, our board of directors reviews the methodology employed in determining how the expenses are allocated to us. Our board of directors assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party service providers known to be available. In addition, our board of directors considers whether any third-party service provider would be capable of providing all such services at comparable cost and quality.

Fidus Investment Advisors, LLC is a Delaware limited liability company that is registered as an investment advisor under the Investment Advisers Act of 1940, as amended, or the Advisers Act. In addition, Fidus Investment Advisors, LLC provides us with office space, equipment and

 



 

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clerical, book-keeping and record-keeping services pursuant to an administration agreement, which we refer to as the Administration Agreement.

Operating and Regulatory Structure

Our investment activities are managed by our investment advisor and supervised by our board of directors, a majority of whom are not interested persons of us, our investment advisor or its affiliates.

As a BDC, we are required to comply with certain regulatory requirements. For example, while we are permitted to finance investments using leverage, which may include the issuance of shares of preferred stock, or notes and other borrowings, our ability to use leverage is limited in significant respects. See “Regulation” in the accompanying prospectus. Any decision on our part to use leverage will depend upon our assessment of the attractiveness of available investment opportunities in relation to the costs and perceived risks of such leverage. The use of leverage to finance investments creates certain risks and potential conflicts of interest. See “Risk Factors—Risks Relating to Our Business and Structure – Regulations governing our operations as a BDC affect our ability to raise, and the way in which we raise, additional capital which may have a negative effect on our growth” and “Risk Factors – Risks Relating to Our Business and Structure—Because we borrow money and may in the future issue additional senior securities including preferred stock and debt securities, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us” in the accompanying prospectus.

We have elected to be treated for U.S. federal income tax purposes as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. In order to maintain our tax treatment as a RIC, we must satisfy certain source of income, asset diversification and distribution requirements. See “Material U.S. Federal Income Tax Considerations” in the accompanying prospectus.

Risk Factors

The value of our assets, as well as the market price of our shares, will fluctuate. Our investments may be risky, and you may lose part of or all of your investment in us. Investing in our securities involves other risks, including the following:

 

   

our dependence on key personnel of our investment advisor and our executive officers;

 

   

our ability to maintain or develop referral relationships;

 

   

our use of leverage;

 

   

the availability of additional capital on attractive terms or at all;

 

   

uncertain valuations of our portfolio investments;

 

   

competition for investment opportunities;

 

   

actual and potential conflicts of interests with our investment advisor;

 

   

other potential conflicts of interest;

 



 

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SBA regulations affecting our wholly-owned SBIC subsidiaries;

 

   

changes in interest rates;

 

   

the impact of a protracted decline in liquidity of credit markets on our business and portfolio of investments;

 

   

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

 

   

the timing, form and amount of any distributions from our portfolio companies;

 

   

changes in laws or regulations applicable to us;

 

   

dilution risks related to our ability to issue shares below our current net asset value;

 

   

possible resignation of our investment advisor;

 

   

the general economy and its impact on the industries in which we invest;

 

   

risks associated with investing in lower middle-market companies;

 

   

the ability of our investment advisor to identify, invest in and monitor companies that meet our investment criteria; and

 

   

our ability to invest in qualifying assets.

See “Risk Factors” beginning on page 12 of the accompanying prospectus for additional factors you should carefully consider before deciding to invest in our securities.

 



 

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THE OFFERING

 

NASDAQ Symbol

“FDUS”

 

Common stock offered by us

Shares of our common stock under the ATM Program having an aggregate offering price of up to $50,000,000. As of the date of this prospectus supplement, we can sell shares of our common stock having an aggregate offering price of up to $43,902,673 under the ATM Program.

 

Use of proceeds

If we sell shares of our common stock with an aggregate offering price of $43,902,673 at a price of $16.36 per share (the last reported sales price of our common stock on August 17, 2017), we anticipate that our net proceeds, after deducting the sales agent commissions and estimated expenses payable by us will be approximately $42.5 million. We intend to use the net proceeds from this offering to make investments in lower middle-market companies in accordance with our investment objective and strategies, to repay the indebtedness outstanding from time-to-time under our senior secured revolving credit agreement with ING Capital LLC (“ING”) (the “Credit Facility”), and for working capital and general corporate purposes. See “Use of Proceeds” in this prospectus supplement for more information.

 

Dividends and Distributions

We pay quarterly distributions to our stockholders out of assets legally available for distribution. Our distributions, if any, will be determined by our board of directors. Our ability to declare distributions depends on our earnings, our overall financial condition (including our liquidity position), qualification for or maintenance of our RIC status and such other factors as our board of directors may deem relevant from time to time.

 

  When we make distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings, recognized capital gains or capital. To the extent there is a return of capital, investors will be required to reduce their basis in our stock for U.S. federal income tax purposes. In the future, our distributions may include a return of capital.

 

Taxation

We have elected to be treated as a RIC for U.S. federal income tax purposes. Accordingly, we generally will not pay corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders. To maintain our tax treatment as a RIC and the associated tax benefits, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our realized net ordinary income and realized net short-term capital gains, if any, in excess of our net long-term capital losses. See “Distributions” and “Material U.S. Federal Income Tax Considerations” in the accompanying prospectus.

 



 

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Effective trading at a discount

Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their net asset value. The risk that our shares may trade at a discount to our net asset value is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our shares will trade above, at or below net asset value. See “Risk Factors” and “Sales of Common Stock Below Net Asset Value” in the accompanying prospectus.

 

Risk factors

See “Risk Factors” beginning on page 12 of the accompanying prospectus for a discussion of risks you should carefully consider before deciding to invest in shares of our common stock.

For additional information regarding our common stock, see “Description of Our Capital Stock” in the accompanying prospectus.

 



 

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FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear, directly or indirectly, based on the assumptions set forth below. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus supplement contains a reference to fees or expenses paid by “you,” “us,” “the Company” or “Fidus,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in us.

 

Stockholder transaction expenses:

  

Sales load borne by us (as a percentage of offering price)

     1.50 %(1)

Offering expenses borne by us (as a percentage of offering price)

     1.60 %(2)

Dividend reinvestment plan expenses

         (3)
  

 

 

 

Total stockholder transaction expenses paid by us (as a percentage of offering price)

     3.10
  

 

 

 

Annual expenses (as a percentage of net assets attributable to common stock)(4):

  

Base management fee

     2.58 %(5)

Incentive fees payable under Investment Advisory Agreement

     2.36 %(6)

Interest payments on borrowed funds

     2.33 %(7)

Other expenses

     1.15 %(8)
  

 

 

 

Total annual expenses

     8.42 %(9)
  

 

 

 

 

(1) Represents the sales load to be paid by us with respect to the shares of common stock to be sold by us in this offering. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus.
(2) The offering expenses for the duration of this offering are estimated to be approximately $0.8 million.
(3) The expenses of administering our dividend reinvestment plan are included in “other expenses.”
(4) “Annual expenses” is calculated as a percentage of net assets attributable to common stock because such expenses are ultimately paid by our common stockholders. Offering expenses, if any, will be borne directly or indirectly by our common stockholders. Net assets attributable to common stock equals average net assets, which is calculated as the average of the net assets balances as of each quarter end during the six months ended June 30, 2017 and the prior year end.
(5) Our base management fee is 1.75% of the average value of our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts) and are estimated by assuming the base management fee remains consistent with the fees incurred for the six months ended June 30, 2017. We may from time to time decide it is appropriate to change the terms of the Investment Advisory Agreement. Under the 1940 Act, any material change to our Investment Advisory Agreement must be submitted to our stockholders for approval. The 2.58% reflected in the table is calculated on our net assets (rather than our total assets). See “Management and Other Agreements—Investment Advisory Agreement” in the accompanying prospectus.
(6) This item represents an estimate of our investment advisor’s incentive fees assuming the incentive fee related to pre-incentive fee net investment income remains consistent with the fees incurred on pre-incentive fee net investment income for the six months ended June 30, 2017. The estimate also assumes that the capital gains incentive fees payable at the end of the 2017 calendar year will be based on the actual cumulative realized capital gains net of cumulative realized losses and unrealized capital depreciation as of December 31, 2017, which we believe is consistent with no capital gains incentive fees payable as of June 30, 2017.

The incentive fee consists of two parts:

The first, payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets, (including interest that is accrued but not yet received in cash), subject to a 2.0% quarterly (8.0% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, our investment advisor receives no incentive fee until our pre-incentive fee net investment income equals the hurdle rate of 2.0% but then receives, as a “catch-up,”

 

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100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, our investment advisor will receive 20.0% of our pre-incentive fee net investment income as if a hurdle rate did not apply.

The second part, payable annually in arrears, equals 20.0% of our realized capital gains net of realized capital losses and unrealized capital depreciation, if any, on a cumulative basis from inception through the end of the fiscal year (or upon the termination of the Investment Advisory Agreement, as of the termination date), less the aggregate amount of any previously paid capital gain incentive fees. We accrue, but do not pay, a capital gains incentive fee in connection with any net unrealized capital appreciation, as appropriate. For the six months ended June 30, 2017, we accrued $0.5 million in capital gains incentive fees in accordance with generally accepted accounting principles.

See “Management and Other Agreements—Investment Advisory Agreement” in the accompanying prospectus.

 

(7) As of June 30, 2017, we had outstanding SBA debentures of $217.3 million, and unfunded commitments from the SBA to purchase up to an additional of $58.0 million SBA debentures. We did not have any outstanding borrowings under our Credit Facility as of June 30, 2017. The Credit Facility has a total commitment of $50.0 million. Interest payments on borrowed funds is based on estimated annual interest and fee expenses on outstanding SBA debentures and borrowings under the Credit Facility as of June 30, 2017 with a weighted average interest rate of 3.7%. We have estimated the annual interest expense on borrowed funds and caution you that our actual interest expense will depend on prevailing interest rates and our rate of borrowing, which may be substantially higher than the estimate provided in this table.
(8) Other expenses represent our estimated annual operating expenses, as a percentage of net assets attributable to common shares estimated for the current year, including professional fees, directors’ fees, insurance costs, expenses of our dividend reinvestment plan and payments under the Administration Agreement based on our allocable portion of overhead and other expenses incurred by our administrator. See “Management and Other Agreements—Administration Agreement” in the accompanying prospectus. Other expenses exclude interest payments on borrowed funds, and if we issue debt securities or preferred stock, interest payments on debt securities and distributions with respect to preferred stock. We currently do not have any class of securities outstanding other than common stock. “Other expenses” are based on actual other expenses for the six months ended June 30, 2017.
(9) “Total annual expenses” as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that the “total annual expenses” percentage be calculated as a percentage of net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period), rather than the total assets, including assets that have been purchased with borrowed amounts. If the “total annual expenses” percentage were calculated instead as a percentage of average consolidated total assets for the six months ended June 30, 2017, our “total annual expenses” would be 5.25% of average consolidated total assets.

Example

The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in us. In calculating the following expense amounts, we have assumed we would have no additional leverage, that none of our assets are cash or cash equivalents and that our annual operating expenses would remain at the levels set forth in the table above. Transaction expenses are not included in the following example.

 

     1 year      3 years      5 years      10 years  

You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return

   $ 86      $ 250      $ 401      $ 735  

You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return resulting entirely from net realized capital gains (all of which is subject to our incentive fee on capital gains)

   $ 94      $ 270      $ 431      $ 775  

The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5.0% annual return, our performance will vary and may result in a return

 

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greater or less than 5.0%. The incentive fee under the Investment Advisory Agreement, which, assuming a 5.0% annual return, would either not be payable or have an insignificant impact on the expense amounts shown above, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. In addition, while the example assumes reinvestment of all distributions at net asset value, if our board of directors authorizes and we declare a cash dividend, participants in our dividend reinvestment plan who have not otherwise elected to receive cash will receive a number of shares of our common stock, determined by dividing the total dollar amount of the distribution payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the distribution. See “Dividend Reinvestment Plan” in the accompanying prospectus for additional information regarding our dividend reinvestment plan.

This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus supplement and the accompanying prospectus contain 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 us, 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,” “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 prospectus supplement and the accompanying prospectus 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;

 

   

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

 

   

the impact of increased competition;

 

   

the ability of our investment advisor to identify suitable investments for us and to monitor and administer our investments;

 

   

the ability of our investment advisor to attract and retain highly talented professionals;

 

   

our regulatory structure and tax status;

 

   

our ability to operate as a BDC, a SBIC and a RIC;

 

   

the adequacy of our cash resources and working capital;

 

   

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

 

   

the timing, form and amount of any dividend distributions;

 

   

the impact of fluctuations in interest rates on our business;

 

   

the valuation of any investments in portfolio companies, particularly those having no liquid trading market; and

 

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our ability to recover unrealized losses.

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 value in 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 portfolio companies with foreign operations; 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, 2016 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 prospectus 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 “Risk Factors” and elsewhere in the accompanying prospectus. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. The forward-looking statements and projections contained in this prospectus supplement and accompanying prospectus are excluded from the safe harbor protection provided by Section 27A of the Securities Act.

 

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PLAN OF DISTRIBUTION

Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated are acting as our Sales Agents in connection with the offer and sale of shares of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Upon written instructions from us, the Sales Agents will use their commercially reasonable efforts consistent with their sales and trading practices to sell, as our sales agent, our common stock under the terms and subject to the conditions set forth in our equity distribution agreement with the Sales Agents, dated August 21, 2014, and an amendment to the equity distribution agreement, dated August 21, 2017. We will instruct the Sales Agents as to the amount of common stock to be sold by it. We may instruct the Sales Agents not to sell common stock if the sales cannot be effected at or above the price designated by us in any instruction. The sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less the Sales Agent’s commission, may be less than the net asset value per share of our common stock at the time of such sale. We or the Sales Agents may suspend the offering of shares of common stock upon proper notice and subject to other conditions.

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act, including sales made directly on NASDAQ or similar securities exchange or sales made to or through a market maker other than on an exchange at prices related to the prevailing market prices or at negotiated prices.

The Sales Agents will provide written confirmation of a sale to us no later than the opening of the trading day on NASDAQ following each trading day in which shares of our common stock are sold under the equity distribution agreement. Each confirmation will include the number of shares of common stock sold on the preceding day, the net proceeds to us and the compensation payable by us to the Sales Agents in connection with the sales.

Under the terms of the equity distribution agreement, each of Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated will be entitled to compensation equal to 1.50% of the gross sales price of shares of our common stock sold through it as sales agent. We estimate that the total expenses for the offering, excluding compensation payable to the Sales Agents under the terms of each equity distribution agreement, will be approximately $0.8 million (including up to $0.2 million in reimbursement of the Sales Agents’ counsel fees) over the estimated duration of this offering.

Settlement for sales of shares of common stock will occur on the second trading day following the date on which such sales are made, or on some other date that is agreed upon by us and the Sales Agents in connection with a particular transaction, in return for payment of the net proceeds to us. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.

We will report at least quarterly the number of shares of our common stock sold through the Sales Agents under the equity distribution agreement and the net proceeds to us.

In connection with any sale of the common stock on our behalf, the Sales Agents may be deemed to be an “underwriter” within the meaning of the Securities Act, and the compensation of the Sales Agent may be deemed to be underwriting commissions or discounts. We have agreed to provide indemnification and contribution to the Sales Agents Securities with respect to certain civil liabilities, including liabilities under the Securities Act.

 

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The offering of our shares of common stock pursuant to the equity distribution agreement will terminate upon the earlier of (i) the sale of all common stock subject to the equity distribution agreement or (ii) the termination of the equity distribution agreement as permitted therein.

The principal business address of Raymond James & Associates, Inc. is 880 Carillon Parkway, St. Petersburg, FL 33716. The principal business address of Robert W. Baird & Co. Incorporated is 777 East Wisconsin Avenue, Milwaukee, WI 53202.

 

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USE OF PROCEEDS

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market” as defined in Rule 415 under the Securities Act, including sales made directly on NASDAQ or sales made to or through a market maker other than on an exchange. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in this paragraph depending on, among other things, the market price of our common stock at the time of any such sale. As a result, the actual net proceeds we receive may be more or less than the amount of net proceeds estimated in this prospectus supplement. As of the date of this prospectus supplement, we can sell shares of our common stock having an aggregate offering price of up to $43,902,673 under the ATM Program. Assuming the sale of all $43,902,673 of common stock offered under this prospectus supplement and the accompanying prospectus at a price of $16.36 per share (the last reported sales price of our common stock on August 17, 2017), we estimate that the net proceeds of this offering will be approximately $42.5 million after deducting the estimated sales commission payable to the Sales Agents and our estimated offering expenses.

We intend to use the net proceeds from the sale of the shares to invest in lower middle-market companies in accordance with our investment objective and strategies, to repay the indebtedness outstanding from time-to-time under our Credit Facility, and for working capital and general corporate purposes. As of August 21, 2017, there were no amounts outstanding under our Credit Facility.

Pending such use, we will invest the net proceeds of this offering primarily in cash, cash equivalents, U.S. Government securities and other high-quality debt instruments that mature in one year or less, or “temporary investments,” as appropriate. These securities may have lower yields than our other investments and accordingly result in lower distributions, if any, by us during such period. See “Regulation—Temporary Investments” in the accompanying prospectus. Our ability to achieve our investment objective may be limited to the extent that the net proceeds from the offering, pending full investment, are held in interest bearing deposits or other short-term instruments that produce income at a rate less than our cost of capital.

 

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CAPITALIZATION

The equity distribution agreement provides that we may offer and sell up to $50,000,000 of our common stock from time to time through our Sales Agents for the offer and sale of such common stock. As of the date of this prospectus supplement, we can sell shares of our common stock having an aggregate offering price of up to $43,902,673 under the ATM Program. The table below assumes that we will sell the remaining $43,902,673 of our common stock at a price of $16.36 per share (the last reported sales price of our common stock on August 17, 2017) but there is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in the table below. In addition, the price per share of any such sale may be greater or less than $16.36, depending on the net asset value and market price of our common stock at the time of any such sale. The following table sets forth our capitalization as of June 30, 2017:

 

   

on an actual basis as of June 30, 2017; and

 

   

on an as further adjusted basis giving effect to the assumed sale of $43.9 million (the aggregate offering amount remaining under the ATM Program as of August 21, 2017) of our common stock at a price of $16.36 per share (the last reported sales price of our common stock on August 17, 2017) less commissions and expenses.

This table should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes thereto included in this prospectus supplement and the accompanying prospectus.

 

     As of June 30, 2017
(Unaudited)
 
     Actual     As
Adjusted
 
     (in thousands)  

ASSETS

    

Cash and cash equivalents

   $ 50,819     $ 93,361  

Investments, at fair value

     553,260       553,260  

Other assets

     10,034       10,034  
  

 

 

   

 

 

 

Total assets

   $ 614,113     $ 656,655  
  

 

 

   

 

 

 

LIABILITIES

    

SBA debentures, net of deferred financing costs

   $ 212,916     $ 212,916  

Credit Facility, net of deferred financing costs

     (333     (333

Other liabilities

     13,107       13,107  
  

 

 

   

 

 

 

Total liabilities

   $ 225,690     $ 225,690  
  

 

 

   

 

 

 

 

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     As of June 30, 2017
(Unaudited)
 
     Actual     As
Adjusted
 
     (in thousands)  

NET ASSETS

    

Common stock, $0.001 par value (100,000,000 shares authorized, 24,480,624 shares issued and outstanding, actual; 27,164,161 shares issued and outstanding, as adjusted)

   $ 24     $ 27  

Additional paid-in capital(1)

     372,760       415,299  

Undistributed net investment income

     8,915       8,915  

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

     (15,196     (15,196

Accumulated net unrealized appreciation on investments

     21,920       21,920  
  

 

 

   

 

 

 

Total net assets

     388,423       430,965  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 614,113     $ 656,655  
  

 

 

   

 

 

 

Net asset value per common share

   $ 15.87     $ 15.87  
  

 

 

   

 

 

 

 

(1) Pro forma additional paid-in capital has been reduced by Sales Agents’ commissions and the estimated offering expenses.

 

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

Our common stock began trading on June 21, 2011 on The Nasdaq Global Market under the symbol “FDUS.” Effective January 3, 2012, our common stock is included on the Nasdaq Global Select Market. Prior to June 21, 2011, there was no established public trading market for our common stock. The following table lists the high and low closing sale price for our common stock, and the closing sale price as a percentage of net asset value and the cash distributions per share that we have declared on our common stock for each fiscal quarter during the last two most recently completed fiscal years.

 

Period

  NAV(1)     High
Closing
Sales
Price
    Low
Closing
Sales
Price
    Premium /
(Discount) of
High Sales
Price to NAV(2)
    Premium /
(Discount) of
Low Sales
Price to NAV(2)
    Distributions
Per Share(3)
 

Year ending December 31, 2017

           

First Quarter

  $ 15.80     $ 17.57     $ 15.88       11.2     0.5   $ 0.39  

Second Quarter

    15.87       18.06       16.37       13.8       3.2       0.39  

Third Quarter (through August 17, 2017)

    *       17.04       16.25       *       *       0.39  

Year ended December 31, 2016

           

First Quarter

    15.25       15.51       11.91       1.7       (21.9     0.39  

Second Quarter

    15.52       15.96       14.70       2.8       (5.3     0.39  

Third Quarter

    15.58       16.33       15.22       4.8       (2.3     0.39  

Fourth Quarter

    15.76       17.07       14.62       8.3       (7.2     0.43  

Year ended December 31, 2015

           

First Quarter

    15.18       17.02       14.40       12.1       (5.1     0.38  

Second Quarter

    15.18       16.90       14.90       11.3       (1.8     0.40  

Third Quarter

    15.12       15.51       13.65       2.6       (9.7     0.39  

Fourth Quarter

    15.17       14.80       13.11       (2.4     (13.6     0.43  

 

(1) Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset values shown are based on outstanding shares at the end of each period.
(2) Calculated as the difference between the respective high or low closing sales price and the quarter end net asset value divided by the quarter end net asset value.
(3) Represents the regular and special, if applicable, distribution declared in the specified quarter. We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions. See “Dividend Reinvestment Plan.”
* Not determinable at time of filing.

We intend to continue to pay quarterly distributions to our stockholders. Our quarterly distributions, if any, are determined by our board of directors. We have elected to be taxed as a RIC under Subchapter M of the Code. As long as we qualify as a RIC, we will not be taxed on our investment company taxable income or net capital gain, to the extent that such income or gain is distributed, or deemed to be distributed, to stockholders on a timely basis.

 

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We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our tax treatment as a RIC. We cannot assure stockholders that they will receive any distributions at a particular level.

We have adopted a dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash distribution, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock, rather than receiving the cash distribution. Under the terms of our dividend reinvestment plan, dividends will primarily be paid in newly issued shares of common stock. However, we reserve the right to purchase shares in the open market in connection with the implementation of the plan. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution.

Distributions in excess of our current and accumulated profits and earnings would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions will be made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. Each year, a statement on Form 1099-DIV identifying the source of the distribution will be sent to our U.S. stockholders of record. Our board of directors presently intends to declare and pay quarterly dividends. Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of Fidus Investment Corporation and its subsidiaries, including the Funds, as of and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, is derived from the consolidated financial statements that have been audited by RSM US LLP, our independent registered public accounting firm. The selected consolidated financial and other data for the six months ended June 30, 2017 and other quarterly financial information is derived from our unaudited financial statements, and in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results of such interim periods. Interim results as of and for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. This financial data should be read in conjunction with our consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this prospectus supplement and the accompanying prospectus.

 

    Six
Months
Ended
June 30,
2017
(Unaudited)
    Years Ended December 31,  
      2016     2015     2014     2013     2012  
          (Dollars in Thousands, Except Per Share Numbers)  

Statement of operations data:

           

Total investment income

  $ 33,499     $ 60,229     $ 54,269     $ 46,116     $ 41,792     $ 33,849  

Interest and financing expenses

    4,985       10,594       9,428       7,507       7,076       6,422  

Base management fee

    4,716       8,254       7,545       5,899       5,261       4,237  

Incentive fee

    4,862       10,369       6,481       4,857       6,792       4,839  

All other expenses

    2,110       3,986       3,932       4,189       3,121       2,660  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

    16,826       27,026       26,883       23,664       19,542       15,691  

Income tax (benefit) provision

    25       425       390       383       246       4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    16,801       26,601       26,493       23,281       19,296       15,687  

Net realized gains (losses) on investments

    6,097       (13,835     9,531       (17,029 )     30,588       1,975  

Net change in unrealized (depreciation) appreciation on investments

    (2,024     29,009       (10,086     13,250       (22,188 )     1,749  

Income tax (provision) benefit on realized gains on investments

    (1,385     (205     39       (17     (493      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

  $ 19,489     $ 41,570     $ 25,977     $ 19,485     $ 27,203     $ 19,411  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

           

Net asset value (at end of period)

  $ 15.87     $ 15.76     $ 15.17     $ 15.16     $ 15.35     $ 15.32  

Net investment income

  $ 0.75     $ 1.45     $ 1.64     $ 1.62     $ 1.43     $ 1.54  

Net gain (loss) on investments

  $ 0.12     $ 0.82     $ (0.04   $ (0.26 )   $ 0.58     $ 0.37  

Net increase in net assets resulting from operations

  $ 0.86     $ 2.27     $ 1.60     $ 1.36     $ 2.01     $ 1.91  

Dividends

  $ 0.78     $ 1.60     $ 1.60     $ 1.72     $ 1.94     $ 1.46  

Other data:

           

Weighted average annual yield on debt investments (1)

    13.0     13.1     13.3 %     13.4     14.5     15.3

Number of portfolio companies at period end

    60       57       53       42       37       30  

Expense ratios (as percentage of average net assets):

           

Operating expenses

    3.2     7.8     7.3 %     6.7     7.2     7.4

Interest expense

    1.4     3.7     3.8 %     3.4     3.4     4.1

 

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(1) Weighted average yields are computed using the effective interest rates for debt investments at cost as of the period end date, including accretion of original issue discount and loan origination fees, but excluding investments on non-accrual status, if any. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our and our subsidiaries’ fees and expenses.

 

     As of
June 30,
2017

(Unaudited)
     As of December 31,  
        2016      2015      2014      2013      2012  
            (Dollars in Thousands)  

Statement of assets and liabilities data:

                 

Total investments at fair value

   $ 553,260      $ 524,454      $ 443,269      $ 396,355      $ 306,981      $ 274,249  

Total assets

     614,113        586,742        480,668        431,020        364,110        330,435  

Borrowings

     217,250        224,000        229,000        183,500        144,500        144,500  

Total net assets

     388,423        353,785        247,362        243,263        211,125        183,091  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

On June 20, 2011, FIC acquired all of the limited partnership interests of Fidus Mezzanine Capital, L.P., or Fund I, and membership interests of Fidus Mezzanine Capital GP, LLC, its general partner, 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 business development companies, or 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 $58.0 million of remaining borrowing capacity under the SBIC Debenture Program and intend to fully utilize such capacity over the ensuing 12-18 months.

Revenues: We generate revenue in the form of interest and fee 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, which may include prepayment penalties. 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. Debt investment 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

 

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recorded on the accrual basis to the extent that we expect to collect such amounts. Debt investments 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 is accrued daily based on the outstanding principal amount and the contractual terms of the debt. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution, and is generally recognized when received. Distributions of earnings from portfolio companies are evaluated to determine if the distribution is a distribution of earnings or a return of capital. Distributions of earnings are included in dividend income while a return of capital is recorded as a reduction in the cost basis of the investment. Estimates are adjusted as necessary when the relevant tax forms are received from the portfolio company.

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.

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, including “dead deal” costs;

 

   

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;

 

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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, 2017, we invested $87.1 million in debt and equity investments, including five new portfolio companies. These investments consisted of subordinated notes ($79.0 million, or 90.8%), senior secured loans ($2.2 million, or 2.5%), equity securities ($5.0 million, or 5.7%) and warrant securities ($0.9 million, or 1.0%). During the six months ended June 30, 2017 we received proceeds from sales or repayments, including principal, return of capital dividends and net realized gains (losses), of $66.7 million.

During the six months ended June 30, 2016, we invested $44.4 million in debt and equity investments, including three new portfolio companies. These investments consisted of subordinated notes ($39.3 million, or 88.6%), senior secured loans ($2.8 million, or 6.2%), equity securities ($2.2 million, or 5.0%) and warrant securities ($0.1 million, or 0.2%). During the six months ended June 30, 2016 we received proceeds from sales or repayments, including principal, return of capital dividends and net realized gains (losses), of $46.0 million.

As of June 30, 2017, the fair value of our investment portfolio totaled $553.3 million and consisted of 55 active portfolio companies and five portfolio companies that have sold their underlying operations. As of June 30, 2017, two debt investments bore interest at a variable rate, which represented $15.8 million of our portfolio on a fair value basis, and the remainder of our debt portfolio was comprised of fixed rate investments. Overall, the portfolio had net unrealized appreciation of $22.0 million as of June 30, 2017. As of June 30, 2017, our average active portfolio company investment at amortized cost was $9.7 million, which excludes investments in the five portfolio companies that have sold their underlying operations.

 

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As of December 31, 2016, the fair value of our investment portfolio totaled $524.5 million and consisted of 53 active portfolio companies and four portfolio companies that have sold their underlying operations. As of December 31, 2016, one debt investment bore interest at a variable rate, which represented $8.2 million of our portfolio on a fair value basis, and the remainder of our debt portfolio was comprised of fixed rate investments. Overall, the portfolio had net unrealized appreciation of $23.9 million as of December 31, 2016. As of December 31, 2016, our average active portfolio company investment at amortized cost was $9.4 million, which excludes investments in the four portfolio companies that have sold their underlying operations.

The weighted average yield on debt investments as of June 30, 2017 and December 31, 2016 was 13.0% and 13.1%, respectively. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses. The weighted average yields were computed using the effective interest rates for debt investments at cost as of June 30, 2017 and December 31, 2016, respectively, including the accretion of original issue discount and loan origination fees, but excluding investments on non-accrual status, if any.

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

 

     Fair Value     Cost  
     June 30, 2017     December 31, 2016     June 30, 2017     December 31, 2016  

Subordinated notes

   $ 387,806        70.1 %   $ 363,646       69.4 %   $ 389,454       73.3   $ 364,543       72.9

Senior secured loans

     76,045        13.7       79,758       15.2       82,724       15.6       83,426       16.7  

Equity

     75,823        13.7       70,849       13.5       50,972       9.6       45,207       9.0  

Warrants

     13,586        2.5       10,201       1.9       8,009       1.5       7,153       1.4  

Royalty rights

                              185             185        
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 553,260        100.0 %   $ 524,454       100.0 %   $ 531,344       100.0 %   $ 500,514       100.0 %
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows portfolio composition by geographic region at fair value and cost and as a percentage of total investments (dollars in thousands). 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, 2017     December 31, 2016     June 30, 2017     December 31, 2016  

Midwest

   $ 186,915        33.8   $ 166,412       31.6 %   $ 176,787       33.2   $ 153,456       30.7

Southeast

     119,355        21.6       122,633       23.4       126,283       23.8       130,107       26.0  

Northeast

     105,735        19.1       98,470       18.8       100,801       19.0       94,481       18.9  

West

     71,561        12.9       73,703       14.1       56,673       10.7       63,717       12.7  

Southwest

     69,694        12.6       63,236       12.1       70,800       13.3       58,753       11.7  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 553,260        100.0   $ 524,454       100.0   $ 531,344       100.0   $ 500,514       100.0
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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,
2017
    December 31,
2016
    June 30,
2017
    December 31,
2016
 

Aerospace & Defense Manufacturing

     11.6     11.7     10.6     11.1

Healthcare Products

     10.0       11.1       8.9       9.3  

Healthcare Services

     8.3       8.0       8.1       8.5  

Transportation services

     7.5       8.9       7.7       8.4  

Component Manufacturing

     7.3       3.5       7.6       3.7  

Business Services

     6.9       7.1       7.5       7.9  

Information Technology Services

     6.1       4.5       6.4       4.8  

Specialty Distribution

     5.9       5.0       5.9       5.0  

Building Products Manufacturing

     5.2       5.7       5.4       5.6  

Vending Equipment Manufacturing

     4.6       3.7       4.8       3.9  

Packaging

     3.2       3.3       3.3       3.5  

Oil & Gas Services

     3.1       2.8       2.8       2.9  

Utility Equipment Manufacturing

     2.8       3.5       3.0       3.7  

Capital Equipment Manufacturing

     2.7       2.9       2.8       3.0  

Industrial Cleaning & Coatings

     2.4       2.4       2.5       2.7  

Promotional Products

     2.2       2.4       2.3       2.4  

Printing Services

     2.0       2.1       2.1       2.2  

Retail

     1.6       1.7       1.4       1.5  

Specialty Chemicals

     1.5       1.6       1.7       1.8  

Restaurants

     1.2       1.5       1.9       1.9  

Oil & Gas Distribution

     1.1       1.1       1.1       1.2  

Apparel Distribution

     1.0       1.1       1.1       1.2  

Laundry Services

     0.7       1.4       0.7       1.3  

Consumer Products

     0.6       2.6       0.1       2.2  

Electronic Components Supplier

     0.5       0.4       0.3       0.3  

Safety Products Manufacturing

     0.0       0.0       0.0       0.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

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, the debt investment is expected to be paid in the near term and the trends and risk factors are favorable, and may include an expected capital gain.

 

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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 and cost as of June 30, 2017 and December 31, 2016:

 

    Fair Value     Cost  

Investment Rating

  June 30, 2017     December 31, 2016     June 30, 2017     December 31, 2016  
    (dollars in thousands)  

1

  $ 77,439        14.0   $ 91,705        17.5 %   $ 45,525        8.6   $ 58,967        11.8

2

    400,782        72.5       371,506        70.9       392,800        73.9       366,697        73.3  

3

    53,884        9.7       38,905        7.4       59,861        11.3       44,510        8.9  

4

    14,649        2.6       22,085        4.2       21,883        4.1       28,194        5.6  

5

    6,506        1.2       253              11,275        2.1       2,146        0.4  
 

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

  $ 553,260        100.0   $ 524,454        100.0   $ 531,344        100.0   $ 500,514        100.0
 

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Based on our investment rating system, the weighted average rating of our portfolio as of June 30, 2017 and December 31, 2016 was 2.0 and 2.0, respectively, on a fair value basis and 2.2 and 2.1, respectively, on a cost basis.

Non-Accrual

As of June 30, 2017, we had investments in one portfolio company on non-accrual status, which had an aggregate cost and fair value of $9.3 million and $6.2 million, respectively. As of December 31, 2016, we had no investments on non-accrual status.

For the three and six months ended June 30, 2017, we recognized unrealized depreciation on non-accrual investments of $1.1 million and $1.4 million, respectively. For the three and six months ended June 30, 2016, we recognized unrealized depreciation on non-accrual investments of $0.1 million and $5.1 million, respectively.

 

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Discussion and Analysis of Results of Operations

Comparison of three months ended June 30, 2017 and June 30, 2016

Investment Income

For the three months ended June 30, 2017, total investment income was $17.3 million, an increase of $3.5 million, or 25.4%, over the $13.8 million of total investment income for the three months ended June 30, 2016. The increase was attributable to a $2.5 million increase in interest income resulting from higher average debt investment balances outstanding during the three months ended June 30, 2017 as compared to the same period in 2016, a $1.1 million increase in fee income resulting from increased prepayments and amendments and related fees during the three months ended June 30, 2017 as compared to the same period in 2016, and partially offset by a $(0.1) million decrease in dividend income due to decreased levels of distributions received from equity investments during the three months ended June 30, 2017 as compared to the same period in 2016.

Expenses

For the three months ended June 30 2017, total expenses, including income tax provision, were $8.3 million, a decrease of $(0.6) million or 6.7%, from the $8.9 million of total expenses, including income tax provision, for the three months ended June 30, 2016. Interest and financing expenses for the three months ended June 30, 2017 were $2.4 million, a decrease of $(0.3) million, or 11.1%, from the $2.7 million of interest and financing expenses for the same period in 2016. The base management fee increased $0.4 million, or 20.0%, to $2.4 million for the three months ended June 30, 2017 due to higher average total assets during the three months ended June 30, 2017 as compared to the same period in 2016. The incentive fee for the three months ended June 30, 2017 was $2.5 million, a $(0.7) million, or 21.9%, decrease from the $3.2 million incentive fee for the three months ended June 30, 2016, which is comprised of an increase in the income incentive fee of $0.7 million and a decrease in the capital gains incentive fee of $(1.4) million during the three months ended June 30, 2017, as compared to the same period in 2016. The administrative service fee, professional fees and other general and administrative expenses totaled $1.0 million for both the three months ended June 30, 2017 and 2016.

Net Investment Income

Net investment income for the three months ended June 30, 2017 was $9.0 million, an increase of $4.1 million, or 83.7%, compared to net investment income of $4.9 million during the three months ended June 30, 2016, as a result of the $3.5 million increase in total investment income coupled with a $0.6 million decrease in total expenses, including income tax provision.

 

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Net Increase in Net Assets Resulting From Operations

For the three months ended June 30, 2017, the total net realized (loss) on investments was $(0.4) million. Significant realized gains and (losses) for the three months ended June 30, 2017 are summarized below:

 

Portfolio Company

  

Realization Event

   Net Realized
Gain (Loss)

(in millions)
 

Anatrace Products, LLC

   Sale of portfolio company    $ 0.9  

Carlson Systems Holdings, Inc.

   Escrow distribution      0.1  

Other

        (0.1

FTH Acquisition Corp. VII

   Exit of portfolio company      (1.3
     

 

 

 

Total

      $ (0.4
     

 

 

 

For the three months ended June 30, 2016, the total net realized gain on investments was $0.6 million. Significant realized gains for the three months ended June 30, 2016 are summarized below:

 

Portfolio Company

 

Realization Event

  Net Realized
Gain (Loss)

(in millions)
 

Safety Products Group, LLC

  Distribution related to sale of operations   $ 0.5  

Other

      0.1  
   

 

 

 

Total

    $ 0.6  
   

 

 

 

During the three months ended June 30, 2017, we recorded a net change in unrealized appreciation on investments of $1.4 million attributable to (i) the reversal of net unrealized appreciation of $(0.1) million related to the exit, sale or restructuring of investments, resulting in unrealized depreciation, (ii) net unrealized depreciation of $(1.5) million on debt investments and (iii) net unrealized appreciation of $3.0 million on equity investments. During the three months ended June 30, 2016, we recorded a net change in unrealized appreciation on investments of $7.5 million attributable to (i) net unrealized depreciation of $(0.3) million on debt investments and (ii) net unrealized appreciation of $7.8 million on equity investments.

During the three months ended June 30, 2017, we did not record any income tax provision for realized gains on investments. During the three months ended June 30, 2016, we recorded $0.2 million income tax provision for expected income taxes due from realized gains on investments.

As a result of these events, our net increase in net assets resulting from operations during the three months ended June 30, 2017 was $10.0 million, a decrease of $(2.8) million, or 21.9%, compared to a net increase in net assets resulting from operations of $12.8 million during the three months ended June 30, 2016.

Comparison of six months ended June 30, 2017 and June 30, 2016

Investment Income

For the six months ended June 30, 2017, total investment income was $33.5 million, an increase of $5.0 million, or 17.5%, over the $28.5 million of total investment income for the

 

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six months ended June 30, 2016. The increase was attributable to a $3.7 million increase in interest income resulting from higher average debt investment balances outstanding during the six months ended June 30, 2017 as compared to the same period in 2016, a $0.3 million increase in dividend income due to increased levels of distributions received from equity investments during the six months ended June 30, 2017 as compared to the same period in 2016, and a $1.0 million increase in fee income resulting from increased prepayments and amendments and related fees during the six months ended June 30, 2017 as compared to the same period in 2016.

Expenses

For the six months ended June 30 2017, total expenses, including income tax provision, were $16.7 million, an increase of $0.2 million or 1.2%, over the $16.5 million of total expenses, including income tax provision, for the six months ended June 30, 2016. Interest and financing expenses for the six months ended June 30, 2017 were $5.0 million, a decrease of $(0.3) million, or 5.7%, from the $5.3 million of interest and financing expenses for the same period in 2016. The base management fee increased $0.7 million, or 17.5%, to $4.7 million for the six months ended June 30, 2017 due to higher average total assets during the six months ended June 30, 2017 as compared to the same period in 2016. The incentive fee for the six months ended June 30, 2017 was $4.8 million, a $(0.3) million, or 5.9%, decrease from the $5.1 million incentive fee for the six months ended June 30, 2016, which is comprised of an increase in the income incentive fee of $0.9 million and a decrease in the capital gains incentive fee of $(1.2) million during the six months ended June 30, 2017, as compared to the same period in 2016. The administrative service fee, professional fees and other general and administrative expenses totaled $2.2 million and $2.1 million for the six months ended June 30, 2017 and 2016, respectively.

Net Investment Income

Net investment income for the six months ended June 30, 2017 was $16.8 million, an increase of $4.8 million, or 40.0%, compared to net investment income of $12.0 million during the six months ended June 30, 2016, as a result of the $5.0 million increase in total investment income compared to only a $0.2 million increase in total expenses, including income tax provision.

Net Increase in Net Assets Resulting From Operations

For the six months ended June 30, 2017, the total net realized gain on investments was $6.1 million. Significant realized gains and (losses) for the six months ended June 30, 2017 are summarized below:

 

Portfolio Company

  

Realization Event

   Net Realized
Gain (Loss)

(in millions)
 

Worldwide Express Operations, LLC

   Sale of portfolio company    $ 6.4  

Anatrace Products, LLC

   Sale of portfolio company      0.9  

Carlson Systems Holdings, Inc.

   Escrow distribution      0.1  

FTH Acquisition Corp. VII

   Exit of portfolio company      (1.3
     

 

 

 

Total

      $ 6.1  
     

 

 

 

 

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For the six months ended June 30, 2016, the total net realized gain on investments was $0.3 million. Significant realized gains and (losses) for the six months ended June 30, 2016 are summarized below:

 

Portfolio Company

 

Realization Event

  Net Realized
Gain (Loss)

(in millions)
 

Safety Products Group, LLC

  Distribution related to sale of operations   $ 0.5  

Other

      0.1  

Continental Anesthesia Management, LLC

  Exit of portfolio company     (0.3
   

 

 

 

Total

    $ 0.3  
   

 

 

 

During the six months ended June 30, 2017, we recorded a net change in unrealized depreciation on investments of $(2.0) million attributable to (i) the reversal of net unrealized appreciation of $(4.6) million related to the exit, sale or restructuring of investments, resulting in unrealized depreciation, (ii) net unrealized depreciation of $(3.6) million on debt investments and (iii) net unrealized appreciation of $6.2 million on equity investments. During the six months ended June 30, 2016, we recorded a net change in unrealized appreciation on investments of $8.3 million attributable to (i) the reversal of net unrealized depreciation on investments of $0.9 million related to the exit or sale of investments, resulting in unrealized appreciation, (ii) net unrealized depreciation of $(6.2) million on debt investments and (iii) net unrealized appreciation of $13.6 million on equity investments.

During the six months ended June 30, 2017 and 2016, we recorded $1.4 million and $0.2 million, respectively, of income tax provision for realized gains on investments.

As a result of these events, our net increase in net assets resulting from operations during the six months ended June 30, 2017 was $19.5 million, a decrease of $(0.8) million, or 3.9%, compared to a net increase in net assets resulting from operations of $20.3 million during the six months ended June 30, 2016.

Liquidity and Capital Resources

As of June 30, 2017, we had $50.8 million in cash and cash equivalents and our net assets totaled $388.4 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. During the six months ended June 30, 2017, we repaid $24.8 million of SBA debentures which would have matured on March 1, 2018. Our remaining outstanding SBA debentures continue to mature in 2018 and subsequent years through 2027, which will require repayment on or before the respective maturity dates.

Cash Flows

For the six months ended June 30, 2017, we experienced a net decrease in cash and cash equivalents in the amount of $6.2 million. During that period, we used $9.7 million of cash for

 

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operating activities, which included the funding of $87.1 million of investments, which were offset by proceeds received from sales and repayments of investments of $66.7 million. During the same period, we received net proceeds from secondary offerings of shares of our common stock off of our effective shelf registration statement of $28.1 million and proceeds from the issuances of SBA debentures of $18.0 million, which were partially offset by net repayment of SBA debentures of $24.8 million, cash dividends paid to stockholders of $17.1 million and the payment of deferred financing costs of $0.7 million.

For the six months ended June 30, 2016, we experienced a net increase in cash and cash equivalents in the amount of $27.5 million. During that period, we received $12.2 million of cash from operating activities, primarily from proceeds received from sales and repayments of investments of $46.0 million, which were partially offset by the funding of $44.4 million of investments. During the same period, we received net proceeds from a secondary offering of shares of our common stock off of our effective shelf registration statement of $43.7 million and proceeds from the issuances of SBA debentures of $0.5 million, which were partially offset by net repayment of borrowings under the Credit Facility of $15.5 million and cash dividends paid to stockholders of $13.3 million.

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 300.0% of an SBIC’s regulatory capital or $150.0 million, whichever is less. For three or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $350.0 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, 2017, Fund I had $125.3 million of outstanding SBA debentures and cannot issue additional SBA debentures. As of June 30, 2017, Fund II had $92.0 million of outstanding SBA debentures. Fund II has the current capacity to issue up to an additional $58.0 million of SBA debentures. Subject to SBA regulatory requirements and approval, we may access up to $74.8 million of additional SBA debentures under the SBIC Debenture Program. For more information on the SBA debentures, please see Note 6 to our consolidated financial statements.

In June 2014, we entered into 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 by substantially all of our assets, excluding the assets of the Funds.

On December 19, 2014, we 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.

 

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Amounts available to borrow 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 limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, transferability, 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, which varies depending on the period of the borrowing under the Credit Facility, 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 plus 1.0%. We pay a commitment fee ranging from 0.5% to 1.0% per annum based on the size of the unused portion of the Credit Facility.

We have made customary representations and warranties and are 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, 2017, we were in compliance with all covenants of the Credit Facility and there were no borrowings outstanding under the Credit Facility.

As of June 30, 2017, the weighted average interest rate for all SBA debentures and borrowings outstanding under the Credit Facility was 3.7%.

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 15, 2017, 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 15, 2018 or the date of our 2018 Annual Meeting of Stockholders. We expect to present our stockholders a similar proposal at our 2018 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 15, 2018 or the date of our 2018 Annual Meeting of Stockholders may not exceed 25.0% of our outstanding common stock immediately prior to each such sale.

Stock repurchase plan

We have an open market stock repurchase program (the “Program”) under which we may acquire up to $5.0 million of our outstanding common stock. Under the Program, we may, but are not obligated to, repurchase outstanding common stock in the open market from time to time provided that we comply with the prohibitions under our insider trading policies and the requirements of Rule 10b-18 of the Securities Exchange Act of 1934, as amended, including certain price, market value and timing constraints. The timing, manner, price and amount of any share

 

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repurchases will be determined by our management, in its discretion, based upon the evaluation of economic and market conditions, stock price, capital availability, applicable legal and regulatory requirements and other corporate considerations. On November 1, 2016, the Board extended the Program through December 31, 2017, or until the approved dollar amount has been used to repurchase shares. The Program does not require us to repurchase any specific number of shares and the Company cannot assure that any shares will be repurchased under the Program.

The Program may be suspended, extended, modified or discontinued at any time. We did not make any repurchases of common stock during the six months ended June 30, 2017 or 2016.

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 engages one or more independent valuation firm(s) to conduct independent appraisals of a selection of our portfolio investments for which market quotations are not readily available. Each portfolio company investment is generally appraised by the valuation firm(s) at least once every calendar year and each new portfolio

 

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company investment is appraised at least once in the twelve-month period following the initial investment. In certain instances, we may determine that it is not cost-effective, and as a result it is not in our stockholders’ best interest, to request the independent appraisal of certain portfolio company investments. Such instances include, but are not limited to, situations where we determine that the fair value of the portfolio company investment is relatively insignificant to the fair value of the total portfolio. Our board of directors consulted with the independent valuation firm(s) in arriving at our determination of fair value for 16 and 13 of our portfolio company investments representing 34.9% and 30.5% of the total portfolio investments at fair value (exclusive of new portfolio company investments made during the three months ended June 30, 2017 and December 31, 2016, respectively) as of June 30, 2017 and December 31, 2016, respectively;

 

   

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

 

   

our 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.

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.

Consistent with the policies and methodologies adopted by our board of directors, we perform detailed valuations of our 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, 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 approach, we typically prepare and analyze 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.

We evaluate investments in portfolio companies using the most recent portfolio company financial statements and forecasts. We also consult 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 our 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, we 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. Our discounted cash flow models estimate a range of fair values by applying an appropriate discount rate to the future cash flow streams of our debt investments, based on future interest and principal payments as set forth in the associated loan agreements. We prepare 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

 

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and credit quality as compared to leverage and credit quality as of the date the investment was made. We 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. We estimate the remaining life of our debt investments to generally be the legal maturity date of the instrument, as we generally intend to hold loans to maturity. However, if we have information available to us that the loan is expected to be repaid in the near term, we would use an estimated remaining life based on the expected repayment date.

For our equity investments, including equity securities and warrants, we generally use 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, we analyze 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, we consider our ability to influence the capital structure of the portfolio company, as well as the timing of a potential exit.

We may also utilize an income approach when estimating the fair value of our 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. We typically prepare and analyze discounted cash flow models based on projections of the future free cash flows (or earnings) of the portfolio company. We consider 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 our royalty rights are calculated based on projected future cash flows and the specific provisions contained in the pertinent royalty agreement. The determination of the fair value of such royalty rights is not a significant component of our valuation process.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements express the uncertainties with respect to the possible effect of such valuations, and any changes in such valuations, on the consolidated financial statements.

Revenue Recognition

Investments and related investment income. 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 changes in the fair value of investments from the prior period, as determined by our board of directors through the application of our valuation policy, as well as reclassifications of any prior period unrealized appreciation or depreciation on exited investments to realized gains or losses on investments.

 

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Interest and dividend income. Interest and dividend income are recorded on the accrual basis to the extent that we expect to collect such amounts. Interest is accrued daily based on the outstanding principal amount and the contractual terms of the debt. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution, and is generally recognized when received. Distributions from portfolio companies are evaluated to determine if the distribution is a distribution of earnings or a return of capital. Distributions of earnings are included in dividend income while a return of capital is recorded as a reduction in the cost basis of the investment. Estimates are adjusted as necessary when the relevant tax forms are received from the portfolio company.

Payment-in-kind interest. Certain of our investments contain a 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. Generally, PIK can be paid-in-kind or all in cash. We stop accruing PIK income when there is reasonable doubt that PIK income will be collected. PIK income is included in our taxable income and, therefore, affects the amount we are required to pay to our stockholders in the form of dividends in order to maintain our tax treatment as a RIC and to avoid paying corporate federal income tax, even though we have not yet collected the cash.

Non-accrual. When there is reasonable doubt that principal, interest or dividends will be collected, loans or preferred equity investments are placed on non-accrual status and we will generally cease recognizing interest or dividend income. Interest and dividend payments received on non-accrual investments may be recognized as interest or dividend income or 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, are likely to remain current.

Warrants. In connection with our debt investments, we will sometimes receive warrants or other equity-related securities (Warrants). We determine 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, or OID, and accreted into interest income using the effective interest method over the term of the debt investment.

Fee income. All transaction fees earned in connection with our investments are recognized as fee income. Such fees typically include fees for services, including structuring and advisory services, provided to portfolio companies. We recognize 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.

We also typically receive 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 our consolidated statements of assets and liabilities and accreted into income over the term of the investment.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which

 

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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. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09, such that the guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and early application is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the impact this ASU will have on our consolidated financial position or disclosures, but we do not expect the impact to be material.

Off-Balance Sheet Arrangements

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. We had off-balance sheet arrangements consisting of outstanding commitments to fund various undrawn revolving loans and other credit facilities totaling $4.9 million and $6.6 million as of June 30, 2017 and December 31, 2016, respectively. Such outstanding commitments are summarized in the following table (dollars in thousands):

 

     June 30, 2017      December 31, 2016  

Portfolio Company—Investment

   Total
Commitment
     Unfunded
Commitment
     Total
Commitment
     Unfunded
Commitment
 

FAR Research Inc.—Revolving Loan

   $ 1,750      $ 1,614      $ 1,750      $ 1,614  

Inflexxion, Inc.—Revolving Loan

     500        150        500        350  

inthinc Technology Solutions, Inc.—Subordinated Note

                   5,000        1,000  

Lightning Diversion Systems, LLC—Revolving Loan

     250        250        250        250  

Oaktree Medical Centre, P.C.—Revolving Loan

     2,500               2,500         

Safety Products Group, LLC—Common Equity

     2,852        2,852        2,852        2,852  

SES Investors, LLC—Revolving Loan

     1,500               1,500        500  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,352      $ 4,866      $ 14,352      $ 6,566  
  

 

 

    

 

 

    

 

 

    

 

 

 

Additional detail for each of the commitments above is provided in the Company’s consolidated schedules of investments.

Related Party Transactions

We have entered into a number of business relationships with affiliated or related parties, including the following:

 

   

In connection with the Formation Transactions, Fund I terminated its management services agreement with Fidus Capital, LLC and we entered into the Investment Advisory Agreement with Fidus Investment Advisors, LLC, as our investment advisor. The investment professionals of Fidus Investment Advisors, LLC were also the investment professionals of Fidus Capital, LLC. We entered into the Investment Advisory Agreement with Fidus Investment Advisors, LLC to manage our day-to-day operating and investing

 

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activities. We pay our investment advisor a fee for its services under the Investment Advisory Agreement consisting of two components—a base management fee and an incentive fee. See Note 5 to our consolidated financial statements.

 

   

Edward H. Ross, our Chairman and Chief Executive Officer, and Thomas C. Lauer, our President, are managers of Fidus Investment Advisors, LLC. In May 2015, Fidus Investment Advisors, LLC entered into a combination with Fidus Partners, LLC (the “Combination”), by which members of Fidus Investment Advisors LLC and Fidus Partners, LLC (“Partners”) contributed all of their respective membership interest in Fidus Investment Advisors LLC and Partners to a newly formed limited liability company, Fidus Group Holdings, LLC (“Holdings”). As a result, Fidus Investment Advisors LLC is a wholly-owned subsidiary of Holdings, which is a newly formed limited liability company organized under the laws of Delaware.

 

   

We entered into the Administration Agreement with Fidus Investment Advisors, LLC to provide us with the office facilities and administrative services necessary to conduct day-to-day operations. See Note 5 to our consolidated financial statements.

 

   

We entered into a license agreement with Fidus Partners, LLC, pursuant to which Fidus Partners, LLC has granted us a non-exclusive, royalty-free license to use the name “Fidus.”

In connection with the IPO and our election to be regulated as a BDC, we applied for and received exemptive relief from the SEC on March 27, 2012 to allow us to take certain actions that would otherwise be prohibited by the 1940 Act, as applicable to BDCs. The relief permits FIC and Fund I, each of which has elected to be treated as a BDC, to operate effectively as one company, specifically allowing them to: (1) engage in certain transactions with each other; (2) invest in securities in which the other is or proposes to be an investor; (3) file consolidated reports with the Commission; and (4) be subject to modified consolidated asset coverage requirements for senior securities issued by a BDC and its SBIC subsidiary. Fund II has not elected to be treated as a BDC and is not party to this exemptive relief. The fourth exemption described above allows us to exclude any indebtedness guaranteed by the SBA and issued by Fund I from the 200.0% asset coverage requirements applicable to us. Effective September 30, 2014, any SBA debentures issued by Fund II are not considered senior securities for purposes of the 200.0% asset coverage requirements.

While we may co-invest with investment entities managed by our investment advisor or its affiliates, to the extent permitted by the 1940 Act and the rules and regulations thereunder, the 1940 Act imposes significant limits on co-investment. The SEC staff has granted us relief sought in an exemptive application that expands our ability to co-invest in portfolio companies with other funds managed by our investment advisor or its affiliates (“Affiliated Funds”) in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions (the “Order”). Pursuant to the Order, we are permitted to co-invest with our affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) or our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching by us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.

In addition, we, Fund I and our investment advisor have each adopted a joint code of ethics pursuant to Rule 17j-1 under the 1940 Act that governs the conduct of our and our investment

 

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advisor’s officers, directors and employees. Additionally, our investment advisor has adopted a code of ethics pursuant to rule 240A-1 under the 1940 Act and in accordance with Rule 17j-1(c). We, and Fund I, have also adopted a code of business conduct that is applicable to all officers, directors and employees of Fidus and our investment advisor. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Maryland General Corporation Law.

Recent Developments

On July 13, 2017, we exited our equity investment in EBL, LLC. We sold our equity for a realized gain of approximately $2.2 million. Concurrently, we invested $10.0 million in subordinated notes and a new common equity investment in EBL, LLC, a lifestyle retailer of urban-inspired footwear, apparel and accessories.

On July 14, 2017, we exited our debt investment in Anatrace Products, LLC. We received payment in full on our subordinated note, including a prepayment penalty.

On July 18, 2017, we invested $10.2 million in senior secured loans of Tile Redi, LLC, a leading manufacturer and marketer of bathroom products for use in tiled showers. The company serves both “do-it-yourselfers” and commercial end users throughout the US, primarily selling into the home remodeling and renovation end markets.

On July 21, 2017, we invested $12.8 million in subordinated notes and common equity of Marco Group International OpCo, LLC, a manufacturer and distributor of surface preparation equipment, parts and supplies to industrial contractors primarily in the downstream energy, infrastructure and industrial markets.

On July 28, 2017, we invested $7.8 million in subordinated notes, preferred equity and common equity of ControlScan, Inc., a leading provider of payments security, managed firewall and managed network solutions and one of the nation’s foremost PCI compliance companies.

On July 31, 2017, the Board declared a regular quarterly dividend of $0.39 per share payable on September 22, 2017 to stockholders of record as of September 8, 2017.

Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. Changes in interest rates affect both our cost of funding and the valuation of our investment portfolio. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. In the future, our investment income may also be affected by changes in various interest rates, including LIBOR and prime rates, to the extent of any debt investments that include floating interest rates. As of June 30, 2017 and December 31, 2016, two and one debt investments, respectively, bore interest at a variable rate, which represented $15.8 million and $8.2 million of our portfolio on a fair value basis, respectively, and the remainder of our debt portfolio was comprised entirely of fixed rate investments. Assuming that the consolidated statements of assets and liabilities as of June 30, 2017 and December 31, 2016 were to remain constant, a hypothetical 100 basis point change in interest rates would not have a material effect on our level of interest income from debt investments. Our pooled SBA debentures bear interest at fixed rates. Our Credit Facility bears 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, which varies depending on the period of the borrowing under the Credit Facility, 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 plus 1.0%.

 

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Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio.

 

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SALES OF COMMON STOCK BELOW NET ASSET VALUE

On June 15, 2017, our stockholders approved our ability to sell or otherwise issue an unlimited number of shares of our common stock at a discount from net asset value per share for a period of one year ending on the earlier of June 15, 2018 or the date of our 2018 Annual Meeting of Stockholders. We are likely to seek this approval again in connection with our 2018 Annual Meeting of Stockholders. In order to sell shares pursuant to this authorization a majority of our directors who have no financial interest in the sale or issuance and a majority of our Independent Directors must (a) find that the sale or issuance is in our best interests and in the best interests of our stockholders, and (b) in consultation with any underwriter or underwriters of the offering, make a good faith determination as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares, or immediately prior to the issuance of such shares, that the price at which such shares are to be sold or otherwise issued is not less than a price which closely approximates the market value of such shares, less any distributing commission or discount. It should be noted that the maximum number of shares issuable below net asset value pursuant to this authority that could result in such dilution is limited to 25% of our then outstanding common stock immediately prior to each such sale. Any offering of common stock below net asset value per share will be designed to raise capital for investment in accordance with our investment objective.

In making a determination that an offering below net asset value per share is in our and our stockholders’ best interests, our board of directors would consider a variety of factors including:

 

   

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

 

   

The amount per share by which the offering price per share and the net proceeds per share are less than the most recently determined net asset value per share;

 

   

The relationship of recent market prices of our common stock to net asset value per share and the potential impact of the offering on the market price per share of our common stock;

 

   

Whether the estimated offering price would closely approximate the market value of our shares;

 

   

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

 

   

The nature of any new investors anticipated to acquire shares in the offering;

 

   

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

 

   

The leverage available to us.

Sales or other issuances by us of our common stock at a discount from net asset value pose potential risks for our existing stockholders whether or not they participate in the offering, as well as for new investors who participate in the offering.

For additional information regarding the impact of sales of our common stock at prices below our current net asset value on existing stockholders, please refer to “Sales of Common Stock Below Net Asset Value” in the accompanying prospectus.

 

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LEGAL MATTERS

Certain legal matters will be passed upon for us by Eversheds Sutherland (US) LLP. Eversheds Sutherland (US) LLP also represents our investment advisor. Certain legal matters will be passed upon for the underwriters by Morrison & Foerster LLP, New York, New York.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The consolidated financial statements, the related senior securities table and the effectiveness of internal control over financial reporting appearing in the accompanying prospectus and registration statement have been audited by RSM US LLP, an independent registered public accounting firm located at One South Wacker Drive, Suite 800, Chicago, Illinois 60606, as stated in their reports appearing elsewhere herein, and are included in reliance upon such reports and upon the authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to the securities offered by this prospectus. The registration statement contains additional information about us and the securities being offered by this prospectus.

We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549-0102. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. We maintain a website at http://www.fdus.com and intend to make all of our annual, quarterly and current reports, proxy statements and other publicly filed information available, free of charge, on or through our website. Information contained on our website is not incorporated into this prospectus supplement, and you should not consider information on our website to be part of this prospectus supplement. You may also obtain such information by contacting us in writing at 1603 Orrington Avenue, Suite 1005, Evanston, Illinois 60201, Attention: Investor Relations. The SEC maintains a website that contains reports, proxy and information statements and other information we file with the SEC at http://www.sec.gov. Copies of these reports, proxy and information statements and other information may also be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549-0102.

PRIVACY NOTICE

We are committed to maintaining the privacy of our stockholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

From time to time, we may receive nonpublic personal information relating to our stockholders. We do not disclose nonpublic personal information about our stockholders or former stockholders to anyone, except as required by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).

 

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We restrict access to nonpublic personal information about our stockholders to employees of our investment advisor, its affiliates or authorized service providers that have a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our stockholders.

 

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INDEX TO FINANCIAL INFORMATION

 

Consolidated Statements of Assets and Liabilities — June 30, 2017 (unaudited) and December 31, 2016

     SF-2  

Consolidated Statements of Operations — Three and Six Months Ended June 30, 2017 (unaudited) and 2016 (unaudited)

     SF-3  

Consolidated Statements of Changes in Net Assets — Six Months Ended June 30, 2017 (unaudited) and 2016 (unaudited)

     SF-4  

Consolidated Statements of Cash Flows — Six Months Ended June  30, 2017 (unaudited) and 2016 (unaudited)

     SF-5  

Consolidated Schedules of Investments — June  30, 2017 (unaudited) and December 31, 2016

     SF-6  

Notes to Consolidated Financial Statements (unaudited)

     SF-20  

 

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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, 2017
(unaudited)
    December 31,
2016
 

ASSETS

    

Investments, at fair value

    

Affiliate investments (cost: $121,032 and $113,995, respectively)

   $ 139,800     $ 132,013  

Non-control/non-affiliate investments (cost: $410,312 and $386,519 respectively)

     413,460       392,441  
  

 

 

   

 

 

 

Total investments, at fair value (cost: $531,344 and $500,514, respectively)

     553,260       524,454  

Cash and cash equivalents

     50,819       57,083  

Interest receivable

     4,492       4,407  

Proceeds receivable from stock offering

     4,234        

Prepaid expenses and other assets

     1,308       798  
  

 

 

   

 

 

 

Total assets

   $ 614,113     $ 586,742  
  

 

 

   

 

 

 

LIABILITIES

    

SBA debentures, net of deferred financing costs (Note 6)

   $ 212,916     $ 219,901  

Borrowings under Credit Facility, net of deferred financing costs (Note 6)

     (333     (462

Accrued interest and fees payable

     2,612       3,122  

Management and incentive fees payable – due to affiliate

     9,645       8,830  

Administration fee payable and other – due to affiliate

     100       570  

Taxes payable

     365       555  

Accounts payable and other liabilities

     385       441  
  

 

 

   

 

 

 

Total liabilities

     225,690       232,957  
  

 

 

   

 

 

 

Commitments and contingencies (Note 7)

    

NET ASSETS

    

Common stock, $0.001 par value (100,000,000 shares authorized, 24,480,624 and 22,446,076, shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively)

     24       22  

Additional paid-in capital

     372,760       340,101  

Undistributed net investment income

     8,915       9,626  

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

     (15,196     (19,908

Accumulated net unrealized appreciation on investments

     21,920       23,944  
  

 

 

   

 

 

 

Total net assets

     388,423       353,785  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 614,113     $ 586,742  
  

 

 

   

 

 

 

Net asset value per common share

   $ 15.87     $ 15.76  
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

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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,
 
    2017     2016     2017     2016  

Investment Income:

       

Interest income

       

Affiliate investments

  $ 2,909     $ 2,763     $ 5,583     $ 5,607  

Non-control/non-affiliate investments

    12,325       10,034       24,399       20,637  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    15,234       12,797       29,982       26,244  

Dividend income

       

Affiliate investments

    268       494       546       656  

Non-control/non-affiliate investments

    347       254       727       335  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend income

    615       748       1,273       991  

Fee income

       

Affiliate investments

    141       6       147       13  

Non-control/non-affiliate investments

    1,254       244       2,030       1,212  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

    1,395       250       2,177       1,225  

Interest on idle funds and other income

    27       37       67       63  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

    17,271       13,832       33,499       28,523  
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

       

Interest and financing expenses

    2,401       2,654       4,985       5,254  

Base management fee

    2,403       2,005       4,716       3,988  

Incentive fee

    2,484       3,190       4,862       5,070  

Administrative service expenses

    340       367       691       688  

Professional fees

    241       253       710       735  

Other general and administrative expenses

    431       399       709       717  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    8,300       8,868       16,673       16,452  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

    8,971       4,964       16,826       12,071  

Income tax provision

    29       21       25       46  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    8,942       4,943       16,801       12,025  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses) on investments:

       

Net realized gains on affiliate investments

          458       26       458  

Net realized (losses) gains on non-control/ non-affiliate investments

    (367     112       6,071       (198

Net change in unrealized appreciation (depreciation) on investments

    1,382       7,485       (2,024     8,253  

Income tax provision from realized gains on investments

          (205     (1,385     (205
 

 

 

   

 

 

   

 

 

   

 

 

 

Net gain on investments

    1,015       7,850       2,688       8,308  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

  $ 9,957       12,793     $ 19,489     $ 20,333  
 

 

 

   

 

 

   

 

 

   

 

 

 

Per common share data:

       

Net investment income per share-basic and diluted

  $ 0.39     $ 0.29     $ 0.75     $ 0.72  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 0.44     $ 0.74     $ 0.86     $ 1.21  
 

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

  $ 0.39     $ 0.39     $ 0.78     $ 0.78  
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding — basic and diluted

    22,653,580       17,329,685       22,550,846       16,815,592  
 

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

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FIDUS INVESTMENT CORPORATION

Consolidated Statements of Changes in Net Assets (unaudited)

(in thousands, except shares)

 

   

 

 

Common Stock

    Additional
paid-in
capital
    Undistributed
net investment
income
    Accumulated
net realized
(loss) on
investments,

net of taxes and
distributions
    Accumulated
net unrealized
(depreciation)

appreciation on
investments
    Total net
assets
 
    Number of
shares
    Par
value
           

Balances at December 31, 2015

    16,300,732     $ 16     $ 246,307     $ 13,887     $ (6,145   $ (6,703   $ 247,362  

Public offerings of common stock, net of expenses (Note 8)

    2,875,000       3       43,667       —         —         —         43,670  

Shares issued under dividend reinvestment plan

    24,353       —         374       —          —         —         374  

Net increase in net assets resulting from operations

    —         —         —          12,025       (174     8,482       20,333  

Dividends declared

    —         —         —          (13,694     —         —         (13,694
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2016

    19,200,085     $ 19     $ 290,348     $ 12,218     $ (6,319   $ 1,779     $ 298,045  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2016

    22,446,076     $ 22     $ 340,101     $ 9,626     $ (19,908   $ 23,944     $ 353,785  

Public offerings of common stock, net of expenses (Note 8)

    2,012,500       2       32,285       —         —         —         32,287  

Shares issued under dividend reinvestment plan

    22,048       —         374       —         —         —         374  

Net increase in net assets resulting from operations

    —         —         —         16,801       4,712       (2,024     19,489  

Dividends declared

    —         —         —         (17,512     —         —         (17,512
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2017

    24,480,624     $ 24     $ 372,760     $ 8,915     $ (15,196   $ 21,920     $ 388,423  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

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FIDUS INVESTMENT CORPORATION

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

     Six Months Ended
June 30,
 
     2017     2016  

Cash Flows from Operating Activities:

    

Net increase in net assets resulting from operations

   $ 19,489     $ 20,333  

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

    

Net change in unrealized depreciation (appreciation) on investments

     2,024       (8,253

Net realized (gain) on investments

     (6,097     (260

Interest and dividend income paid-in-kind

     (3,864     (2,201

Accretion of original issue discount

     (275     (120

Accretion of loan origination fees

     (726     (528

Purchase of investments

     (87,087     (44,422

Proceeds from sales and repayments of investments

     66,733       46,034  

Proceeds from loan origination fees

     486       281  

Amortization of deferred financing costs

     625       547  

Changes in operating assets and liabilities:

    

Interest receivable

     (85     (575

Prepaid expenses and other assets

     (510     162  

Accrued interest and fees payable

     (510     197  

Management and incentive fees payable – due to affiliate

     815       1,493  

Administration fee payable and other – due to affiliate

     (470     (223

Taxes payable

     (190     (195

Accounts payable and other liabilities

     (56     (76
  

 

 

   

 

 

 

Net cash (used for) provided by operating activities

     (9,698     12,194  
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Proceeds from stock offering, net of expenses

     28,053       43,670  

Proceeds received from SBA debentures

     18,000       500  

Repayments of SBA debentures

     (24,750     —    

Proceeds received from borrowings under Credit Facility

     11,000       13,000  

Repayments of borrowings under Credit Facility

     (11,000     (28,500

Payment of deferred financing costs

     (731     (58

Dividends paid to stockholders, including expenses

     (17,138     (13,320
  

 

 

   

 

 

 

Net cash provided by financing activities

     3,434       15,292  
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (6,264     27,486  

Cash and cash equivalents:

    

Beginning of period

     57,083       31,657  
  

 

 

   

 

 

 

End of period

   $ 50,819     $ 59,143  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash payments for interest

   $ 4,870     $ 4,510  

Cash payments for taxes, net of tax refunds received

   $ 1,600     $ 446  

Non-cash financing activities:

    

Shares issued under dividend reinvestment plan

   $ 374     $ 374  

Proceeds receivable from stock offering

   $ 4,234     $ —    

See Notes to Consolidated Financial Statements (unaudited).

 

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FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (unaudited)

June 30, 2017

(In thousands, except shares)

 

Industry

Portfolio Company (a)(b)

Investment Type (c)

   Rate (d)
Cash/PIK
     Maturity      Principal
Amount
     Cost     Fair Value      Percent
of Net
Assets
 

Aerospace & Defense Manufacturing

                

FDS Avionics Corp. (k)

                

(dba Flight Display Systems)

                

Subordinated Note

     12.3%/2.8%        4/1/2020      $ 5,367      $ 5,354     $ 5,005     

Preferred Equity (186 units) (i)(f)

              371       371     

Common Equity (200 units) (i)

              2,000       3     
           

 

 

   

 

 

    
              7,725       5,379        1

Fiber Materials, Inc. (k)

                

Subordinated Note

     12.0%/1.0%        5/30/2022        4,024        4,006       4,023     

Common Equity (10 units)

              1,000       1,285     
           

 

 

   

 

 

    
              5,006       5,308        1

Lightning Diversion Systems, LLC

                

Senior Secured Loan (j)

     10.5%/0.0%        9/16/2021        21,204        21,124       21,204     

Revolving Loan ($250 commitment) (h)

     10.5%/0.0%        9/16/2021        —          (1     —       

Common Equity (600,000 units)

              —         3,760     
           

 

 

   

 

 

    
              21,123       24,964        6

Malabar International (k)

                

Subordinated Note (j)

     11.3%/2.0%        11/13/2021        7,693        7,684       7,693     

Preferred Equity (1,494 shares) (f)

     6.0%/0.0%        5/12/2022           1,997       6,009     
           

 

 

   

 

 

    
              9,681       13,702        4

Simplex Manufacturing Co.

                

Subordinated Note

     14.0%/0.0%        11/1/2017        4,050        4,050       4,050     

Warrant (29 shares) (l)

              1,155       3,539     
           

 

 

   

 

 

    
              5,205       7,589        2

Steward Holding LLC (k)

                

(dba Steward Advanced Materials)

                

Subordinated Note

     12.0%/3.3%        5/12/2021        7,262        7,237       7,262     

Common Equity (1,000,000 units)

              1,000       460     
           

 

 

   

 

 

    
              8,237       7,722        2

Apparel Distribution

                

Jacob Ash Holdings, Inc.

                

Subordinated Note (j)

     13.0%/4.0%        6/30/2018        4,000        3,997       4,000     

Subordinated Note

     13.0%/0.0%        6/30/2018        510        507       510     

Preferred Equity (66,138 shares) (f)

     0.0%/15.0%        6/30/2018           1,149       1,152     

Warrant (63,492 shares) (l)

              67       —       
           

 

 

   

 

 

    
              5,720       5,662        1

Building Products Manufacturing

                

SES Investors, LLC (k)

                

(dba SES Foam)

                

Senior Secured Loan

     11.0%/0.0%        3/8/2022        10,448        10,403       9,340     

Revolving Loan ($1,500 commitment)(i)

     6.0%/0.0%        3/8/2022        1,500        1,494       1,500     

Common Equity (6,000 units) (g)(i)

              600       269     
           

 

 

   

 

 

    
              12,497       11,109        3

The Wolf Organization, LLC

                

Common Equity (175 shares)

              1,455       3,321        1

 

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FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2017

(In thousands, except shares)

 

Industry

Portfolio Company (a)(b)

Investment Type (c)

   Rate (d)
Cash/PIK
   Maturity    Principal
Amount
     Cost      Fair Value      Percent
of Net
Assets
 

US GreenFiber, LLC

                 

Subordinated Note (j)

   12.0%/2.0%    3/1/2019    $ 14,004      $ 13,979      $ 13,790     

Common Equity (2,522 units) (g)(i)

              586        322     
           

 

 

    

 

 

    
              14,565        14,112        4

Business Services

                 

Comprehensive Logistics Co., Inc.

                 

Subordinated Note (j)

   11.5%/4.5%    11/22/2021      15,416        15,352        15,417        4

Inflexxion, Inc. (k)

                 

Senior Secured Loan

   7.0%/6.0%    12/16/2019      4,324        4,312        3,537     

Revolving Loan ($500 commitment) (i)

   7.0%/6.0%    12/16/2019      365        364        299     

Preferred Equity (252,046 units)

              252        149     

Preferred Equity (308,987 units)

              309        182     

Preferred Equity (1,400 units)

              1,400        —       
           

 

 

    

 

 

    
              6,637        4,167        1

Plymouth Rock Energy, LLC

                 

Senior Secured Loan (j)

   11.0%/0.0%    6/30/2019      5,945        5,945        5,945        2

Vanguard Dealer Services, L.L.C.

                 

Subordinated Note

   12.3%/0.0%    1/30/2021      11,450        11,411        11,450     

Common Equity (6,000 shares)

              600        953     
           

 

 

    

 

 

    
              12,011        12,403        3

Capital Equipment Manufacturing

                 

Thermoforming Technology Group LLC

                 

Subordinated Note

   12.5%/0.0%    9/14/2021      14,700        14,643        14,700     

Common Equity (3,500 units) (g)(i)

              350        389     
           

 

 

    

 

 

    
              14,993        15,089        4

Component Manufacturing

                 

Hilco Plastics Holdings, LLC

                 

(dba Hilco Technologies)

                 

Subordinated Note

   11.5%/1.0%    7/15/2022      8,063        8,028        8,063     

Common Equity (72,507 units) (g)(i)

              500        448     
           

 

 

    

 

 

    
              8,528        8,511        2

NGT Acquisition Holdings, LLC

                 

(dba Techniks Industries)

                 

Subordinated Note

   12.0%/0.0%    3/21/2022      11,000        10,946        10,946     

Common Equity (378 units) (i)

              500        500     
           

 

 

    

 

 

    
              11,446        11,446        3

Toledo Molding & Die, Inc.

                 

Subordinated Note (i)

   10.5%/0.0%    12/18/2018      10,000        9,945        10,000        3

TransGo, LLC

                 

Subordinated Note

   13.3%/0.0%    8/28/2022      9,500        9,455        9,455     

Common Equity (1,000 units)

              1,000        1,000     
           

 

 

    

 

 

    
              10,455        10,455        3

Consumer Products

                 

World Wide Packaging, LLC (k)

                 

Common Equity (1,517,573 units) (g)(i)

              499        3,205        1

 

SF-7


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2017

(In thousands, except shares)

 

Industry

Portfolio Company (a)(b)

Investment Type (c)

   Rate (d)
Cash/PIK
     Maturity      Principal
Amount
     Cost      Fair Value      Percent
of Net
Assets
 

Electronic Components Supplier

                 

Apex Microtechnology, Inc. (k)

                 

Warrant (2,293 shares) (l)

            $ 220      $ 385     

Common Equity (11,690 shares)

              1,169        2,108     
           

 

 

    

 

 

    
              1,389        2,493        1

Healthcare Products

                 

Allied 100 Group, Inc.

                 

Subordinated Note (j)

     11.5%/0.0%        5/26/2020      $ 13,000        12,966        13,000     

Common Equity (1,250,000 units) (i)

              1,250        1,295     
           

 

 

    

 

 

    
              14,216        14,295        4

Anatrace Products, LLC

                 

Subordinated Note

     13.0%/1.3%        6/23/2021        6,500        6,485        6,565     

Common Equity (360,000 shares) (i)

              —          —       
           

 

 

    

 

 

    
              6,485        6,565        2

OMC Investors, LLC

                 

(dba Ohio Medical Corporation)

                 

Subordinated Note

     12.0%/0.0%        7/15/2021        10,000        9,926        8,602     

Common Equity (5,000 shares)

              500        253     
           

 

 

    

 

 

    
              10,426        8,855        2

Pfanstiehl, Inc. (k)

                 

Subordinated Note

     10.5%/0.0%        9/29/2021        6,208        6,191        6,208     

Common Equity (8,500 units) (i)

              850        11,137     
           

 

 

    

 

 

    
              7,041        17,345        4

Six Month Smiles Holdings, Inc.

                 

Subordinated Note (i)

     6.0%/8.5%        7/31/2020        9,156        9,136        8,110        2

Healthcare Services

                 

Medsurant Holdings, LLC (k)

                 

Subordinated Note

     12.3%/0.0%        6/18/2021        6,267        6,226        6,267     

Preferred Equity (126,662 units) (g)

              1,345        2,257     

Warrant (505,176 units) (g)(l)

              4,516        7,984     
           

 

 

    

 

 

    
              12,087        16,508        4

Microbiology Research Associates, Inc. (k)

                 

Subordinated Note

     11.0%/1.5%        3/13/2022        8,602        8,582        8,602     

Common Equity (1,625,731 units) (i)

              1,939        2,819     
           

 

 

    

 

 

    
              10,521        11,421        3

Oaktree Medical Centre, P.C.

                 

(dba Pain Management Associates)

                 

Senior Secured Loan (i)

     11.5%/0.0%        1/1/2018        571        631        640     

Senior Secured Loan (i)

     7.0%/12.0%        1/1/2018        6,449        6,904        4,944     

Revolving Loan ($2,500 commitment) (i)

     11.5%/0.0%        1/1/2018        2,500        2,685        2,800     
           

 

 

    

 

 

    
              10,220        8,384        2

United Biologics, LLC

                 

Subordinated Note

     12.0%/2.0%        4/30/2018        8,786        8,762        8,786     

Preferred Equity (98,377 units) (g)(i)

              1,069        455     

Warrant (57,469 units) (l)

              566        126     
           

 

 

    

 

 

    
              10,397        9,367        2

 

SF-8


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2017

(In thousands, except shares)

 

Industry

Portfolio Company (a)(b)

Investment Type (c)

   Rate (d)
Cash/PIK
   Maturity      Principal
Amount
     Cost      Fair Value      Percent
of Net
Assets
 

Industrial Cleaning & Coatings

                 

K2 Industrial Services, Inc.

                 

Tranche A Loan

   11.8%/2.5%      4/25/2022      $ 10,174      $ 10,136      $ 10,173     

Tranche B Loan

   11.8%/7.3%      4/25/2022        2,101        2,094        2,102     

Common Equity (1,673 shares)

              1,268        862     
           

 

 

    

 

 

    
              13,498        13,137        3

Information Technology Services

                 

inthinc Technology Solutions, Inc. (m)

                 

Royalty Rights

        4/24/2020           185        —          0

New Era Technology, Inc.

                 

Subordinated Note (i)

   11.0%/1.5%      9/3/2022        11,558        11,504        11,504     

Common Equity (197,369 shares) (i)

              750        750     
           

 

 

    

 

 

    
              12,254        12,254        3

Revenue Management Solutions, LLC

                 

Subordinated Note (j)

   11.5%/1.0%      7/4/2022        8,793        8,714        8,714     

Subordinated Note (i)

   7.0%/6.5%      7/4/2022        790        779        779     

Common Equity (2,250,000 units)

              2,250        2,250     
           

 

 

    

 

 

    
              11,743        11,743        3

Software Technology, LLC

                 

Subordinated Note (j)

   11.0%/0.0%      6/23/2023        8,750        8,710        8,750     

Common Equity (11 units)

              1,125        1,148     
           

 

 

    

 

 

    
              9,835        9,898        3

Laundry Services

                 

Caldwell & Gregory, LLC

                 

Subordinated Note

   0.0%/12.0%      5/31/2022        2,861        2,861        2,861     

Common Equity (500,000 units) (g)

              500        642     

Warrant (242,121 units) (g)(l)

              242        311     
           

 

 

    

 

 

    
              3,603        3,814        1

Oil & Gas Distribution

                 

LNG Indy, LLC

                 

(dba Kinetrex Energy)

                 

Subordinated Note (j)

   11.5%/0.0%      9/28/2021        5,000        4,977        5,000     

Common Equity (1,000 units)

              1,000        1,168     
           

 

 

    

 

 

    
              5,977        6,168        2

Oil & Gas Services

                 

IOS Acquisitions, Inc. (m)

                 

Common Equity (2,152 units) (i)

              103        17        0

Pinnergy, Ltd. (k)

                 

Subordinated Note (j)

   0.0%/10.0%      1/24/2020        8,843        8,826        8,843     

Common Equity - Class A-2 (42,500 units) (j)

              3,000        5,494     

Common Equity - Class B (1,000 units) (j)

              3,000        3,000     
           

 

 

    

 

 

    
              14,826        17,337        4

Packaging

                 

Rohrer Corporation

                 

Subordinated Note (j)

   11.0%/1.5%      1/18/2022        16,740        16,672        16,740     

Common Equity (389 shares)

              750        858     
           

 

 

    

 

 

    
              17,422        17,598        5

 

SF-9


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2017

(In thousands, except shares)

 

Industry

Portfolio Company (a)(b)

Investment Type (c)

   Rate (d)
Cash/PIK
   Maturity      Principal
Amount
     Cost      Fair Value      Percent
of Net
Assets
 

Printing Services

                 

Brook & Whittle Limited

                 

Subordinated Note

   12.0%/4.8%      12/31/2017      $ 8,226      $ 8,226      $ 8,417     

Subordinated Note

   12.0%/2.0%      12/31/2017        2,366        2,366        2,366     

Warrant (1,051 shares) (l)

              285        321     

Common Equity - Series A (148 shares)

              110        45     

Common Equity - Series D (527 shares)

              53        146     
           

 

 

    

 

 

    
              11,040        11,295        3

Promotional Products

                 

Hub Acquisition Sub, LLC

                 

(dba Hub Pen)

                 

Subordinated Note (j)

   12.3%/0.0%      9/23/2021        11,350        11,307        11,350     

Common Equity (7,500 units)

              750        1,046     
           

 

 

    

 

 

    
              12,057        12,396        3

Restaurants

                 

ACFP Management, Inc. (m)

                 

Common Equity (1,000,000 units) (i)

              —          —          0

Cardboard Box LLC

                 

(dba Anthony’s Coal Fired Pizza)

                 

Common Equity (521,021 units) (i)

              520        244        0

Restaurant Finance Co, LLC

                 

Senior Secured Loan (j)(o)

   15.0%/4.0%      7/31/2020        9,342        9,314        6,175        2

Retail

                 

EBL, LLC (EbLens)

                 

Common Equity (750,000 units) (g)(i)

              750        2,212        1

Palmetto Moon, LLC

                 

Senior Secured Loan

   11.5%/0.0%      10/31/2021        6,254        6,220        6,254     

Common Equity (499 units) (i)

              499        376     
           

 

 

    

 

 

    
              6,719        6,630        2

Safety Products Manufacturing

                 

Safety Products Group, LLC (k)(m)

                 

Preferred Equity (749 units) (g)(i)

              —          9     

Common Equity (676 units) ($2,852 commitment) (g)(i)

              —          —       
           

 

 

    

 

 

    
              —          9        0

Specialty Chemicals

                 

FAR Research Inc. (k)

                 

Senior Secured Loan (j)

   11.8%/1.0%      3/31/2019        7,297        7,285        7,297     

Revolving Loan ($500 commitment) (i)

   11.8%/1.0%      3/31/2019        139        135        139     

Common Equity (1,396 units)

              1,396        897     
           

 

 

    

 

 

    
              8,816        8,333        1

Specialty Distribution

                 

Carlson Systems Holdings, Inc. (m)

                 

Common Equity (15,000 units) (i)

              —          1     
           

 

 

    

 

 

    
              —          1        0

 

SF-10


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2017

(In thousands, except shares)

 

Industry

Portfolio Company (a)(b)

Investment Type (c)

   Rate (d)
Cash/PIK
     Maturity      Principal
Amount
     Cost      Fair Value      Percent
of Net
Assets
 

Pugh Lubricants, LLC

                 

Subordinated Note (j)

     12.3%/0.0%        5/10/2022      $ 18,581      $ 18,496      $ 18,581     

Common Equity (6,285 units) (g)(i)

              612        730     
           

 

 

    

 

 

    
              19,108        19,311        5

Virginia Tile Company, LLC

                 

Subordinated Note (j)

     12.3%/0.0%        4/7/2022        12,000        11,966        12,000     

Common Equity (17 units)

              342        1,246     
           

 

 

    

 

 

    
              12,308        13,246        3

Transportation Services

                 

Cavallo Bus Lines Holdings, LLC

                 

Subordinated Note

     12.8%/0.0%        4/26/2021        7,395        7,366