UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
 
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to
 
Commission file number: 814-00939
________________ 
HMS Income Fund, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
 
45-3999996
(I.R.S. Employer
Identification No.)
 
 
 
2800 Post Oak Boulevard
Suite 5000
Houston, Texas
(Address of Principal Executive Offices)
 
77056-6118
(Zip Code)
 
(888) 220-6121
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and formal fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o 
 
Accelerated filer o 
 
Non-accelerated filer þ 
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo þ
 
The issuer had 11,186,960 shares of common stock outstanding as of May 12, 2014.




TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION 
Item 1.
Financial Statements
 
 
Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013
 
Unaudited Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013
 
Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2014 and 2013
 
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013
 
Consolidated Schedules of Investments as of March 31, 2014 (Unaudited) and December 31, 2013
 
Notes to the Consolidated Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II — OTHER INFORMATION 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
Signatures
 
Exhibit Index
 
  



PART I — FINANCIAL INFORMATION

Item 1.    Financial Statements

HMS Income Fund, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
 
March 31, 2014
 
December 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Portfolio investments at fair value:
 
 
 
Non-Control/Non-Affiliate investments (amortized cost: $140,538 and $66,410 as of March 31, 2014 and December 31, 2013, respectively)
$
141,218

 
$
66,882

Total portfolio investments
141,218

 
66,882

 
 
 
 
Cash
17,549

 
6,356

Interest receivable
839

 
399

Receivable for securities sold
3,010

 
—

Prepaid and other assets
86

 
109

Due from Main Street Capital Corporation
19

 
19

Deferred offering costs (net of accumulated amortization of $1,221 and $631 as of March 31, 2014 and December 31, 2013, respectively)
3,583

 
3,688

Deferred financing costs (net of accumulated amortization of $185 and $144 as of March 31, 2014 and December 31, 2013, respectively)
741

 
168

Total assets
$
167,045

 
$
77,621

 
 
 
 
LIABILITIES
 

 
 

Accounts payable and other liabilities
$
184

 
$
71

Payable for unsettled trades
2,405

 
2,608

Stockholder distributions payable
521

 
295

Due to affiliates
4,139

 
3,771

Payable for securities purchased
49,216

 
8,799

Note payable
27,500

 
14,000

Total liabilities
83,965

 
29,544

 
 
 
 
Commitments and Contingencies
 
 
 
 
 
 
 
NET ASSETS
 

 
 

Common stock, $.001 par value; 150,000,000 shares authorized, 9,373,983 and 5,396,967 issued and outstanding as of March 31, 2014 and December 31, 2013, respectively
9

 
5

Additional paid in capital
82,754

 
47,600

Accumulated net investment income, net of stockholder distributions
—

 
—

Accumulated net realized gain on investment, net of stockholder distributions
—

 
—

Distributions in excess of accumulated net investment income and net realized gains
(383
)
 
—

Net unrealized appreciation
700

 
472

Total net assets
83,080

 
48,077

 
 
 
 
Total liabilities and net assets
$
167,045

 
$
77,621

 
 
 
 
Net asset value per share
$
8.86

 
$
8.91

 
See notes to the financial statements.

1


HMS Income Fund, Inc.
Consolidated Statements of Operations
(in thousands, except shares, per share and per unit amounts)
(Unaudited) 
 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
INVESTMENT INCOME:
 

 
 

Interest income:
 

 
 

Non-Control/Non-Affiliate investments
$
1,661

 
$
392

Total interest income
1,661

 
392

EXPENSES:
 

 
 

Interest expense
200

 
77

Base management and incentive fees
606

 
84

Administrative services expenses
329

 
233

Professional fees
210

 
115

Insurance
46

 
46

Other general and administrative
78

 
53

Expenses before fee and expense waivers
1,469

 
608

Waiver of management and incentive fees
(303
)
 
(84
)
Waiver of administrative services expenses
(329
)
 
(233
)
Total expenses, net of fee and expense waivers
837

 
291

 
 
 
 
NET INVESTMENT INCOME
824

 
101

 
 
 
 
NET REALIZED GAIN FROM INVESTMENTS
 

 
 

Non-Control/Non-Affiliate investments
69

 
—

Total realized gain from investments
69

 
—

 
 
 
 
NET REALIZED INCOME
893

 
101

 
 
 
 
NET UNREALIZED APPRECIATION (DEPRECIATION)
 

 
 

Non-Control/Non-Affiliate investments
228

 
207

Total net unrealized appreciation (depreciation)
228

 
207

 
 
 
 
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$
1,121

 
$
308

NET INVESTMENT INCOME PER SHARE/UNIT – BASIC AND DILUTED
$
0.11

 
$
0.07

NET REALIZED INCOME PER SHARE/UNIT
$
0.12

 
$
0.07

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE/UNIT – BASIC AND DILUTED
$
0.15

 
$
0.22

DISTRIBUTIONS DECLARED PER SHARE/UNIT
$
0.17

 
$
0.17

WEIGHTED AVERAGE SHARES/UNITS OUTSTANDING – BASIC AND DILUTED
7,388,639

 
1,407,778

 
See notes to the financial statements.


2


HMS Income Fund, Inc.
Consolidated Statements of Change in Net Assets
For the Three Months Ended March 31, 2014 and March 31, 2013
(in thousands, except number of shares)
(Unaudited)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional Paid-In
Capital
 
Accumulated Net Investment Income, Net
of Stockholder
Distributions
 
Accumulated Net Realized Gain, Net of Stockholder Distributions
 
Distributions from Other Sources (1)
 
Net Unrealized
Appreciation
 
Total Net
Assets
Balance at December 31, 2013
5,396,967

 
$
5

 
$
47,600

 
$
—

 
$
—

 
$
—

 
$
472

 
$
48,077

Issuance of common stock
3,977,411

 
4

 
39,318

 
—

 
—

 
—

 
—

 
39,322

Redemption of common stock
(395
)
 
—

 
(15
)
 
—

 
—

 
—

 
—

 
(15
)
Selling commissions and dealer manager fees
—

 
—

 
(3,559
)
 
—

 
—

 
—

 
—

 
(3,559
)
Offering costs
—

 
—

 
(590
)
 
—

 
—

 
—

 
—

 
(590
)
Stockholder distributions declared
—

 
—

 
—

 
(824
)
 
(69
)
 
(383
)
 
—

 
(1,276
)
Net increase in net assets resulting from operations
—

 
—

 
—

 
824

 
69

 
—

 
228

 
1,121

Balance at March 31, 2014
9,373,983

 
$
9

 
$
82,754

 
$
—

 
$
—

 
$
(383
)
 
$
700

 
$
83,080



 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional Paid-In
Capital
 
Accumulated Net Investment Income, Net
of Stockholder
Distributions
 
Accumulated Net Realized Gain, Net of Stockholder Distributions
 
Distributions from Other Sources (1)
 
Net Unrealized
Appreciation
 
Total Net
Assets
Balance at December 31, 2012
1,289,472

 
$
1

 
$
11,248

 
$
109

 
$
14

 


 
$
51

 
$
11,423

Issuance of common stock
283,600

 
1

 
2,815

 
—

 
—

 


 
—

 
2,816

Selling commissions and dealer manager fees
—

 
—

 
(263
)
 
—

 
—

 


 
—

 
(263
)
Offering costs
—

 
—

 
(42
)
 
—

 
—

 


 
—

 
(42
)
Stockholder distributions declared
—

 
—

 
—

 
(210
)
 
(14
)
 
(19
)
 
—

 
(243
)
Net increase in net assets resulting from operations
—

 
—

 
—

 
101

 
—

 


 
207

 
308

Balance at March 31, 2013
1,573,072

 
$
2

 
$
13,758

 
$
—

 
$
—

 
$
(19
)
 
$
258

 
$
13,999


See notes to the financial statements.

(1) Please see discussion of Other Sources of Distributions in Note 6-Stockholder Distributions.

3


HMS Income Fund, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited) 
 
Three Months Ended 
 March 31, 2014
 
Three Months Ended 
 March 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net increase in net assets resulting from operations
$
1,121

 
$
308

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


 


Principal repayments received, proceeds from sales of investments in portfolio companies
12,942

 
5,170

Investments in portfolio companies
(49,359
)
 
(6,096
)
Net unrealized (appreciation) of portfolio investments
(228
)
 
(207
)
Net realized (gain) on sale of portfolio investments
(69
)
 
—

Amortization of deferred financing costs
41

 
22

Accretion of unearned income
(215
)
 
3

Changes in other assets and liabilities:


 
 

Interest receivable
(440
)
 
(36
)
Prepaid and other assets
23

 
49

Due from Main Street Capital Corporation
—

 
966

Due to affiliates
917

 
(169
)
Accounts payable and other liabilities
19

 
(35
)
Payable for unsettled trades
(203
)
 
457

Net cash provided by (used in) operating activities
(35,451
)
 
432

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from issuance of common stock
38,313

 
2,754

Redemption of common shares
(15
)
 
—

Payment of selling commissions and dealer manager fees
(3,412
)
 
(263
)
Payment of offering costs
(591
)
 
(63
)
Payment of stockholder distributions
(631
)
 
(209
)
Repayments on note payable
(40,000
)
 
(1,000
)
Proceeds from note payable
53,500

 
—

Payment of deferred financing costs
(520
)
 
(99
)
Net cash provided by (used in) financing activities
46,644

 
1,120

 
 
 
 
Net increase in cash and cash equivalents
11,193

 
1,552

 
 
 
 
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD
6,356

 
1,832

 
 
 
 
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD
$
17,549

 
$
3,384

 
See notes to the financial statements.


4


HMS Income Fund, Inc.
Consolidated Schedule of Investments
As of March 31, 2014
(dollars in thousands)
(Unaudited)
Portfolio Company (1)
Business Description
Type of Investment (1)
Principal (5)
Cost (5)
Fair Value
 
 
 
 
 
 
Non-Control/Non-Affiliate Investments (2)
ABG Intermediate Holdings 2, LLC (6)
Trademark Licensing of Clothing
LIBOR Plus 5.00%, Current Coupon 6.00%, Secured Debt (Maturity - June 28, 2019)
$
1,496

$
1,489

$
1,522

Allflex Holdings III Inc. (6) (11)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00%, Current Coupon 8.00%, Secured Debt (Maturity - July 19, 2021)
950

969

965

Ameritech College Operations, LLC (8) (10)
For-Profit Nursing and Healthcare College
18% Secured Debt (Maturity - March 9, 2017)
750

750

750

AMF Bowling Centers, Inc. (6)
Bowling Alley Operator
LIBOR Plus 7.50%, Current Coupon 8.75%, Secured Debt (Maturity - June 29, 2018)
4,956

5,030

5,061

Ancile Solutions, Inc. (6)
Provider of eLearning Solutions
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - July 15, 2018)
1,219

1,209

1,228

Answers Corporation (6)
Consumer Internet Search Services Provider
LIBOR Plus 5.50%, Current Coupon 6.50%, Secured Debt (Maturity - December 20, 2018)
1,481

1,467

1,479

Aptean, Inc. (6) (9)
Enterprise Application Software Provider
LIBOR Plus 4.25%, Current Coupon 5.25%, Secured Debt (Maturity - February 26, 2020)
4,000

3,985

4,025

Artel, LLC (6)
Land-Based and Commercial Satellite Provider
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - November 27, 2017)
1,164

1,130

1,147

Ascend Learning, LLC (6)
Technology Based Healthcare Learning Solutions
LIBOR Plus 5.00%, Current Coupon 6.00%, Secured Debt (Maturity - July 31, 2019)
750

746

761

Atkins Nutritionals Holdings II, Inc. (6)
Weight Management Food Products
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - January 2, 2019)
993

984

1,005

BBTS Borrower LP (6) (9)
Oil & Gas Exploration and Midstream Services
LIBOR Plus 6.50%, Current Coupon 7.75%, Secured Debt (Maturity - June 4, 2019)
4,481

4,524

4,533

Blackhawk Specialty Tools LLC (6)
Oilfield Equipment & Services
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - August 1, 2019)
1,481

1,481

1,485

Bluestem Brands, Inc. (6)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 6.50%, Current Coupon 7.50%, Secured Debt (Maturity - December 6, 2018)
1,778

1,769

1,798

California Healthcare Medical Billing, Inc. (8) (10)
Outsourced Billing & Revenue Cycle Management
12% Secured Debt, (Maturity - October 17, 2015)
750

750

750

California Pizza Kitchen, Inc. (9)
Casual Dining Restaurant Chain
LIBOR Plus 4.25%, Current Coupon 5.25%, Secured Debt (Maturity - July 7, 2017)
1,995

1,925

1,905

Cedar Bay Generation Company LP (6)
Coal-Fired Cogeneration Plant
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - April 23, 2020)
1,635

1,634

1,651

Consolidated Aerospace Manufacturing, LLC (9)
Aerospace Components Manufacturer
LIBOR Plus 4.00%, Current Coupon 5.00%, Secured Debt (Maturity - February 28, 2020)
1,500

1,493

1,508

CST Industries, Inc. (6)
Storage Tank Manufacturer
LIBOR Plus 6.25%, Current Coupon 7.75%, Secured Debt (Maturity - May 22, 2017)
2,466

2,436

2,429

e-Rewards, Inc. (6) (9)
Provider of Digital Data Collection
LIBOR Plus 5.00%, Current Coupon 6.00%, Secured Debt (Maturity - October 29, 2018)
4,472

4,457

4,472

Excelitas Technologies Corp. (6) (9)
Lighting and Sensor Components
LIBOR Plus 5.00%, Current Coupon 6.00%, Secured Debt (Maturity - November 2, 2020)
3,481

3,496

3,502

Extreme Reach, LLC (6)
TV and Video Advertising Platform
LIBOR Plus 5.75%, Current Coupon 6.75%, Secured Debt (Maturity - January 24, 2020)
750

739

769

Fender Musical Instruments Corporation (6)
Manufacturer of Musical Instruments
LIBOR Plus 4.50%, Current Coupon 5.75%, Secured Debt (Maturity - April 3, 2019)
446

442

450

FishNet Security, Inc. (6)
Information Technology Value-Added Reseller
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - November 30, 2017)
1,975

1,959

1,986

Fram Group Holdings, Inc. (6)
Manufacturer of Automotive Maintenance Products
LIBOR Plus 5.00%, Current Coupon 6.50%, Secured Debt (Maturity - July 31, 2017)
1,497

1,486

1,503

Golden Nugget, Inc. (6)
Owner & Operator of Hotels and Casinos
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity - November 21, 2019)
998

991

1,022

iEnergizer Limited (6) (7) (9)
Provider of Business Outsourcing Solutions
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - May 1, 2019)
4,845

4,805

4,772

Inn of the Mountain Gods Resort and Casino
Hotel & Casino Owner & Operator
9.25% Secured Bond (Maturity - November 30, 2020)
1,884

1,823

1,846

Ipreo Holdings LLC (6)
Application Software for Capital Markets
LIBOR Plus 4.00%, Current Coupon 5.00%, Secured Debt (Maturity - August 7, 2017)
732

732

739

Jackson Hewitt Tax Service Inc. (6) (9)
Tax Preparation Service Provider
LIBOR Plus 8.50%, Current Coupon 10.00%, Secured Debt (Maturity - October 16, 2017)
3,258

3,267

3,250

Joernes Healthcare, LLC (6)
Health Care Equipment & Supplies
LIBOR Plus 5.00%, Current Coupon 6.75%, Secured Debt (Maturity - March 28, 2018)
974

965

954

Keypoint Government Solutions, Inc. (6)
Pre-Employment Screening Services
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - November 13, 2017)
1,893

1,888

1,874

Larchmont Resources, LLC (6)
Oil & Gas Exploration & Production
LIBOR Plus 7.25%, Current Coupon 8.25%, Secured Debt (Maturity - August 7, 2019)
746

750

761

Learning Care Group (US) No. 2 Inc. (6)
Provider of Early Childhood Education
LIBOR Plus 4.50%, Current Coupon 5.75%, Secured Debt (Maturity - May 8, 2019)
995

986

1,001

LJ Host Merger Sub, Inc. (6)
Managed Services and Hosting Provider
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - December 13, 2019)
1,988

1,968

1,978

 
 
LIBOR Plus 8.75%, Current Coupon 10.00%, Secured Debt (Maturity - December 23, 2020)  (11)
500

490

498

 
 
 
 
2,458

2,476

MAH Merger Corporation (6)
Sports-Themed Casual Dining Chain
LIBOR Plus 4.50%, Current Coupon 5.75%, Secured Debt (Maturity - July 19, 2019)
1,492

1,493

1,496

MediMedia USA, Inc. (6)
Provider of Healthcare Media and Marketing
LIBOR Plus 6.75%, Current Coupon 8.00%, Secured Debt (Maturity - November 20, 2018)
1,990

1,943

1,940

MedSolutions Holdings, Inc. (6)
Specialty Benefit Management
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - July 8, 2019)
1,950

1,948

1,964

MP Assets Corporation (6)
Manufacturer of Battery Components
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity - December 19, 2019)
990

980

990

Nice-Pak Products, Inc. (9)
Pre-Moistened Wipes Manufacturer
LIBOR Plus 5.75%, Current Coupon 7.25%, Secured Debt (Maturity - June 18, 2014)
4,680

4,603

4,587

North Atlantic Trading Company, Inc. (6)
Marketer/Distributor of Tobacco
LIBOR Plus 6.50%, Current Coupon 7.75%, Secured Debt (Maturity -January 13, 2020)
1,500

1,485

1,515

NRC US Holding Company LLC
Environmental Services Provider
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity -July 30, 2019)
3,491

3,482

3,517

Panolam Industries International, Inc. (6)
Decorative Laminate Manufacturer
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - August 23, 2017)
892

885

874

Permian Holdings, Inc.
Storage Tank Manufacturer
10.50% Secured Bond (Maturity - January 15, 2018)
1,910

1,884

1,943

Peroxychem, LLC (9)
Chemical Manufacturer
LIBOR Plus 6.50%, Current Coupon 7.5%, Secured Debt (Maturity - February 28, 2020)
4,500

4,477

4,523

Pitney Bowes Management Services Inc. (6)
Provider of Document Management Services
LIBOR Plus 6.25%, Current Coupon 7.50%, Secured Debt (Maturity - October 1, 2019)
995

985

1,004

Polyconcept Financial B.V. (6) (9)
Promotional Products to Corporations and Consumers
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - June 28, 2019)
2,469

2,467

2,469

Prowler Acquisition Corporation (6)
Specialty Distributor to the Energy Sector
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity - January 28, 2020)
750

743

757

Ravago Holdings America, Inc. (6) (9)
Polymers Distributor
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity - December 20, 2020)
4,250

4,271

4,295

Recorded Books, Inc. (6)
Audiobook and Digital Content Publisher
LIBOR Plus 4.25%, Current Coupon 5.25%, Secured Debt (Maturity - January 31, 2020)
2,500

2,475

2,494

Relativity Media, LLC (9)
Full-scale Film and Television Production and Distribution
10.00% Secured Debt (Maturity - May 30, 2015)
3,693

3,693

3,703

 
 
15.00% PIK Secured Debt (Maturity - May 30, 2015)  (11)
1,000

1,000

1,020

 
 
 
 
4,693

4,723

RentPath, Inc. (6) (9)
Online Apartment Aggregator
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - May 29, 2020)
2,494

2,431

2,450

SCE Partners, LLC (6)
Hotel & Casino Operator
LIBOR Plus 7.25%, Current Coupon 8.25%, Secured Debt (Maturity - August 14, 2019)
1,000

991

915

Sotera Defense Solutions, Inc. (6)
Defense Industry Intelligence Services
LIBOR Plus 6.00%, Current Coupon 7.50%, Secured Debt (Maturity - April 21, 2017)
938

910

837

Sutherland Global Services, Inc. (6)
Business Process Outsourcing Provider
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - March 6, 2019)
950

933

957

Synagro Infrastructure Company, Inc. (6)
Waste Management Services
LIBOR Plus 5.25%, Current Coupon 6.25%, Secured Debt (Maturity - August 22, 2020)
995

976

1,004

TeleGuam Holdings, LLC (6) (9)
Cable and Telecom Services Provider
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - December 10, 2018)
988

989

986

 
 
LIBOR Plus 7.50%, Current Coupon 8.75%, Secured Debt (Maturity - June 10, 2019) (11)
3,000

3,023

3,015

 
 
 
 
4,012

4,001

Tervita Corporation (6) (7)
Oil and Gas Environmental Services
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - May 15, 2018)
2,494

2,503

2,478

The Topps Company, Inc. (6)
Trading Cards & Confectionary
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - October 2, 2018)
998

988

1,001

Therakos, Inc. (6)
Immune System Disease Treatment
LIBOR Plus 6.25%, Current Coupon 7.50%, Secured Debt (Maturity - December 27, 2017)
1,489

1,461

1,502

ThermaSys Corporation (6)
Manufacturer of Industrial Heat Exchanges
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - May 3, 2019)
1,481

1,463

1,481

Totes Isotoner Corporation (6) (9)
Weather Accessory Retail
LIBOR Plus 5.75%, Current Coupon 7.25%, Secured Debt (Maturity - July 7, 2017)
1,937

1,954

1,948

Travel Leaders Group, LLC (6) (9)
Travel Agency Network Provider
LIBOR Plus 6.00%, Current Coupon 7.00%, Secured Debt (Maturity - December 5, 2018)
4,938

4,895

4,901

Universal Fiber Systems, LLC (6)
Manufacturer of Synthetic Fibers
LIBOR Plus 4.25%, Current Coupon 5.25%, Secured Debt (Maturity - January 31, 2019)
1,698

1,695

1,711

Vantage Oncology, LLC
Outpatient Radiation Oncology Treatment Centers
9.50% Secured Bond (Maturity - June 15, 2017)
1,000

1,000

1,018

Visant Corporation (6) (9) (10)
School Affinity Stores
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - December 22, 2016)
2,691

2,681

2,674

Vision Solutions, Inc. (6) (9)
Provider of Information Availability Software
LIBOR Plus 4.50%, Current Coupon 6.00%, Secured Debt (Maturity - July 23, 2016)
3,188

3,202

3,212

Walker & Dunlop Inc. (6) (7)
Real Estate Financial Services
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity - December 20, 2020)
748

741

758

YP Holdings LLC (6) (9)
Online and Offline Advertising Operator
LIBOR Plus 6.75%, Current Coupon 8.00%, Secured Debt (Maturity - June 4, 2018)
3,858

3,873

3,900

Total Non-Control/Non-Affiliate Investments (2) (3) (4) (100% of total Portfolio Investments at fair value)
 
$
140,538

$
141,218

(1)
See Note 3 - Fair Value Hierarchy for Investments for summary geographic location of portfolio companies
(2)
Non-Control/Non-Affiliate investments are defined by the Investment Company Act of 1940, as amended (the “1940 Act”) as investments that are neither Control investments nor Affiliate investments.
(3)
Control investments are defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained. As of March 31, 2014, the Company did not own any Control investments
(4)
Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned, or an investment in an investment company’s investment adviser, and the investments are not classified as Control investments. As of March 31, 2014, the Company did not own any Affiliate investments.
(5)
Principal is net of payments. Cost represents amortized cost which is net of repayments and adjusted for the amortization of premiums and/or accretion of discounts, as applicable.
(6)
Index based floating interest rate is subject to contractual minimum interest rates.
(7)
The investment is not a qualifying asset under the 1940 Act. A business development company (“BDC”) may not acquire any asset other than qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC's total assets.
(8)
Lower middle market investment.
(9)
Investment is under contract to purchase and met trade date accounting criteria as of March 31, 2014. Settlement occurred or is scheduled to occur after March 31, 2014. See Note 2 for summary of Security Transactions.
(10)
Investment serviced by Main Street Partners pursuant to the Servicing Agreement. See Note 2 for summary of Investment Classification.
(11)
Second lien secured debt investment.

See notes to the financial statements.


5


HMS Income Fund, Inc.
Consolidated Schedule of Investments
As of December 31, 2013
(dollars in thousands)
Portfolio Company (1)
Business Description
Type of Investment (1)
Principal (5)
Cost (5)
Fair Value
 
 
 
 
 
 
Non-Control/Non-Affiliate Investments (2)
ABG Intermediate Holdings 2, LLC (6)
Trademark Licensing of Clothing
LIBOR Plus 5.00%, Current Coupon 6.00%, Secured Debt (Maturity - June 28, 2019)
$
1,500

$
1,492

$
1,496

Allflex Holdings III Inc. (6) (11)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00%, Current Coupon 8.00%, Secured Debt (Maturity - July 19, 2021)
950

969

964

Ameritech College Operations, LLC (8) (10)
For-Profit Nursing and Healthcare College
18% Secured Debt (Maturity - March 9, 2017)
750

750

750

AMF Bowling Centers, Inc. (6)
Bowling Alley Operator
LIBOR Plus 7.50%, Current Coupon 8.75%, Secured Debt (Maturity - June 29, 2018)
988

959

995

Ancile Solutions, Inc. (6)
Provider of eLearning Solutions
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - July 15, 2018)
1,234

1,224

1,234

Answers Corporation (6) (9)
Consumer Internet Search Services Provider
LIBOR Plus 5.50%, Current Coupon 6.50%, Secured Debt (Maturity - December 20, 2018)
1,500

1,485

1,485

Apria Healthcare Group, Inc. (6)
Home Healthcare Equipment
LIBOR Plus 5.50%, Current Coupon 6.75%, Secured Debt (Maturity - April 6, 2020)
995

995

1,000

Artel, LLC (6) (9)
Land-Based and Commercial Satellite Provider
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - November 27, 2017)
1,188

1,152

1,170

Atkins Nutritionals Holdings II, Inc. (6)
Weight Management Food Products
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - January 2, 2019)
993

983

1,005

BBTS Borrower LP (6)
Oil & Gas Exploration and Midstream Services
LIBOR Plus 6.50%, Current Coupon 7.75%, Secured Debt (Maturity - June 4, 2019)
1,489

1,482

1,503

Blackhawk Specialty Tools LLC (6)
Oilfield Equipment & Services
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - August 1, 2019)
1,500

1,500

1,496

Bluestem Brands, Inc. (6)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 6.50%, Current Coupon 7.50%, Secured Debt (Maturity - December 6, 2018)
1,000

980

990

California Healthcare Medical Billing, Inc. (8) (10)
Outsourced Billing & Revenue Cycle Management
12% Secured Debt, (Maturity - October 17, 2015)
750

750

750

CDC Software Corporation (6)
Enterprise Application Software
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - August 6, 2018)
743

737

749

Cedar Bay Generation Company LP (6)
Coal-Fired Cogeneration Plant
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - April 23, 2020)
885

876

892

Collective Brands Finance, Inc. (6)
Specialty Footwear Retailer
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - October 19, 2019)
496

496

499

e-Rewards, Inc. (6)
Provider of Digital Data Collection
LIBOR Plus 5.00%, Current Coupon 6.00%, Secured Debt (Maturity - October 29, 2018)
1,000

980

994

Excelitas Technologies Corp. (6)
Lighting and Sensor Components
LIBOR Plus 5.00%, Current Coupon 6.00%, Secured Debt (Maturity - November 2, 2020)
989

980

997

Fender Musical Instruments Corporation (6)
Manufacturer of Musical Instruments
LIBOR Plus 4.50%, Current Coupon 5.75%, Secured Debt (Maturity - April 3, 2019)
448

443

455

FishNet Security, Inc. (6)
Information Technology Value-Added Reseller
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - November 30, 2017)
1,980

1,963

1,989

Fram Group Holdings, Inc. (6) (9)
Manufacturer of Automotive Maintenance Products
LIBOR Plus 5.00%, Current Coupon 6.50%, Secured Debt (Maturity - July 31, 2017)
1,500

1,489

1,489

Getty Images, Inc. (6)
Digital Photography and Video Content Marketplace
LIBOR Plus 3.50%, Current Coupon 4.75%, Secured Debt (Maturity - October 18, 2019)
997

895

933

Golden Nugget, Inc. (6)
Hotels & Casinos in Las Vegas and Louisiana
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity - November 21, 2019)
700

693

712

iEnergizer Limited (6) (7) (9)
Provider of Business Outsourcing Solutions
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - May 1, 2019)
1,437

1,413

1,417

Inn of the Mountain Gods Resort and Casino
Hotel & Casino
9.25% Secured Bond (Maturity - November 30, 2020)
1,000

955

968

Ipreo Holdings LLC (6) (9)
Application Software for Capital Markets
LIBOR Plus 4.00%, Current Coupon 5.00%, Secured Debt (Maturity - August 5, 2017)
732

732

743

Jackson Hewitt Tax Service Inc. (6)
Tax Preparation Services
LIBOR Plus 8.50%, Current Coupon 10.00%, Secured Debt (Maturity - October 16, 2017)
1,000

1,000

995

Joernes Healthcare, LLC (6)
Health Care Equipment & Supplies
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - March 28, 2018)
993

984

973

Keypoint Government Solutions, Inc. (6)
Pre-Employment Screening Services
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - November 13, 2017)
920

915

910

Larchmont Resources, LLC (6)
Oil & Gas Exploration & Production
LIBOR Plus 7.25%, Current Coupon 8.50%, Secured Debt (Maturity - August 7, 2019)
746

750

760

Learning Care Group (US) No. 2 Inc. (6)
Provider of Early Childhood Education
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - May 8, 2019)
998

988

1,004

LJ Host Merger Sub, Inc. (6) (9)
Managed Services and Hosting Provider
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - December 13, 2019)
1,000

990

995

 
 
LIBOR Plus 8.75%, Current Coupon 10.00%, Secured Debt (Maturity - December 11, 2020) (11)
500

490

498

 
 
 
 
1,480

1,493

MAH Merger Corporation (6)
Sports-Themed Casual Dining Chain
LIBOR Plus 4.50%, Current Coupon 5.75%, Secured Debt (Maturity - July 19, 2019)
1,500

1,500

1,493

MediMedia USA, Inc. (6)
Provider of Health Care Media and Marketing
LIBOR Plus 6.75%, Current Coupon 8.00%, Secured Debt (Maturity - November 20, 2018)
995

967

973

MedSolutions Holdings, Inc. (6)
Specialty Benefit Management
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - July 8, 2019)
975

966

974

Mitel US Holdings, Inc. (6)
Manufacturer of Battery Components
LIBOR Plus 4.50%, Current Coupon 7.00%, Secured Debt (Maturity - December 19, 2019)
893

884

896

MP Assets Corporation (6)
Manufacturer of Battery Components
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity - December 19, 2019)
1,000

990

998

National Vision, Inc. (6)
Discount Optical Retailer
LIBOR Plus 5.75%, Current Coupon 7.00%, Secured Debt (Maturity - August 2, 2018)
730

721

732

Neenah Foundry Company (6)
Operator of Iron Foundries
LIBOR Plus 5.50%, Current Coupon 6.75%, Secured Debt (Maturity - August 26, 2017)
12

12

12

NRC US Holding Company LLC (6)
Environmental Services Provider
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity - July 30, 2019)
975

970

977

Orbitz Worldwide, Inc. (6) (7)
Online Travel Agent
LIBOR Plus 4.75%, Current Coupon 5.75%, Secured Debt (Maturity - March 25, 2019)
498

498

500

Panolam Industries International, Inc. (6)
Decorative Laminate Manufacturer
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - August 23, 2017)
905

897

875

Permian Holdings, Inc.
Storage Tank Manufacturer
10.50% Secured Bond (Maturity - January 15, 2018)
910

888

896

Pitney Bowes Management Services Inc. (6)
Provider of Document Management Services
LIBOR Plus 6.25%, Current Coupon 7.50%, Secured Debt (Maturity - October 1, 2019)
998

988

1,005

Polyconcept Financial B.V. (6)
Promotional Products to Corporations and Consumers
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - June 28, 2019)
975

966

979

Ravago Holdings America, Inc. (6) (9)
Polymers Distributor
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity - December 20, 2020)
1,250

1,238

1,253

Relativity Media, LLC
Full-scale Film and Television Production and Distribution
10.00% Secured Debt (Maturity - May 30, 2015)
1,976

1,976

1,976

SCE Partners, LLC (6)
Hotel & Casino Operator
LIBOR Plus 7.25%, Current Coupon 8.25%, Secured Debt (Maturity - August 14, 2019)
1,000

990

930

Sotera Defense Solutions, Inc. (6)
Defense Industry Intelligence Services
LIBOR Plus 6.00%, Current Coupon 7.50%, Secured Debt (Maturity - April 21, 2017)
944

913

849

Sutherland Global Services, Inc. (6)
Business Process Outsourcing Provider
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - March 6, 2019)
963

945

965

Synagro Infrastructure Company, Inc. (6)
Waste Management Services
LIBOR Plus 5.25%, Current Coupon 6.25%, Secured Debt (Maturity - August 22, 2020)
998

978

989

TeleGuam Holdings, LLC (6)
Cable and Telecom Services Provider
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - December 10, 2018)
499

499

498

 
 
LIBOR Plus 7.50%, Current Coupon 8.75%, Secured Debt (Maturity - June 10, 2019) (11)
1,000

1,006

1,005

 
 
 
 
1,505

1,503

Tervita Corporation (6) (7)
Oil and Gas Environmental Services
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - May 15, 2018)
996

990

1,002

The Topps Company, Inc. (6)
Trading Cards & Confectionary
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - October 2, 2018)
1,000

990

1,003

Therakos, Inc. (6)
Immune System Disease Treatment
LIBOR Plus 6.25%, Current Coupon 7.50%, Secured Debt (Maturity - December 27, 2017)
1,489

1,460

1,494

ThermaSys Corporation (6)
Manufacturer of Industrial Heat Exchanges
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - May 3, 2019)
1,500

1,482

1,489

Totes Isotoner Corporation (6)
Weather Accessory Retail
LIBOR Plus 5.75%, Current Coupon 7.25%, Secured Debt (Maturity - July 7, 2017)
944

952

949

Travel Leaders Group, LLC (6)
Travel Agency Network Provider
LIBOR Plus 6.00%, Current Coupon 7.00%, Secured Debt (Maturity - December 5, 2018)
1,500

1,470

1,481

Universal Fiber Systems, LLC (6)
Manufacturer of Synthetic Fibers
LIBOR Plus 5.75%, Current Coupon 7.50%, Secured Debt (Maturity - June 26, 2015)
1,699

1,678

1,707

Vantage Oncology, LLC
Outpatient Radiation Oncology Treatment Centers
9.50% Secured Bond (Maturity - August 7, 2017)
1,000

1,000

1,030

Visant Corporation (6) (10)
School Affinity Stores
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - December 22, 2016)
691

691

683

Vision Solutions, Inc. (6)
Provider of Information Availability Software
LIBOR Plus 4.50%, Current Coupon 6.00%, Secured Debt (Maturity - July 23, 2016)
1,000

990

1,004

Walker & Dunlop Inc. (6) (7) (9)
Real Estate Financial Services
LIBOR Plus 4.50%, Current Coupon 5.50%, Secured Debt (Maturity - December 20, 2020)
750

743

746

YP Holdings LLC (6)
Online and Offline Advertising Operator
LIBOR Plus 6.75%, Current Coupon 8.00%, Secured Debt (Maturity - June 4, 2018)
700

682

709

Total Non-Control/Non-Affiliate Investments (2) (3) (4) (100% of total Portfolio Investments at fair value)
 
$
66,410

$
66,882


(1)
See Note 3 - Fair Value Hierarchy for Investments for summary geographic location of portfolio companies
(2)
Non-Control/Non-Affiliate investments are defined by the Investment Company Act of 1940, as amended (the “1940 Act”) as investments that are neither Control investments nor Affiliate investments.
(3)
Control investments are defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained. As of December 31, 2013, the Company did not own any Control investments
(4)
Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned, or an investment in an investment company’s investment adviser, and the investments are not classified as Control investments. As of December 31, 2013, the Company did not own any Affiliate investments.
(5)
Principal is net of payments. Cost represents amortized cost which is net of repayments and adjusted for the amortization of premiums and/or accretion of discounts, as applicable.
(6)
Index based floating interest rate is subject to contractual minimum interest rates.
(7)
The investment is not a qualifying asset under the 1940 Act. A business development company (“BDC”) may not acquire any asset other than qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC's total assets.
(8)
Lower middle market investment.
(9)
Investment is under contract to purchase and met trade date accounting criteria as of December 31, 2013. Settlement occurred after December 31, 2013. See Note 2 for summary of Security Transactions.
(10)
Investment serviced by Main Street Partners pursuant to the Servicing Agreement. See Note 2 for summary of Investment Classification.
(11)
Second lien secured debt investment.

See notes to the financial statements.


6


HMS Income Fund, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
 
Note 1. Principal Business and Organization

HMS Income Fund, Inc. (the “Company”) was formed as a Maryland corporation on November 28, 2011 under the General Corporation Law of the State of Maryland. The Company is an externally managed, non-diversified closed-end investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company has elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s primary investment objective is to generate current income through debt and equity investments. A secondary objective of the Company is to generate long-term capital appreciation through such investments. On December 16, 2011, the Company filed a registration statement on Form N-2, as amended (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) to register for sale up to $1.5 billion of shares of common stock (the “Offering”). Except as with respect to minimum offering requirements set by securities regulators of certain states, there is no minimum number of shares of common stock required to be sold in the Offering. As of March 31, 2014, the Company had raised approximately $81.4 million in the public offering, including proceeds from the distribution reinvestment plan of approximately $854,000.

The business of the Company is managed by HMS Adviser LP (the “Adviser”), a Texas limited partnership and affiliate of Hines Interests Limited Partnership (“Hines”), pursuant to an Investment Advisory and Administrative Services Agreement dated May 31, 2012, as amended (the “Advisory Agreement”). On May 31, 2012, the Company and the Adviser also retained Main Street Capital Corporation (“Main Street”), a New York Stock Exchange listed BDC, as the Company’s investment sub-adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), pursuant to an Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement”) to identify, evaluate, negotiate and structure prospective investments, make investment and portfolio management recommendations for approval by the Adviser, monitor the Company’s investment portfolio and provide certain ongoing administrative services to the Adviser. Main Street obtained a no-action letter from the SEC in November 2013 that permitted it to assign investment sub-adviser duties under the Sub-Advisory Agreement to MSC Adviser I, LLC (“MSC Adviser”), a wholly owned subsidiary of Main Street, and Main Street assigned such duties, and the Sub-Advisory Agreement was amended to reflect such change on December 31, 2013. The term “Sub-Adviser,” as used herein, refers to Main Street until December 31, 2013 and MSC Adviser thereafter. The Adviser and Sub-Adviser are collectively referred to herein as the “Advisers.” Upon the execution of the Sub-Advisory Agreement, Main Street became an affiliate of the Company. The Company has engaged Hines Securities, Inc. (the “Dealer Manager”), an affiliate of the Adviser, to serve as the dealer manager for the Offering. The Dealer Manager is responsible for marketing the Company’s shares of common stock being offered pursuant to the Offering.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly-owned consolidated subsidiary. Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X, the Company is precluded from consolidating portfolio company investments, including those in which it has a controlling interest, unless the portfolio company is another investment company. An exception to this general principle occurs if the Company owns a controlled operating company whose purpose is to provide services directly to the Company such as an investment adviser or transfer agent. None of the investments made by the Company qualify for this exception. Therefore, the Company’s portfolio investments are carried on the balance sheet at fair value, as discussed below, with changes to fair value recognized as “Net Unrealized Appreciation (Depreciation)” on the Statement of Operations until the investment is realized, usually upon exit, resulting in any gain or loss on exit being recognized as a “Net Realized Gain (Loss) from Investments.”
  
Use of Estimates

The preparation of the financial statements requires the Company to make estimates and judgments that affect the reported amounts and disclosures of assets, liabilities and contingencies as of the date of the financial statements and accompanying notes. The Company evaluates its assumptions and estimates on an ongoing basis. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Additionally, application of the Company’s accounting policies involves exercising judgments regarding assumptions as to future uncertainties. Actual results may differ from these estimates under different assumptions or conditions. Significant

7


estimates are used in the determination of fair value of investments. See Note 3 - Fair Value Hierarchy for Investments for a description of these estimates.

Reclassifications

The presentation of distributions on the Consolidated Statements of Changes in Net Assets in the prior year have been reclassified to conform to the presentation for the three months ended March 31, 2014.

Investment Classification

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, (a) “Control” investments are defined as investments in companies in which the Company owns more than 25% of the voting securities or has rights to nominate greater than 50% of the directors or managers of the companies, (b) “Affiliate” investments are defined as investments in which between 5% and 25% of the voting securities are owned, or an investment in an investment company’s investment adviser, and the investments are not classified as Control investments and (c) “Non-Control/Non-Affiliate” investments are defined as investments that are neither Control investments nor Affiliated investments.
 
Valuation of Portfolio Investments
 
The Company accounts for its portfolio investments at fair value under the provisions of the Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Company to assume that the portfolio investment is to be sold in the principal market to independent market participants. Market participants are defined as buyers and sellers in the principal market that are independent, knowledgeable, and willing and able to transact. For those investments in which there is an absence of a principal market, the Company incorporates the income approach to estimate the fair value of its portfolio debt investments primarily through the use of a yield to maturity model.

The Company determines in good faith the fair value of its portfolio investments pursuant to a valuation policy in accordance with ASC 820 and valuation policies approved by the Company’s board of directors and in accordance with the 1940 Act. The Company reviews external events, including private mergers, sales and acquisitions involving comparable companies, and considers these events in the valuation process.  The Company’s valuation policy and process are intended to provide a consistent basis for determining the fair value of the portfolio.

The Company’s portfolio strategy calls for it to invest in illiquid securities issued by private companies with annual revenues generally between $10 million and $150 million. These securities are also defined herein as lower middle market (“LMM”) investments. These portfolio investments may be subject to restrictions on resale and will generally have either no established trading market or established markets that are inactive; therefore, market quotations are generally not readily available. The Company determines the fair value primarily using a yield to maturity approach that analyzes the discounted cash flows of interest and principal for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of each of these portfolio investments at each reporting date. The Company’s estimate of the expected repayment date of a debt security is generally the legal repayment date of the instrument. The yield to maturity analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors. The Company will use the value determined by the yield analysis as the fair value for that security. However, it is the Company’s position that assuming a borrower is outperforming underwriting expectations and because these respective investments do not contain pre-payment penalties, the borrower would most likely prepay or refinance the borrowing if the market interest rate, given the borrower’s current credit quality, is lower than the stated loan interest rate. Therefore, the Company does not believe that a market participant would pay a premium for the investment, and because of the Company’s general intent to hold its loans to repayment, the Company generally does not believe that the fair value of the investment should be adjusted in excess of the face amount. However, adjustments to investment values will be made for declines in fair value due to market changes or borrower specific credit deterioration. As of March 31, 2014 and December 31, 2013, the Company owned two LMM investments which had a total estimated fair value of $1.5 million which is approximately 1.1% and 2.2% of the Company’s portfolio investments at fair value, respectively.

The Company’s portfolio strategy also calls for it to invest in private placement debt securities that are generally larger in size than LMM investments. Private placement debt securities generally have established markets that are not active; however, market quotations are generally readily available. For these private placement investments, the Company uses observable inputs, such as third party quotes or other independent pricing of identical or similar assets in non-active markets, to determine the fair value of those investments. However, the Company often cannot observe the inputs considered by the third party in

8


determining their quotes. The fair value of these investments on the reporting date is determined by taking the midpoint between the bid-ask spread as of the reporting date obtained from a third party pricing service. The receivable and liability for Securities under contract to sell and purchase have been valued at the contract price. As of March 31, 2014 and December 31, 2013, the Company owned 69 and 64 private placement investments, respectively, which had a total estimated fair value of $139.7 million and $65.4 million or approximately 98.9% and 97.8% of the Company’s portfolio investments at fair value, respectively.

Due to the inherent uncertainty in the valuation process, the Company’s estimate of fair value may differ materially from the values that would have been used had an active market for the securities existed. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the amounts ultimately realized upon sale, liquidation or other exit of these investments to be materially different than the valuations currently assigned. The Company estimates the fair value of each individual investment and records changes in fair value as unrealized appreciation (depreciation) in the Statements of Operations.
 
Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less at the date of purchase. Cash and cash equivalents are carried at cost, which approximates fair value.

Security Transactions

Security transactions are accounted for on the trade date. Any gain or loss on the transaction is unrealized until the trade is settled. As of the trade date, the investment is derecognized for security sales and recognized for security purchases. As of March 31, 2014, and December 31, 2013, the Company had thirty-two and nine investments at contract prices of $49.2 million and $8.8 million, respectively, under contract to purchase which had not yet settled. These investments have been recognized by the Company and are included in the schedule of investments at fair value. The settlement obligations are presented on the balance sheet in the line item “Payable for securities purchased" at the contract price. As of March 31, 2014, and December 31, 2013, the Company had two and zero investments at contract prices of $3.0 million and $0, respectively, under contract to sell which had not yet settled. These investments were derecognized by the Company and are not included in the schedule of investments. The sale trades are presented on the balance sheet in the line item “Receivable for securities sold” at the contract price.

 Interest Income
 
Interest income is recorded on the accrual basis to the extent amounts are expected to be collected. Prepayment penalties received by the Company are recorded as income upon receipt. Accrued interest is evaluated for collectability. When a debt security becomes 90 days or more past due and the Company does not expect the debtor to be able to service all of its debt or other obligations, the debt security will generally be placed on non-accrual status and the Company will cease recognizing interest income on that debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a debt security’s status significantly improves with respect to the debtor’s ability to service the debt or other obligations, or if a debt security is fully impaired, sold or written off, it will be removed from non-accrual status. As of March 31, 2014 and December 31, 2013, the Company did not have any investments that were more than 90 days past due or on non-accrual status. Additionally, the Company is not aware of any material changes to the creditworthiness of the borrowers underlying its debt investments.

From time to time, the Company may hold debt instruments in its investment portfolio that contain a payment-in-kind (“PIK”) interest provision. If these borrowers elect to pay or are obligated to pay interest under the optional PIK provision, and if deemed collectible in management’s judgment, then the interest would be computed at the contractual rate specified in the investment’s credit agreement, added to the principal balance of the investment, and recorded as interest income. Thus, the actual collection of this interest would be deferred until the time of debt principal repayment. As of March 31, 2014, the Company held one investment that was under contract to purchase but had not yet settled, which contained a PIK provision. This was the only investment containing a PIK provision held by the Company during the three months ended March 31, 2014 and no interest related to this investment was recognized into interest income. During the three months ended March 31, 2013, the Company did not hold any investments that contained a PIK provision.
 
Unearned Income – Original Issue Discount / Premium to Par Value

The Company may purchase debt investments at a value different than par value. For purchases at less than par value a discount is recorded, which is accreted into interest income based on the effective interest method over the life of the debt

9


investment. For purchases at greater than par value, a premium is recorded, which is amortized as a reduction to interest income based on the effective interest method over the life of the investment. Upon repayment or sale, any unamortized discount or premium is also amortized as an adjustment to interest income. For the three months ended March 31, 2014 and March 31, 2013 the Company accreted approximately a net $215,000 and ($3,000), respectively, into interest income which was net of premiums.
 
Net Realized Gains or Losses from Investments and Net Change in Unrealized Appreciation (Depreciation) from Investments

Generally, net realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment and the principal amount, without regard to unrealized appreciation or depreciation previously recognized. However, if the disposition of investment occurs within a short period of initial acquisition, within 90 days of acquisition for primary investments and within 120 days of acquisition for secondary investments, the net realized gains or losses are measured by the difference between the net proceeds from the sale or disposition and cost basis of the investment. Net change in unrealized appreciation or depreciation from investments reflects the net change in the fair value of the investment portfolio and the reclassification of any prior period unrealized appreciation (depreciation) on exited investments to realized gains or losses.

Due from Main Street

Due from Main Street represents principal and interest payments from portfolio investments serviced and received by Main Street on the Company’s behalf.  The amounts due to the Company as of March 31, 2014 and December 31, 2013 were subsequently collected in April 2014, and January 2014, respectively.
 
Deferred Financing Costs
 
Deferred financing costs represent fees and other direct costs incurred in connection with arranging the Company’s borrowings. These costs were incurred in connection with the Company’s revolving credit facility (see Note 4 for a discussion regarding the Company’s Credit Facility and Syndicated Credit Facility) and have been capitalized. The deferred financing costs are being amortized to interest expense using the straight-line method over the life of the credit facility, which the Company believes is materially consistent with the effective interest method. For the three months ended March 31, 2014 and March 31, 2013 the Company amortized approximately $41,000 and $22,000 respectively, into interest expense related to deferred financing costs.
 
Organizational and Offering Costs
 
In accordance with the Advisory Agreement and the Sub-Advisory Agreement, the Company will reimburse the Adviser and Sub-Adviser for any organizational expenses and Offering costs that are paid on the Company’s behalf, which consist of, among other costs, expenses of the Company’s organization, actual legal, accounting, bona fide out-of-pocket itemized and detailed due diligence costs, printing, filing fees, transfer agent costs, postage, escrow fees, data processing fees, advertising and sales literature and other Offering-related costs. Pursuant to the terms of the Advisory Agreement and Sub-Advisory Agreement, the Advisers are responsible for the payment of Offering costs to the extent they exceed 1.5% of the aggregate gross proceeds from the Offering.

As of March 31, 2014 and December 31, 2013, the Adviser and Sub-Adviser incurred approximately $4.8 million and $4.3 million, respectively, of Offering costs on the Company’s behalf. Upon the execution of the Advisory Agreement and Sub-Advisory Agreement, on May 31, 2012, the Company recorded a due to affiliates liability and capitalized the deferred Offering costs as it is probable that aggregate gross proceeds from the Offering will be at a level that will require the Company to reimburse the Advisers for these costs. As of March 31, 2014, the balance of the due to affiliate liability related to organizational and Offering costs was $3.6 million. On a regular basis, management reviews capital raise projections to evaluate the likelihood of the capital raise reaching a level that would require the Company to reimburse the Adviser for the offering costs incurred on the Company's behalf. Based on the $4.8 million of offering costs incurred by the Adviser through March 31, 2014, the Company would have to raise approximately $320 million to be obligated to reimburse the Adviser for all of these costs. Commencing with the Company’s initial closing, which occurred on September 17, 2012, and continuing with every closing thereafter, 1.5% of the proceeds of such closings will be amortized as a charge to additional paid in capital and a reduction of deferred Offering costs, until such asset is fully amortized. As of March 31, 2014, approximately $1.2 million has been amortized.  The Company expects to reimburse the Advisers for such costs incurred on its behalf on a monthly basis up to a maximum aggregate amount of 1.5% of the gross Offering proceeds. Pursuant to the terms of the Advisory Agreement and Sub-Advisory Agreement, the Adviser and Sub-Adviser will be responsible for the payment of organizational and Offering expenses to the extent they exceed 1.5% of gross proceeds from the Offering.
 

10


Payable for Unsettled Trades
 
The Company accepts stockholder’s subscriptions on a weekly basis. For subscriptions received, for which shares of common stock were not issued by March 31, 2014, the amounts of such subscriptions are presented as cash and as a payable for unsettled trades. The shares issued in exchange for the subscriptions were issued and outstanding on April 1, 2014.
 
Per share Information
 
Net increase in net assets resulting from operations per share, net investment income per share, and net realized income per share are calculated based upon the weighted average number of shares of common stock outstanding during the reporting period. The weighted average share amount was calculated assuming the shares of common stock issued as part of the Merger Transaction were outstanding from the beginning of the period.
 
Concentration of Credit Risk
 
The Company has cash deposited in a financial institution in excess of federally insured levels. Management regularly monitors the financial stability of these financial institutions in an effort to manage the Company’s exposure to any significant credit risk in cash. The Federal Deposit Insurance Corporation generally only insures limited amounts per depositor per insured bank.
 
Fair Value of Financial Instruments
 
Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial instruments, consisting of cash, accounts receivable from affiliates, interest payable to affiliates, other accrued expenses and liabilities, and notes payable approximate the fair values of such items.
 
Recent Accounting Pronouncements

In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”). ASU 2013-01 limits the scope of the new balance sheet offsetting disclosure requirements to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and certain securities borrowing and lending arrangements. Public companies are required to apply ASU 2013-01 prospectively for interim and annual reporting periods beginning after January 1, 2013. The adoption of this guidance did not have a material impact on the Company's financial statements.

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). ASU 2013-04 provides additional guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. Public companies are required to apply ASU 2013-04 prospectively for interim and annual reporting periods beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the Company's financial statements.

In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2013-08, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”). ASU 2013-08 amends the criteria that define an investment company, clarifies the measurement guidance and requires certain additional disclosures. Public companies are required to apply ASU 2013-08 prospectively for interim and annual reporting periods beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the Company's financial statements.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that have been issued and any that are not yet effective will not have a material impact on its financial statements upon adoption.


11


Note 3 — Fair Value Hierarchy for Investments
 
Fair Value Hierarchy
 
ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
 
Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:
 
•
Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
•
Level 2—Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable for essentially the full term of the investment. Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in non-active markets (for example, thinly traded public companies), pricing models whose inputs are observable for substantially the full term of the investment, and pricing models whose inputs are derived principally from or corroborated by, observable market data through correlation or other means for substantially the full term of the investment.
•
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Such information may be the result of consensus pricing information or broker quotes for which sufficient observable inputs were not available.

As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, gains and losses for such investments categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). The Company conducts reviews of fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain investments.
 
The Company’s investment portfolio at March 31, 2014 and December 31, 2013 was comprised exclusively of debt securities. The fair value determination for these investments primarily consisted of both observable (Level 2) and unobservable (Level 3) inputs.

The fair value determination of the Level 3 securities required one or more of the following unobservable inputs:
 
•
Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most recent period available as compared to budgeted numbers;
•
Current and projected financial condition of the portfolio company;
•
Current and projected ability of the portfolio company to service its debt obligations;
•
Type and amount of collateral, if any, underlying the investment;
•
Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio, and net debt/EBITDA ratio) applicable to the investment;
•
Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);
•
Pending debt or capital restructuring of the portfolio company;
•
Projected operating results of the portfolio company;
•
Current information regarding any offers to purchase the investment;
•
Current ability of the portfolio company to raise any additional financing as needed;
•
Changes in the economic environment which may have a material impact on the operating results of the portfolio company;
•
Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;
•
Qualitative assessment of key management;
•
Contractual rights, obligations or restrictions associated with the investment;

12


•
Third party pricing for securities with limited observability of inputs determining the pricing; and
•
Other factors deemed relevant.

The following table presents fair value measurements of investments, by major class, as of March 31, 2014 according to the fair value hierarchy (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
First lien secured debt
$
—

 
$
—

 
135,720

 
$
135,720

Second lien secured debt
—

 
—

 
5,498

 
5,498

Total
$
—

 
$
—

 
$
141,218

 
$
141,218

 
The following table presents fair value measurements of investments, by major class, as of at December 31, 2013 according to the fair value hierarchy (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
First lien secured debt
$
—

 
$
4,728

 
$
59,686

 
$
64,414

Second lien secured debt
—

 
—

 
2,468

 
2,468

Total
$
—

 
$
4,728

 
$
62,154

 
$
66,882

 
The following table presents fair value measurements of investments segregated by the level within the fair value hierarchy as of March 31, 2014 (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
LMM portfolio investments
$
—

 
$
—

 
$
1,500

 
$
1,500

Private placement investments
—

 
—

 
139,718

 
139,718

Total
$
—

 
$
—

 
$
141,218

 
$
141,218

 
The following table presents fair value measurements of investments segregated by the level within the fair value hierarchy, as of December 31, 2013 (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
LMM portfolio investments
$
—

 
$
—

 
$
1,500

 
$
1,500

Private placement investments
—

 
4,728

 
60,654

 
65,382

Total
$
—

 
$
4,728

 
$
62,154

 
$
66,882


The Company’s investment portfolio at March 31, 2014 and December 31, 2013 was comprised exclusively of debt securities, which include LMM investments and private placement investments. The significant unobservable input utilized in the determination of the fair value of the LMM portfolio investments is the risk adjusted discount rate utilized in the discounted cash flow approach. The discount rate is based on the underlying credit quality of the borrower as of March 31, 2014 and December 31, 2013. The use of a higher discount rate would result in a lower fair value, and conversely the use of a lower discount rate would result in a higher fair value. Given that the loans have no prepayment penalties, assuming that the loan is outperforming underwriting and market interest rates have declined, the lower interest rate would result in a higher fair value of the investment; however, due to the lack of prepayment penalties, the Company does not believe that any significant value in excess of the par value would ever be realized. Therefore, the Company will not value the LMM loans at a value in excess of the principal amount due.

The fair value determination for the private placement investments was based upon quotes obtained through a third party pricing service. If available and determined to be reliable, the Company uses the third party quotes, to estimate the fair value of its private placement investments owned. The inputs for determining the third party quotes are often unobservable to the Company. These valuations consist of a combination of observable inputs in non-active markets for which sufficient observable inputs were available to determine the fair value of these investments, observable inputs in the non-active market for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. The

13


third party quotes are reviewed and discussed with the Company's Sub-Adviser. As a result, a portion of the Company's private placement investments was categorized as Level 2 as of December 31, 2013 and none of the Company's private placement investments was categorized as Level 2 as of March 31, 2014 . For the private placement investments for which sufficient observable inputs were not available to determine the fair value of the investments, the Company categorized such investments as Level 3 as of March 31, 2014 and December 31, 2013.

The following table, which is not intended to be all inclusive, presents the significant unobservable input of the Company’s Level 3 investments as of March 31, 2014 (in thousands):
 
 
Fair Value
 
Valuation
Technique
 
Significant Unobservable Input
 
Range
 
Weighted
Average
LMM portfolio investments
$
1,500

 
Discounted Cash Flows
 
Expected Principal Recovery
 
—
 
100
%
 
 

 
 
 
Risk Adjusted Discount Factor
 
12% - 18%
 
15
%
Private placement investments
$
139,718

 
Market Approach
 
Third Party Quotes
 
89% - 103%
 
100
%
 
$
141,218

 
 
 
 
 
 
 
 
  
The following table, which is not intended to be all inclusive, presents the significant unobservable input of the Company’s Level 3 investments as of December 31, 2013 (in thousands):

 
Fair Value
 
Valuation
Technique
 
Significant Unobservable Input
 
Range
 
Weighted
Average
LMM portfolio investments
$
1,500

 
Discounted Cash Flows
 
Expected Principal Recovery
 
—
 
100
%
 
 

 
 
 
Risk Adjusted Discount Factor
 
12% - 18%
 
15.0
%
Private placement investments
60,654

 
Market Approach
 
Third Party Quotes
 
88% - 103%
 
99.7
%
 
$
62,154

 
 
 
 
 
 
 
 

The following table provides a summary of changes in fair value of the Company’s Level 3 portfolio investments for the three months ended March 31, 2014 (in thousands):

Type of Investment
January 1, 2014 Fair Value
 
Transfers Into Level 3 Hierarchy
 
Payment-in-Kind Interest Accrual
 
New
Investments
 
Sales/ Repayments
 
Net Unrealized
Appreciation
(Depreciation)
 
Net Realized Gain (Loss)
 
March 31, 2014 Fair Value
LMM
$
1,500

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 

 
$
1,500

Private Placement
60,654

 
4,728

 
—

 
89,991

 
(15,952
)
 
228

 
69

 
139,718

Total
$
62,154

 
$
4,728

 
$
—

 
$
89,991

 
$
(15,952
)
 
$
228

 
$
69

 
$
141,218


For the three months ended March 31, 2014, there were transfers of $5 million between Level 2 and Level 3 portfolio investments. The transfers represent private placement investments which are valued based upon third party quotes with limited activity. In prior periods, these were classified as Level 2 fair value measurements. As of March 31, 2014, the Company obtained information regarding the quotes, including the number of quotes used to value these investments. Given the lack of observable inputs of the third party quotes, these investments were determined to be Level 3 fair value measurements as of March 31, 2014. There were no transfers into Level 3 during the three months ended March 31, 2013.

14



Portfolio Investment Composition
 
The composition of the Company’s investments as of March 31, 2014, at cost and fair value, was as follows (in thousands):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
First lien secured debt
$
135,056

 
96.1
%
 
$
135,720

 
96.1
%
Second lien secured debt
5,482

 
3.9
%
 
5,498

 
3.9
%
Total
$
140,538

 
100.0
%
 
$
141,218

 
100.0
%
  
The composition of the Company’s investments as of December 31, 2013, at cost and fair value, was as follows (in thousands):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
First lien secured debt
$
63,945

 
96.3
%
 
$
64,414

 
96.3
%
Second lien secured debt
2,465

 
3.7
%
 
2,468

 
3.7
%
Total
$
66,410

 
100.0
%
 
$
66,882

 
100.0
%
 
The composition of the Company’s investments by geographic region of the United States as of March 31, 2014, at cost and fair value, is set forth in the table below (in thousands).
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
Northeast
$
43,253

 
30.8
%
 
$
43,589

 
30.9
%
Southwest
18,063

 
12.8
%
 
18,234

 
12.9
%
West
16,685

 
11.9
%
 
16,744

 
11.8
%
Southeast
30,864

 
22.0
%
 
31,044

 
22.0
%
Midwest
20,354

 
14.4
%
 
20,357

 
14.4
%
Non-United States
11,319

 
8.1
%
 
11,250

 
8.0
%
Total
$
140,538

 
100.0
%
 
$
141,218

 
100.0
%
 
The composition of the Company’s investments by geographic region of the United States as of December 31, 2013, at cost and fair value, is set forth in the table below (in thousands).
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
Northeast
$
20,459


30.8
%

$
20,611


30.8
%
Southwest
9,545


14.4
%

9,645


14.4
%
West
9,254


13.9
%

9,358


14.0
%
Southeast
11,674


17.6
%

11,771


17.6
%
Midwest
11,569


17.4
%

11,575


17.3
%
Non-United States
3,909


5.9
%

3,922


5.9
%
Total
$
66,410


100.0
%

$
66,882


100.0
%
  

15


The composition of the Company’s total investments by industry as of March 31, 2014 and December 31, 2013, at cost was as follows:
Cost:
March 31, 2014

December 31, 2013

 Internet Software and Services
9.4
%

5.9
%
 Media
9.3
%

6.7
%
Hotels, Restaurants, & Leisure
7.7
%

5.4
%
 IT Services
7.6
%

11.2
%
Chemicals
6.2
%

1.9
%
 Software
5.6
%

3.7
%
 Oil, Gas, and Consumable Fuels
5.0
%

4.7
%
 Specialty Retail
4.4
%

6.6
%
Diversified Consumer Services
4.1
%

4.1
%
Energy Equipment & Services
3.4
%

3.7
%
Electronic Equipment, Instruments & Components
3.2
%

3.0
%
Household Products
3.3
%

—
%
Commercial Services & Supplies
3.2
%

2.9
%
 Textiles, Apparel, & Luxury Goods
3.0
%

4.0
%
 Advertising
2.7
%

1.0
%
 Health Care Providers & Services
2.6
%

5.6
%
 Aerospace and Defense
1.9
%

1.7
%
 Professional Services
2.0
%

2.8
%
Data Processing and Outsourced Services
1.7
%

2.2
%
 Containers and Packaging
1.7
%

—
%
 Internet and Catalog Retail
1.3
%

2.2
%
Electric Utilities
1.2
%

1.3
%
 Auto Components
1.1
%

2.2
%
 Life Sciences Tools & Services
1.0
%

2.2
%
 Restaurants
1.1
%

2.3
%
 Tobacco
1.1
%

—
%
 Electrical Equipment
1.0
%

2.2
%
 Leisure Equipment and Products
1.0
%

2.2
%
 Food & Staples Retailing
0.7
%

1.5
%
 Food Products
0.7
%

1.5
%
 Health Care Equipment and Supplies
0.7
%

1.5
%
 Metals and Mining
0.6
%

1.4
%
 Thrifts & Mortgage Finance 
0.5
%

1.1
%
 Communications Equipment
—
%

1.3
%
Total
100.0
%

100.0
%
 

16


The composition of the Company’s total investments by industry as of March 31, 2014 and December 31, 2013, at fair value was as follows:
Fair Value:
March 31, 2014

December 31, 2013

 Internet Software and Services
9.4
%

5.9
%
 Media
9.3
%

6.7
%
Hotels, Restaurants, & Leisure
7.6
%

5.4
%
 IT Services
7.6
%

11.3
%
Chemicals
6.2
%

1.9
%
 Software
5.6
%

3.7
%
 Oil, Gas, and Consumable Fuels
5.1
%

4.7
%
 Specialty Retail
4.4
%

6.6
%
Diversified Consumer Services
4.1
%

4.1
%
Energy Equipment & Services
3.3
%

3.8
%
Electronic Equipment, Instruments & Components
3.2
%

3.0
%
Household Products
3.2
%

—
%
Commercial Services & Supplies
3.2
%

2.9
%
 Textiles, Apparel, & Luxury Goods
3.0
%

4.0
%
 Advertising
2.8
%

1.1
%
 Health Care Providers & Services
2.6
%

5.6
%
 Aerospace and Defense
1.9
%

1.7
%
 Professional Services
1.9
%

2.7
%
Data Processing and Outsourced Services
1.8
%

2.2
%
 Containers and Packaging
1.7
%

—
%
 Internet and Catalog Retail
1.3
%

2.2
%
Electric Utilities
1.2
%

1.3
%
 Auto Components
1.1
%

2.2
%
 Life Sciences Tools & Services
1.1
%

2.2
%
 Restaurants
1.1
%

2.3
%
 Tobacco
1.1
%

—
%
 Electrical Equipment
1.0
%

2.2
%
 Leisure Equipment and Products
1.0
%

2.2
%
 Food & Staples Retailing
0.7
%

1.5
%
 Food Products
0.7
%

1.4
%
 Health Care Equipment and Supplies
0.7
%

1.5
%
 Metals and Mining
0.6
%

1.3
%
 Thrifts & Mortgage Finance 
0.5
%

1.1
%
 Communications Equipment
—
%

1.3
%
Total
100.0
%

100.0
%
 

17


Note 4 — Borrowings
 
On December 11, 2011, the Company's predecessor-in-interest, HMS Income LLC, entered into the Main Street Facility and immediately borrowed $7.5 million, the entire amount available under the facility. Interest on outstanding borrowings under the Main Street Facility was payable at a floating rate equal to LIBOR plus a margin of 3.0%. The Main Street Facility was repaid in full and terminated in May 2012 with proceeds of the Credit Facility described below.

On May 24, 2012, HMS Income LLC entered into a $15 million senior secured revolving credit facility with Capital One, National Association (“Capital One”) and immediately borrowed $7 million under the facility, which proceeds were used in the repayment in full of the Main Street facility. The Credit Facility had an accordion provision allowing increases in borrowing of up to $60 million, for a total facility of up to $75 million, subject to certain conditions. On August 16, 2013, the Company expanded the available capacity under the Credit Facility from $15 million to $25 million. The Credit Facility was further amended on November 25, 2013, increasing the capacity of the Credit Facility from $25 million to $30 million.

On March 11, 2014, the Company entered into the Syndicated Credit Facility, a $70 million senior secured credit facility with Capital One, as the administrative agent, and with Capital One and the other banks, (the "Lenders"), in the Syndicated Credit Facility. This Syndicated Credit Facility amends and restated in its entirety the Credit Facility. In connection with the entry into the Syndicated Credit Facility, on March 11, 2014, the Company borrowed $20 million, $13 million of which was used to satisfy the obligations under the Credit Facility. Borrowings under the Syndicated Credit Facility bear interest, subject to the Company’s election, on a per annum basis equal to (i) the adjusted LIBOR rate plus 2.75% or (ii) the base rate plus 1.75%. The base rate is defined as the higher of (a) the prime rate or (b) the Federal Funds Rate (as defined in the credit agreement) plus 0.5%. The adjusted LIBOR rate is defined in the credit agreement for the Syndicated Credit Facility as the LIBOR rate plus such amount as adjusted for statutory reserve requirements for Eurocurrency liabilities. The Company pays unused commitment fees of 0.25% per annum on the unused lender commitment under the Syndicated Credit Facility if more than 50% of the Syndicated Credit Facility is being used and a commitment fee of 0.375% per annum on the unused lender commitments under the Syndicated Credit Facility if less than 50% of the Syndicated Credit Facility is being used. The Syndicated Credit Facility has a three year term, with two one-year extension options, subject to approval of the Lenders. Additionally, the Syndicated Credit Facility has an accordion provision allowing borrowing capacity to increase to $150 million. Borrowings under the Syndicated Credit Facility are secured by all of the Company’s assets as well as all of the assets, and a pledge of equity ownership interests, of any future subsidiaries of the Company, which would be joined as guarantors. The credit agreement for the Syndicated Credit Facility contains affirmative and negative covenants usual and customary for credit facilities of this nature, including, but not limited to: (i) maintaining an interest coverage ratio of at least 2.0 to 1.0, which was 5.1 to 1 for the three months ended March 31, 2014, and was 5.5 to 1 for the twelve months ended March 31, 2014 (ii) maintaining an asset coverage ratio of at least 2.25 to 1.0, which was 3.9 to 1 as of March 31, 2014, and (iii) maintaining a minimum adjusted tangible net worth of at least 80% of the Company's adjusted tangible net worth on the closing date of the Syndicated Credit Facility, which was approximately 98% as of March 31, 2014. Additionally, the Company must provide information to Capital One on a regular basis, preserve the Company's corporate existence, comply with applicable laws, including the 1940 Act, pay obligations when they become due, and invest the proceeds of the Offering in accordance with its investment objectives and strategies (as set forth in the Syndicated Credit Facility). Further, the credit agreement contains usual and customary default provisions including, without limitation: (i) a default in the payment of interest and principal; (ii) insolvency or bankruptcy of the Company; (iii) a material adverse change in the Company's business; or (iv) breach of any covenant, representation or warranty in the loan agreement or other credit documents and failure to cure such breach within defined periods. Additionally, the Syndicated Credit Facility requires the Company to obtain written approval from the administrative agent prior to entering into any material amendment, waiver or other modification of any provision of the Advisory Agreement. As of March 31, 2014, the Company was not aware of any instances of noncompliance with covenants related to the Syndicated Credit Facility. The maturity date of the Syndicated Credit Facility is March 11, 2017, and the Company has two, one-year extension options subject to Lender approval. As of March 31, 2014, the Company had borrowings of $27.5 million outstanding on the Syndicated Credit Facility, which the Company estimated approximated fair value.



18


Note 5 – Financial Highlights
 
The following is a schedule of financial highlights of the Company for the three months ended March 31, 2014 and the year ended December 31, 2013.
Per Share/Unit Data:
Three Months Ended 
 March 31, 2014
 
Year Ended December 31, 2013
 
 
 
 
Net asset value at beginning of period
$
8.91

 
$
8.86

 
 
 
 
Net realized income(1)(2)
0.12

 
0.65

Net unrealized appreciation (1) (2)
0.03

 
0.16

Net increase in net assets resulting from operations
0.15

 
0.81

 
 
 
 
Stockholder distributions from net investment income
(0.11
)
 
(0.64
)
Stockholder distributions from net realized gains
(0.01
)
 
(0.01
)
Stockholder distributions from other sources
(0.05
)
 
(0.05
)
Net decrease in net assets resulting from stockholder distributions (1) (3)
(0.17
)
 
(0.70
)
 
 
 
 
Issuance of common stock above net asset value (4), net of offering costs (1)
(0.03
)
 
(0.06
)
Net increase (decrease) in net assets resulting from capital share transactions
(0.03
)
 
(0.06
)
Net asset value at end of the period
$
8.86

 
$
8.91

 
 
 
 
Shares/units outstanding at end of period
9,373,983

 
5,396,967

Weighted average shares/units outstanding
7,388,639

 
2,648,689


(1)
Based on weighted average number of shares of common stock outstanding for the period.
(2)
Change in net realized gain and net unrealized appreciation from investments can change significantly from period to period.
(3)
The stockholder distributions represent the stockholder distributions declared for the period.
(4)
The continuous issuance of shares of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price in excess of net asset value per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date times (B) the differences between the net proceeds per share and the net asset value per share on each share transaction date, divided by (ii) the weighted average shares of common stock outstanding for the period.

 
Three Months Ended 
 March 31, 2014
 
Year Ended December 31, 2013
 
(in thousands, except percentages)
Net asset value at end of period
$
83,080

 
$
48,077

Average net assets
$
65,579

 
$
24,864

Average Credit Facility borrowings
$
20,750

 
$
9,660

 
 
 
 
Ratios to average net assets:
 
 
 
Ratio of total expenses to average net assets(1)
1.28
%
 
4.23
%
Ratio of total expenses, excluding interest expense, to average net assets (1)
0.97
%
 
2.55
%
Ratio of net investment income to average net assets
1.26
%
 
6.86
%
 
 
 
 
Portfolio turnover ratio
15.33
%
 
49.37
%
 
 
 
 
Total return (2)
1.35
%
 
8.47
%

19



(1)
For the three months ended March 31, 2014, the Advisers waived base management fees of approximately $303,000, capital gains incentive fees of approximately $0, and administrative services expenses of approximately $329,000. For the year ended December 31, 2013, the Advisers waived base management fees of approximately $779,000, capital gains incentive fees of approximately $5,000, administrative services expenses of approximately $1 million, and made an expense support payment to the Company of $153,000. The ratio is calculated by reducing the expenses to reflect the waiver of expenses and to reflect the reduction of expenses for the expense support and reimbursement payment from the Adviser.
(2)
Total return is calculated on the change in net asset value per share, stockholder distributions declared per share and the amount of the stock dividend per share over the reporting period.

Note 6 – Stockholder Distributions
 
The following table reflects the cash distributions per share that the Company has declared on its common stock during the three months ended March 31, 2014 (in thousands except per share amounts).
 
Distributions
For the Period Ended
Per Share
 
Amount
Three months ended March 31, 2014