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, 2016
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 66,757,981 shares of common stock outstanding as of May 12, 2016.




TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION 
Item 1.
Condensed Consolidated Financial Statements:
 
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Changes in Net Assets
 
Condensed Consolidated Statements of Cash Flows
 
Condensed Consolidated Schedules of Investments
 
Notes to the Condensed Consolidated Financial Statements
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.    Condensed Consolidated Financial Statements

HMS Income Fund, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
 
March 31, 2016
 
December 31, 2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Portfolio investments at fair value:
 
 
 
Non-Control/Non-Affiliate investments (amortized cost: $880,163 and $866,499 as of March 31, 2016 and December 31, 2015, respectively)
$
809,806

 
$
812,205

Affiliate investments (amortized cost: $30,459 and $23,949 as of March 31, 2016 and December 31, 2015, respectively)
32,298

 
25,303

Control investments (amortized cost: $13,171 and $14,241 as of March 31, 2016 and December 31, 2015, respectively)
15,728

 
15,480

Total portfolio investments (amortized cost: $923,793 and $904,689 as of March 31, 2016 and December 31, 2015, respectively)
857,832

 
852,988

 
 
 
 
Cash and cash equivalents
20,505

 
24,001

Interest receivable
8,248

 
7,927

Receivable for securities sold
11,824

 
1,995

Prepaid and other assets
700

 
511

Deferred offering costs (net of accumulated amortization of $9,030 and $9,018 as of March 31, 2016 and December 31, 2015, respectively)
296

 
1,107

Deferred financing costs (net of accumulated amortization of $1,733 and $1,370 as of March 31, 2016 and December 31, 2015, respectively)
4,952

 
4,883

Total assets
$
904,357

 
$
893,412

 
 
 
 
LIABILITIES
 

 
 

Accounts payable and other liabilities
$
1,011

 
$
624

Payable for unsettled trades
514

 
—

Stockholder distributions payable
3,805

 
3,717

Due to affiliates
4,791

 
5,723

Payable for securities purchased
3,563

 
11,696

Notes payable
395,000

 
380,000

Total liabilities
408,684

 
401,760

 
 
 
 
Commitments and Contingencies (Note 11)
 
 
 
 
 
 
 
NET ASSETS
 

 
 

Common stock, $.001 par value; 150,000,000 shares authorized, 64,661,916 and 62,382,044 issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
65

 
62

Additional paid-in capital
564,233

 
546,508

Accumulated distributions in excess of net investment income
(2,662
)
 
(3,219
)
Net unrealized (depreciation)
(65,963
)
 
(51,699
)
Total net assets
495,673

 
491,652

 
 
 
 
Total liabilities and net assets
$
904,357

 
$
893,412

 
 
 
 
Net asset value per share
$
7.67

 
$
7.88


See notes to the condensed consolidated financial statements.

1


HMS Income Fund, Inc.
Condensed Consolidated Statements of Operations
(dollars in thousands, except share and per share amounts)
(Unaudited) 
 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
INVESTMENT INCOME:
 

 
 

Interest, fee and dividend income:
 

 
 

Non-Control/Non-Affiliate investments
$
20,438

 
$
11,358

Affiliate investments
587

 
199

Control investments
234

 
236

Total interest, fee and dividend income
21,259

 
11,793

EXPENSES:
 

 
 

Interest expense
3,710

 
1,975

Base management and incentive fees
4,987

 
3,365

Administrative services expenses
533

 
437

Offering costs
12

 
—

Professional fees
428

 
203

Insurance
47

 
49

Other general and administrative
328

 
232

Expenses before fee and expense waivers
10,045

 
6,261

Waiver of incentive fees
(493
)
 
(358
)
Waiver of administrative services expenses
(533
)
 
(437
)
Total expenses, net of fee and expense waivers
9,019

 
5,466

 
 
 
 
NET INVESTMENT INCOME
12,240

 
6,327

 
 
 
 
NET REALIZED GAIN (LOSS) FROM INVESTMENTS
 

 
 

Non-Control/Non-Affiliate investments
(646
)
 
20

Affiliate investments
—

 
—

Control investments
—

 
—

Total realized gain (loss) from investments
(646
)
 
20

 
 
 
 
NET REALIZED INCOME
11,594

 
6,347

 
 
 
 
NET UNREALIZED APPRECIATION (DEPRECIATION)
 

 
 

Non-Control/Non-Affiliate investments
(16,066
)
 
2,912

Affiliate investments
485

 
928

Control investments
1,318

 
—

Total net unrealized appreciation (depreciation)
(14,263
)
 
3,840

 
 
 
 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
(2,669
)
 
$
10,187

 
 
 
 
PER SHARE INFORMATION - BASIC AND DILUTED
 
 
 
NET INVESTMENT INCOME PER SHARE
$
0.19

 
$
0.17

NET REALIZED INCOME PER SHARE
$
0.18

 
$
0.18

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE (EARNINGS PER SHARE)
$
(0.04
)
 
$
0.28

DISTRIBUTIONS DECLARED PER SHARE
$
0.17

 
$
0.17

WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
63,230,882

 
36,265,941



See notes to the condensed consolidated financial statements.

2


HMS Income Fund, Inc.
Condensed Consolidated Statements of Changes in Net Assets
For the Three Months Ended March 31, 2016 and March 31, 2015
(dollars in thousands, except number of shares)
(Unaudited) 
 
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
Change in Net Assets from Operations:
 
 
 
 
Net investment income
 
$
12,240

 
$
6,327

Net realized gain (loss) on investments
 
(646
)
 
20

Net unrealized appreciation (depreciation)
 
(14,263
)
 
3,840

Net increase (decrease) in net assets resulting from operations
 
(2,669
)
 
10,187

 
 
 
 
 
Change in Net Assets from Shareholders' Distributions:
 
 
 
 
Distributions from net investment income
 
(11,037
)
 
(6,240
)
Distributions from net realized gain on investments
 
—

 
(20
)
Net decrease in net assets resulting from shareholders' distributions
 
(11,037
)
 
(6,260
)
 
 
 
 
 
Change in Net Assets from Capital Share Transactions:
 
 
 
 
Issuance of common stock, net of issuance costs
 
13,461

 
87,371

Reinvestment of shareholder distributions
 
5,794

 
2,884

Repurchase of common stock
 
(1,528
)
 
(289
)
Offering costs
 
—

 
(1,476
)
Net increase in net assets resulting from capital share transactions
 
17,727

 
88,490

 
 
 
 
 
Total Increase in Net Assets
 
4,021

 
92,417

Net Assets at beginning of period
 
491,652

 
260,063

Net Assets at end of the period
 
$
495,673

 
$
352,480

 
 
 
 
 
NAV at end of the period
 
$
7.67

 
$
8.57

 
 
 
 
 
Common shares outstanding, beginning of period
 
62,382,044

 
30,967,120

Issuance of common shares
 
1,746,007

 
9,894,080

Issuance of common shares pursuant to distribution reinvestment plan
 
734,373

 
325,967

Repurchase of common shares
 
(200,508
)
 
(33,842
)
Common shares outstanding, end of period
 
64,661,916

 
41,153,325


See notes to the condensed consolidated financial statements.


3


HMS Income Fund, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited) 
 
Three Months Ended 
 March 31, 2016
 
Three Months Ended 
 March 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net increase (decrease) in net assets resulting from operations
$
(2,669
)
 
$
10,187

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:
 
 
 
Principal repayments received and proceeds from sales of investments in portfolio companies
47,384

 
24,588

Investments in portfolio companies
(83,139
)
 
(187,231
)
Net unrealized (appreciation) depreciation of portfolio investments
14,263

 
(3,840
)
Net realized (gain) loss on sale of portfolio investments
646

 
(20
)
Amortization of deferred financing costs
363

 
211

Amortization of deferred offering costs
12

 
—

Accretion of unearned income
(2,267
)
 
(489
)
Net payment-in-kind interest accrual
(8
)
 
(194
)
Changes in other assets and liabilities:
 
 
 

Interest receivable
(321
)
 
(1,678
)
Prepaid and other assets
125

 
178

Due to affiliates
(79
)
 
2,355

Accounts payable and other liabilities
315

 
60

Payable for unsettled trades
514

 
(1,799
)
Net cash used in operating activities
(24,861
)
 
(157,672
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from issuance of common stock
14,760

 
94,552

Redemption of common shares
(1,528
)
 
(289
)
Payment of selling commissions and dealer manager fees
(1,051
)
 
(8,675
)
Payment of offering costs
(301
)
 
(1,476
)
Payment of stockholder distributions
(5,156
)
 
(2,783
)
Repayments on notes payable
(106,000
)
 
(36,864
)
Proceeds from notes payable
121,000

 
118,000

Payment of deferred financing costs
(359
)
 
(752
)
Net cash provided by financing activities
21,365

 
161,713

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(3,496
)
 
4,041

 
 
 
 
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD
24,001

 
19,868

 
 
 
 
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD
$
20,505

 
$
23,909

 
See notes to the condensed consolidated financial statements.


4

HMS Income Fund, Inc.
Condensed Consolidated Schedule of Investments
As of March 31, 2016
(dollars in thousands)
(Unaudited)
Portfolio Company (1) (3)
Business Description
Type of Investment (2) (3)
Index Rate (22)
Principal (7)
Cost (7)
Fair Value
 
 
 
 
 
 
 
Control Investments (6)
GRT Rubber Technologies, LLC (8) (10) (13)
Engineered Rubber Product Manufacturer
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - December 19, 2019)
1 month LIBOR
$
6,848

$
6,736

$
6,848

 
 
Member Units (2,896 shares)
—
—

6,435

8,880

 
 
 
 
 
13,171

15,728

 
 
 
 
 
 
 
Subtotal Control Investments (6) (2% of total investments at fair value)
 
 
$
13,171

$
15,728

 
Affiliate Investments (4)
AFG Capital Group, LLC (10) (13)
Provider of Rent-to-Own Financing Solutions and Services
11.00% Secured Debt (Maturity Date - November 7, 2019)
None
$
3,240

$
3,125

$
3,201

 
 
Member Units (46 shares)
—
—

300

545

 
 
Warrants (10 equivalent shares, Expiration - November 7, 2024)
—
—

65

132

 
 
 
 
 
3,490

3,878

EIG Traverse Co-Investment, LP (9) (15)
Investment Partnership
LP Interests (EIG Traverse Co-Investment, LP) (Fully diluted 22.2%) (16)
—
—

9,805

9,805

Freeport First Lien Loan Fund III, LP (9) (15)
Investment Partnership
LP Interests (Freeport First Lien Loan Fund III, LP) (Fully diluted 6.0%) (16)
—
—

3,564

3,564

HW Temps LLC (8) (10) (13)
Temporary Staffing Solutions
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity Date - July 2, 2020)
1 month LIBOR
2,494

2,433

2,433

 
 
Preferred Member Units (800 shares) (16)
—
—

986

1,238

 
 
 
 
 
3,419

3,671

M.H. Corbin, LLC (10) (13)
Manufacturer and Distributor of Traffic Safety Products
10.00% Secured Debt (Maturity Date -August 31, 2020)
None
3,456

3,425

3,425

 
 
Preferred Member Units (1,000 shares)
 
—

1,500

1,500

 
 
 
 
 
4,925

4,925

Mystic Logistics, Inc. (10) (13)
Logistics and Distribution Services Provider for Large Volume Mailers
12.00% Secured Debt (Maturity Date - August 15, 2019)
None
2,362

2,302

2,362

 
 
Common Stock (1,468 shares) (16)
—
—

680

1,348

 
 
 
 
 
2,982

3,710

SoftTouch Medical Holdings LLC (8) (10) (13)
Home Provider of Pediatric Durable Medical Equipment
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity Date - October 31, 2019)
1 month LIBOR
1,425

1,404

1,425

 
 
Member Units (785 shares) (16)
—
—

870

1,320

 
 
 
 
 
2,274

2,745

 
 
 
 
 
 
 
Subtotal Affiliate Investments (4) (4% of total investments at fair value)
 
 
$
30,459

$
32,298

 
 
 
 
 
 
 
Non-Control/Non-Affiliate Investments (5)
AccuMed Corporation (8) (11)
Medical Device Contract Manufacturer
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - October 29, 2020)
3 month LIBOR
$
10,352

$
10,204

$
10,204

Adams Publishing Group, LLC (8) (11)
Local Newspaper Operator
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - November 3, 2020)
3 month LIBOR
9,263

9,084

9,089

Ahead, LLC (8) (11)
IT Infrastructure Value Added Reseller
LIBOR Plus 6.50%, Current Coupon 7.14%, Secured Debt (Maturity - November 2, 2020)
3 month LIBOR
9,875

9,595

9,628

Allflex Holdings III Inc. (8)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - July 19, 2021) (14)
3 month LIBOR
14,922

15,013

14,343

AmeriTech College Operations, LLC (10) (13)
For-Profit Nursing and Healthcare College
10.00% Secured Debt, (Maturity - January 31, 2020)
None
375

375

375

 
 
10.00% Secured Debt, (Maturity - November 30, 2019)
None
61

60

61

 
 
10.00% Secured Debt, (Maturity - May 15, 2016)
None
64

64

64

 
 
Preferred Member Units (364 shares, 5.0% cumulative) (16)
—
—

284

284

 
 
 
 
 
783

784

AMF Bowling Centers, Inc. (8)
Bowling Alley Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - September 18, 2021)
3 month LIBOR
13,812

13,744

13,605

AP Gaming I, LLC (8) (11)
Developer, Manufacturer, and Operator of Gaming Machines
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity - December 21, 2020)
3 month LIBOR
11,378

11,266

10,581

Apex Linen Service, Inc. (10) (13)
Industrial Launderers
13.00% Secured Debt, (Maturity - October 30, 2022)
None
3,000

2,945

2,945

 
 
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - October 30, 2022)
1 month LIBOR
400

400

400

 
 
 
 
 
3,345

3,345

Aptean, Inc. (8)
Enterprise Application Software Provider
LIBOR Plus 4.25% (Floor 1.00%), Current Coupon 5.25%, Secured Debt (Maturity - February 26, 2020)
3 month LIBOR
4,404

4,404

4,296

Arcus Hunting, LLC (8) (11)
Manufacturer of Bowhunting and Archery Products and Accessories
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - November 13, 2019)
3 month LIBOR
5,987

5,859

5,915

Artel, LLC (8)
Provider of Secure Satellite Network and IT Solutions
LIBOR Plus 7.00% (Floor 1.25%), 7.25% Current/1.0% PIK, Current Coupon 8.25%, Secured Debt (Maturity - November 27, 2017)
3 month LIBOR
3,259

3,199

2,786

ATX Networks Corp. (8) (9)
Provider of Radio Frequency Management Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - June 11, 2021)
3 month LIBOR
14,888

14,619

14,739

BarFly Ventures, LLC (11)
Casual Restaurant Group
12.00% Secured Debt (Maturity Date - August 30, 2020)
None
1,374

1,350

1,254

 
 
Warrants (.364 equivalent shares, Expiration - August 31, 2025)
—
—

158

80

 
 
Options (.731 equivalent shares)
—
—

133

158

 
 
 
 
 
1,641

1,492

Berry Aviation, Inc. (11)
Airline Charter Service Operator
12.00% Current / 1.75% PIK Secured Debt (Maturity Date - January 30, 2020) (14)
None
1,407

1,387

1,395

 
 
Common Stock (138 shares)
—

—

100

122

 
 
 
 
 
1,487

1,517

Bioventus, LLC (8) (11)
Production of Orthopedic Healing Products
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%, Secured Debt (Maturity - April, 10, 2020) (14)
1 month LIBOR
7,000

6,893

6,895

Blackbrush Oil and Gas LP (8)
Oil & Gas Exploration
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - July 30, 2021) (14)
3 month LIBOR
12,085

11,669

9,356

Blackhawk Specialty Tools LLC (8)
Oilfield Equipment & Services
LIBOR Plus 5.25% (Floor 1.25%), Current Coupon 6.50%, Secured Debt (Maturity - August 1, 2019)
3 month LIBOR
8,380

7,916

6,914

Blue Bird Body Company (8)
School Bus Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - June 26, 2020)
3 month LIBOR
4,987

4,930

4,940

Bluestem Brands, Inc. (8) (9)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - November 6, 2020)
3 month LIBOR
14,417

14,143

12,777

Brightwood Capital Fund III, LP (9) (15)
Investment Partnership
LP Interests (Brightwood Capital Fund III, LP) (Fully diluted .52%) (16)
—
—

3,825

3,663

Brundage-Bone Concrete Pumping, Inc.
Construction Services Provider
10.38% Secured Bond (Maturity - September 1, 2021) (14)
None
12,000

12,099

12,000

Buca C, LLC (8) (10) (13)
Casual Restaurant Group
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - June 30, 2020)
1 month LIBOR
17,020

16,722

17,020

 
 
Preferred Member Units (4 units, 6.0% cumulative)
—
—

2,400

3,846

 
 
 
 
 
19,122

20,866

CAI Software, LLC (10) (13)
Provider of Specialized Enterprise Resource Planning Software
12.00% Secured Debt (Maturity Date - October 10, 2019)
None
1,085

1,061

1,085

 
 
Member Units (16,339 shares)
—
—

163

325

 
 
 
 
 
1,224

1,410

CJ Holding Company (8)
Oil and Gas Equipment and Services
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - March 24, 2020)
1 month LIBOR
5,940

5,212

2,643

CapFusion Holding, LLC (9) (10) (13)
Business Lender
13.00% Secured Debt (Maturity Date - March 25, 2021)
None
2,400

2,072

2,073

 
 
Warrants (400 equivalent shares, Expiration - March 24, 2026)
—
—

300

300

 
 
 
 
 
2,372

2,373

Cengage Learning Acquisitions, Inc. (8)
Provider of Educational Print and Digital Services
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - March 31, 2020)
1 month LIBOR
8,513

8,493

8,490

Cenveo Corporation
Provider of Commercial Printing, Envelopes, Labels, Printed Office Products
6.00% Secured Bond (Maturity - August 1, 2019)
None
10,000

8,486

7,275

Charlotte Russe, Inc. (8)
Fast-Fashion Retailer to Young Women
LIBOR Plus 5.50% (Floor 1.25%), Current Coupon 6.75%, Secured Debt (Maturity - May 22, 2019)
3 month LIBOR
15,101

14,868

8,025

Clarius BIGS, LLC (11) (13) (18)
Prints & Advertising Film Financing
15.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
None
2,429

2,171

291

 
 
20.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
None
878

785

104

 
 
 
 
 
2,956

395

Compuware Corporation (8)
Provider of Software and Supporting Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - December 15, 2019)
3 month LIBOR
14,803

14,419

14,335

Covenant Surgical Partners, Inc.
Ambulatory Surgical Centers
8.75% Secured Debt (Maturity - August 1, 2019)
None
9,500

9,500

9,120

CRGT, Inc. (8)
Provider of Custom Software Development
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - December 18, 2020)
3 month LIBOR
11,550

11,348

11,521

CST Industries, Inc. (8)
Storage Tank Manufacturer
LIBOR Plus 6.25% (Floor 1.50%), Current Coupon 7.75%, Secured Debt (Maturity - May 22, 2017)
3 month LIBOR
1,871

1,871

1,857

Datacom, LLC (10) (13)
Technology and Telecommunications Provider
5.25%/5.25% PIK, Current Coupon 10.50% Secured Debt (Maturity - May 30, 2019)
None
1,245

1,226

1,144

 
 
Class A Preferred Member Units (1,530 units, 15.0% cumulative) (16)
—
—

131

136

 
 
Class B Preferred Member Units (717 units)
—
—

670

511

 
 
 
 
 
2,027

1,791

Digital River, Inc. (8)
Provider of Outsourced e-Commerce Solutions and Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - February 12, 2021)
3 month LIBOR
14,586

14,460

14,312

ECP-PF Holdings Groups, Inc. (11)
Fitness Club Operator
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - November 26, 2019)
3 month LIBOR
1,875

1,861

1,832

East West Copolymer & Rubber, LLC (10) (13)
Manufacturer of Synthetic Rubbers
12.00% Secured Debt (Maturity Date - October 17, 2019)
None
2,400

2,339

2,339

 
 
Warrants (627,697 equivalent shares, Expiration - October 15, 2024)
—
—

10

13

 
 
 
 
 
2,349

2,352

Energy & Exploration Partners, LLC (18)
Oil & Gas Exploration and Production
LIBOR plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - January 22, 2019) (8) (18)
3 month LIBOR
9,900

8,638

1,171

 
 
LIBOR plus 10.00% (Floor 1.00%), Current coupon 11.0% Secured Debt (Maturity - September 7, 2016) (8)
1 month LIBOR
609

596

607

 
 
 
 
 
9,234

1,778

Evergreen Skills Lux S.á r.l. (d/b/a Skillsoft) (8) (9)
Technology-Based Performance Support Solutions
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity - April 28, 2022) (14)
3 month LIBOR
10,902

10,396

5,177

Extreme Reach, Inc. (8)
Integrated TV and Video Advertising Platform
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - February 7, 2020)
3 month LIBOR
6,587

6,542

6,576

Flavors Holdings, Inc. (8)
Global Provider of Flavoring and Sweetening Products and Solutions
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - April 3, 2020)
3 month LIBOR
12,272

11,612

11,045

Fram Group Holdings, Inc. (8)
Manufacturer of Automotive Maintenance Products
LIBOR Plus 5.50% (Floor 1.50%), Current Coupon 7.00%, Secured Debt (Maturity - July 29, 2017)
1 month LIBOR
7,776

7,519

7,180

GST Autoleather, Inc. (8)
Automotive Leather Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity Date - July 10, 2020)
3 month LIBOR
11,845

11,702

11,430

Guerdon Modular Holdings, Inc. (10) (13)
Multi-Family and Commercial Modular Construction Company
13.00% Secured Debt (Maturity - August 13, 2019)
None
2,600

2,549

2,575

 
 
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - August 13, 2019) (8)
1 month LIBOR
240

235

235

 
 
Common Stock (53,008 shares)
—
—

746

302

 
 
 
 
 
3,530

3,112

Guitar Center, Inc.
Musical Instruments Retailer
6.50% Secured Bond (Maturity - April 15, 2019)
None
15,015

13,879

13,514

Halcon Resources Corporation
Oil & Gas Exploration & Production
9.75% Unsecured Bond (Maturity - July 15, 2020) (17)
None
3,000

2,645

533

Hojeij Branded Foods, Inc. (8) (11)
Multi-Airport, Multi-Concept Restaurant Operator
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity Date - July 28, 2021)
3 month LIBOR
5,473

5,425

5,408

Horizon Global Corporation (8)
Auto Parts Manufacturer
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity Date - June 30, 2021)
1 month LIBOR
12,513

12,309

12,043

Hunter Defense Technologies, Inc. (8)
Provider of Military and Commercial Shelters and Systems
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity Date - August 5, 2019)
1 month LIBOR
10,495

10,400

8,658

Hygea Holdings Corp. (8) (11)
Provider of Physician Services
LIBOR Plus 9.25%, Current Coupon 9.87% Secured Debt (Maturity Date - February 24, 2019)
3 Month LIBOR
8,000

7,342

7,342

 
 
Warrants (4,880,735 equivalent shares, Expiration - February 24, 2023)
—
—

369

369

 
 
 
 
 
7,711

7,711

ICON Health and Fitness, Inc.
Producer of Fitness Products
11.88% Secured Bond (Maturity - October 15, 2016)
None
14,337

14,203

12,975

iEnergizer Limited (8) (9)
Provider of Business Outsourcing Solutions
LIBOR 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - May 1, 2019)
1 month LIBOR
4,155

4,150

3,635

Indivior Finance, LLC (8) (9)
Specialty Pharmaceutical Company Treating Opioid Dependence
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - December 19, 2019)
3 month LIBOR
9,375

8,907

8,938

Industrial Container Services, LLC (8) (11)
Steel Drum Reconditioner
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - December 31, 2018)
3 month LIBOR
4,974

4,920

4,920

Inn of the Mountain Gods Resort and Casino
Hotel & Casino Owner & Operator
9.25% Secured Bond (Maturity - November 30, 2020)
None
10,749

10,558

9,943

Intertain Group Limited (8) (9)
Business-to-Consumer Online Gaming Operator
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - April 8, 2022)
1 month LIBOR
9,677

9,530

9,653

iPayment, Inc. (8)
Provider of Merchant Acquisition
LIBOR Plus 5.25% (Floor 1.50%), Current Coupon 6.75%, Secured Debt (Maturity - May 8, 2017)
3 month LIBOR
15,115

14,989

14,445

iQor US Inc. (8)
Business Process Outsourcing Services Provider
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - April 1, 2021)
3 month LIBOR
7,817

7,330

6,410

IronGate Energy Services, LLC
Oil and Gas Services
11.00% Secured Bond (Maturity - July 1, 2018)
None
5,825

5,828

1,398

Jackmont Hospitality, Inc. (8) (11)
Franchisee of Casual Dining Restaurants
LIBOR Plus 4.25% (Floor 1.00%)/ 2.50% PIK , Current Coupon 7.75%, Secured Debt (Maturity Date - May 26, 2021)
1 month LIBOR
8,904

8,869

8,520

Joerns Healthcare, LLC (8)
Manufacturer and Distributor of Health Care Equipment & Supplies
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - May 9, 2020)
3 month LIBOR
4,401

4,382

4,362

JSS Holdings, Inc. (8)
Aircraft Maintenance Program Provider
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity Date - August 31, 2021)
3 month LIBOR
14,381

14,060

13,662

Kellermeyer Bergensons Services, LLC (8)
Outsourced Janitorial Services to Retail/Grocery Customers
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - April 29, 2022) (14)
3 month LIBOR
14,700

14,594

13,965

Kendra Scott, LLC (8)
Jewelry Retail Stores
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity Date - July 17, 2020)
3 month LIBOR
9,750

9,664

9,726

Keypoint Government Solutions, Inc. (8)
Provider of Pre-Employment Screening Services
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity - November 13, 2017)
3 month LIBOR
1,965

1,958

1,955

LaMi Products, LLC (8) (11)
General Merchandise Distribution
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - September 16, 2020)
3 month LIBOR
10,735

10,534

10,735

Larchmont Resources, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 8.75% (Floor 1.00%), Current Coupon 9.75%, Secured Debt (Maturity - August 7, 2019)
3 month LIBOR
13,230

11,956

6,086

Legendary Pictures Funding, LLC (8) (11)
Producer of TV, Film, and Comic Content
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - April 22, 2020)
3 month LIBOR
7,500

7,374

7,369

LJ Host Merger Sub, Inc. (8)
Managed Services and Hosting Provider
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity - December 13, 2019)
3 month LIBOR
5,053

5,041

5,003

MediMedia USA, Inc. (8)
Provider of Healthcare Media and Marketing
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity - November 20, 2018)
3 month LIBOR
11,904

11,829

11,636

Milk Specialties Company (8)
Processor of Nutrition Products
LIBOR Plus 7.00% (Floor 1.25%), Current Coupon 8.25%, Secured Debt (Maturity - November 9, 2018)
3 month LIBOR
4,303

4,267

4,311

Minute Key, Inc. (10) (13)
Operator of Automated Key Duplication Kiosk
10.00% Current / 2.00% PIK Secured Debt (Maturity Date - September 19, 2019) (14)
None
3,846

3,743

3,743

 
 
Warrants (359,352 equivalent shares, Expiration - May 20, 2025)
—
—

70

70

 
 
 
 
 
3,813

3,813

Mood Media Corporation (8) (9)
Provider of Electronic Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - May 1, 2019)
3 month LIBOR
14,937

14,918

13,987

New Media Holdings II LLC (8) (9)
Local Newspaper Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - June 4, 2020)
3 month LIBOR
14,819

14,666

14,494

North American Lifting Holdings, Inc. (8)
Crane Service Provider
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity - November 27, 2020)
3 month LIBOR
1,091

818

815

North Atlantic Trading Company, Inc. (8)
Marketer/Distributor of Tobacco
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity -January 13, 2020)
1 month LIBOR
10,989

10,993

10,879

Novitex Acquisition, LLC (8)
Provider of Document Management Services
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity - July 7, 2020)
3 month LIBOR
11,558

11,324

10,518

Panolam Industries International, Inc. (8)
Decorative Laminate Manufacturer
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity - August 23, 2017)
1 month LIBOR
7,291

7,238

7,219

Paris Presents, Inc. (8)
Branded Cosmetic and Bath Accessories
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity - December 31, 2021) (14)
1 month LIBOR
7,500

7,369

7,350

Parq Holdings, LP (8) (9) (12)
Hotel and Casino Operator
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - December 17, 2020)
1 month LIBOR
12,500

12,359

11,719

Permian Holdings, Inc.
Storage Tank Manufacturer
10.50% Secured Bond (Maturity - January 15, 2018)
None
6,885

5,917

2,410

Pernix Therapeutics Holdings, Inc. (11)
Pharmaceutical Royalty - Anti-Migraine
12.00% Secured Bond (Maturity - August 1, 2020)
None
3,104

3,073

2,906

Pike Corporation (8)
Construction and Maintenance Services for Electric Transmission and Distribution Infrastructure
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - June 22, 2022) (14)
3 month LIBOR
13,334

13,045

13,223

Polyconcept Financial B.V. (8)
Promotional Products to Corporations and Consumers
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity - June 28, 2019)
1 month LIBOR
5,312

5,304

5,246

Premier Dental Services, Inc. (8)
Dental Care Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - November 1, 2018)
3 month LIBOR
4,511

4,492

4,082

Prowler Acquisition Corporation (8)
Specialty Distributor to the Energy Sector
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity - January 28, 2020)
3 month LIBOR
9,407

8,182

6,585

Raley's, Inc. (8)
Family-Owned Supermarket Chain in California
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - May 18, 2022)
3 month LIBOR
5,029

4,937

5,016

RCHP, Inc. (8)
Region Non-Urban Hospital Owner/Operator
LIBOR Plus 10.25% (Floor 1.00%), Current Coupon 11.25%, Secured Debt (Maturity - October 23, 2019) (14)
2 month LIBOR
15,072

14,700

15,223

Renaissance Learning, Inc. (8)
Technology-based K-12 Learning Solutions
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - April 11, 2022) (14)
3 month LIBOR
12,950

12,506

11,558

RGL Reservoir Operations, Inc. (8) (9)
Oil & Gas Equipment & Services
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - August 13, 2021)
3 month LIBOR
3,940

3,844

1,005

RLJ Entertainment, Inc. (8) (11)
Movie and TV Programming Licensee and Distributor
LIBOR Plus 8.75% (Floor .25%), Current Coupon 9.37%, Secured Debt (Maturity - September 11, 2019)
3 month LIBOR
8,046

7,791

7,916

RM Bidder, LLC (11)
Acquisition Vehicle
Common Stock (1,854 shares)
—
—

31

29

 
 
Series A Warrants (124,915 equivalent shares, Expiration - October 20, 2025)
—
—

284

200

 
 
Series B Warrants (93,686 equivalent shares, Expiration - October 20, 2025)
—
—

—

—

 
 
 
 
 
315

229

Sage Automotive Interiors, Inc (8)
Automotive Textiles Manufacturer
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - October 8, 2021) (14)
3 month LIBOR
5,000

4,958

4,950

Salient Partners, LP (8)
Provider of Asset Management Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - June 9, 2021)
1 month LIBOR
7,369

7,237

7,148

Sorenson Communications, Inc.
Manufacturer of Communication Products for Hearing Impaired
9.00% Secured Bond (Maturity - October 31, 2020) (14)
None
11,710

11,246

10,656

Sotera Defense Solutions, Inc. (8)
Defense Industry Intelligence Services
LIBOR Plus 7.50% (Floor 1.50%), Current Coupon 9.00%, Secured Debt (Maturity - April 21, 2017)
3 month LIBOR
3,440

3,350

3,182

Stardust Finance Holdings, Inc. (8)
Manufacturer of Diversified Building Products
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - March 13, 2022)
3 month LIBOR
2,475

2,420

2,456

 
 
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity - March 13, 2023) (14)
3 month LIBOR
5,000

4,412

4,875

 
 
 
 
 
6,832

7,331

Synagro Infrastructure Company, Inc. (8)
Waste Management Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - August 22, 2020)
3 month LIBOR
2,704

2,684

2,298

TaxAct, Inc. (8)
Provider of Tax Preparation Solutions
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - January 3, 2023)
1 month LIBOR
9,000

8,798

8,775

Teleguam Holdings, LLC (8)
Cable and Telecom Services Provider
LIBOR Plus 7.50% (Floor 1.25%), Current Coupon 8.75%, Secured Debt (Maturity - June 10, 2019) (14)
1 month LIBOR
3,000

3,016

2,978

Templar Energy, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - November 25, 2020) (14)
3 month LIBOR
3,000

2,983

338

Tervita Corporation (8) (9)
Oil and Gas Environmental Services
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - May 15, 2018)
3 month LIBOR
1,003

1,008

847

The Topps Company, Inc. (8)
Trading Cards & Confectionary
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - October 2, 2018)
3 month LIBOR
978

972

960

TOMS Shoes, LLC (8)
Global Designer, Distributor, and Retailer of Casual Footwear
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - October 30, 2020)
3 month LIBOR
4,950

4,553

3,261

Travel Leaders Group, LLC (8) (12)
Travel Agency Network Provider
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - December 7, 2020)
3 month LIBOR
16,693

16,594

16,631

Unirush LLC (10) (13)
Provider of Prepaid Debt Card Solutions
12.00 Secured Debt (Maturity Date - February 1, 2019)
None
3,000

2,647

2,647

 
 
Warrants (111,181 equivalent shares, Expiration - February 2, 2026)
—
—

313

313

 
 
 
 
 
2,960

2,960

USJ-IMECO Holding Company, LLC (8)
Marine Interior Design and Installation
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - April 16, 2020)
3 month LIBOR
7,847

7,829

7,730

Valley Healthcare Group, LLC (8) (10) (13)
Provider of Durable Medical Equipment
LIBOR Plus 12.50% (Floor .50%), Current Coupon 13.00%, Secured Debt (Maturity - December 29, 2020)
1 month LIBOR
2,600

2,550

2,550

Vision Solutions, Inc. (8)
Provider of Information Availability Software
LIBOR Plus 6.00% (Floor 1.50%), Current Coupon 7.00%, Secured Debt (Maturity - July 23, 2016)
1 month LIBOR
1,185

1,186

1,144

 
 
LIBOR Plus 8.00% (Floor 1.50%), Current Coupon 9.50%, Secured Debt (Maturity - July 23, 2017) (14)
1 month LIBOR
875

872

809

 
 
 
 
 
2,058

1,953

Vivid Seats, LLC (8)
Provider of Online Secondary Ticket Marketplace
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - March 1, 2022)
1 month LIBOR
5,000

4,654

4,681

Volusion, LLC (10)
Provider of Online Software-as-a-Service eCommerce Solutions
10.50% Secured Debt (Maturity Date - January 24, 2020)
None
7,500

6,895

6,895

 
 
Preferred Member Units (2,090,001 shares)
—
—

6,000

6,000

 
 
Warrants (407,408 equivalent shares, Expiration - January 26, 2025)
—
—

600

600

 
 
 
 
 
13,495

13,495

Worley Claims Services, LLC (8) (11)
Insurance Adjustment Management and Services Provider
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - October 31, 2020)
1 month LIBOR
6,419

6,368

6,196

YP Holdings LLC (8)
Online and Offline Advertising Operator
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity - June 4, 2018)
1 month LIBOR
12,347

14,281

13,415

 
 
 
 
 
 
 
Subtotal Non-Control/Non-Affiliate Investments (5) (94% of total portfolio investments at fair value)
 
 
$
880,163

$
809,806

 
 
 
 
 
 
 
Total Portfolio Investments
 
 
 
 
$
923,793

$
857,832

 
 
 
 
 
 
 
Short Term Investments (20)
 
 
 
 
 
 
Fidelity Institutional Money Market Funds
—
Prime Money Market Portfolio, Class II Shares (21)
—
—
$
4,615

$
4,615

US Bank Money Market Account (21)
—
—
—
—
5,284

5,284

UMB Bank Money Market Account (21)
—
—
—
—
4,334

4,334

 
 
 
 
 
 
 
Total Short Term Investments
 
 
 
 
$
14,233

$
14,233

(1) All investments are Middle Market portfolio investments, unless otherwise noted. All of the Company's assets are encumbered as security for the Company's credit agreements. See Note 4 - Borrowings.
(2) Debt investments are income producing, unless otherwise noted. Equity investments and warrants are non-income producing, unless otherwise noted.
(3) See Note 3 - Fair Value Hierarchy for Investments for summary geographic location of portfolio companies.
(4) Affiliate investments are generally defined by the 1940 Investment Company Act of 1940, as amended (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.
(5) Non-Control/Non-Affiliate investments are generally defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments.
(6) Control investments are generally 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.
(7) Principal is net of repayments. Cost represents amortized cost which is net of repayments and adjusted for the amortization of premiums and/or accretion of discounts, as applicable.
(8) Index based floating interest rate is subject to contractual minimum interest rates.
(9) The investment is not a qualifying asset in an eligible portfolio company under the 1940 Act. A business development company (“BDC”) may not acquire any asset other than qualifying assets in eligible portfolio companies unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC's total assets. As of March 31, 2016, approximately 12.9% of the Company's investments were considered non-qualifying.
(10) Investment is classified as a Lower Middle Market investment.
(11) Investment is classified as a Private Loan portfolio investment.
(12) Investment or portion of investment is under contract to purchase and met trade date accounting criteria as of March 31, 2016. Settlement occurred or is scheduled to occur after March 31, 2016.
(13) Investment serviced by Main Street pursuant to servicing arrangements with the Company.
(14) Second lien secured debt investment.
(15) Investment is classified as an Other Portfolio investment.
(16) Income producing through dividends or distributions.
(17) Unsecured debt investment.
(18) Investment is on non-accrual status as of March 31, 2016.
(19) Maturity date is under on-going negotiations with the portfolio company and other lenders, if applicable.
(20) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less.
(21) Effective yield as of March 31, 2016 was approximately 0.01%.
(22) The 1, 2, 3, and 6-month London Interbank Offered Rate ("LIBOR") rates were 0.44%, 0.52%, 0.63% and 0.90%, respectively, as of March 31, 2016. The actual LIBOR rate for each loan listed may not be the applicable LIBOR rate as of March 31, 2016, as the loan may have been priced or repriced based on a LIBOR rate prior to or subsequent to March 31, 2016. The prime rate was 3.50% as of March 31, 2016.

See notes to the condensed consolidated financial statements.

5


HMS Income Fund, Inc.
Condensed Consolidated Schedule of Investments
As of December 31, 2015
(dollars in thousands)
Portfolio Company (1) (3)
Business Description
Type of Investment (2) (3)
Index Rate (22)
Principal (7)
Cost (7)
Fair Value
 
 
Control Investments (6)
GRT Rubber Technologies, LLC (8) (10) (13)
Engineered Rubber Product Manufacturer
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - December 19, 2019)
1 month LIBOR
$
7,941

$
7,806

$
7,806

 
 
Member Units (2,896 shares)
—
—

6,435

7,674

 
 
 
 
 
14,241

15,480

 
 
 
 
 
 
Subtotal Control Investments (6) (2% of total portfolio investments at fair value)
 
 
$
14,241

$
15,480

 
 
 
 
 
 
 
Affiliate Investments (4)
AFG Capital Group, LLC (10) (13)
Provider of Rent-to-Own Financing Solutions and Services
11.00% Secured Debt (Maturity Date - November 7, 2019)
None
$
3,240

$
3,118

$
3,198

 
 
Member Units (46 shares)
—
—

300

505

 
 
Warrants (10 equivalent shares, Expiration - November 7, 2024)
—
—

65

122

 
 
 
 
 
3,483

3,825

EIG Traverse Co-Investment, LP (9) (15)
Investment Partnership
LP Interests (EIG Traverse Co-Investment, LP) (Fully diluted 6.6%) (16)
—
—

4,755

4,755

Freeport First Lien Loan Fund III, LP (9) (15)
Investment Partnership
LP Interests (Freeport First Lien Loan Fund III, LP) (Fully diluted 6.4%) (16)
—
—

2,077

2,077

HW Temps LLC (8) (10) (13)
Temporary Staffing Solutions
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity Date - July 2, 2020)
1 month LIBOR
2,494

2,430

2,430

 
 
Member Units (800 shares)
—
—

986

986

 
 
 
 
 
3,416

3,416

M.H. Corbin LLC (10) (13)
Manufacturer and Distributor of Traffic Safety Products
10.00% Secured Debt (Maturity Date - August 31, 2021)
None
3,500

3,467

3,467

 
 
Member Units (1,000 shares)
—
—

1,500

1,500

 
 
 
 
 
4,967

4,967

Mystic Logistics, Inc. (10) (13)
Logistics and Distribution Services Provider for Large Volume Mailers
12.00% Secured Debt (Maturity Date - August 15, 2019)
None
2,362

2,299

2,361

 
 
Common Stock (1,468 shares) (16)
—
—

680

1,492

 
 
 
 
 
2,979

3,853

SoftTouch Medical Holdings LLC (8) (10) (13)
Home Provider of Pediatric Durable Medical Equipment
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity Date - October 31, 2019)
1 month LIBOR
1,425

1,402

1,402

 
 
Member Units (785 shares) (16)
—
—

870

1,008

 
 
 
 
 
2,272

2,410

 
 
 
 
 
 
 
Subtotal Affiliate Investments (4) (3% of total portfolio investments at fair value)
 
 
$
23,949

$
25,303

 
 
 
 
 
 
 
Non-Control/Non-Affiliate Investments (5)
AccuMed Corporation (8) (11)
Medical Device Contract Manufacturer
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - October 29, 2020)
2 month LIBOR
9,750

9,595

9,595

Adams Publishing Group, LLC (8) (11)
Local Newspaper Operator
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - November 3, 2020)
2 month LIBOR
9,506

9,317

9,328

Ahead, LLC (8) (11)
IT Infrastructure Value Added Reseller
LIBOR Plus 6.50%, Current Coupon 6.76%, Secured Debt (Maturity - November 2, 2020)
1 month LIBOR
10,000

9,708

9,750

Allflex Holdings III Inc. (8)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - July 19, 2021) (14)
3 month LIBOR
14,922

15,013

14,713

AmeriTech College Operations, LLC (10) (13)
For-Profit Nursing and Healthcare College
10.00% Secured Debt, (Maturity - January 31, 2020)
None
375

375

375

 
 
10.00% Secured Debt, (Maturity - November 30, 2019)
None
61

60

60

 
 
10.00% Secured Debt, (Maturity - May 15, 2016)
None
64

64

64

 
 
Preferred Member Units (364 shares) (16)
—
—

284

284

 
 
 
 
 
783

783

AMF Bowling Centers, Inc. (8)
Bowling Alley Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - September 18, 2021)
3 month LIBOR
13,847

13,777

13,720

AP Gaming I, LLC (8) (11)
Developer, Manufacturer, and Operator of Gaming Machines
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity - December 21, 2020)
3 month LIBOR
11,407

11,290

11,036

Apex Linen Service, Inc. (10) (13)
Industrial Launderers
13.00% Secured Debt, (Maturity - October 30, 2022)
None
3,000

2,944

2,944

 
 
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - October 30, 2022)
1 month LIBOR
400

400

400

 
 
 
 
 
3,344

3,344

Aptean, Inc. (8)
Enterprise Application Software Provider
LIBOR Plus 4.25% (Floor 1.00%), Current Coupon 5.25%, Secured Debt (Maturity - February 26, 2020)
3 month LIBOR
4,415

4,415

4,323

Arcus Hunting, LLC (8) (11)
Manufacturer of Bowhunting and Archery Products and Accessories
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - November 13, 2019)
3 month LIBOR
4,770

4,665

4,665

Artel, LLC (8)
Land-Based and Commercial Satellite Provider
LIBOR Plus 7.00% (Floor 1.25%), Current Coupon 8.25%, Secured Debt (Maturity - November 27, 2017)
3 month LIBOR
3,344

3,274

2,859

ATX Networks Corp. (8) (9)
Provider of Radio Frequency Management Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - June 11, 2021)
3 month LIBOR
14,925

14,645

14,701

BarFly Ventures, LLC (11)
Casual Restaurant Group
12.00% Secured Debt (Maturity Date - August 30, 2020)
None
1,374

1,348

1,348

 
 
Warrants (.364 equivalent shares, Expiration - August 31, 2025)
—
—

158

158

 
 
 
 
 
1,506

1,506

Berry Aviation, Inc. (11)
Airline Charter Service Operator
12.00% Current / 1.75% PIK Secured Debt (Maturity Date - January 30, 2020) (14)
None
1,407

1,386

1,386

 
 
Common Stock (138 shares)
—

—

100

100

 
 
 
 
 
1,486

1,486

Bioventus, LLC (8) (11)
Production of Orthopedic Healing Products
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%, Secured Debt (Maturity - April, 10, 2020) (14)
1 month LIBOR
7,000

6,888

6,895

Blackbrush Oil and Gas LP (8)
Oil & Gas Exploration
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - July 30, 2021) (14)
3 month LIBOR
12,085

11,655

9,758

Blackhawk Specialty Tools LLC (8)
Oilfield Equipment & Services
LIBOR Plus 5.25% (Floor 1.25%), Current Coupon 6.50%, Secured Debt (Maturity - August 1, 2019)
3 month LIBOR
8,500

8,047

7,862

Blue Bird Body Company (8)
School Bus Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - June 26, 2020)
3 month LIBOR
5,062

5,002

5,027

Bluestem Brands, Inc. (8) (9)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - November 6, 2020)
3 month LIBOR
14,619

14,330

13,705

Brightwood Capital Fund III, LP (9) (15)
Investment Partnership
LP Interests (Brightwood Capital Fund III, LP) (Fully diluted .52%) (16)
—
—

3,825

3,695

Brundage-Bone Concrete Pumping, Inc.
Construction Services Provider
10.38% Secured Bond (Maturity - September 1, 2021) (14)
None
10,000

10,173

9,750

Buca C, LLC (8) (10) (13)
Casual Restaurant Group
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - June 30, 2020)
1 month LIBOR
17,020

16,708

16,708

 
 
Preferred Member Units (4 units)
—
—

2,472

2,472

 
 
 
 
 
19,180

19,180

CAI Software, LLC (10) (13)
Provider of Specialized Enterprise Resource Planning Software
12.00% Secured Debt (Maturity Date - October 10, 2019)
None
1,165

1,138

1,165

 
 
Member Units (16,339 shares)
—
—

163

250

 
 
 
 
 
1,301

1,415

CJ Holding Company (8)
Oil and Gas Equipment and Services
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - March 24, 2020)
1 month LIBOR
5,955

5,189

3,710

Cengage Learning Acquisitions, Inc. (8)
Provider of Educational Print and Digital Services
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - March 31, 2020)
1 month LIBOR
15,018

15,024

14,680

Cenveo Corporation
Provider of Commercial Printing, Envelopes, Labels, Printed Office Products
6.00% Secured Bond (Maturity - August 1, 2019)
None
10,000

8,719

7,050

Charlotte Russe, Inc. (8)
Fast-Fashion Retailer to Young Women
LIBOR Plus 5.50% (Floor 1.25%), Current Coupon 6.75%, Secured Debt (Maturity - May 22, 2019)
3 month LIBOR
15,101

14,853

10,541

Clarius BIGS, LLC (11) (13) (18)
Prints & Advertising Film Financing
15.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
None
2,480

2,222

412

 
 
20.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
None
896

803

149

 
 
 
 
 
3,025

561

Compuware Corporation (8)
Provider of Software and Supporting Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - December 15, 2019)
3 month LIBOR
14,250

13,893

13,523

Covenant Surgical Partners, Inc.
Ambulatory Surgical Centers
8.75% Secured Debt (Maturity - August 1, 2019)
None
9,500

9,500

9,263

CRGT, Inc. (8)
Provider of Custom Software Development
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - December 18, 2020)
3 month LIBOR
14,168

13,918

14,098

CST Industries, Inc. (8)
Storage Tank Manufacturer
LIBOR Plus 6.25% (Floor 1.50%), Current Coupon 7.75%, Secured Debt (Maturity - May 22, 2017)
3 month LIBOR
1,978

1,975

1,958

Datacom, LLC (10) (13)
Technology and Telecommunications Provider
10.50% Secured Debt (Maturity - May 30, 2019)
None
1,245

1,226

1,192

 
 
Preferred Member Units (1,530 units) (16)
—
—

131

131

 
 
Preferred Member Units (717 units)
—
—

670

564

 
 
 
 
 
2,027

1,887

Digital River, Inc. (8) (12)
Provider of Outsourced e-Commerce Solutions and Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - February 12, 2021)
3 month LIBOR
9,786

9,691

9,688

ECP-PF: CT Operations, Inc. (8) (11)
Fitness Club Operator
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - November 26, 2019)
3 month LIBOR
1,875

1,860

1,831

East West Copolymer & Rubber, LLC (10) (13)
Manufacturer of Synthetic Rubbers
12.00% Secured Debt (Maturity Date - October 17, 2019)
None
2,400

2,336

2,336

 
 
Warrants (627,697 equivalent shares, Expiration - October 15, 2024)
—
—

10

10

 
 
 
 
 
2,346

2,346

Energy & Exploration Partners, LLC (18)
Oil & Gas Exploration and Production
LIBOR plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - January 22, 2019) (8) (18)
3 month LIBOR
9,900

8,638

2,500

 
 
8.75% Secured Debt (Maturity - January 21, 2016)
None
233

233

233

 
 
 
 
 
8,871

2,733

Evergreen Skills Lux S.á r.l. (d/b/a Skillsoft) (8) (9)
Technology-Based Performance Support Solutions
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity - April 28, 2022) (14)
3 month LIBOR
10,902

10,382

7,277

Extreme Reach, Inc. (8)
Integrated TV and Video Advertising Platform
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - February 7, 2020)
3 month LIBOR
6,853

6,822

6,742

Flavors Holdings, Inc. (8)
Global Provider of Flavoring and Sweetening Products and Solutions
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - April 3, 2020)
3 month LIBOR
8,438

8,135

7,509

Fram Group Holdings, Inc. (8)
Manufacturer of Automotive Maintenance Products
LIBOR Plus 5.50% (Floor 1.50%), Current Coupon 7.00%, Secured Debt (Maturity - July 29, 2017)
1 month LIBOR
8,099

7,782

6,105

GST Autoleather, Inc. (8)
Automotive Leather Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity Date - July 10, 2020)
3 month LIBOR
9,875

9,796

9,529

Guerdon Modular Holdings, Inc. (10) (13)
Multi-Family and Commercial Modular Construction Company
11.00% Secured Debt (Maturity - August 13, 2019)
None
2,600

2,542

2,547

 
 
Common Stock (53,008 shares)
—
—

746

497

 
 
 
 
 
3,288

3,044

Guitar Center, Inc.
Musical Instruments Retailer
6.50% Secured Bond (Maturity - April 15, 2019)
None
13,015

12,135

10,933

Halcon Resources Corporation
Oil & Gas Exploration & Production
9.75% Unsecured Bond (Maturity - July 15, 2020) (17)
None
3,000

2,630

870

Hojeij Branded Foods, Inc. (8) (11)
Multi-Airport, Multi-Concept Restaurant Operator
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity Date - July 28, 2021)
3 month LIBOR
5,330

5,280

5,280

Horizon Global Corporation (8)
Auto Parts Manufacturer
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity Date - June 30, 2021)
1 month LIBOR
12,675

12,462

12,580

Hunter Defense Technologies, Inc. (8)
Provider of Military and Commercial Shelters and Systems
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity Date - August 5, 2019)
3 month LIBOR
10,495

10,420

10,390

ICON Health and Fitness, Inc.
Producer of Fitness Products
11.88% Secured Bond (Maturity - October 15, 2016)
None
13,337

13,252

12,670

iEnergizer Limited (8) (9)
Provider of Business Outsourcing Solutions
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - May 1, 2019)
1 month LIBOR
4,312

4,305

3,988

Indivior Finance, LLC (8) (9)
Specialty Pharmaceutical Company Treating Opioid Dependence
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - December 19, 2019)
3 month LIBOR
9,500

9,003

8,930

Industrial Container Services, LLC (8) (11)
Steel Drum Reconditioner
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - December 31, 2018)
3 month LIBOR
4,987

4,930

4,930

Inn of the Mountain Gods Resort and Casino
Hotel & Casino Owner & Operator
9.25% Secured Bond (Maturity - November 30, 2020)
None
10,749

10,551

9,943

Intertain Group Limited (8) (9)
Business-to-Consumer Online Gaming Operator
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - April 8, 2022)
3 month LIBOR
9,938

9,783

9,914

Invenergy Thermal Operating I, LLC (8)
Power Generation
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - October 19, 2022)
3 month LIBOR
9,975

9,775

9,676

iPayment, Inc. (8) (12)
Provider of Merchant Acquisition
LIBOR Plus 5.25% (Floor 1.50%), Current Coupon 6.75%, Secured Debt (Maturity - May 8, 2017)
3 month LIBOR
15,115

14,954

14,532

iQor US Inc. (8)
Business Process Outsourcing Services Provider
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - April 1, 2021)
3 month LIBOR
7,837

7,320

6,295

IronGate Energy Services, LLC
Oil and Gas Services
11.00% Secured Bond (Maturity - July 1, 2018)
None
5,825

5,828

3,204

Jackmont Hospitality, Inc. (8) (11)
Franchisee of Casual Dining Restaurants
LIBOR Plus 4.25% (Floor 1.00%)/ 2.50% PIK , Current Coupon 7.75%, Secured Debt (Maturity Date - May 26, 2021)
1 month LIBOR
8,715

8,678

8,325

Joerns Healthcare, LLC (8)
Manufacturer and Distributor of Health Care Equipment & Supplies
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - May 9, 2020)
3 month LIBOR
4,412

4,392

4,381

JSS Holdings, Inc. (8)
Aircraft Maintenance Program Provider
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity Date - August 31, 2021)
3 month LIBOR
14,566

14,230

13,765

Kellermeyer Bergensons Services, LLC (8)
Outsourced Janitorial Services to Retail/Grocery Customers
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - April 29, 2022) (14)
3 month LIBOR
14,700

14,591

14,553

Kendra Scott, LLC (8)
Jewelry Retail Stores
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity Date - July 17, 2020)
3 month LIBOR
9,875

9,784

9,801

Keypoint Government Solutions, Inc. (8)
Provider of Pre-Employment Screening Services
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity - November 13, 2017)
3 month LIBOR
2,033

2,025

2,023

LaMi Products, LLC (8) (11)
General Merchandise Distribution
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - September 16, 2020)
3 month LIBOR
4,729

4,640

4,640

Larchmont Resources, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 8.75% (Floor 1.00%), Current Coupon 9.75%, Secured Debt (Maturity - August 7, 2019)
3 month LIBOR
13,268

11,918

9,420

Legendary Pictures Funding, LLC (8) (11)
Producer of TV, Film, and Comic Content
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - April 22, 2020)
3 month LIBOR
7,500

7,367

7,425

LJ Host Merger Sub, Inc. (8)
Managed Services and Hosting Provider
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity - December 13, 2019)
3 month LIBOR
5,122

5,109

5,071

MAH Merger Corporation (8)
Sports-Themed Casual Dining Chain
LIBOR Plus 4.50% (Floor 1.25%), Current Coupon 5.75%, Secured Debt (Maturity - July 19, 2019)
1 month LIBOR
1,373

1,373

1,370

MediMedia USA, Inc. (8)
Provider of Healthcare Media and Marketing
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity - November 20, 2018)
3 month LIBOR
11,904

11,826

11,369

Milk Specialties Company (8)
Processor of Nutrition Products
LIBOR Plus 7.00% (Floor 1.25%), Current Coupon 8.25%, Secured Debt (Maturity - November 9, 2018)
3 month LIBOR
4,669

4,630

4,673

Minute Key, Inc. (10) (13)
Operator of Automated Key Duplication Kiosk
10.00% Current / 2.00% PIK Secured Debt (Maturity Date - September 19, 2019) (14)
None
3,530

3,426

3,426

 
 
Warrants (359,352 equivalent shares, Expiration - May 20, 2025)
—
—

70

70

 
 
 
 
 
3,496

3,496

Mood Media Corporation (8) (9)
Provider of Electronic Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - May 1, 2019)
3 month LIBOR
14,975

14,953

14,282

New Media Holdings II LLC (8) (9)
Local Newspaper Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - June 4, 2020)
3 month LIBOR
14,856

14,696

14,726

North Atlantic Trading Company, Inc. (8)
Marketer/Distributor of Tobacco
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity -January 13, 2020)
3 month LIBOR
11,222

11,222

11,138

Novitex Acquisition, LLC (8)
Provider of Document Management Services
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity - July 7, 2020)
3 month LIBOR
11,632

11,387

10,963

Panolam Industries International, Inc. (8)
Decorative Laminate Manufacturer
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity - August 23, 2017)
1 month LIBOR
7,402

7,342

7,365

Paris Presents, Inc. (8)
Branded Cosmetic and Bath Accessories
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity - December 31, 2021) (14)
1 month LIBOR
7,500

7,364

7,350

Parq Holdings, LP (8) (9) (12)
Hotel and Casino Operator
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - December 17, 2020)
1 month LIBOR
12,500

12,354

12,000

Permian Holdings, Inc.
Storage Tank Manufacturer
10.50% Secured Bond (Maturity - January 15, 2018)
None
6,885

5,819

2,616

Pernix Therapeutics Holdings, Inc. (11)
Pharmaceutical Royalty - Anti-Migraine
12.00% Secured Bond (Maturity - August 1, 2020)
None
3,341

3,309

3,305

Pike Corporation (8) (12)
Construction and Maintenance Services for Electric Transmission and Distribution Infrastructure
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - June 22, 2022) (14)
3 month LIBOR
13,334

13,037

13,079

Polyconcept Financial B.V. (8)
Promotional Products to Corporations and Consumers
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity - June 28, 2019)
1 month LIBOR
5,312

5,303

5,279

Premier Dental Services, Inc. (8)
Dental Care Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - November 1, 2018)
3 month LIBOR
4,511

4,490

3,958

Prowler Acquisition Corporation (8)
Specialty Distributor to the Energy Sector
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity - January 28, 2020)
3 month LIBOR
7,248

6,541

6,161

Raley's, Inc. (8)
Family-Owned Supermarket Chain in California
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - May 18, 2022)
3 month LIBOR
5,094

4,998

5,069

RCHP, Inc. (8)
Region Non-Urban Hospital Owner/Operator
LIBOR Plus 10.25% (Floor 1.00%), Current Coupon 11.25%, Secured Debt (Maturity - October 23, 2019) (14)
2 month LIBOR
15,072

14,680

15,072

Renaissance Learning, Inc. (8)
Technology-based K-12 Learning Solutions
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - April 11, 2022) (14)
3 month LIBOR
12,950

12,493

12,238

RGL Reservoir Operations, Inc. (8) (9)
Oil & Gas Equipment & Services
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - August 13, 2021)
3 month LIBOR
3,950

3,850

1,534

RLJ Entertainment, Inc. (8) (11)
Movie and TV Programming Licensee and Distributor
LIBOR Plus 8.75% (Floor .25%), Current Coupon 9.08%, Secured Debt (Maturity - September 11, 2019)
3 month LIBOR
8,134

7,824

7,824

RM Bidder, LLC (11)
Acquisition Vehicle
Common Stock (1,854 shares)
—
—

31

30

 
 
Series A Warrants (124,915 equivalent shares, Expiration - October 20, 2025)
—
—

284

242

 
 
Series B Warrants (93,686 equivalent shares, Expiration - October 20, 2025)
—
—

—

—

 
 
 
 
 
315

272

Sage Automotive Interiors, Inc (8)
Automotive Textiles Manufacturer
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - October 8, 2021) (14)
3 month LIBOR
5,000

4,956

4,950

Salient Partners, LP (8)
Provider of Asset Management Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - June 9, 2021)
1 month LIBOR
7,388

7,250

7,240

Siteone Landscape Supply, LLC (8) (11)
Distributor of Landscaping Supplies
LIBOR Plus 4.00% (Floor 1.00%), Current Coupon 5.00%, Secured Debt (Maturity - December 23, 2019)
3 month LIBOR
6,383

6,149

6,224

Sorenson Communications, Inc.
Manufacturer of Communication Products for Hearing Impaired
9.00% Secured Bond (Maturity - October 31, 2020) (14)
None
11,710

11,226

11,007

Sotera Defense Solutions, Inc. (8)
Defense Industry Intelligence Services
LIBOR Plus 7.50% (Floor 1.50%), Current Coupon 9.00%, Secured Debt (Maturity - April 21, 2017)
3 month LIBOR
3,453

3,344

3,194

Stardust Finance Holdings, Inc. (8)
Manufacturer of Diversified Building Products
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - March 13, 2022)
3 month LIBOR
2,481

2,425

2,413

 
 
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity - March 13, 2023) (14)
3 month LIBOR
5,000

4,766

4,825

 
 
 
 
 
7,191

7,238

Synagro Infrastructure Company, Inc. (8)
Waste Management Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - August 22, 2020)
3 month LIBOR
2,704

2,683

2,366

Teleguam Holdings, LLC (8)
Cable and Telecom Services Provider
LIBOR Plus 7.50% (Floor 1.25%), Current Coupon 8.75%, Secured Debt (Maturity - June 10, 2019) (14)
1 month LIBOR
3,000

3,017

2,985

Templar Energy, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - November 25, 2020) (14)
3 month LIBOR
3,000

2,982

364

Tervita Corporation (8) (9)
Oil and Gas Environmental Services
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - May 15, 2018)
3 month LIBOR
1,009

1,015

785

The Topps Company, Inc. (8)
Trading Cards & Confectionary
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - October 2, 2018)
3 month LIBOR
980

974

962

TOMS Shoes, LLC (8)
Global Designer, Distributor, and Retailer of Casual Footwear
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - October 30, 2020)
3 month LIBOR
4,963

4,548

3,387

Travel Leaders Group, LLC (8)
Travel Agency Network Provider
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - December 7, 2020)
3 month LIBOR
14,306

14,226

14,163

USJ-IMECO Holding Company, LLC (8)
Marine Interior Design and Installation
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - April 16, 2020)
3 month LIBOR
7,867

7,848

7,789

Valley Healthcare Group, LLC (8) (10) (13)
Provider of Durable Medical Equipment
LIBOR Plus 12.50% (Floor .50%), Current Coupon 13.00%, Secured Debt (Maturity - December 29, 2020)
1 month LIBOR
2,600

2,548

2,548

Vantage Oncology, LLC
Outpatient Radiation Oncology Treatment Centers
9.50% Secured Bond (Maturity - June 15, 2017)
None
13,507

13,211

11,413

Vision Solutions, Inc. (8)
Provider of Information Availability Software
LIBOR Plus 4.50% (Floor 1.50%), Current Coupon 6.00%, Secured Debt (Maturity - July 23, 2016)
1 month LIBOR
1,296

1,297

1,257

 
 
LIBOR Plus 8.00% (Floor 1.50%), Current Coupon 9.50%, Secured Debt (Maturity - July 23, 2017) (14)
1 month LIBOR
875

871

831

 
 
 
 
 
2,168

2,088

Volusion, LLC (10)
Provider of Online Software-as-a-Service eCommerce Solutions
10.50% Secured Debt (Maturity Date - January 24, 2020)
None
7,500

6,866

6,866

 
 
Member Units (2,090,001 shares)
—
—

6,000

6,000

 
 
Warrants (407,408 equivalent shares, Expiration - January 26, 2025)
—
—

600

600

 
 
 
 
 
13,466

13,466

Worley Claims Services, LLC (8) (11)
Insurance Adjustment Management and Services Provider
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - October 31, 2020)
1 month LIBOR
6,435

6,382

6,210

YP Holdings LLC (8)
Online and Offline Advertising Operator
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity - June 4, 2018)
1 month LIBOR
12,347

12,336

11,977

 
 
 
 
 
 
 
Subtotal Non-Control/Non-Affiliate Investments (5) (95% of total portfolio investments at fair value)
 
 
$
866,499

$
812,205

 
 
 
 
 
 
 
Total Portfolio Investments
 
 
 
 
$
904,689

$
852,988

 
 
 
 
 
 
 
Short Term Investments (20)
 
 
 
 
 
 
Fidelity Institutional Money Market Funds
—
Prime Money Market Portfolio, Class II Shares (21)
—
$
13,363

$
13,363

$
13,363

US Bank Money Market Account (21)
—
—
—
7,009

7,009

7,009

 
 
 
 
 
 
 
Total Short Term Investments
 
 
 
 
$
20,372

$
20,372

(1) All investments are Middle Market portfolio investments, unless otherwise noted. All of the Company's assets are encumbered as security for the Company's credit agreements. See Note 4 - Borrowings.
(2) Debt investments are income producing, unless otherwise noted. Equity investments and warrants are non-income producing, unless otherwise noted.
(3) See Note 3 - Fair Value Hierarchy for Investments for summary geographic location of portfolio companies.
(4) Affiliate investments are defined by the 1940 Investment Company Act of 1940, as amended (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.
(5) Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments.
(6) 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.
(7) Principal is net of repayments. Cost represents amortized cost which is net of repayments and adjusted for the amortization of premiums and/or accretion of discounts, as applicable.
(8) Index based floating interest rate is subject to contractual minimum interest rates.
(9) 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. As of December 31, 2015, approximately 12.6% of the Company's investments were considered non-qualifying.
(10) Investment is classified as a Lower Middle Market investment.
(11) Investment is classified as a Private Loan portfolio investment.
(12) Investment or portion of investment is under contract to purchase and met trade date accounting criteria as of December 31, 2015. Settlement occurred or is scheduled to occur after December 31, 2015.
(13) Investment serviced by Main Street pursuant to servicing arrangements with the Company.
(14) Second lien secured debt investment.
(15) Investment is classified as an Other Portfolio investment.
(16) Income producing through dividends or distributions.
(17) Unsecured debt investment.
(18) Investment is on non-accrual status as of December 31, 2015.
(19) Maturity date is under on-going negotiations with the portfolio company and other lenders, if applicable.
(20) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less.
(21) Effective yield as of December 31, 2015 was approximately 0.01%.
(22) The 1, 2, 3, and 6 month LIBOR rates were 0.43%, 0.51%, 0.61% and 0.85%, respectively, as of December 31, 2015. The actual LIBOR rate for each loan listed may not be the applicable LIBOR rate as of December 31, 2015, as the loan may have been priced or repriced based on a LIBOR rate prior to or subsequent to December 31, 2015. The prime rate was 3.25% as of December 31, 2015.

See notes to the condensed consolidated financial statements.

6


HMS Income Fund, Inc.
Notes to the Condensed 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 BDC under 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 equity and equity related investments including warrants, convertible securities and other rights to acquire equity securities. The Company’s portfolio strategy calls for it to invest primarily in illiquid debt and equity securities issued by lower middle market ("LMM") companies, which generally have annual revenues between $10 million and $150 million, and middle market ("Middle Market") companies that are generally larger in size than the LMM companies. The Company categorizes some of its investments in LMM companies and Middle Market companies as private loan ("Private Loan") portfolio investments. Private Loan investments, often referred to in the debt markets as “club deals,” are investments, generally in debt instruments, that the Company originates on a collaborative basis with other investment funds. Private Loan investments are typically similar in size, structure, terms and conditions to investments the Company holds in its LMM portfolio and Middle Market portfolio. The Company’s portfolio also includes other portfolio ("Other Portfolio") investments which primarily consist of investments that are not consistent with the typical profiles for its LMM portfolio investments, Middle Market portfolio investments or Private Loan portfolio investments, including investments which may be managed by third parties.

The Company previously registered for sale up to 150,000,000 shares of common stock pursuant to a registration statement on Form N-2 (File No. 333-178548) which was initially declared effective by the Securities and Exchange Commission (the “SEC”) on June 4, 2012 (the “Initial Offering”). The Initial Offering terminated on December 1, 2015. The Company raised approximately $601.2 million under the Initial Offering, including proceeds from the dividend reinvestment plan of approximately $22.0 million. On January 5, 2016, the SEC declared a new registration statement on Form N-2 (File No. 333-204659), as amended, effective under which the Company registered for sale up to $1,500,000,000 worth of shares of common stock (the “Offering”). As of March 31, 2016, the Company had raised approximately $20.6 million in the Offering, including proceeds from the distribution reinvestment plan of approximately $5.8 million.

The Company's wholly owned subsidiaries, HMS Funding I LLC (“HMS Funding”) and HMS Equity Holding, LLC (“HMS Equity Holding”), were both organized as Delaware limited liability companies in 2014. HMS Funding was created pursuant to the Capital One Credit Facility (as defined below) in order to function as a "Structured Subsidiary," which is permitted to incur debt outside of the Capital One Credit Facility since it is not a guarantor under the Capital One Credit Facility. HMS Equity Holding, which has elected to be a taxable entity, primarily holds equity investments in portfolio companies which are “pass through” entities for tax purposes.

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”), under an Investment Advisory and Administrative Services Agreement dated May 31, 2012, as amended (the “Investment Advisory Agreement”). The Company and the Adviser have retained MSC Adviser I, LLC (the "Sub-Adviser"), a wholly owned subsidiary of Main Street Capital Corporation ("Main Street"), a New York Stock Exchange listed BDC, as the Company’s investment sub-adviser, 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. The Adviser and the Sub-Adviser are collectively referred to as the “Advisers,” and each is registered under the Investment Advisers Act of 1940, as amended. Upon the execution of the Sub-Advisory Agreement, Main Street became an affiliated person 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 unaudited condensed consolidated financial statements of the Company are prepared in accordance with the instructions to Form 10Q and accounting principles generally accepted in the United States of America (“GAAP”). The unaudited

7


condensed consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company’s results for the interim periods presented. The results of operations for interim periods are not indicative of results to be expected for the full year.

Amounts as of December 31, 2015 included in the unaudited condensed consolidated financial statements have been derived from the Company's audited consolidated financial statements as of that date. All intercompany balances and transactions have been eliminated. Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, these financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 11, 2016. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
 
Reclassifications

Certain amounts in the Condensed Consolidated Statements of Changes in Net Assets related to selling commissions, dealer manager fees and issuances under our dividend reinvestment plan have been disaggregated as of March 31, 2016. The prior period has been reclassified to conform to this presentation as of March 31, 2016.

Interest, Fee and Dividend Income
 
Interest and dividend 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. Dividend income is recorded when dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Accrued interest and dividend income is evaluated quarterly 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. Additionally, if a debt security has deferred interest payment terms and the Company becomes aware of a deterioration in credit quality, the Company will evaluate the collectability of the deferred interest payment. If it is determined that the deferred interest is unlikely to be collected, the Company will place the security on non-accrual status and cease recognizing interest income on that debt security until the borrower has demonstrated the ability and intent to pay the 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, 2016, the Company had three debt investments in two portfolio companies that were more than 90 days past due and had three debt investments in two portfolio companies that were on non-accrual status as of March 31, 2016. These portfolio companies experienced a significant decline in credit quality raising doubt regarding the Company's ability to collect the principal and interest contractually due. Given the credit deterioration of these portfolio companies, the Company has recognized no interest income on the three non-accrual debt investments during the three months ended March 31, 2016. Aside from these three investments on non-accrual status as of March 31, 2016, the Company is not aware of any material changes to the creditworthiness of the borrowers underlying its debt investments.

As of December 31, 2015, the Company had two debt investments in one portfolio company that were more than 90 days past due and had three debt investments in two portfolio companies that were on non-accrual status. These portfolio companies experienced a significant decline in credit quality raising doubt around the Company's ability to collect the principal and interest contractually due. Given the credit deterioration of these portfolio companies, the Company has recognized no interest income on two of the three non-accrual debt investments during the year ended December 31, 2015. For the other non-accrual debt investment, an allowance of $196,000 was booked for the interest income recognized during the three months ended December 31, 2015.

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, recorded as interest income and periodically added to the principal balance of the investment. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. The Company stops accruing PIK interest and writes off any accrued and uncollected interest in arrears when it determines that such PIK interest in arrears is no longer collectible.

8



As of March 31, 2016 and December 31, 2015, the Company held eight and seven investments, respectively, which contained a PIK provision. As of March 31, 2016, two of the eight investments with PIK provisions were on non-accrual status. No PIK interest was recorded on these two non-accrual investments during the three months ended March 31, 2016. As of December 31, 2015, two of the seven investments with PIK provisions were on non-accrual status. No PIK interest was recorded on these two non-accrual investments during the year ended December 31, 2015. For the three months ended March 31, 2016 and March 31, 2015, the Company capitalized $8,000 and $194,000, respectively, of PIK interest. The Company stops accruing PIK interest and writes off any accrued and uncollected interest in arrears when it determines that such PIK interest in arrears is no longer collectible.

The Company may periodically provide services, including structuring and advisory services, to its portfolio companies or other third parties. The income from such services is non-recurring. For services that are separately identifiable and evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment or other applicable transaction closes. Fees received in connection with debt financing transactions for services that do not meet these criteria are treated as debt origination fees and are deferred and accreted into interest income over the life of the financing.

A presentation of the investment income the Company received from its Investment Portfolio in each of the periods presented (dollars in thousands) is as follows:
 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
(Unaudited)
Interest, Fee and Dividend Income
 
 
 
     Interest Income
$
20,706

 
$
11,608

     Fee Income
275

 
46

     Dividend Income
278

 
139

Total Interest, Fee and Dividend Income
$
21,259

 
$
11,793


Offering Costs

In accordance with the Investment Advisory Agreement and the Sub-Advisory Agreement, the Company reimburses the Advisers for any offering costs that are paid on the Company's behalf, which consist of, among other costs, actual legal, accounting, bona fide out-of-pocket itemized and detailed due diligence costs, printing, filing fees, transfer agent costs, postage, escrow fees, advertising and sales literature and other offering costs. Pursuant to the terms of the Investment 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.

The Company has decided to change its accounting treatment of offering costs to more closely follow certain SEC interpretations. Prior to January 1, 2016, offering costs were capitalized as incurred by the Advisers and such costs, up to 1.5% of the gross proceeds, were recorded as a charge to additional paid in capital and a reduction of deferred offering costs. Effective January 1, 2016, offering costs are capitalized as deferred offering costs as incurred by the Company and subsequently amortized to expense over a 12-month period. Deferred offering costs related to an offering will be fully amortized to expense upon the expiration or earlier termination of an offering. The Company evaluated this change in accounting treatment of offering costs and determined that it did not have a material impact on the Company's consolidated financial position, results of operations or cash flows for periods prior to January 1, 2016.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements under ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that 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 an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date which defers the effective date of ASU 2014-09 by one year for all entities under GAAP. The new guidance will be effective for the annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. Early adoption would be

9


permitted for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact the adoption of this new accounting standard will have on the Company's consolidated financial statements and disclosures.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis which amends the consolidation requirements under ASC 810. This guidance amends the criteria for determining which entities are considered variable interest entities (“VIEs”) and amends the criteria for determining if a service provider possesses a variable interest in a VIE. ASU No. 2015-02 also eliminates the deferral under ASU 2010-10 for application of the VIE consolidation model that was granted for investments in certain investment companies. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The Company adopted this standard during the three months ended March 31, 2016. There was no impact on the Company's consolidated financial statements from the adoption of this new accounting standard.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs which amends the required presentation of debt issuance costs on the balance sheet. The guidance will require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the ASU No. 2015-03. For public business entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. In August 2015, the FASB issued ASU No. 2015-15, Interest—Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements which clarified ASU 2015-03. This guidance allows an entity to defer and present debt issuance costs for line-of-credit arrangements as an asset and subsequently amortize these deferred costs over the term of the line-of-credit arrangement. The Company adopted this standard during the three months ended March 31, 2016. There was no impact on the Company's consolidated financial statements from the adoption of this new accounting standard since the guidance allows the Company to continue to present its debt issuance costs for its line-of-credit arrangements as assets that are amortized over the term of the arrangements.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This ASU removes, from the fair value hierarchy, investments which measure fair value using net asset value ("NAV") per share practical expedient. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. For public companies, this ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendment should be applied retrospectively to all periods presented. The Company adopted this standard during the three months ended March 31, 2016. There was no impact on the Company's consolidated financial statements from the adoption of this new accounting standard as none of our investments are measured through the use of the practical expedient.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities which amends the guidance related to the classification and measurement of investments in equity securities. The guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The ASU will also amend the guidance related to the presentation of certain fair value changes for financial liabilities measured at fair value and certain disclosure requirements associated with the fair value of financial instruments. For public companies, this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its consolidated financial statements and disclosures.

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.

Note 3 — Fair Value Hierarchy for Investments

Fair Value Hierarchy
 
FASB's ASC Topic 820, Fair Value Measurement and Disclosures ("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.
 

10


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.

As of March 31, 2016 and December 31, 2015, the Company’s investment portfolio was comprised of debt securities, equity investments, and Other Portfolio investments. The fair value determination for these investments primarily consisted of unobservable (Level 3) inputs.

As of March 31, 2016 and December 31, 2015, all of the Company’s LMM portfolio investments consisted of illiquid securities issued by private companies. The fair value determination for the LMM portfolio investments primarily consisted of unobservable inputs. As a result, all of the Company’s LMM portfolio investments were categorized as Level 3 as of March 31, 2016 and December 31, 2015.

As of March 31, 2016 and December 31, 2015, the Company's Middle Market portfolio investments consisted primarily of Middle Market investments in secured and unsecured debt investments and independently rated debt investments. The fair value determination for these investments consisted of a combination of (1) observable inputs in non-active markets for which sufficient observable inputs were available to determine the fair value of these investments, (2) observable inputs in the non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and (3) unobservable inputs. As a result, all of the Company's Middle Market portfolio investments were categorized as Level 3 as of March 31, 2016 and December 31, 2015.

As of March 31, 2016 and December 31, 2015, the Company’s Private Loan portfolio investments consisted primarily of debt investments. The fair value determination for Private Loan investments consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. As a result, all of the Company’s Private Loan portfolio investments were categorized as Level 3 as of March 31, 2016 and December 31, 2015.

As of March 31, 2016 and December 31, 2015, the Company’s Other Portfolio investments consisted of illiquid securities issued by private companies. The fair value determination for these investments primarily consisted of unobservable inputs. As a result, all of the Company’s Other Portfolio equity investments were categorized as Level 3 as of March 31, 2016 and December 31, 2015.

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;

11


•
Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio, and net debt/earnings before interest, tax, depreciation and amortization ("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;
•
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 the Company’s investments, by major class, as of March 31, 2016 according to the fair value hierarchy (dollars in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
First lien secured debt investments
$
—

 
$
—

 
$
672,812

 
$
672,812

Second lien secured debt investments
—

 
—

 
138,834

 
138,834

Unsecured debt investments
—

 
—

 
533

 
533

Equity investments
—

 
—

 
45,653

 
45,653

Total
$
—

 
$
—

 
$
857,832

 
$
857,832


The following table presents fair value measurements of the Company’s investments, by major class, as of December 31, 2015 according to the fair value hierarchy (dollars in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
First lien secured debt investments
$
—

 
$
—

 
$
676,437

 
$
676,437

Second lien secured debt investments
—

 
—

 
140,459

 
140,459

Unsecured debt investments
—

 
—

 
870

 
870

Equity investments
—

 
—

 
35,222

 
35,222

Total
$
—

 
$
—

 
$
852,988

 
$
852,988


The following table presents fair value measurements of the Company’s investments, by investment classification, segregated by the level within the fair value hierarchy as of March 31, 2016 (dollars in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
LMM portfolio investments
$
—

 
$
—

 
$
93,508

 
$
93,508

Private Loan investments
—

 
—

 
119,458

 
119,458

Middle Market investments
—

 
—

 
627,834

 
627,834

Other Portfolio investments
—

 
—

 
17,032

 
17,032

Total
$
—

 
$
—

 
$
857,832

 
$
857,832



12


The following table presents fair value measurements of the Company’s investments, by investment classification, segregated by the level within the fair value hierarchy as of December 31, 2015 (dollars in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
LMM portfolio investments
$
—

 
$
—

 
$
85,460

 
$
85,460

Private Loan investments
—

 
—

 
111,088

 
111,088

Middle Market investments
—

 
—

 
645,913

 
645,913

Other Portfolio investments
—

 
—

 
10,527

 
10,527

Total
$
—

 
$
—

 
$
852,988

 
$
852,988


The significant unobservable inputs used in the fair value measurement of the Company’s LMM equity securities and Private Loan equity securities, which are generally valued through an average of the discounted cash flow technique and the market comparable/enterprise value technique (unless one of these approaches is not applicable), are (i) EBITDA multiples and (ii) the weighted average cost of capital (“WACC”). Significant increases (decreases) in EBITDA multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Conversely, significant increases (decreases) in WACC inputs in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement of the Company’s LMM, Middle Market and Private Loan debt investments are (i) risk adjusted discount rates used in the yield-to-maturity valuation technique (described in Note 2-Basis of Presentation and Summary of Significant Accounting Policies-Valuation of Portfolio Investments in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 11, 2016) and (ii) the percentage of expected principal recovery. Significant increases (decreases) in any of these discount rates in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in any of these expected principal recovery percentages in isolation would result in a significantly higher (lower) fair value measurement. However, due to the nature of certain investments, fair value measurements may be based on other criteria, such as third-party appraisals of collateral and fair values as determined by independent third parties, which are not presented in the table below.

The following table, which is not intended to be all inclusive, presents the significant unobservable inputs of the Company’s Level 3 investments as of March 31, 2016 (dollars in thousands):
 
Fair Value
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
 
Weighted
Average (2)
LMM equity investments
$
27,663

 
Discounted Cash Flows
 
WACC
 
10.4% - 16.2%
 
13.2%
 
 
 
Market Approach/Enterprise Value
 
EBITDA Multiples  (1)
 
5.0x - 18.8x
 
9.5x
 
 
 
 
 
NAV Multiple
 
0.8x - 2.0x
 
1.6x
LMM debt investments
$
65,845

 
Discounted Cash Flows
 
Expected Principal Recovery
 
100.0%
 
100.0%
 
 

 
 
 
Risk Adjusted Discount Factor
 
8.5% - 16.5%
 
10.2%
Private Loan debt investments
$
52,664

 
Market Approach
 
Third Party Quotes
 
93.0% - 98.5%
 
96.6%
Private Loan debt investments
$
65,836

 
Discounted Cash Flows
 
Expected Principal Recovery
 
12.2% - 100.0%
 
99.2%
 
 
 
 
 
Risk Adjusted Discount Factor
 
8.5% - 16.5%
 
10.2%
Private Loan equity investments
$
958

 
Market Approach/Enterprise Value
 
EBITDA Multiples  (1)
 
4.5x - 9.9x
 
6.2x
 
 
 
 
 
Revenue Multiples (1)
 
3.1x
 
3.1x
 
 
 
 
 
WACC
 
12.8% - 12.9%
 
12.8%
Middle Market debt investments
$
627,834

 
Market Approach
 
Third Party Quotes
 
11.3% - 101.0%
 
92.1%
Other Portfolio investments
$
17,032

 
Market Approach
 
NAV
 
97.7% - 100.0%
 
99.5%
 
$
857,832

 
 
 
 
 
 
 
 
(1) EBITDA may include pro forma adjustments and/or other add-backs based on specific circumstances related to each investment.
(2) Weighted average excludes investments for which the significant unobservable input was not utilized in the fair value determination.


13


The following table, which is not intended to be all inclusive, presents the significant unobservable inputs of the Company’s Level 3 investments as of December 31, 2015 (dollars in thousands):
 
Fair Value
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
 
Weighted
Average (2)
LMM equity investments
$
24,165

 
Discounted Cash Flows
 
WACC
 
11.9% - 16.3%
 
13.9%
 
 
 
Market Approach/Enterprise Value
 
EBITDA Multiples (1)
 
5.0x - 18.8x
 
10.8x
 
 
 
 
 
NAV Multiple
 
2.0x
 
2.0x
LMM debt investments
$
61,295

 
Discounted Cash Flows
 
Expected Principal Recovery
 
100.0%
 
100.0%
 
 

 
 
 
Risk Adjusted Discount Factor
 
10.3% - 14.5%
 
12.7%
Private Loan debt investments
$
60,173

 
Market Approach
 
Third Party Quotes
 
96.5% - 99.0%
 
97.7%
Private Loan debt investments
$
50,385

 
Discounted Cash Flows
 
Expected Principal Recovery
 
16.6% - 100.0%
 
98.1%
 
 
 
 
 
Risk Adjusted Discount Factor
 
9.1% - 15.4%
 
10.5%
Private Loan equity investments
$
530

 
Market Approach/Enterprise Value
 
EBITDA Multiples (1)
 
4.5x - 10.8x
 
9.1x
 
 
 
 
 
Revenue Multiples (1)
 
3.1x
 
3.1x
 
 
 
 
 
WACC
 
12.5%
 
12.5%
Middle Market debt investments
$
645,913

 
Market Approach
 
Third Party Quotes
 
12.1% - 100.1%
 
91.5%
Other Portfolio investments
$
10,527

 
Market Approach
 
NAV
 
98.9%
 
98.9%
 
$
852,988

 
 
 
 
 
 
 
 
(1) EBITDA may include pro forma adjustments and/or other add-backs based on specific circumstances related to each investment.
(2) Weighted average excludes investments for which the significant unobservable input was not utilized in the fair value determination.

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, 2016 (dollars in thousands):
Type of Investment
January 1, 2016 Fair Value
 
Transfers Into Level 3 Hierarchy
 
PIK 
Interest
Accrual
 
New Investments (1)
 
Sales/ Repayments
 
Net Unrealized
Appreciation
(Depreciation)
 
Net Realized Gain (Loss)
 
March 31, 2016 Fair Value
LMM Equity
$
24,165

 
$
—

 
$
(72
)
 
$
613

 
$
—

 
$
2,957

 
$
—

 
$
27,663

LMM Debt
61,295

 
—

 
16

 
5,356

 
(1,218
)
 
396

 
—

 
65,845

Private Loan Equity
530

 
—

 
—

 
502

 
—

 
(74
)
 
—

 
958

Private Loan Debt
110,558

 
—

 
56

 
16,129

 
(7,516
)
 
(567
)
 
(160
)
 
118,500

Middle Market
645,913

 
—

 
8

 
48,136

 
(48,794
)
 
(16,943
)
 
(486
)
 
627,834

Other Portfolio
10,527

 
—

 
—

 
6,537

 
—

 
(32
)
 
—

 
17,032

Total
$
852,988

 
$
—

 
$
8

 
$
77,273

 
$
(57,528
)
 
$
(14,263
)
 
$
(646
)
 
$
857,832

(1) Column includes changes to investments due to the net accretion of discounts/premiums and amortization of fees.

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, 2015 (dollars in thousands):
Type of Investment
January 1, 2015 Fair Value
 
Transfers Into Level 3 Hierarchy
 
PIK 
Interest
Accrual
 
New Investments (1)
 
Sales/ Repayments
 
Net Unrealized
Appreciation
(Depreciation)
 
Net Realized Gain (Loss)
 
March 31, 2015 Fair Value
LMM Equity
$
9,808

 
$
—

 
$
—

 
$
6,600

 
$
—

 
$
860

 
$
—

 
$
17,268

LMM Debt
23,808

 
—

 
6

 
8,221

 
(240
)
 
67

 
(30
)
 
31,832

Private Loan Equity
—

 
—

 
—

 
100

 
—

 
—

 
—

 
100

Private Loan Debt
47,655

 
—

 
188

 
10,943

 
(126
)
 
(65
)
 
—

 
58,595

Middle Market
391,016

 
—

 
—

 
180,203

 
(23,751
)
 
2,978

 
50

 
550,496

Other Portfolio
1,575

 
—

 
—

 
—

 
—

 
—

 
—

 
1,575

Total
$
473,862

 
$
—

 
$
194

 
$
206,067

 
$
(24,117
)
 
$
3,840

 
$
20

 
$
659,866

(1) Column includes changes to investments due to the net accretion of discounts/premiums and amortization of fees.


14


For the three months ended March 31, 2016 and 2015, there were no transfers between Level 2 and Level 3 portfolio investments.

Portfolio Investment Composition

The composition of the Company’s investments as of March 31, 2016, at cost and fair value, was as follows (dollars in thousands):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
First lien secured debt investments
$
729,455

 
79.0
%
 
$
672,812

 
78.4
%
Second lien secured debt investments
150,901

 
16.3

 
138,834

 
16.2

Unsecured debt investments
2,645

 
0.3

 
533

 
0.1

Equity investments
38,623

 
4.2

 
43,576

 
5.1

Equity warrants
2,169

 
0.2

 
2,077

 
0.2

Total
$
923,793

 
100.0
%
 
$
857,832

 
100.0
%
 
The composition of the Company’s investments as of December 31, 2015, at cost and fair value, was as follows (dollars in thousands):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
First lien secured debt investments
$
719,941

 
79.6
%
 
$
676,437

 
79.3
%
Second lien secured debt investments
148,906

 
16.5

 
140,459

 
16.5

Unsecured debt investments
2,630

 
0.3

 
870

 
0.1

Equity investments
32,025

 
3.5

 
34,020

 
4.0

Equity warrants
1,187

 
0.1

 
1,202

 
0.1

Total
$
904,689

 
100.0
%
 
$
852,988

 
100.0
%

The composition of the Company’s investments by geographic region as of March 31, 2016, at cost and fair value, was as follows (dollars in thousands) (since the Other Portfolio investments do not represent a single geographic region, this information excludes Other Portfolio investments):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
Northeast
$
183,087

 
20.2
%
 
$
174,206

 
20.7
%
Southeast
188,433

 
20.8

 
191,453

 
22.8

West
137,189

 
15.1

 
121,952

 
14.5

Southwest
161,980

 
17.9

 
126,919

 
15.1

Midwest
178,477

 
19.7

 
172,761

 
20.5

Non-United States
57,433

 
6.3

 
53,514

 
6.4

Total
$
906,599

 
100.0
%
 
$
840,805

 
100.0
%
 
The composition of the Company’s investments by geographic region as of December 31, 2015, at cost and fair value, was as follows (dollars in thousands) (since the Other Portfolio investments do not represent a single geographic region, this information excludes Other Portfolio investments):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
Northeast
$
178,900


20.0
%

$
171,284


20.3
%
Southeast
188,237


21.1


188,401


22.4

West
140,576


15.7


127,353


15.1

Southwest
159,579


17.8


135,473


16.1

Midwest
168,769


18.9


165,113


19.6

Non-United States
57,971


6.5


54,837


6.5

Total
$
894,032


100.0
%

$
842,461


100.0
%

15


The composition of the Company’s total investments by industry as of March 31, 2016 and December 31, 2015, at cost and fair value was as follows (since the Other Portfolio investments do not represent a single industry, this information excludes Other Portfolio investments):

 
Cost
 
Fair Value

March 31, 2016
 
December 31, 2015
 
March 31, 2016
 
December 31, 2015
Hotels, Restaurants, and Leisure
10.4
%
 
10.7
%
 
11.1
%
 
11.2
%
Media
7.9

 
7.8

 
8.0

 
7.9

Internet Software and Services
5.4

 
4.2

 
5.8

 
4.4

IT Services
5.4

 
5.4

 
5.5

 
5.5

Commercial Services and Supplies
5.3

 
5.4

 
5.4

 
5.5

Oil, Gas, and Consumable Fuels
4.9

 
4.9

 
2.4

 
3.1

Specialty Retail
4.2

 
4.1

 
3.7

 
3.7

Auto Components
4.0

 
3.9

 
4.2

 
3.9

Health Care Providers and Services
4.0

 
4.7

 
4.3

 
4.7

Diversified Consumer Services
4.0

 
4.7

 
3.6

 
4.5

Energy Equipment and Services
3.5

 
3.4

 
2.3

 
2.8

Food Products
3.4

 
3.1

 
3.5

 
3.2

Construction and Engineering
3.2

 
3.0

 
3.4

 
3.1

Diversified Telecommunication Services
3.1

 
3.1

 
3.2

 
3.3

Software
3.1

 
2.4

 
3.3

 
2.6

Electronic Equipment, Instruments & Components
2.7

 
2.8

 
2.8

 
2.8

Leisure Equipment and Products
2.3

 
2.1

 
2.4

 
2.2

Health Care Equipment and Supplies
2.1

 
2.1

 
2.4

 
2.2

Pharmaceuticals
2.1

 
2.1

 
2.2

 
2.3

Diversified Financial Services
1.9

 
1.7

 
2.0

 
1.7

Internet and Catalog Retail
1.6

 
1.6

 
1.5

 
1.6

Machinery
1.5

 
1.6

 
2.0

 
1.8

Aerospace and Defense
1.5

 
1.5

 
1.4

 
1.6

Tobacco
1.2

 
1.3

 
1.3

 
1.3

Distributors
1.2

 
1.2

 
1.3

 
1.3

Textiles, Apparel & Luxury Goods
1.1

 
1.1

 
1.0

 
1.0

Professional Services
1.0

 
1.0

 
1.1

 
1.0

Marine
0.9

 
0.9

 
0.9

 
0.9

Personal Products
0.8

 
0.8

 
0.9

 
0.9

Metals and Mining
0.8

 
0.8

 
0.9

 
0.9

Capital Markets
0.8

 
0.8

 
0.9

 
0.9

Building Products
0.8

 
0.8

 
0.9

 
0.9

Consumer Finance
0.7

 
0.4

 
0.8

 
0.4

Insurance
0.7

 
0.7

 
0.7

 
0.7

Food & Staples Retailing
0.5

 
0.6

 
0.6

 
0.6

Automobiles
0.5

 
0.6

 
0.6

 
0.6

Communications Equipment
0.5

 
0.6

 
0.6

 
0.6

Air Freight & Logistics
0.3

 
0.3

 
0.4

 
0.5

Chemicals
0.3

 
0.3

 
0.3

 
0.3

Containers and Packaging
0.2

 
0.2

 
0.2

 
0.2

Airlines
0.2

 
0.2

 
0.2

 
0.2

Utilities
—

 
1.1

 
—

 
1.2

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 

16


Note 4 — Borrowings
 
On March 11, 2014, the Company entered into a senior secured revolving credit agreement (the "Capital One Credit Facility") with Capital One, National Association (“Capital One”), as administrative agent, and with Capital One and other financial institutions as lenders. The Capital One Credit Facility, as amended, provides a borrowing capacity of $125.0 million, with an accordion provision allowing borrowing capacity to increase to $150 million. As of March 31, 2016, the Company had borrowings of $65.0 million outstanding and $60.0 million available on the Capital One Credit Facility. The Company estimated that the outstanding borrowings approximated fair value. As of March 31, 2016, the Company was not aware of any instances of noncompliance with covenants related to the Capital One Credit Facility.

On May 18, 2015, HMS Funding entered into an amended and restated credit agreement (the “Deutsche Bank Credit Facility”) among HMS Funding, the Company, as equityholder and servicer, Deutsche Bank AG, New York Branch (“Deutsche Bank”), as administrative agent, the financial institutions party thereto as lenders (together with Deutsche Bank, the “HMS Funding Lenders”), and U.S. Bank National Association, as collateral agent and collateral custodian. The Deutsche Bank Credit Facility, as amended, provides a borrowing capacity of $385.0 million. As of March 31, 2016, the Company had borrowings of $330.0 million outstanding and $55.0 million available on the Deutsche Bank Credit Facility. The Company estimated that the outstanding borrowings approximated fair value. As of March 31, 2016, the Company was not aware of any instances of noncompliance with covenants related to the Deutsche Bank Credit Facility.

Note 5 – Financial Highlights
 
The following is a schedule of financial highlights of the Company for the three months ended March 31, 2016 and March 31, 2015.
Per Share Data:
Three Months Ended 
 March 31, 2016
 
Three Months Ended 
 March 31, 2015
NAV at beginning of period
$
7.88

 
$
8.40

Results from Operations
 
 
 
Net investment income (1) (2)
0.19

 
0.17

Net realized appreciation (depreciation) (1) (2)
(0.01
)
 
0.01

Net unrealized appreciation (depreciation) (1) (2)
(0.22
)
 
0.10

Net increase (decrease) in net assets resulting from operations
(0.04
)
 
0.28

Stockholder distributions (1) (3)
 
 
 
Distributions from net investment income (1) (2)
(0.17
)
 
(0.17
)
Distributions from realized appreciation (1) (2)
—

 
—

Net decrease in net assets resulting from stockholder distributions
(0.17
)
 
(0.17
)
Capital share transactions
 
 
 
Issuance of common stock above (below) NAV (4), net of offering costs (1)
—

 
0.06

Net increase (decrease) in net assets resulting from capital share transactions
—

 
0.06

Other (5)
—

 
—

NAV at end of the period
$
7.67

 
$
8.57

Shares outstanding at end of period
64,661,916

 
41,153,325

Weighted average shares outstanding
63,230,882

 
36,265,941

(1)
Based on weighted average number of shares of common stock outstanding for the period.
(2)
Changes in net realized income and net unrealized appreciation (depreciation) 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 NAV per share due to the sale of shares at the then prevailing public offering price in excess of NAV 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 NAV per share on each share transaction date, divided by (ii) the weighted average shares of common stock outstanding for the period.
(5)
Includes the impact of the different share amounts as a result of calculating certain per share data based on the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.


17


 
Three Months Ended 
 March 31, 2016
 
Three Months Ended 
 March 31, 2015
 
(dollars in thousands)
NAV at end of period
$
495,673

 
$
352,480

Average net assets
$
493,663

 
$
306,272

Average Credit Facilities borrowings
$
387,500

 
$
223,432

 
 
 
 
Ratios to average net assets:
 
 
 
Ratio of total expenses to average net assets (1)
1.83
 %
 
1.78
%
Ratio of total expenses, excluding interest expense, to average net assets (1)
1.08
 %
 
1.14
%
Ratio of net investment income to average net assets
2.48
 %
 
2.07
%
 
 
 
 
Portfolio turnover ratio
6.73
 %
 
4.25
%
 
 
 
 
Total return (2)
(0.52
)%
 
4.05
%
(1)
For the three months ended March 31, 2016 and the three months ended March 31, 2015, the Advisers waived base management fees of $0 and $0, respectively, subordinated incentive fees of approximately $493,000 and $358,000, respectively, and administrative services expenses of approximately $533,000 and $437,000, respectively. The ratio is calculated by reducing the expenses to reflect the waiver of expenses and reimbursement of administrative services in both periods presented. See Note 9-Related Party Transactions and Arrangements for further discussion of fee waivers provided by the Advisers.
(2)
Total return is calculated on the change in NAV per share and stockholder distributions declared per share over the reporting period.

Note 6 – Stockholder Distributions

The following table reflects the cash distributions per share that the Company declared on its common stock during the three months ended March 31, 2016 and March 31, 2015 (dollars in thousands except per share amounts).
 
Distributions
 
Per Share
 
Amount
2016
 
 
 
Three months ended March 31, 2016
$
0.17

 
$
11,037

2015
 
 
 
Three months ended March 31, 2015
$
0.17

 
$
6,260


On March 23, 2016, with the authorization of the Company’s board of directors, the Company declared distributions to its stockholders for the period of April 2016 through June 2016. These distributions have been, or will be, calculated based on stockholders of record each day from April 1, 2016 through June 30, 2016 in an amount equal to $0.00191781 per share, per day. Distributions are paid on the first business day following the completion of each month to which they relate.

The Company has adopted an “opt in” distribution reinvestment plan for its stockholders. As a result, if the Company makes a distribution, its stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Company’s common stock.

The following table reflects the sources of the cash distributions that the Company declared and, in some instances, paid on its common stock during the three months ended March 31, 2016 and March 31, 2015.
 
Three Months Ended 
 March 31, 2016
 
Three Months Ended 
 March 31, 2015
 
(dollars in thousands)
Source of Distribution
Distribution
Amount
 
Percentage
 
Distribution
Amount
 
Percentage
Net realized income from operations (before waiver of incentive fees)
$
11,037

 
100
%
 
$
5,989

 
96
%
Waiver of base management and incentive fees
—

 
—
%
 
271

 
4
%
Total
$
11,037

 
100
%
 
$
6,260

 
100
%

The Company may fund its cash distributions from all sources of funds legally available, including stock offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to it on account of preferred and common equity investments in portfolio companies, and fee and expense waivers from the Advisers. The Company has not established limits on the amount of funds that the Company may use from legally available sources to make distributions. The Company expects that for the foreseeable

18


future, a portion of the distributions may be paid from sources other than net realized income from operations, which may include stock offering proceeds, borrowings, and fee and expense waivers from the Advisers. See Note 9 - Related Party Transactions and Arrangements - Advisory Agreements and Conditional Fee Waiver.

The Company’s distributions may exceed its earnings and, as a result, a portion of the distributions it makes may represent a return of capital for U.S. federal income tax purposes. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of directors. 

Note 7 – Taxable Income

The Company has elected to be treated for U.S. federal income tax purposes as a RIC. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on net ordinary income or capital gains that the Company timely distributes to its stockholders each taxable year from taxable earnings and profits. To qualify as a RIC in any taxable year, the Company must, among other things, satisfy certain source-of-income and asset diversification requirements. In addition, the Company must distribute an amount in each taxable year generally at least equal to 90% of its investment company taxable income, determined without regard to any deduction for dividends paid, in order to maintain its ability to be subject to taxation as a RIC (the "Annual Distribution Requirement"). As a part of maintaining its RIC status, undistributed taxable income (subject to a 4% excise tax) pertaining to a given taxable year may be distributed up to 12 months subsequent to the end of that taxable year, provided such distributions are declared prior to the earlier of (1) eight-and-one-half months after the close of that taxable year or (2) the filing of the federal income tax return for such prior taxable year. In order to avoid excise tax, the Company needs to distribute, in respect of each calendar year an amount at least equal to the sum of (1) 98.0% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of its capital gain in excess of capital loss, or capital gain net income, (adjusted for certain ordinary losses) for the one-year period ending October 31 in that calendar year (or, if the Company so elects for that calendar year) and (3) any net ordinary income and capital gain net income for preceding years that was not distributed with respect to such years and on which the Company paid no U.S. federal income tax (the "Excise Tax Avoidance Requirement"). For the taxable year ended December 31, 2014, approximately $59,000, or $0.0019 per share of the Company's taxable income was distributed in 2015, prior to the filing of its federal income tax return for the 2014 taxable year, and no portion of this amount was subject to the 4% nondeductible excise tax. For the taxable year ended December 31, 2015, the Company estimated approximately $3.8 million, or $0.0615 per share, of its taxable income will be distributed in 2016, prior to the filing of its federal income tax return for the 2015 taxable year. As a result, the Company anticipates that it will be subject to a $108,000 nondeductible excise tax for the 2015 taxable year.

Listed below is a reconciliation of "Net increase (decrease) in net assets resulting from operations" to taxable income and to total distributions declared to common stockholders for the three months ended March 31, 2016 and 2015 (dollars in thousands).
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
Net increase (decrease) in net assets resulting from operations
$
(2,669
)
 
$
10,187

Net change in unrealized (appreciation) depreciation
14,263

 
(3,840
)
Income tax (benefit) provision
23

 
6

Pre-tax book (income) loss not consolidated for tax purposes
89

 
10

Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates
14

 
(136
)
Estimated taxable income (1)
11,720

 
6,227

 
 
 
 
Taxable income earned in prior year and carried forward for distribution in current year
3,839

 
143

 
 
 
 
Taxable income earned prior to period end and carried forward for distribution next period
(8,327
)
 
(2,463
)
Dividend accrued as of period end and paid-in the following period
3,805

 
2,353

Taxable income earned to be carried forward
(4,522
)
 
(110
)
 
 
 
 
Total distributions accrued or paid to common stockholders
$
11,037

 
$
6,260

(1)
The Company's taxable income for each period is an estimate and will not be finally determined until the Company files its tax return for each year. Therefore, the final taxable income, and the taxable income earned in each period and carried forward for distribution in the following period, may be different than this estimate.

The income tax expense, or benefit, and the related tax assets and liabilities generated by HMS Equity Holding, if any, are reflected in the Company’s Condensed Consolidated Statement of Operations. For the three months ended March 31, 2016 and 2015, the

19


Company recognized a net income tax (benefit) provision of $(23,000) and $6,000, respectively, related to deferred taxes of $4.4 million and $3,000 respectively, and other taxes of $(23,000) and $3,000, respectively, offset by a valuation allowance of $(4.4) million and $0, respectively. For the three months ended March 31, 2016 and 2015, the other taxes included $(23,000) and $3,000, respectively, related to accruals for state and other taxes.

The net deferred tax asset at March 31, 2016 and December 31, 2015 was $0 and $0, respectively, of which $157,000 and $4.8 million, respectively, related to current year net loss on portfolio investments held by HMS Equity Holding and $2.9 million and $187,000, respectively, related to net loss carryforwards from historical realized losses on portfolio investments held by HMS Equity Holding offset by $640,000 and $599,000, respectively, related to basis differences of portfolio investments held by HMS Equity Holding which are “pass through” entities for tax purposes and $4.4 million and $4.4 million, respectively, related to a valuation allowance. Based on HMS Equity Holding's short operating history, management believes it is more likely than not that there will be inadequate profits in HMS Equity Holding against which the deferred tax assets can be offset. Accordingly, the Company recorded a Valuation Allowance against such deferred tax asset.

The following table sets forth the significant components of net deferred tax assets and liabilities as of March 31, 2016 and December 31, 2015 (amounts in thousands):
 
 
March 31, 2016
 
December 31, 2015
Deferred tax assets:
 
 
 
 
Net operating loss carryforwards
 
$
3,026

 
$
2,869

Net basis differences in portfolio investments
 
—

 
—

Net unrealized depreciation of portfolio investments
 
2,049

 
2,143

    Total deferred tax assets
 
5,075

 
5,012

Deferred tax liabilities:
 
 
 
 
Net basis differences in portfolio investments
 
(640
)
 
(599
)
Net unrealized appreciation of portfolio investments
 
—

 
—

Other
 
—

 
—

    Total deferred tax liabilities
 
(640
)
 
(599
)
Valuation allowance
 
(4,435
)
 
(4,413
)
    Total net deferred tax assets (liabilities)
 
$
—

 
$
—


For federal income tax purposes, the net loss carryforwards expire in various taxable years from 2034 through 2036. The timing and manner in which HMS Equity Holding expects to utilize any net loss carryforwards in such taxable years, or in total, may be limited in the future under the provisions of the Code.

The determination of the tax attributes of the Company’s distributions is made annually at the end of the Company’s taxable year based upon the Company’s taxable income for the full taxable year and distributions paid for the full taxable year. Therefore, a determination made on an interim basis may not be representative of the actual tax attributes of distributions for a full year. The actual tax characteristics of distributions to stockholders will be reported to stockholders subject to information reporting shortly after the close of each calendar year on Form 1099-DIV.

Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal tax regulations, which may differ from amounts determined in accordance with GAAP and those differences could be material. These book-to-tax differences, such as the non-deductible excise tax, have no impact on net assets.

Note 8 – Supplemental Cash Flow Disclosures
 
Listed below are the supplemental cash flow disclosures for the three months ended March 31, 2016 and March 31, 2015 (dollars in thousands):
Supplemental Disclosure of Cash Flow Information
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
Cash paid for interest
 
$
3,231

 
$
1,749

Cash paid for income taxes
 
$
182

 
$
9

 
 
 
 
 
Supplemental Disclosure of Non-Cash Flow Information
 
 

 
 

Stockholder distributions declared and unpaid
 
$
3,805

 
$
2,353

Stockholder distributions reinvested
 
$
5,794

 
$
2,884

Change in unpaid deferred offering costs
 
$
1,100

 
$
921


20


Supplemental Disclosure of Cash Flow Information
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
Unpaid deferred financing costs
 
$
73

 
$
—

Unpaid sales commissions and dealer manager fee
 
$
247

 
$
—


Note 9 — Related Party Transactions and Arrangements
 
Advisory Agreements and Conditional Fee Waiver
 
The Company and the Adviser have entered into two expense support and conditional reimbursement agreements (as amended from time to time, the “2013 and 2014 Expense Reimbursement Agreements”), pursuant to which the Adviser could pay the Company up to 100% of its operating expenses through December 31, 2015 (the “Expense Support Payment”) in order to achieve a reasonable level of expenses relative to its investment income (the “Operating Expense Objective”). The Company's board of directors, in its sole discretion, may approve the repayment of unreimbursed Expense Support Payments (a “Reimbursement Payment”) upon a determination by the board of directors that the Company has achieved the Operating Expense Objective in any quarter following receipt by the Company of an Expense Support Payment. The Company may reimburse any unreimbursed Expense Support Payments within three years from the date each respective Expense Support Payment was determined. Any Expense Support Payments that remain unreimbursed three years after such payment will be permanently waived.

The Company and the Advisers have entered into a conditional fee waiver agreement (as amended from time to time, the “Conditional Fee Waiver Agreement”), pursuant to which the Advisers could waive certain fees through December 31, 2015 upon the occurrence of any event that, in the Advisers’ sole discretion, causes such waivers to be deemed necessary. The previously waived fees are potentially subject to repayment by the Company, if at all, within a period not to exceed three years from the date of each respective fee waiver.

The Company and the Advisers have entered into a conditional income incentive fee waiver agreement (the “2016 Conditional Income Incentive Fee Waiver Agreement”), pursuant to which, for a period from January 1, 2016 through June 30, 2016, the Advisers could waive the “subordinated incentive fee on income,” as such term is defined in the Investment Advisory Agreement, upon the occurrence of any event that, in the Advisers’ sole discretion, causes such waiver to be deemed necessary. The 2016 Conditional Income Incentive Fee Waiver Agreement may require the Company to repay the Advisers for previously waived reimbursement of Expense Support Payments or waived base management fees or incentive fees under certain circumstances. The previously waived fees are potentially subject to repayment by the Company, if at all, within a period not to exceed three years from the date of each respective fee waiver. Thus, in any quarter where a surplus exists, that surplus will be available, subject to approval of the board of directors, to reimburse waived fees and Expense Support Payments as follows:

1.
First, to reimburse Expense Support Payments, beginning with the earliest year eligible for reimbursement; and
2.
Second, to reimburse all waived fees, beginning with the earliest year eligible for reimbursement.

Reimbursement of previously waived fees will only be permitted with the approval of the board of directors and if the operating expense ratio is equal to or less than the operating expense ratio at the time the corresponding fees were waived and if the annualized rate of regular cash distributions to stockholders is equal to or greater than the annualized rate of the regular cash distributions at the time the corresponding fees were waived.

For the three months ended March 31, 2016 and 2015, the Company incurred base management fees of approximately $4.5 million and $3.0 million, respectively, and the Advisers waived base management fees of $0 and $0, respectively. Accordingly, net of waivers, the Company paid base management fees of approximately $4.5 million for the three months ended March 31, 2016 and paid base management fees of approximately $3.0 million for the three months ended March 31, 2015. For the three months ended March 31, 2016 and 2015, the Company incurred capital gains incentive fees of $0 and $0, respectively, and subordinated incentive fees on income of approximately $493,000 and $358,000, respectively. For the three months ended March 31, 2016 and 2015, the Advisers waived capital gains incentive fees of $0 and $0, respectively, and subordinated incentive fees on income of approximately $493,000 and $358,000, respectively.

For the three months ended March 31, 2016 and 2015, the Company did not record an accrual for any previously waived fees. Any future reimbursement of previously waived fees to the Advisers will not be accrued until the reimbursement of the waived fees becomes probable and estimable, which will be upon approval of the Company’s board of directors. To date, none of the previously waived fees has been approved by the board of directors for reimbursement.

The table below presents the fees waived by the Advisers and the timing of potential reimbursement of waived fees (dollars in thousands). Previously waived fees will only be reimbursed with the approval of the Company's board of directors and if the

21


"Operating Expense Ratio" (as described in footnote 3 to the table below) is equal to or less than the Company's operating expense ratio at the time the corresponding fees were waived and if the annualized rate of the Company's regular cash distributions to stockholders is equal to or greater than the annualized rate of the Company's regular cash distributions at the time the corresponding fees were waived.
 
Management Fee (1)
 
Subordinated Incentive Fee (1)
 
Capital Gain Incentive Fee (1)
 
Expense Support (1)
 
 
 
 
Quarter Ended
Waivers
Repaid to Adviser (2)
 
Waivers
Repaid to Adviser (2)
 
Waivers
Repaid to Adviser (2)
 
Payments
Repaid to Adviser (2)
 
Operating Expense Ratio (3)
Annualized Distribution Rate (4)
Eligible to be Repaid Through
6/30/2012
$
31

$
—

 
$
18

$
—

 
$
—

$
—

 
$
—

$
—

 
1.35%
7.00%
Expired
9/30/2012
$
97

$
—

 
$
52

$
—

 
$
3

$
—

 
$
—

$
—

 
1.97%
7.00%
Expired
12/31/2012
$
104

$
—

 
$
53

$
—

 
$
—

$
—

 
$
—

$
—

 
2.96%
7.00%
Expired
3/31/2013
$
84

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.86%
7.00%
Expired
6/30/2013
$
118

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.36%
7.00%
6/30/2016
9/30/2013
$
268

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.22%
7.00%
9/30/2016
12/31/2013
$
309

$
—

 
$
—

$
—

 
$
5

$
—

 
$
153

$
—

 
0.49%
7.00%
12/31/2016
3/31/2014
$
306

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.28%
7.00%
3/31/2017
6/30/2014
$
548

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.28%
7.00%
6/30/2017
9/30/2014
$
821

$
—

 
$
—

$
—

 
$
—

$
—

 
$
328

$
—

 
1.23%
7.00%
9/30/2017
12/31/2014
$
148

$
—

 
$
451

$
—

 
$
—

$
—

 
$
—

$
—

 
1.70%
7.00%
12/31/2017
3/31/2015
$
—

$
—

 
$
358

$
—

 
$
—

$
—

 
$
—

$
—

 
1.78%
7.18%
3/31/2018
6/30/2015
$
—

$
—

 
$
930

$
—

 
$
—

$
—

 
$
—

$
—

 
1.69%
7.07%
6/30/2018
9/30/2015
$
—

$
—

 
$
155

$
—

 
$
—

$
—

 
$
—

$
—

 
2.11%
7.07%
9/30/2018
12/31/2015
$
—

$
—

 
$
1,159

$
—

 
$
—

$
—

 
$
—

$
—

 
2.27%
7.78%
12/31/2018
3/31/2016
$
—

$
—

 
$
493

$
—

 
$
—

$
—

 
$
—

$
—

 
1.83%
8.14%
3/31/2019
(1)
Fees waived pursuant to the Conditional Fee Waiver Agreement and the 2016 Conditional Income Incentive Fee Waiver Agreement and Expense Support Payments pursuant to the 2013 and 2014 Expense Reimbursement Agreements.
(2)
Subject to the approval of the Company’s board of directors, in future periods, previously waived fees may be paid to the Advisers, if the Company’s cumulative net increase in net assets resulting from operations exceeds the amount of cumulative distributions paid to stockholders. The previously waived fees are potentially subject to repayment by the Company, if at all, within a period not to exceed three years from the date of each respective fee waiver. To date, none of the previously waived fees and Expense Support Payments have been approved for reimbursement by the Company’s board of directors.
(3)
The “Operating Expense Ratio” is calculated on a quarterly basis as a percentage of average net assets and includes all expenses borne by the Company, except for base management and incentive fees and administrative expenses waived by the Advisers and organizational and offering expenses. For the quarter ended December 31, 2013, expenses have been reduced by $153,000, the amount of the Expense Support Payment received in 2013 from the Adviser. For the quarter ended September 30, 2014, expenses have been reduced by $328,000, which Expense Support Payment was received from the Adviser on October 30, 2014.
(4)
“Annualized Distribution Rate” equals $0.00191781 per share, per day. “Annualized Distribution Rate” does not include the special stock dividend paid to stockholders on September 14, 2012 and was based on the Company's offering price per share as of the final day of the quarter.

Pursuant to the Investment Advisory Agreement and Sub-Advisory Agreement, the Company is required to pay or reimburse the Advisers for administrative services expenses, which include all costs and expenses related to the Company's day-to-day administration and management not related to advisory services. The Advisers do not earn any profit under their provision of administrative services to the Company. For the three months ended March 31, 2016 and 2015, the Company incurred, and the Advisers waived the reimbursement of, administrative services expenses of approximately $533,000 and $437,000, respectively. On May 9, 2016, the Company and the Advisers agreed to an amendment to the 2014 Expense Reimbursement Agreement, which extended the period for waiver of reimbursement of administrative services expenses accrued pursuant to the Investment Advisory Agreement and the Sub-Advisory Agreement through June 30, 2016. The waiver of the reimbursement of administrative services expenses is not subject to future reimbursement.

The table below presents the administrative services expenses waived by the Advisers (dollars in thousands).
 
 
Administrative Services
 
 
 
 
 
 
Quarter Ended
 
Waivers
Repaid to Adviser
 
Operating Expense Ratio (1)
 
Annualized Distribution Rate (2)
 
Eligible to be Repaid Through (3)
6/30/2012
 
$
25

$
—

 
1.35%
 
7.00%
 
Not Eligible to be Repaid
9/30/2012
 
$
129

$
—

 
1.97%
 
7.00%
 
Not Eligible to be Repaid
12/31/2012
 
$
284

$
—

 
2.96%
 
7.00%
 
Not Eligible to be Repaid

22


 
 
Administrative Services
 
 
 
 
 
 
Quarter Ended
 
Waivers
Repaid to Adviser
 
Operating Expense Ratio (1)
 
Annualized Distribution Rate (2)
 
Eligible to be Repaid Through (3)
3/31/2013
 
$
233

$
—

 
1.86%
 
7.00%
 
Not Eligible to be Repaid
6/30/2013
 
$
222

$
—

 
1.36%
 
7.00%
 
Not Eligible to be Repaid
9/30/2013
 
$
234

$
—

 
1.22%
 
7.00%
 
Not Eligible to be Repaid
12/31/2013
 
$
329

$
—

 
0.49%
 
7.00%
 
Not Eligible to be Repaid
3/31/2014
 
$
329

$
—

 
1.28%
 
7.00%
 
Not Eligible to be Repaid
6/30/2014
 
$
385

$
—

 
1.28%
 
7.00%
 
Not Eligible to be Repaid
9/30/2014
 
$
371

$
—

 
1.23%
 
7.00%
 
Not Eligible to be Repaid
12/31/2014
 
$
412

$
—

 
1.70%
 
7.00%
 
Not Eligible to be Repaid
3/31/2015
 
$
437

$
—

 
1.78%
 
7.18%
 
Not Eligible to be Repaid
6/30/2015
 
$
480

$
—

 
1.69%
 
7.07%
 
Not Eligible to be Repaid
9/30/2015
 
$
517

$
—

 
2.11%
 
7.07%
 
Not Eligible to be Repaid
12/31/2015
 
$
603

$
—

 
2.27%
 
7.78%
 
Not Eligible to be Repaid
3/31/2016
 
$
533

$
—

 
1.83%
 
8.14%
 
Not Eligible to be Repaid
(1)
The “Operating Expense Ratio” is calculated on a quarterly basis as a percentage of average net assets and includes all expenses borne by the Company, except for base management and incentive fees and administrative expenses waived by the Advisers and organizational and offering expenses. For the quarter ended December 31, 2013, expenses have been reduced by $153,000, the amount of the Expense Support Payment received in 2013 from the Adviser. For the quarter ended September 30, 2014, expenses have been reduced by $328,000, which Expense Support Payment was received from the Adviser on October 30, 2014.
(2)
“Annualized Distribution Rate” equals $0.00191781 per share, per day. “Annualized Distribution Rate” does not include the special stock dividend paid to stockholders on September 14, 2012 and was based on the Company's offering price per share as of the last day of the quarter.
(3)
The Advisers have agreed to permanently waive reimbursement by the Company of administrative expenses through June 30, 2016. The administrative expenses are waived on a quarterly basis and are not eligible for future reimbursement from the Company to the Advisers.

As of March 31, 2016 and December 31, 2015, the Adviser and Sub-Adviser have incurred approximately $10.7 million and $10.1 million, respectively, of offering costs on the Company’s behalf. As of March 31, 2016, approximately $9.3 million of offering costs has been reimbursed to the Advisers. The Company expects to reimburse the Advisers for the balance of such costs incurred on its behalf on a monthly basis up to a maximum aggregate amount of 1.5% of the gross stock offering proceeds.
 
The table below outlines fees incurred and expense reimbursements payable to Hines, Main Street and their affiliates for the three months ended March 31, 2016 and 2015 and amounts unpaid as of March 31, 2016 and December 31, 2015 (dollars in thousands).
 
 
Incurred
 
Unpaid as of
 
 
Three Months Ended March 31,
 
March 31, 2016
 
December 31, 2015
Type and Recipient
 
2016
 
2015
 
Base Management Fees (1) - the Adviser, Sub-Adviser
 
$
4,494

 
$
3,007

 
$
4,496

 
$
4,521

Incentive Fees on Income (1) - the Adviser, Sub-Adviser
 
—

 
—

 
—

 
—

Capital Gains Incentive Fee (1) - the Adviser, Sub-Adviser
 
—

 
—

 
—

 
—

Offering Costs - the Adviser, Sub-Adviser
 
308

 
555

 
7

 
1,107

Expense Support from Adviser
 
—

 
—

 
—

 
—

Other (2) - the Adviser
 
93

 
65

 
41

 
95

Selling Commissions - Dealer Manager
 
875

 
6,038

 
254

 
—

Dealer Manager Fee - Dealer Manager
 
423

 
2,619

 
(7
)
 
—

Due to Affiliates
 
 
 
 

 
$
4,791

 
$
5,723

(1)
Net of amounts waived by the Advisers.
(2)
Includes amounts the Adviser paid on behalf of the Company such as general and administrative services expenses.

Note 10 – Share Repurchase Plan
 
Since inception of the share repurchase program, the Company funded the repurchase of $4.6 million in shares. For the three months ended March 31, 2016 and 2015, the Company funded $1.5 million and $289,011, respectively, for shares tendered for repurchase under the plan approved by the board of directors. Since inception of the share repurchase program, the Company has funded all redemption requests validly tendered and not withdrawn.

23


For the Three Months Ended
 
Repurchase Date
 
Shares Repurchased
 
Percentage of Shares Tendered that were Repurchased
 
Repurchase Price
per Share
 
Aggregate Consideration for Repurchased Shares
March 31, 2016
 
3/30/2016
 
200,508

 
100
%
 
7.62

 
1,527,873


Note 11 – Commitments and Contingencies

At March 31, 2016, the Company had a total of approximately $29.8 million in outstanding commitments comprised of (i) 16 commitments to fund revolving loans that had not been fully drawn or term loans that had not been funded and (ii) three capital commitments that had not been fully called. The Company recognized unrealized depreciation of $98,000 on the outstanding unfunded loan commitments and unrealized appreciation of $14,000 on the outstanding unfunded capital commitments during three months ended March 31, 2016. At December 31, 2015, the Company had a total of approximately $34.1 million in outstanding commitments comprised of (i) 14 commitments to fund revolving loans that had not been fully drawn or term loans that had not been funded and (ii) three capital commitments that had not been fully called. The Company recognized unrealized depreciation of $79,000 on the outstanding unfunded loan commitments and unrealized depreciation of $14,000 on the outstanding unfunded capital commitments during the year ended December 31, 2015.
 
Commitments and Contingencies
 
(dollars in thousands)
 
March 31, 2016
 
December 31, 2015
Unfunded Loan Commitments

 
 
AccuMed Corp.
$
250

 
$
875

Apex Linen Services, Inc.
1,003

 
1,003

Arcus Hunting, LLC
2,069

 
1,196

BarFly Ventures, LLC
1,531

 
1,531

Buca C, LLC
1,780

 
1,780

CapFusion Holding, LLC
1,600

 
—

Datacom, LLC
1,500

 
1,500

Guerdon Modular Holdings, Inc.
160

 
400

Hojeij Branded Foods, Inc.
2,000

 
2,143

HW Temps LLC
200

 
200

Jackmont Hospitality, Inc.
1,200

 
1,333

LaMi Products, LLC
1,765

 
1,521

Minute Key, Inc.
200

 
500

Mystic Logistics, Inc.
200

 
200

Unirush LLC
1,000

 
—

Volusion, LLC
3,000

 
3,000

Unfunded Capital Commitments
 
 
 
Brightwood Capital Fund III, LP
1,250

 
1,250

EIG Traverse Co-Investment, LP
195

 
5,245

Freeport First Lien Loan Fund III, LP
8,936

 
10,423

Total
$
29,839

 
$
34,100


Note 12 – Subsequent Events
 
From April 1, 2016 through May 12, 2016, the Company raised approximately $15.5 million in the Offering. During this period, the Company funded approximately $13.5 million in investments and received proceeds from repayments and dispositions of approximately $34.5 million.

On April 20, 2016 and May 3, 2016, the Company increased its public offering price per share to $8.70 and $8.80, respectively, effective as of the Company's weekly closes on April 21, 2016 and May 5, 2016, respectively.


24


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion is based on the condensed consolidated financial statements as of March 31, 2016 (unaudited) and December 31, 2015, and for the three months ended March 31, 2016 and 2015. Amounts as of December 31, 2015 included in the unaudited condensed consolidated financial statements have been derived from the Company's audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as the audited consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2015. Capitalized terms used in this Item 2 have the same meaning as in the accompanying condensed consolidated financial statements in Item 1 unless otherwise defined in this Report.

We refer to HMS Income Fund, Inc. as the “Company,” and the use of “we,” “our,” “us” or similar pronouns in this Report refers to HMS Income Fund, Inc.

Forward-Looking Statements
 
Some of the statements in this Report constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this Report may include statements as to:
 
•
our future operating results;
•
our business prospects and the prospects of our current and prospective portfolio companies;
•
the impact of the investments that we expect to make;
•
the ability of our portfolio companies to achieve their objectives;
•
our expected financings 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;
•
changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes to the value of our assets;
•
the impact of increased competition;
•
our contractual arrangements and relationships with third parties;
•
the dependence of our future success on the general economy, including general economic trends, and its impact on the industries in which we invest;
•
the relative and absolute performance of our investment adviser, HMS Adviser LP (the "Adviser"), a Texas limited partnership, including in identifying suitable investments for us;
•
our ability to make distributions to our stockholders;
•
the effects of applicable legislation and regulations and changes thereto; and
•
the impact of future acquisitions and divestitures.

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this Report involve risks and uncertainties.

Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Part II-Item 1A. Risk Factors” and elsewhere in this Report. Other factors that could cause actual results to differ materially include:
 
•
changes in the economy;
•
risks associated with possible disruption in our operations or the economy generally
•
future changes in laws or regulations and conditions in our operating areas.

We have based the forward-looking statements included in this Report on information available to us on the date of this Report. Except as required by the federal securities laws, we assume no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission (the "SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this Report are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended.


25


OVERVIEW

We are a specialty finance company sponsored by Hines Interests Limited Partnership ("Hines") that makes debt and equity investments in middle market ("Middle Market") companies, which we define as companies with annual revenues generally between $10 million and $3 billion and in lower middle market ("LMM") companies, which we define as companies with annual revenues generally between $10 million and $150 million. We are 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"). We are, therefore, required to comply with certain regulatory requirements. We have 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").
Our primary investment objective is to generate current income through debt and equity investments. A secondary objective is to generate long-term capital appreciation through equity and equity related investments, including warrants, convertible securities and other rights to acquire equity securities. Our portfolio strategy calls for us to invest primarily in illiquid debt and equity securities issued by LMM companies and Middle Market companies in private placements and negotiated transactions, which are traded in private over-the-counter markets for institutional investors. We will also invest in, and a significant portion of our assets are invested in, customized direct secured and unsecured loans to and equity securities of LMM companies, referred to as LMM securities. Typically, our investments in LMM companies will require us to co-invest with Main Street Capital Corporation, a New York Stock Exchange listed BDC ("Main Street"), and/or its affiliates. We categorize some of our investments in LMM companies and Middle Market companies as private loan ("Private Loan") portfolio investments. Private Loan investments, often referred to in the debt markets as “club deals,” are investments, generally in debt instruments, that we originate on a collaborative basis with other investment funds. Private Loan investments are typically similar in size, structure, terms and conditions to investments we hold in our LMM portfolio and Middle Market portfolio. Our portfolio also includes other portfolio ("Other Portfolio") investments which primarily consist of investments that are not consistent with the typical profiles for our LMM portfolio investments, Middle Market portfolio investments or Private Loan portfolio investments, including investments which may be managed by third parties.

We previously registered for sale up to 150,000,000 shares of common stock pursuant to a registration statement on Form N-2 (File No. 333-178548) which was initially declared effective by the SEC on June 4, 2012 (the “Initial Offering”). The Initial Offering terminated on December 1, 2015. We raised approximately $601.2 million under the Initial Offering, including proceeds from the dividend reinvestment plan of approximately $22.0 million. On January 5, 2016, the SEC declared a new registration statement on Form N-2 (File No. 333-204659), as amended, effective under which we registered for sale up to $1,500,000,000 worth of shares of common stock (the “Offering”). As of March 31, 2016, we had raised approximately $20.6 million in the Offering, including proceeds from the distribution reinvestment plan of approximately $5.8 million.

Our business is managed by the Adviser, an affiliate of Hines, under an Investment Advisory and Administrative Services Agreement dated May 31, 2012, as amended (the “Investment Advisory Agreement”). We and the Adviser have retained MSC Adviser I, LLC (the "Sub-Adviser"), a wholly owned subsidiary of Main Street as our investment sub-adviser 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 our investment portfolio and provide certain ongoing administrative services to the Adviser. The Adviser and the Sub-Adviser are collectively referred to as the “Advisers,” and each is registered under the Investment Advisers Act of 1940, as amended. Upon the execution of the Sub-Advisory Agreement, Main Street became our affiliate. We have engaged Hines Securities, Inc. (the “Dealer Manager”), an affiliate of the Adviser, to serve as the Dealer Manager for our offerings. The Dealer Manager is responsible for marketing our shares of common stock being offered pursuant to our offerings.

As a BDC, we are subject to certain regulatory restrictions in making our investments, including limitations on our ability to co-invest with certain affiliates, including Main Street. However, we received an order from the SEC, that permits us, subject to certain conditions, to co-invest with Main Street in certain transactions originated by Main Street and/or our Advisers. The exemptive relief permits us, and certain of our directly or indirectly wholly owned subsidiaries on one hand, and Main Street, and or/certain of its affiliates on the other hand, to co-invest in the same investment opportunities where such investment may otherwise be prohibited under Section 57(a)(4) of the 1940 Act. In addition, we may continue to co-invest with Main Street and/or its affiliates in syndicated deals and secondary loan market purchases in accordance with applicable regulatory guidance or interpretations.

As of March 31, 2016, we had investments in 83 Middle Market debt investments, 20 Private Loan debt investments, 22 LMM debt investments, 19 LMM equity investments, seven Private Loan equity investments and three Other Portfolio investments with an aggregate fair value of approximately $857.8 million, a cost basis of approximately $923.8 million, and a weighted average effective annual yield of approximately 8.2%. The weighted average annual yield was calculated using the effective interest rates for all investments at March 31, 2016, including accretion of original issue discount, amortization of premium to par value and amortization of fees received in connection with transactions. This calculation assumes zero yield for investments on non-accrual status. Approximately 80.0% and 16.5% of our total portfolio investments at fair value (excluding our Other Portfolio investments)

26


were secured by first priority liens and second priority liens on portfolio company assets, respectively, with the remainder in unsecured debt investments and equity investments.
 
The level of new portfolio investment activity will fluctuate from period to period based upon the status of our capital raising efforts under the Offering, our view of the current economic fundamentals, our ability to identify new investment opportunities that meet our investment criteria and our ability to close on the identified transactions. The level of new investment activity and associated interest and fee income will directly impact future investment income. While we intend to grow our portfolio and our investment income over the long-term, our growth and our operating results may be more limited during depressed economic periods. However, we intend to appropriately manage our cost structure and liquidity position based on applicable economic conditions and our investment outlook. The level of realized gains or losses and unrealized appreciation or depreciation will also fluctuate depending upon portfolio activity and the performance of our individual portfolio companies. The changes in realized gains and losses and unrealized appreciation or depreciation could have a material impact on our operating results.
 
Investment Income
 
We have generated, and plan to continue to generate, investment income primarily in the form of interest on the debt securities that we hold, dividends and other distributions with respect to any equity interests that we hold and capital gains, if any, on convertible debt or other equity interests that we acquire in portfolio companies. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, and possibly consulting fees and performance-based fees. All such fees will be generated in connection with our investments and recognized as earned or as additional yield over the life of the debt investment. To date our investment income has been interest income on debt investments, accretion of original issue discounts, dividend income, amortization of premiums and fees received from transactions and net realized/unrealized appreciation (depreciation).

Expenses
 
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. Our primary operating expenses will be debt service payments, general and administrative expenses, and payment of advisory fees under the Investment Advisory Agreement. The investment advisory fees paid to our Adviser (and the fees paid by our Adviser to our Sub-Adviser pursuant to the Sub-Advisory Agreement) will compensate our Advisers for their work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. We expect our expenses to fluctuate based upon the amount of assets under management.
 
We bear all other expenses of our operations and transactions, including fees and expenses relating to:
  ●
 
corporate and organizational expenses relating to offerings of our common stock, subject to certain limitations;
  ●
 
the cost of calculating our net asset value ("NAV"), including the cost of any third-party valuation services;
  ●
 
the cost of effecting sales and repurchase of shares of our common stock and other securities;
  ●
 
fees payable to third parties relating to, or associated with, monitoring our financial and legal affairs, making investments, and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;
  ●
 
interest payable on debt, if any;
  ●
 
investment advisory fees;
  ●
 
transfer agent and custodial fees;
  ●
 
fees and expenses associated with marketing efforts;
  ●
 
federal and state registration fees;
  ●
 
federal, state and local taxes;
  ●
 
independent directors’ fees and expenses, including travel expenses;
  ●
 
costs of director and stockholder meetings, proxy statements, stockholders’ reports and notices;
  ●
 
cost of fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;
  ●
 
direct costs such as printing of stockholder reports and advertising or sales materials, mailing, long distance telephone, and staff;
  ●
 
fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act of 2002, the 1940 Act, and other applicable federal and state securities laws and regulations;
  ●
 
costs associated with our reporting and compliance obligations under the 1940 Act and other applicable federal and state securities laws;
  ●
 
brokerage commissions for our investments;

27


  ●
 
all other expenses incurred by our Advisers in performing their obligations, subject to the limitations included in the Investment Advisory Agreement and Sub-Advisory Agreement; and
  ●
 
all other expenses incurred by us or any administrator in connection with administering our business, including payments under any administration agreement that will be based upon our allocable portion of overhead and other expenses incurred by any administrator in performing its obligations under any proposed administration agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer and Chief Financial Officer and their respective staffs.

During periods of asset growth, we expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets and increase during periods of asset declines.

Base Management and Incentive Fee, Administrative Services Expense Waiver and Expense Support and Conditional Reimbursement Agreement

We and our Adviser have entered into two expense support and conditional reimbursement agreements (as amended from time to time, the “2013 and 2014 Expense Reimbursement Agreements”), pursuant to which our Adviser could pay us up to 100% of its operating expenses through December 31, 2015 (the “Expense Support Payment”) in order to achieve a reasonable level of expenses relative to our investment income (the “Operating Expense Objective”). Our board of directors, in its sole discretion, may approve the repayment of unreimbursed Expense Support Payments (a “Reimbursement Payment”) upon a determination by the board of directors that we have achieved the Operating Expense Objective in any quarter following our receipt of an Expense Support Payment. We may reimburse any unreimbursed Expense Support Payments within three years from the date each respective Expense Support Payment was determined. Any Expense Support Payments that remain unreimbursed three years after such payment will be permanently waived.

We and our Advisers have entered into a conditional fee waiver agreement (as amended from time to time, the “Conditional Fee Waiver Agreement”), pursuant to which our Advisers could waive certain fees through December 31, 2015 upon the occurrence of any event that, in our Advisers’ sole discretion, causes such waivers to be deemed necessary. The previously waived fees are potentially subject to repayment by us, if at all, within a period not to exceed three years from the date of each respective fee waiver.

We and our Advisers have entered into a conditional income incentive fee waiver agreement (the “2016 Conditional Income Incentive Fee Waiver Agreement”), pursuant to which, for a period from January 1, 2016 through June 30, 2016, our Advisers could waive the “subordinated incentive fee on income,” as such term is defined in the Investment Advisory Agreement, upon the occurrence of any event that, in our Advisers’ sole discretion, causes such waiver to be deemed necessary. The 2016 Conditional Income Incentive Fee Waiver Agreement may require us to repay our Advisers for previously waived reimbursement of Expense Support Payments or waived base management fees or incentive fees under certain circumstances. The previously waived fees are potentially subject to repayment by us, if at all, within a period not to exceed three years from the date of each respective fee waiver. Thus, in any quarter where a surplus exists, that surplus will be available, subject to approval of the board of directors, to reimburse waived fees and Expense Support Payments as follows:

1.
First, to reimburse Expense Support Payments, beginning with the earliest year eligible for reimbursement; and
2.
Second, to reimburse all waived fees, beginning with the earliest year eligible for reimbursement.

Reimbursement of previously waived fees will only be permitted with the approval of our board of directors and if the operating expense ratio is equal to or less than the operating expense ratio at the time the corresponding fees were waived and if the annualized rate of regular cash distributions to stockholders is equal to or greater than the annualized rate of the regular cash distributions at the time the corresponding fees were waived.

For the three months ended March 31, 2016 and 2015, we incurred base management fees of approximately $4.5 million and $3.0 million, respectively, and our Advisers waived no base management fees in either period. For the three months ended March 31, 2016 and 2015, we incurred capital gains incentive fees of $0 and $0, respectively, and subordinated incentive fees on income of $493,000 and $358,000, respectively. For the three months ended March 31, 2016 and 2015, our Advisers waived capital gains incentive fees of $0 and $0, respectively, and subordinated incentive fees on income of $493,000 and $358,000, respectively.

For the three months ended March 31, 2016 and 2015, we did not record an accrual for any previously waived fees. Any future reimbursement of previously waived fees to our Advisers will not be accrued until the reimbursement of the waived fees become probable and estimable, which will be upon approval of our board of directors. To date, none of the previously waived fees has been approved by our board of directors for reimbursement.


28


For more information on our fee waivers and expense reimbursements, see Note 9 - Related Party Transactions and Arrangement - Advisory Agreements and Conditional Fee Waiver to our condensed consolidated financial statements included elsewhere in this report.

Administration

Pursuant to the Investment Advisory Agreement and Sub-Advisory Agreement, we are required to pay or reimburse our Advisers for administrative services expenses, which include all costs and expenses related to our day-to-day administration and management not related to advisory services. For the three months ended March 31, 2016 and 2015, we incurred, and our Advisers waived the reimbursement of, administrative services expenses of approximately $533,000 and $437,000, respectively. On May 9, 2016, we and the Advisers agreed to an amendment to the 2014 Expense Reimbursement Agreement, which extended the period for waiver of reimbursement of administrative expenses accrued pursuant to the Investment Advisory Agreement and the Sub-Advisory Agreement through June 30, 2016. The waiver of the reimbursement of administrative service expenses is not subject to future reimbursement.

CRITICAL ACCOUNTING POLICIES
 
Each of our critical accounting policies involves the use of estimates that require management to make assumptions that are subjective in nature. Management relies on its experience, collects historical and current market data, and analyzes these assumptions in order to arrive at what it believes to be reasonable estimates. In addition, application of these accounting policies involves the exercise of judgments regarding assumptions as to future uncertainties. Actual results could materially differ from these estimates. A disclosure of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2015 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies during 2016, except as described below.

Offering Costs

In accordance with the Investment Advisory Agreement and the Sub-Advisory Agreement, we reimburse our Advisers for any offering costs that are paid on our behalf, which consist of, among other costs, actual legal, accounting, bona fide out-of-pocket itemized and detailed due diligence costs, printing, filing fees, transfer agent costs, postage, escrow fees, advertising and sales literature and other offering costs. Pursuant to the terms of the Investment Advisory Agreement and Sub-Advisory Agreement, our Advisers are responsible for the payment of offering costs to the extent they exceed 1.5% of the aggregate gross proceeds from our offering.

We decided to change our accounting treatment of offering costs to more closely follow certain SEC interpretations. Prior to January 1, 2016, offering costs were capitalized as incurred by our Advisers and such costs, up to 1.5% of the gross proceeds, were recorded as a charge to additional paid in capital and a reduction of deferred offering costs. Effective January 1, 2016, offering costs are capitalized as deferred offering costs as incurred by us and subsequently amortized to expense over a 12-month period. Deferred offering costs related to an offering will be fully amortized to expense upon the expiration or earlier termination of an offering.

As of March 31, 2016, our Advisers have been reimbursed approximately $9.3 million since inception for offering costs. As of March 31, 2016, our Advisers carried a balance of $1.4 million for offering expenses incurred on our behalf, net of (i) incremental offering expenses incurred by our Advisers on our behalf and (ii) our reimbursement payments to our Advisers and any payable balances for reimbursement of offering costs.

PORTFOLIO INVESTMENT COMPOSITION

Our Middle Market portfolio investments primarily consist of direct or secondary purchases of interest-bearing debt securities in companies that are generally larger in size than the LMM companies included in our LMM portfolio. While our Middle Market debt investments are generally secured by a first priority lien, 20.2% of the fair value of our Middle Market portfolio is secured by second priority liens.
 
Our current LMM portfolio consists of debt investments secured by first and second priority liens (66.4% and 4.0% of the total fair value of the LMM portfolio, respectively) on the assets of the portfolio companies and equity investments (29.6% of the total fair value of the LMM portfolio) in privately held LMM companies as of March 31, 2016. The LMM debt investments generally mature between five and seven years from the original investment date. The LMM equity investments represent an equity position or the right to acquire an equity position through warrants.

Our Private Loan portfolio primarily consists of debt investments secured by first and second priority liens (92.3% and 6.9% of the total fair value of the Private Loan portfolio, respectively) on the assets of the 19 Private Loan portfolio companies and equity

29


investments (0.8% of the total fair value of the Private Loan portfolio) in three Private Loan companies as of March 31, 2016. The Private Loan debt investments typically have stated terms between three and seven years from the original investment date. The Private Loan equity investments represent an equity position or the right to acquire an equity position through warrants.

Our Other Portfolio investments consist of investments which are not consistent with the typical profiles for LMM, Middle Market and Private Loan portfolio investments, including investments which may be managed by third parties. In the Other Portfolio investments, we may incur indirect fees and expenses in connection with investments managed by third parties, such as investments in other investment companies or private funds.

During the three months ended March 31, 2016, we funded investment purchases of approximately $83.1 million and had two investments under contract to purchase as of March 31, 2016, for approximately $3.6 million, which settled or are scheduled to settle after March 31, 2016. We also received proceeds from sales and repayments of existing portfolio investments of approximately $47.4 million including $37.5 million in sales. Additionally, we had three investments under contract to sell as of March 31, 2016, for approximately $11.8 million, which represented the contract sales price. The combined result of which increased our portfolio, on a cost basis, by approximately $19.1 million, or 2.1%, and the number of portfolio investments by seven, or 4.8%, compared to the portfolio as of December 31, 2015. As of March 31, 2016, the largest investment in an individual portfolio company represented approximately 2.4% of our portfolio’s fair value with the remaining investments in an individual portfolio company ranging from 0.03% to 1.9%. The average investment in our portfolio is approximately $5.6 million or 0.6% of the total portfolio. As a result of these transactions, our portfolio has become increasingly broadened across individual portfolio investments, geographic regions, and industries. Further, our total portfolio's investment composition (excluding our Other Portfolio investments) at fair value is comprised of 80.0% first lien debt securities, 16.5% second lien debt securities, with the remainder in unsecured debt investments and equity investments. First lien debt securities have priority over subordinated debt owed by the issuer with respect to the collateral pledged as security for the loan. Due to the relative priority of payment of first lien investments, these generally have lower yields than lower priority, less secured investments.

During the three months ended March 31, 2015, we made investment purchases of approximately $187.2 million and had 15 investments under contract to purchase as of March 31, 2015 for approximately $68.9 million, which settled after March 31, 2015. We also received proceeds from sales and repayments of existing portfolio investments of approximately $24.6 million including $3.5 million in sales and had one investment under contract to sell as of March 31, 2015 for approximately $1.0 million, which represented the contract sales price.

The result of the aforementioned transactions further diversified our geographic and industry concentrations and based upon our investment rating system, which is described further below, the weighted average rating of our LMM was approximately 2.5 and 3.0 as of March 31, 2016 and December 31, 2015. Lastly, the overall weighted average effective yield on our investment portfolio has decreased from 8.3% as of December 31, 2015 to 8.2% as of March 31, 2016.

Summaries of the composition of our total investment portfolio at cost and fair value are shown in the following tables (this information excludes Other Portfolio investments):
 
March 31, 2016
 
December 31, 2015
Cost:
LMM
 
Private Loan
 
Middle Market
 
Total
 
LMM
 
Private Loan
 
Middle Market
 
Total
First Lien Secured Debt
70.1
%
 
92.4
%
 
79.6
%
 
80.5
%
 
69.4
%
 
92.3
%
 
79.9
%
 
80.5
%
Second Lien Secured Debt
4.3

 
6.7

 
20.0

 
16.6

 
4.1

 
7.2

 
19.7

 
16.7

Unsecured Debt
—

 
—

 
0.4

 
0.3

 
—

 
—

 
0.4

 
0.3

Equity
24.4

 
0.1

 
—

 
2.4

 
25.6

 
0.1

 
—

 
2.4

Equity warrants
1.2

 
0.8

 
—

 
0.2

 
0.9

 
0.4

 
—

 
0.1

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
March 31, 2016
 
December 31, 2015
Fair Value:
LMM
 
Private Loan
 
Middle Market
 
Total
 
LMM
 
Private Loan
 
Middle Market
 
Total
First Lien Secured Debt
66.4
%
 
92.3
%
 
79.7
%
 
80.0
%
 
67.7
%
 
92.1
%
 
79.9
%
 
80.3
%
Second Lien Secured Debt
4.0

 
6.9

 
20.2

 
16.5

 
4.0

 
7.4

 
19.9

 
16.7

Unsecured Debt
—

 
—

 
0.1

 
0.1

 
—

 
—

 
0.2

 
0.1

Equity
28.4

 
0.1

 
—

 
3.2

 
27.4

 
0.1

 
—

 
2.8

Equity warrants
1.2

 
0.7

 
—

 
0.2

 
0.9

 
0.4

 
—

 
0.1

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%


30


For the tables showing our total investment portfolio composition by geographic region and by industry, see Note 3-Fair Value Hierarchy for Investments-Portfolio Investment Composition to our condensed consolidated financial statements included elsewhere in this Report.

PORTFOLIO ASSET QUALITY
  
As of March 31, 2016, we owned a broad portfolio of 154 investments in 121 companies representing a wide range of industries. We believe that this diversity adds to the structural protection of the portfolio, revenue sources, income, cash flows and dividends. The portfolio included the following:

▪
83 debt investments in 80 Middle Market portfolio companies with an aggregate fair value of approximately $627.8 million and a cost basis of approximately $695.5 million. The Middle Market portfolio had a weighted average annual effective yield of approximately 8.2% and 79.7% of the investments were secured by first priority liens. Further, 87.3% of the Middle Market investments contain variable rates, though a majority of the investments with variable rates are subject to contractual minimum base interest rates between 100 and 150 basis points.

▪
20 debt investments in 19 Private Loan portfolio companies with an aggregate fair value of approximately $118.5 million and a cost basis of approximately $122.2 million. The Private Loan debt investments had a weighted average annual effective yield of approximately 9.0%, which is calculated assuming the investments on non-accrual status are non-yielding, and 93.0% of the Private Loan debt investments were secured by first priority liens. Further, 96.0% of the Private Loan debt investments contain variable rates, though a majority of the investments with variable rates are subject to contractual minimum base interest rates between 100 and 150 basis points.

▪
22 debt investments in 18 LMM portfolio companies with an aggregate fair value of approximately $65.8 million and a cost basis of approximately $65.3 million. The LMM debt investments had a weighted average annual effective yield of approximately 11.1% and 94.3% of the debt investments were secured by first priority liens. Further, 43.4% of the LMM debt investments are fixed rate investments with fixed interest rates between 7.0% and 15.1%. Further, 10 LMM debt investments, representing approximately 56.6% of the LMM debt investments have variable rates subject to a contractual minimum base interest rate of 100 basis points.

▪
19 equity investments and 10 equity warrant investments in 16 LMM portfolio companies, three Private Loan portfolio companies and three Other Portfolio companies with an aggregate fair value of approximately $45.7 million and a cost basis of approximately $40.8 million.

Overall, our investment portfolio had a weighted average effective yield of approximately 8.2%, and 78.4% of our total portfolio's investment composition (including our Other Portfolio investments) was secured by first-priority liens.

As of March 31, 2016, we had three investments in two portfolio companies that were on non-accrual status. These companies were in default for failure to pay the combined outstanding principal balances of $13.2 million due upon the maturity of the loans. Our Advisers are currently working with the borrowers to maximize recovery of the amounts borrowed. As of March 31, 2016, these three investments on non-accrual status comprised approximately 0.2% of our total investment portfolio at fair value and 1.3% of the total investment portfolio at cost. As of December 31, 2015, we had three investments in two portfolio companies that were on non-accrual status. These two investments on non-accrual status comprised approximately 0.4% of the total investment portfolio at fair value and 1.3% of the total investment portfolio at cost. One of the two portfolio companies on non-accrual status was in default due to failure to pay its outstanding principal balance of $3.4 million due upon the maturity of its two loans. The other portfolio company on non-accrual status was in default due to failure to pay its required quarterly interest payment and due to declaring bankruptcy in the fourth quarter of 2015. For those investments in which S&P credit ratings are available, approximately 50.3% of the portfolio, the portfolio had a weighted average effective credit rating of B.

We utilize a rating system developed by our Sub-Adviser to rate the performance of each LMM portfolio company. The investment rating system takes into consideration various factors, including each investment’s expected level of returns, collectability, comparisons to competitors and other industry participants, and the portfolio company’s future outlook.

•
Investment Rating 1 represents a LMM portfolio company that is performing in a manner which significantly exceeds expectations.
•
Investment Rating 2 represents a LMM portfolio company that, in general, is performing above expectations.
•
Investment Rating 3 represents a LMM portfolio company that is generally performing in accordance with expectations. All new LMM portfolio investments receive an initial Investment Rating 3.
•
Investment Rating 4 represents a LMM portfolio company that is underperforming expectations, requiring increased monitoring and scrutiny by us.

31


•
Investment Rating 5 represents a LMM portfolio company that is significantly underperforming, requiring heightened levels of monitoring and scrutiny by us and involves the recognition of significant unrealized depreciation on such investment.

The following table shows the distribution of our LMM portfolio investments on the 1 to 5 investment rating scale at fair value as of March 31, 2016 and December 31, 2015 (dollars in thousands):
 
 
March 31, 2016
 
December 31, 2015
Investment Rating
 
Investments at Fair Value
 
Percentage of Total LMM Portfolio
 
Investments at Fair Value
 
Percentage of Total LMM Portfolio
1
 
$
—

 
—
%
 
$
—

 
—
%
2
 
48,337

 
51.7

 
9,093

 
10.6

3
 
39,484

 
42.2

 
70,653

 
82.7

4
 
5,687

 
6.1

 
5,714

 
6.7

5
 
—

 
—

 
—

 
—

Totals
 
$
93,508

 
100.0
%
 
$
85,460

 
100.0
%
 
Based upon the investment rating system, the weighted average rating of our LMM portfolio at fair value was approximately 2.5 and 3.0 as of March 31, 2016 and December 31, 2015.
 
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
 
RESULTS COMPARISONS FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND MARCH 31, 2015

Total Investment Income, Expenses, Net Assets
 
For the three months ended March 31, 2016 and 2015, our total investment income was approximately $21.3 million and $11.8 million, respectively, consisting predominately of interest income. As of March 31, 2016 the portfolio had a weighted average annual effective yield on investments of approximately 8.2% compared to 8.5% as of March 31, 2015, and our average investment portfolio for the three months ended March 31, 2016 was $855.4 million compared to $566.9 million for the three months ended March 31, 2015. Additionally, during the three months ended March 31, 2016 and 2015, we accreted approximately $2.3 million and $489,000, respectively, of unearned income into interest income. The increase in interest income was primarily due to the growth in our total portfolio resulting from the investment of additional equity capital raised and borrowings under our senior secured revolving credit facility with Capital One, National Association as administrative agent (the "Capital One Credit Facility") and the amended and restated credit agreement entered into by HMS Funding I, LLC, our wholly owned subsidiary, with Deutsche Bank AG, New York Branch as administrative agent (the "Deutsche Bank Credit Facility," and, together with our Capital One Credit Facility, the "Credit Facilities"). We believe further increases in investment income in future periods may arise due to (i) a growing base of portfolio company investments and (ii) investments being held for the entire period relative to incremental net investment activity during each quarter. For information on the Credit Facilities, see Note 4 - Borrowings to our condensed consolidated financial statements included elsewhere in this report.
 
For the three months ended March 31, 2016, expenses, net of incentive fee and administrative services expense waivers, were approximately $9.0 million as compared to expenses of approximately $5.5 million for the three months ended March 31, 2015. The increase in expenses is primarily due to increases in management fees of $1.5 million, interest expense of $1.7 million, and other general and administrative expense of $96,000. Management fees increased primarily due to an increase in the average gross assets of the Company. Interest expense increased due to an increase in the average borrowings during the period. Average borrowings were $387.5 million for the three months ended March 31, 2016 compared to $223.4 million for the three months ended March 31, 2015. Additionally, interest expense was higher for the three months ended March 31, 2016, due to the increase in amortization of deferred financing costs as a result of costs paid in connection with the Credit Facilities. As of both March 31, 2016 and March 31, 2015, the annualized interest rate on our borrowings was approximately 3%. Other general and administrative expenses increased due to additional banking costs, trade costs and other costs associated with the increase in overall portfolio size.

For the three months ended March 31, 2016, the net decrease in net assets resulting from operations (gross of stockholder distributions declared) was approximately $2.7 million. The decrease was attributable to unrealized depreciation on investments of approximately $14.3 million, realized losses of approximately $646,000 and offset by net investment income of approximately $12.2 million.


32


For the three months ended March 31, 2015, the net increase in net assets was approximately $10.2 million. The increase was primarily attributable to net investment income of approximately $6.3 million, realized gains of approximately $20,000 and unrealized appreciation on investments of approximately $3.8 million.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Overview

As of March 31, 2016, we had approximately $20.5 million in cash and cash equivalents, and our NAV totaled approximately $495.7 million, equating to approximately $7.67 per share. The change from the December 31, 2015 NAV per share of $7.88 was largely due to the unrealized depreciation on investments in the portfolio. The unrealized depreciation on investments in our portfolio was primarily driven by the broad price declines in the high yield bond and leveraged loan markets and by the effect of declining oil prices on our investments in the oil and gas sector.
 
Liquidity and Capital Resources
 
Cash Flows

For the three months ended March 31, 2016, we experienced a net decrease in cash and cash equivalents of approximately $3.5 million. During that period, approximately $24.9 million of cash was used in our operating activities, which principally consisted of the purchase of new portfolio investments of $83.1 million and a net decrease in net assets resulting from operations of approximately $2.7 million offset by principal repayments from and sales of investments in portfolio companies of $47.4 million. During the three months ended March 31, 2016, approximately $21.4 million was generated from financing activities, which principally consisted of a net $15.0 million increase in borrowings under the Credit Facilities, and $13.4 million in net stock offering proceeds received offset by $5.2 million in cash distributions paid to stockholders, $1.5 million in cash distributions related to redemption of our common stock and $359,000 paid for financing costs related to the Credit Facilities amendments during the three months ended March 31, 2016.

For the three months ended March 31, 2015, we experienced a net increase in cash and cash equivalents of approximately $4.0 million. During that period, approximately $157.7 million of cash was used in our operating activities, which principally consisted of the purchase of new portfolio debt investments of $187.2 million, offset by a net increase in net assets resulting from operations of approximately $10.2 million and principal repayments from and sales of investments in portfolio companies of $24.6 million. During the three months ended March 31, 2015, approximately $161.7 million was generated from financing activities, which principally consisted of a net $81.1 million increase in borrowings under the Credit Facilities and $84.4 million in net stock offering proceeds received and offset by $2.8 million in cash distributions paid to stockholders and $752,000 paid for financing costs related to the Credit Facilities entered into during the three months ended March 31, 2015.

Initial Offering and Offering
 
During the three months ended March 31, 2016, we raised proceeds of $20.6 million from the Offering, including proceeds from the distribution reinvestment plan, and incurred $1.3 million for selling commissions and Dealer Manager fees. We also incurred an obligation for $308,000 of costs related to the Offering.

During the three months ended March 31, 2015, we raised proceeds of $98.9 million from the Initial Offering, including proceeds from the distribution reinvestment plan, and incurred $8.7 million for selling commissions and Dealer Manager fees. We also incurred an obligation for $1.5 million of costs related to the Initial Offering.

Distributions

The following table reflects the cash distributions per share that we have declared on our common stock during the three months ended March 31, 2016 and March 31, 2015 (dollars in thousands except per share amounts).
 
Distributions
 
Per Share
 
Amount
2016
 
 
 
Three months ended March 31, 2016
$
0.17

 
$
11,037

2015
 
 
 
Three months ended March 31, 2015
$
0.17

 
$
6,260


On March 23, 2016, with the authorization of our board of directors, we declared distributions to our stockholders for the period of April 2016 through June 2016. These distributions have been, or will be, calculated based on stockholders of record each day

33


from April 1, 2016 through June 30, 2016 in an amount equal to $0.00191781 per share, per day. Distributions are paid on the first business day following the completion of each month to which they relate.
 
Specific tax characteristics of all distributions are reported to stockholders shortly after the close of each calendar year on Form
1099-DIV. For the year ended December 31, 2015, approximately 99.7% of the distributions paid were taxable to the investor as ordinary income and approximately 0.3% were treated capital gain distributions for federal income tax purposes.

We have adopted an “opt in” distribution reinvestment plan for our stockholders. As a result, if we make a distribution, our stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock.
 
We may fund our cash distributions from any sources of funds legally available, including stock offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and fee waivers from our Advisers. We have not established any limit on the extent to which we may use borrowings or stock offering proceeds to fund distributions. Our distributions may exceed our earnings, especially during the period before we have substantially invested the stock offering proceeds. As a result, a portion of the distributions we make may represent a return of capital for U.S. federal income tax purposes.
 
The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.
 
In order to satisfy the Code's requirements applicable to maintaining our ability to be subject to tax as a RIC, we must distribute to our stockholders substantially all of our taxable income each taxable year. However, we may elect to spill over certain excess undistributed taxable income from one taxable year into the next taxable year, which would require us to pay a 4% non-deductible excise tax on such excess undistributed taxable income. In order to avoid excise tax, we need to satisfy the Excise Tax Avoidance Requirement. We estimate approximately $3.8 million, or $0.0615 per share, of our taxable income for the 2015 taxable year will be distributed during the 2016 taxable year, prior to the filing of our federal income tax return for our 2015 taxable year. As such, we anticipate that we will be subject to a taxable year 2015 liability for the 4% nondeductible excise tax of approximately $108,000. In order to avoid excise tax, we need to distribute, in respect of each calendar year dividends of an amount at least equal to the sum of (1) 98.0% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain in excess of capital loss, or capital gain net income, adjusted for certain ordinary losses, for the one year period ending on October 31st of such calendar year (or, if we so elect, for the calendar year) and (3) any net ordinary income and capital gain net income for the preceding calendar years that was not distributed during such calendar years and on which we paid no U.S. federal income tax.

Financing Arrangements

We anticipate that we will continue to fund our investment activities through existing cash, capital raised from our stock offerings, and borrowings on the Credit Facilities. Our primary uses of funds in both the short-term and long-term will be investments in portfolio companies, operating expenses and cash distributions to holders of our common stock.
 
As of March 31, 2016, we had $65.0 million outstanding and $60.0 million available under our Capital One Credit Facility, and $330.0 million outstanding and $55.0 million available under the Deutsche Bank Credit Facility, both of which we estimated approximated fair value. Availability under the Credit Facilities is subject to certain limitations and the asset coverage restrictions under the 1940 Act.
 
As a BDC, we generally are 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%. As of March 31, 2016, our asset coverage ratio under BDC regulations was 217% when including unfunded commitments as a senior security. As of December 31, 2015, our asset coverage ratio under BDC regulations was 219% when including unfunded commitments as a senior security. As of March 31, 2016, considering these limitations, we had the ability to draw upon the entire $115.0 million of remaining capacity in the Credit Facilities.

Although we have been able to secure access to potential additional liquidity, through proceeds from the Offering and also by entering into the Credit Facilities, there is no assurance that equity or debt capital will be available to us in the future on favorable terms, or at all.

Related-Party Transactions and Agreements

We have entered into agreements with our Advisers and our Dealer Manager, whereby we pay certain fees and reimbursements to these entities. These include payments to our Dealer Manager for selling commissions and the Dealer Manager fee and payments to our Adviser for reimbursement of offering costs. In addition, we make payments for certain services that include the identification,

34


execution, and management of our investments and also the management of our day-to-day operations provided to us by our Advisers, pursuant to various agreements that we have entered into. See Note 9-Related Party Transactions and Arrangements to the financial statements included elsewhere in this Report on Form 10-Q for additional information regarding related party transactions.

 Contractual Obligations
 
As of March 31, 2016, we had $395.0 million in borrowings outstanding under the Credit Facilities. Unless extended, our Capital One Credit Facility will expire March 11, 2017, and the Deutsche Bank Credit Facility will mature on June 16, 2020. Our Capital One Credit Facility has two, one-year extension options, with lender approval that, if approved and exercised, would permit us to extend the maturity to March 11, 2019. See Note 4-Borrowings to the financial statements included elsewhere in this Report on Form 10-Q for a description of the Credit Facilities.
 
A summary of our significant contractual payment obligations for the repayment of outstanding borrowings at March 31, 2016 is as follows:
 
Payments Due By Period (dollars in thousands)
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
After 5 years
Capital One Credit Facility(1)
$
65,000

 
$
—

 
$
65,000

 
$
—

 
$
—

Deutsche Bank Credit Facility(2)
$
330,000

 
$
—

 
$
—

 
$
330,000

 
$
—

Total Credit Facilities
$
395,000

 
$
—

 
$
65,000

 
$
330,000

 
$
—

(1)
At March 31, 2016, $60.0 million remained available under our Capital One Credit Facility; however, our borrowing capacity is limited to the asset coverage ratio restrictions imposed by the 1940 Act, as discussed above.
(2)
At March 31, 2016, $55.0 million remained available under the Deutsche Bank Credit Facility; however, our borrowing ability is limited to the asset coverage ratio restrictions imposed by the 1940 Act, as discussed above.

Off-Balance Sheet Arrangements
 
At March 31, 2016, we had a total of approximately $29.8 million in outstanding commitments comprised of (i) 16 commitments to fund revolving loans that had not been fully drawn or term loans that had not been funded and (ii) three capital commitments that had not been fully called. We recognized unrealized depreciation of $98,000 on our outstanding unfunded loan commitments and unrealized appreciation of $14,000 on our outstanding unfunded capital commitments during three months ended March 31, 2016. At December 31, 2015, we had a total of approximately $34.1 million in outstanding commitments comprised of (i) 14 commitments to fund revolving loans that had not been fully drawn or term loans that had not been funded and (ii) three capital commitments that had not been fully called. We recognized unrealized depreciation of $79,000 on our outstanding unfunded loan commitments and unrealized depreciation of $14,000 on our outstanding unfunded capital commitments during the year ended December 31, 2015.
 
Commitments and Contingencies
 
(dollars in thousands)
 
March 31, 2016
 
December 31, 2015
Unfunded Loan Commitments
 
 
 
AccuMed Corp.
$
250

 
$
875

Apex Linen Services, Inc.
1,003

 
1,003

Arcus Hunting, LLC
2,069

 
1,196

BarFly Ventures, LLC
1,531

 
1,531

Buca C, LLC
1,780

 
1,780

CapFusion Holding, LLC
1,600

 
—

Datacom, LLC
1,500

 
1,500

Guerdon Modular Holdings, Inc.
160

 
400

Hojeij Branded Foods, Inc.
2,000

 
2,143

HW Temps LLC
200

 
200

Jackmont Hospitality, Inc.
1,200

 
1,333

LaMi Products, LLC
1,765

 
1,521

Minute Key, Inc.
200

 
500

Mystic Logistics, Inc.
200

 
200

Unirush LLC
1,000

 
—

Volusion, LLC
3,000

 
3,000


35


 
Commitments and Contingencies
 
(dollars in thousands)
 
March 31, 2016
 
December 31, 2015
Unfunded Capital Commitments
 
 
 
Brightwood Capital Fund III, LP
1,250

 
1,250

EIG Traverse Co-Investment, LP
195

 
5,245

Freeport First Lien Loan Fund III, LP
8,936

 
10,423

Total
$
29,839

 
$
34,100


Recent Developments and Subsequent Events
 
From April 1, 2016 through May 12, 2016, we raised approximately $15.5 million in the Offering. During this period, we funded approximately $13.5 million in investments and received proceeds from repayments and dispositions of approximately $34.5 million.

On April 20, 2016 and May 3, 2016, we increased our public offering price per share to $8.70 and $8.80, respectively, effective as of our weekly closes on April 21, 2016 and May 5, 2016, respectively.

36


Item 3.    Quantitative and Qualitative Disclosures about Market Risk.
 
Quantitative and Qualitative Disclosures about Market Risk
 
We are subject to financial market risks, in particular changes in interest rates. Changes in interest rates may affect our interest income from portfolio investments, the fair value of our fixed income investments, and our cost of funding.
 
Our interest income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent any of our debt investments include floating interest rates. We generally invest in floating rate debt instruments, meaning that the interest rate payable on such instrument resets periodically based upon changes in a specified interest rate index, typically the one-month LIBOR. As of March 31, 2016, approximately 85.3% of our LMM, Private Loan, and Middle Market portfolio debt investments (based on cost) contained floating interest rates. At March 31, 2016, the one-month LIBOR was approximately 0.4%. However, many of our investments provide that the specified interest rate index on such instruments will never fall below a level, or floor, generally between 100 and 150 basis points, equal to 1.0% to 1.5%, regardless of the level of the specified index rate. Given that most floating rate debt investments have index floors at or above 100 basis points, a decline in index rates is not expected to result in a change to interest income.

In addition, any fluctuations in prevailing interest rates may affect the fair value of our fixed rate debt instruments and result in changes in unrealized gains and losses, and may also affect a net increase or decrease in net assets resulting from operations. Such changes in unrealized appreciation and depreciation will materialize into realized gains and losses if we sell our investments before their respective debt maturity dates.

Further, because we borrow money to make investments, our net investment income is partially dependent upon the difference between the interest rate at which we invest borrowed funds and the interest rate at which we borrow funds. In periods of rising interest rates and when we have borrowed capital with floating interest rates, our interest expense will increase, which will increase our financing costs and reduce our net investment income, especially to the extent we hold fixed-rate debt investments. As a result, 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.
 
The following table shows the approximate annualized increase or decrease (dollars in thousands) in the components of net investment income due to hypothetical interest rate index changes, assuming no changes in our investments and borrowings as of March 31, 2016.
Change in interest rates
 
Increase (Decrease) in
Interest Income
 
Increase (Decrease) in
Interest Expense
 
Net Increase (Decrease) in Net
Investment Income
Down 25 basis points
 
$
(65
)
 
$
(988
)
 
$
923

Up 50 basis points
 
705

 
1,975

 
(1,270
)
Up 100 basis points
 
4,072

 
3,950

 
122

Up 200 basis points
 
11,678

 
7,900

 
3,778

Up 300 basis points
 
19,291

 
11,850

 
7,441


Although we believe that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit market, credit quality, the size and composition of the assets in our portfolio and other business developments, including borrowing under the Credit Facilities or other borrowings, that could affect net increase in net assets resulting from operations, or net income. Accordingly, we can offer no assurances that actual results would not differ materially from the analysis above.

If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. As of March 31, 2016, we had not entered into any interest rate hedging arrangements.
 

37


Item 4.    Controls and Procedures.
 
In accordance with Securities Exchange Act of 1934, as amended (the "Exchange Act"), Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2016, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act), during the three months ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


38


PART II — OTHER INFORMATION
 
Item 1.    Legal Proceedings.
 
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.
 
Item 1A. Risk Factors.
 
There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, that we filed with the SEC on March 11, 2016.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
 
Issuer Purchases of Equity Securities

Repurchases of our common stock pursuant to our tender offer are as follows:
 
Period
 
Total Number of Shares Purchased
 
Average Price per Share
 
Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)
January 1, 2016 through January 31, 2016
 
—

 
$
—

 
—

 
—

February 1, 2016 through February 29, 2016
 
—

 
$
—

 
—

 
—

March 1, 2016 through March 31, 2016
 
200,508

 
$
7.62

 
200,508

 
—


Item 3.    Defaults upon Senior Securities.
 
None.
 
Item 4.    Mine Safety Disclosures.
 
Not applicable.
 
Item 5.    Other Information.
 
Not applicable.


39


Item 6.    Exhibits.

Exhibit No.
 
Description
3.1
 
Articles of Amendment and Restatement (filed as Exhibit (a)(2) to Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No. 333-178548), filed on May 31, 2012 and incorporated herein by reference).
3.2
 
Amended and Restated Bylaws of the Registrant (Filed as Exhibit 3.1 to the Registrant’s current report on Form 8-K filed with the SEC on September 24, 2015 (File No. 814-00939) and incorporated by reference herein).
10.1
 
Third Amendment to the Amended and Restated Loan Financing and Servicing Agreement, dated as of February 9, 2016, by and among HMS Funding I LLC, as borrower, the Registrant, as equityholder and servicer, the financial institutions party thereto as lenders, Deutsche Bank AG, New York Branch, as administrative agent, and U.S. Bank National Association, as collateral agent (Filed as Exhibit 10.1 to the Registrant’s current report on Form 8-K, filed on February 11, 2016 (File No. 814-00939) and incorporated herein by reference).
10.2
 
Conditional Income Incentive Fee Waiver Agreement, dated as of May 9, 2016, by and among the Registrant, HMS Adviser LP and MSC Adviser I, LLC (Filed as Exhibit 10.1 to the Registrant’s current report on Form 8-K, filed on May 13, 2016 (File No. 814-00939) and incorporated herein by reference).
31.1
 
Certification of Chief Executive Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
31.2
 
Certification of Chief Financial Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).


40


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
HMS INCOME FUND, INC.
 
 
 
 
Date:
May 16, 2016
By:
/s/ SHERRI W. SCHUGART
 
 
 
Sherri W. Schugart
 
 
 
Chairman, Chief Executive Officer and President
 
 
 
 
Date:
May 16, 2016
By:
/s/ RYAN T. SIMS
 
 
 
Ryan T. Sims
 
 
 
Chief Financial Officer and Secretary


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EXHIBIT INDEX
 
Exhibit No.
 
Description
3.1
 
Articles of Amendment and Restatement (filed as Exhibit (a)(2) to Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No. 333-178548), filed on May 31, 2012 and incorporated herein by reference).
3.2
 
Amended and Restated Bylaws of the Registrant (Filed as Exhibit 3.1 to the Registrant’s current report on Form 8-K filed with the SEC on September 24, 2015 (File No. 814-00939) and incorporated by reference herein).
10.1
 
Third Amendment to the Amended and Restated Loan Financing and Servicing Agreement, dated as of February 9, 2016, by and among HMS Funding I LLC, as borrower, the Registrant, as equityholder and servicer, the financial institutions party thereto as lenders, Deutsche Bank AG, New York Branch, as administrative agent, and U.S. Bank National Association, as collateral agent (Filed as Exhibit 10.1 to the Registrant’s current report on Form 8-K, filed on February 11, 2016 (File No. 814-00939) and incorporated herein by reference).
10.2
 
Conditional Income Incentive Fee Waiver Agreement, dated as of May 9, 2016, by and among the Registrant, HMS Adviser LP and MSC Adviser I, LLC (Filed as Exhibit 10.1 to the Registrant’s current report on Form 8-K, filed on May 13, 2016 (File No. 814-00939) and incorporated herein by reference).
31.1
 
Certification of Chief Executive Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
31.2
 
Certification of Chief Financial Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).


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