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PROSPECTUS SUPPLEMENT		Filed Pursuant to Rule 497
(to Prospectus dated April 30, 2015)		Registration Statement No. 333-202531

$50,000,000

Fidus Investment Corporation

Common Stock

 

 

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, or the 1940 Act. Our investment objective is to provide attractive risk-adjusted returns by generating both current income from our debt investments and capital appreciation from our equity related investments.

We entered into equity distribution agreements, dated August 21, 2014, with Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated, each a “Sales Agent” and, collectively, the “Sales Agents,” pursuant to one master agreement (the “equity distribution agreement”) through which we could sell, by means of at-the-market offerings from time, shares of our common stock having an aggregate offering price of up to $50.0 million (the “ATM Program”). At the inception of the ATM Program, shares of our common stock were registered for sale by registration statement No. 333-182785 and offered by a prospectus supplement dated August 21, 2014.

Pursuant to the ATM Program, as set forth in Supplement No. 2, dated March 5, 2015, and Supplement No. 1, dated November 6, 2014, to the prospectus supplement dated August 21, 2014, the gross proceeds raised, the related sales agent commission, the offering expenses and the average price at which shares were issued under the ATM Program from the period of August 21, 2014 through May 7, 2015 are as follows:

 

(In thousands, except shares and per share data)
Fiscal Year 2014 Issuance of Common Stock		Number of Shares				Gross Proceeds				Sales Agent Commission				Offering Expenses				Average Offering Price
Fourth Quarter ended December 31, 2014			4,812			$	80			$	1			$	2			$	17.00
Third Quarter ended September 30, 2014			153,541				2,850				43				13				18.56
Total			158,353			$	2,930			$	44			$	15			$	18.51
Fiscal Year 2015 Issuance of Common Stock
First Quarter ended March 31, 2015			49,193			$	819			$	12			$	4			$	16.65
Second Quarter (through May 7, 2015)			56,333				937				14				4				16.64
Total			105,526			$	1,756			$	26			$	8			$	16.64

On March 5, 2015, we filed a new registration statement (No. 333-202531) which was declared effective April 30, 2015 (the “Registration Statement”). As disclosed in this Prospectus Supplement and the accompanying prospectus, we intend to continue the ATM Program using shares registered under the Registration Statement.

The equity distribution agreement provides that we may offer and sell shares of our common stock having an aggregate offering price of up to $50,000,000 from time to time through the Sales Agents. Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities Act, including sales made directly on the NASDAQ Global Select Market, or NASDAQ or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.

The sales agents are not required to sell any specific number or dollar amount of shares of our common stock but, as instructed by us, will make all sales using commercially reasonable efforts, consistent with their normal trading and sales practices, as our sales agents and subject to the terms of the equity distribution agreement. From time to time during the terms of the equity distribution agreement, we may deliver a placement notice to one of the sales agents specifying the length of the selling period, the amount of shares to be sold and the minimum price below which sales may not be made. Shares of our common stock to which this prospectus supplement relates will be sold only through one sales agent on any given day. The offering of shares of common stock pursuant to the equity distribution agreement will terminate upon the earlier of (1) the sale of shares having an aggregate offering price of $50,000,000 or (2) the termination of the equity distribution agreement. Under the terms of the equity distribution agreement, the Sales Agents will receive a commission equal to 1.50% of the gross sales price of any shares of our common stock sold through the Sales Agents under the equity distribution agreement. See “Plan of Distribution” beginning on page S-11 of this prospectus supplement.

Our common stock is listed on NASDAQ under the trading symbol “FDUS.” The last sale price, as reported on NASDAQ on April 30, 2015, was $16.65 per share. The net asset value per share of our common stock at March 31, 2015 (the last date prior to the date of this prospectus supplement on which we determined net asset value) was $15.18. The sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less commissions paid to the Sales Agents, will not be less than the net asset value per share of our common stock at the time of such sale.

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

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

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

 

 

 

RAYMOND JAMES		BAIRD

The date of this prospectus supplement is May 7, 2015

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TABLE OF CONTENTS

Prospectus Supplement

 

		Page
PROSPECTUS SUPPLEMENT SUMMARY			S-1
THE OFFERING			S-6
FEES AND EXPENSES			S-8
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS			S-10
PLAN OF DISTRIBUTION			S-11
USE OF PROCEEDS			S-12
CAPITALIZATION			S-13
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			S-14
SALE OF COMMON STOCK BELOW NET ASSET VALUE			S-26
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS			S-27
LEGAL MATTERS			S-29
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			S-29
AVAILABLE INFORMATION			S-29
PRIVACY NOTICE			S-29
INDEX TO FINANCIAL STATEMENTS			SF-1

Prospectus

 

SUMMARY			1
FEES AND EXPENSES			9
RISK FACTORS			12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			37
USE OF PROCEEDS			38
RATIO OF EARNINGS TO FIXED CHARGES			38
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS			39
SELECTED CONSOLIDATED FINANCIAL DATA			41
SELECTED QUARTERLY FINANCIAL DATA			42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION AND RESULTS OF OPERATIONS			43
SENIOR SECURITIES			56
THE COMPANY			57
PORTFOLIO COMPANIES			67
MANAGEMENT			70
MANAGEMENT AND OTHER AGREEMENTS			80
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS			87
CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS			89
SALES OF COMMON STOCK BELOW NET ASSET VALUE			90
DIVIDEND REINVESTMENT PLAN			95
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS			97
DESCRIPTION OF OUR CAPITAL STOCK			106
DESCRIPTION OF OUR PREFERRED STOCK			112
DESCRIPTION OF OUR SUBSCRIPTION RIGHTS			113
DESCRIPTION OF OUR DEBT SECURITIES			114
REGULATION			126
PLAN OF DISTRIBUTION			132
CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR			134
BROKERAGE ALLOCATION AND OTHER PRACTICES			134
LEGAL MATTERS			134
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			134
AVAILABLE INFORMATION			134
PRIVACY NOTICE			135
INDEX TO FINANCIAL STATEMENTS			F-1

 

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ABOUT THE PROSPECTUS SUPPLEMENT

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

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

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

 

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THE OFFERING

 

NASDAQ Symbol

“FDUS”

 

Common stock offered by us

Shares of our common stock having an aggregate offering price of up to $50,000,000.

 

Manner of offering

“At the market offering” that may be made from time to time through Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated, each a “Sales Agent and, collectively, the “Sales Agents,” using commercially reasonable efforts. See “Plan of Distribution” in this prospectus supplement for more information.

 

Use of proceeds

If we sell shares of our common stock with an aggregate offering price of $50.0 million, we anticipate that our net proceeds, after deducting the sales agent commissions and estimated expenses payable by us will be approximately $48.5 million. As of May 7, 2015, we have received net proceeds, after deducting the sales agent commissions and offering expenses payable by us, of approximately $4.6 million in this offering. We intend to use the net proceeds from this offering to make investments in lower middle-market companies in accordance with our investment objective and strategies and for working capital and general corporate purposes. See “Use of Proceeds” in this prospectus supplement for more information.

 

Dividends and Distributions

Our dividends and other distributions, if any, are determined and declared by our board of directors from time to time. Our ability to declare dividends depends on our earnings, our overall financial condition (including our liquidity position), our ability to maintain our qualification as a regulated investment company, or RIC, compliance with applicable BDC regulations, compliance with applicable SBIC regulations and such other factors as our board of directors may deem relevant from time to time. We typically pay quarterly dividends and may pay other distributions to our stockholders out of assets legally available for distribution.

 

Our board of directors declared a regular quarterly distribution of $0.38 per share and a special distribution of $0.02 per share, both of which are payable on June 25, 2015 to stockholders of record as of June 11, 2015.

 

Taxation

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

 

Effective trading at a discount

Shares of closed-end investment companies, including business development companies, frequently trade at a discount to their net asset value. The risk that our shares may trade at a discount to our net asset value is separate and distinct from the risk that our net

 

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asset value per share may decline. We cannot predict whether our shares will trade above, at or below net asset value. See “Risk Factors” and “Sales of Common Stock Below Net Asset Value” in the accompanying prospectus.

 

Risk factors

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

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

 

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FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear, directly or indirectly, based on the assumptions set forth below. We caution you that some of the percentages indicated in the table below are estimates and may vary. Moreover, the information set forth below does not include all transaction costs and expenses that investors may incur in connection with each offering of our common stock pursuant to this prospectus supplement. Except where the context suggests otherwise, whenever this prospectus supplement contains a reference to fees or expenses paid by “you,” “us,” “the Company” or “Fidus,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in us.

 

Stockholder transaction expenses:
Sales load (as a percentage of offering price)			1.5	% (1)
Offering expenses borne by us (as a percentage of offering price)			1.6	% (2)
Dividend reinvestment plan expenses			—	% (3)
Total stockholder transaction expenses paid by us (as a percentage of offering price)			3.1	%
Annual expenses (as a percentage of net assets attributable to common stock)(4):
Base management fee			2.9	% (5)
Incentive fees payable under Investment Advisory Agreement			2.6	% (6)
Interest payments on borrowed funds			3.4	% (7)
Other expenses			1.8	% (8)
Total annual expenses			10.7	% (9)

 

(1)	Represents the commission with respect to the shares of common stock being sold in this offering. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus.

(2)	The percentage reflects estimated offering expenses of approximately $0.8 million for the estimated duration of this offering.

(3)	The expenses of administering our dividend reinvestment plan are included in “Other expenses.”

(4)

“Annual expenses” is calculated as a percentage of net assets attributable to common stock because such expenses are ultimately paid by our common stockholders. Offering expenses, if any, will be borne directly or indirectly by our common stockholders. Net assets attributable to common stock equals average net assets for the three months ended March 31, 2015.

(5)

Our base management fee is 1.75% of the average value of our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts) and are estimated by assuming the base management fee remains consistent with the fees incurred for the three months ended March 31, 2015. We may from time to time decide it is appropriate to change the terms of the Investment Advisory Agreement. Under the 1940 Act, any material change to our Investment Advisory Agreement must be submitted to stockholders for approval. The 2.9% reflected in the table is calculated on our net assets (rather than our total assets). See “Management and Other Agreements—Investment Advisory Agreement” in the accompanying prospectus.

(6)

This item represents an estimate of our investment advisor’s incentive fees assuming the incentive fee related to pre-incentive fee net investment income remains consistent with the fees incurred on pre-incentive fee net investment income for the three months ended March 31, 2015. The estimate also assumes that the capital gains incentive fees payable at the end of the 2015 calendar year will be based on the actual cumulative realized capital gains net of cumulative realized losses and unrealized capital depreciation as of December 31, 2015, which we believe is consistent with no capital gains incentive fees payable as of March 31, 2015.

The incentive fee consists of two parts:

The first, payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income (including interest that is accrued but not yet received in cash), subject to a 2.0% quarterly (8.0% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, our investment advisor receives no incentive fee until our pre-incentive fee net investment income equals the hurdle rate of 2.0% but then receives, as a “catch-up,” 100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, our investment advisor will receive 20.0% of our pre-incentive fee net investment income as if a hurdle rate did not apply.

 

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The second part, payable annually in arrears, equals 20.0% of our realized capital gains net of realized capital losses and unrealized capital depreciation, if any, on a cumulative basis from inception through the end of the fiscal year (or upon the termination of the Investment Advisory Agreement, as of the termination date), less the aggregate amount of any previously paid capital gain incentive fees. We accrue, but do not pay, a capital gains incentive fee in connection with any net unrealized capital appreciation, as appropriate. For the three months ended March 31, 2015, we accrued less than $0.1 million in capital gains incentive fees in accordance with generally accepted accounting principles.

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

 

(7)

As of March 31, 2015, we had outstanding SBA debentures of $178.5 million, and unfunded commitments from the SBA to purchase up to an additional of $46.5 million SBA debentures, as well as $10.8 million in outstanding borrowings under the Credit Facility, which has total commitment of $50.0 million. Interest payments on borrowed funds is based on estimated annual interest and fee expenses on outstanding SBA debentures and borrowings under the Credit Facility as of March 31, 2015 with a weighted average interest rate of 4.2%. We have estimated the annual interest payments on borrowed funds and caution you that our actual interest payments will depend on prevailing interest rates and our rate of borrowing, which may be substantially higher than the estimate provided in this table.

(8)

Other expenses represent our estimated annual operating expenses, including professional fees, directors’ fees, insurance costs, expenses of our dividend reinvestment plan and payments under the Administration Agreement based on our allocable portion of overhead and other expenses incurred by our administrator. See “Management and Other Agreements—Administration Agreement” in the accompanying prospectus. Other expenses exclude interest payments on borrowed funds, and if we issue debt securities or preferred stock, interest payments on debt securities and distributions with respect to preferred stock. We currently do not have any class of securities outstanding other than common stock. “Other expenses” are based on actual other expenses for the three months ended March 31, 2015.

(9)

“Total annual expenses” as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that the “total annual expenses” percentage be calculated as a percentage of net assets, rather than the total assets including assets that have been purchased with borrowed amounts. If the “total annual expenses” percentage were calculated instead as a percentage of average consolidated total assets for the three months ended March 31, 2015, our “total annual expenses” would be 6.0% of average consolidated total assets.

Example

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

 

		1 year				3 years				5 years				10 years
You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return		$	110			$	310			$	487			$	845

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

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

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus supplement and the accompanying prospectus contain forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “should,” “targets,” “projects” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

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

 

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our ability to maintain or develop referral relationships;

 

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our use of leverage;

 

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

 

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uncertain valuations of our portfolio investments;

 

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competition for investment opportunities;

 

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actual and potential conflicts of interest with our investment advisor;

 

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other potential conflicts of interest;

 

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SBA regulations affecting our wholly-owned SBIC subsidiaries;

 

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changes in interest rates;

 

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

 

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

 

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

 

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changes in laws or regulations applicable to us;

 

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

 

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possible resignation of our investment advisor or administrator;

 

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

 

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risks associated with investing in lower middle-market companies;

 

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

 

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our ability to invest in qualifying assets.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this prospectus supplement should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Risk Factors” and elsewhere in this prospectus supplement and the accompanying prospectus. You should not place undue reliance on these forward-looking statements as a prediction of actual results, which apply only as of the date of this prospectus supplement. We expressly disclaim any responsibilities to update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The forward-looking statements and projections contained in this prospectus supplement and the accompanying prospectus are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act.

 

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PLAN OF DISTRIBUTION

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

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

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

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

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

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

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

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

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

 

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USE OF PROCEEDS

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market” as defined in Rule 415 under the Securities Act, including sales made directly on NASDAQ or sales made to or through a market maker other than on an exchange. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in this paragraph depending on, among other things, the market price of our common stock at the time of any such sale. As a result, the actual net proceeds we receive may be more or less than the amount of net proceeds estimated in this prospectus supplement. Assuming the sale of all $50.0 million of common stock offered under this prospectus supplement and the accompanying prospectus, we estimate that the net proceeds of this offering will be approximately $48.5 million after deducting the estimated sales commission payable to the Sales Agents and our estimated offering expenses.

We intend to use the net proceeds from the sale of the shares to invest in lower middle-market companies in accordance with our investment objective and strategies, to repay the outstanding indebtedness under our Credit Facility, and for working capital and general corporate purposes. As of May 6, 2015, there were no outstanding borrowings under our Credit Facility.

Pending investments as described above, we will invest any remaining net proceeds of this offering primarily in cash, cash equivalents, U.S. Government securities and other high-quality debt instruments that mature in one year or less, or “temporary investments,” as appropriate. These securities may have lower yields than our other investments and accordingly result in lower distributions, if any, by us during such period. See “Regulation — Temporary Investments” in the accompanying prospectus.

 

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CAPITALIZATION

The equity distribution agreement provides that we may offer and sell up to $50.0 million of our common stock from time to time through our Sales Agents for the offer and sale of such common stock. The table below assumes that we will sell all of the $50.0 million of our common stock but there is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in the table below. In addition, the price per share of any such sale may be greater or less than $16.65, depending on the net asset value and market price of our common stock at the time of any such sale. The following table sets forth our capitalization as of March 31, 2015:

 

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on an actual basis; and

 

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on an as further adjusted basis giving effect to the assumed sale of $45.3 million (the aggregate offering amount remaining under the ATM Program as of May 7, 2015) of our common stock at a price of $16.65 per share (the last reported sales price of our common stock on April 30, 2015) less commissions and expenses.

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

 

		As of March 31, 2015
		Actual				As Adjusted
		(Unaudited)
Assets:
Cash and cash equivalents		$	16,367			$	60,275
Investments, at fair value			412,604				412,604
Other assets			11,007				11,007
Total assets		$	439,978			$	483,886
Liabilities:
SBA debentures		$	178,500			$	178,500
Borrowings under credit facility			10,800				10,800
Other liabilities			6,010				6,010
Total liabilities			195,310				195,310
Net Assets:
Common stock, $0.001 par value (100,000,000 shares authorized; 16,113,152 shares issued and outstanding, actual; 18,834,628 shares issued and outstanding, as adjusted)			16				19
Additional paid-in capital			244,103				288,008
Undistributed net investment income			12,563				12,563
Accumulated net realized (loss) gain on investments, net of taxes and distributions			(15,999	)			(15,999	)
Accumulated net unrealized appreciation			3,985				3,985
Total net assets			244,668				288,576
Total liabilities and net assets		$	439,978			$	483,886
Net asset value per common share		$	15.18			$	15.32

 

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

Overview

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

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

On June 20, 2011, Fidus Investment Corporation acquired all of the limited partnership interests of Fidus Mezzanine Capital, L.P., or Fund I, and membership interests of Fidus Mezzanine Capital GP, LLC, its general partner, through the Formation Transactions (as defined in Note 1 to the consolidated financial statements), resulting in Fund I becoming our wholly-owned SBIC subsidiary. Immediately following the Formation Transactions, we and Fund I elected to be treated as business development companies, or BDCs, under the 1940 Act and our investment activities have been managed by Fidus Investment Advisors, LLC, our investment advisor, and supervised by our board of directors, a majority of whom are independent of us. On March 29, 2013, we commenced operations of a second wholly-owned subsidiary, Fidus Mezzanine Capital II, L.P. (“Fund II”). Fund I and Fund II are collectively referred to as the “Funds.”

Fund I received its SBIC license on October 22, 2007 and Fund II received its SBIC license on May 28, 2013. We plan to continue to operate the Funds as SBICs, subject to SBA approval, and to utilize the proceeds of the sale of SBA debentures to enhance returns to our stockholders. We have also made, and continue to make, investments directly through FIC. We believe that utilizing FIC and the Funds as investment vehicles provides us with access to a broader array of investment opportunities. Based on the current capitalization of the Funds, we have approximately $46.5 million of remaining borrowing capacity under the SBIC Debenture Program and intend to fully utilize such capacity over the ensuing 12-24 months.

In August 2014, we entered into an equity distribution agreement with Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated through which the Company could sell, by means of the ATM Program shares of the Company’s common stock having an aggregate offering price of up to $50.0 million. During the period from August 21, 2014 through December 31, 2014, 158,353 shares of our common stock were sold at an average offering price of $18.51 per share resulting in net proceeds of $2.9 million after commissions to the sales agent on shares sold and offering costs of $0.1 million. During the three months ended March 31, 2015, 49,193 shares of our common stock were sold at an average offering price of $16.65 per share resulting in net proceeds of $0.8 million after commissions to the sales agent on shares sold and offering costs of less than $0.1 million. We intend to continue utilizing our ATM Program for capital to fund additional investments during 2015.

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

 

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dividends will be collected. See “Critical Accounting Policies and Use of Estimates – Revenue Recognition.” Interest and dividend income is accrued based upon the outstanding principal amount and contractual terms of debt and preferred equity investments. Interest is accrued on a daily basis. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution. Distributions of earnings from portfolio companies are evaluated to determine if the distribution is a distribution of earnings or a return of capital.

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

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

 

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organization;

 

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

 

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

 

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

 

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offerings of our common stock and other securities;

 

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investment advisory fees and management fees;

 

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

 

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transfer agent, dividend agent and custodial fees and expenses;

 

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federal and state registration fees;

 

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

 

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U.S. federal, state and local taxes;

 

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Independent Directors’ fees and expenses;

 

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

 

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

 

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

 

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

 

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proxy voting expenses; and

 

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

Portfolio Composition, Investment Activity and Yield

During the three months ended March 31, 2015, we invested $39.6 million in debt and equity investments, including five new portfolio companies. These investments consisted of subordinated notes ($24.8 million, or 62.7%), senior

 

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secured loans ($12.8 million, or 32.3%), equity securities ($1.8 million, or 4.5%), and warrants ($0.2 million, or 0.5%). During the three months ended March 31, 2015, we received proceeds from sales or repayments, including principal, return of capital dividends and net realized gains (losses), of $24.7 million. During the three months ended March 31, 2014, we invested $17.3 million in debt and equity investments, including one new portfolio company. These investments consisted of subordinated notes ($1.5 million, or 8.7%), senior secured loans ($9.8 million, or 56.6%), equity securities ($5.6 million, or 32.4%) and warrants ($0.4 million, or 2.3%). During the three months ended March 31, 2014, we received proceeds from repayments of principal, including return of capital dividends and realized gains, of $13.6 million.

As of March 31, 2015, the fair value of our investment portfolio totaled $412.6 million and consisted of 47 portfolio companies. As of March 31, 2015, our debt portfolio was entirely comprised of fixed rate investments. Overall, the portfolio had net unrealized appreciation of $5.2 million as of March 31, 2015. Our average portfolio company investment at amortized cost was $8.7 million as of March 31, 2015.

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

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

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

 

		Fair Value								Cost
		March 31, 2015				December 31, 2014				March 31, 2015				December 31, 2014
Subordinated notes			66.5	%			69.1	%			67.6	%			69.8	%
Senior secured loans			21.0				18.7				21.3				19.0
Equity			10.9				10.8				9.4				9.4
Warrants			1.6				1.4				1.7				1.8
Total			100.0	%			100.0	%			100.0	%			100.0	%

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

 

		Fair Value								Cost
		March 31, 2015				December 31, 2014				March 31, 2015				December 31, 2014
Midwest			25.3	%			23.9	%			25.2	%			23.7	%
Southeast			25.2				28.6				25.9				29.0
West			21.3				19.9				19.2				18.4
Northeast			18.2				16.9				18.0				16.7
Southwest			10.0				10.7				11.7				12.2
Total			100.0	%			100.0	%			100.0	%			100.0	%

 

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

 

		Fair Value								Cost
		March 31, 2015				December 31, 2014				March 31, 2015				December 31, 2014
Healthcare products			12.5	%			11.2	%			12.1	%			10.6	%
Specialty distribution			11.0				10.3				9.8				9.3
Healthcare services			10.0				10.3				10.6				10.8
Aerospace & defense manufacturing			9.4				9.4				8.3				8.6
Transportation services			6.1				4.0				6.0				3.9
Consumer products			5.4				5.6				5.4				5.6
Oil & gas services			4.5				8.6				4.9				8.8
Business services			4.5				3.1				4.6				3.2
Component manufacturing			4.3				4.3				4.4				4.6
Industrial cleaning & coatings			3.9				4.1				4.1				4.2
Building products manufacturing			3.6				3.6				3.5				3.7
Financial services			3.5				3.7				3.3				3.4
Safety products manufacturing			2.6				2.7				2.6				2.7
Utility equipment manufacturing			2.6				2.6				2.5				2.6
Printing services			2.4				2.4				2.5				2.6
Information technology services			2.1				2.3				2.4				2.5
Specialty chemicals			2.0				2.2				2.1				2.2
Restaurants			1.9				1.7				1.8				1.6
Laundry services			1.5				1.5				1.4				1.4
Telecommunication services			1.4				—				1.5				—
Apparel distribution			1.4				1.5				1.4				1.5
Vending equipment manufacturing			1.2				—				1.2				—
Retail cleaning			0.9				1.1				2.6				2.7
Specialty cracker manufacturing			0.5				0.5				0.3				0.3
Electronic components supplier			0.3				0.4				0.3				0.4
Retail			0.3				2.7				0.2				2.6
Commercial cleaning			0.2				0.2				0.2				0.2
Total			100.0	%			100.0	%			100.0	%			100.0	%

Portfolio Asset Quality

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

 

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

 

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

 

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

 

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

 

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

 

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

 

		March 31, 2015								December 31, 2014
		Investments at Fair Value				Percent of Total Portfolio				Investments at Fair Value				Percent of Total Portfolio
		(dollars in thousands)
Investment Rating
1		$	70,859				17.2	%		$	49,499				12.5	%
2			288,959				70.0				297,024				74.9
3			49,859				12.1				48,814				12.3
4			2,927				0.7				1,018				0.3
5			—				—				—				—
Totals		$	412,604				100.0	%		$	396,355				100.0	%

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

Non-Accrual

As of March 31, 2015 and December 31, 2014, we had no investments on non-accrual status.

Discussion and Analysis of Results of Operations

Comparison of three months ended March 31, 2015 and March 31, 2014

Investment Income

For the three months ended March 31, 2015, total investment income was $12.8 million, an increase of $2.3 million, or 21.6%, over the $10.6 million of total investment income for the three months ended March 31, 2014. The increase was primarily attributable to a $2.4 million increase in interest income resulting largely from higher average levels of debt investments outstanding and a $0.2 million increase in fee income, which was offset by a $0.2 million decrease in dividend income due to lower average levels of income producing equity investments outstanding during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014.

Expenses

For the three months ended March 31, 2015, total expenses, including income tax provision, were $6.6 million, an increase of $1.5 million or 29.2%, over the $5.1 million of total expenses, including income tax provision, for the three months ended March 31, 2014. Interest and financing expenses for the three months ended March 31, 2015 were $2.1 million, an increase of $0.4 million or 21.5%, compared to $1.8 million for the three months ended March 31, 2014 as a result of higher average balances of SBA debentures outstanding during 2015 and interest and commitment fees related to the Credit Facility. The base management fee increased $0.4 million, or 31.2%, to $1.8 million for the three months ended March 31, 2015 due to higher average total assets less cash and cash equivalents for the three months ended March 31, 2015 than the comparable period in 2014. The incentive fee for the three months ended March 31, 2015 was $1.6 million, a $0.8 million, or 89.9%, increase from the $0.8 million incentive fee for the three months ended March 31, 2014 which was the result of an increase of $0.3 million in the income incentive fee to $1.6 million and a capital gains incentive fee accrual of $0.1 million during the 2015 period compared to a capital gains incentive fee reversal of $0.4 million during the same period in 2014. The administrative service fee, professional fees and other general and administrative expenses totaled $1.1 million for both the three months ended March 31, 2015 and 2014.

Net Investment Income

Net investment income for the three months ended March 31, 2015 was $6.2 million, which was an increase of $0.8 million, or 14.4%, compared to net investment income of $5.4 million during the three months ended March 31, 2014 as a result of the $2.3 million increase in total investment income and the $1.5 million increase in total expenses, including income tax provision.

Net Increase in Net Assets Resulting From Operations

For the three months ended March 31, 2015, we did not record any realized gains or losses on investments. For the three months ended March 31, 2014, the total realized gain on investments was $1.9 million, which consisted of realized gains on an investment in one portfolio company and realized gains on an investment in one non-control/non-affiliate portfolio company.

 

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During the three months ended March 31, 2015, we recorded a net change in unrealized appreciation on investments of $0.2 million attributable to (i) the reversal of net unrealized depreciation on investments of $0.3 million related to the exit or sale of investments, resulting in unrealized appreciation, (ii) net unrealized depreciation of $1.4 million on debt investments and (iii) net unrealized appreciation of $1.3 million on equity investments. During the three months ended March 31, 2014, we recorded a net change in unrealized depreciation on investments of $3.9 million attributable to (i) the reversal of net unrealized appreciation on investments of $1.9 million related to the exit or sale of investments, resulting in unrealized depreciation, (ii) net unrealized depreciation of $3.4 million on debt investments and (iii) net unrealized appreciation of $1.4 million on equity investments.

As a result of these events, our net increase in net assets resulting from operations during the three months ended March 31, 2015 was $6.4 million, or an increase of $3.0 million, or 89.7%, compared to a net increase in net assets resulting from operations of $3.4 million during the prior year period.

Liquidity and Capital Resources

As of March 31, 2015, we had $16.4 million in cash and cash equivalents and our net assets totaled $244.7 million. We believe that our current cash and cash equivalents on hand, our continued access to SBA-guaranteed debentures, our Credit Facility and our anticipated cash flows from operations will provide adequate capital resources with which to operate and finance our investment business and make distributions to our stockholders for at least the next 12 months. We intend to generate additional cash primarily from the future offerings of securities (including the ATM Program) and future borrowings, as well as cash flows from operations, including income earned from investments in our portfolio companies. On both a short-term and long-term basis, our primary use of funds will be investments in portfolio companies and cash distributions to our stockholders.

Cash Flows

For the three months ended March 31, 2015, we experienced a net decrease in cash and cash equivalents in the amount of $13.0 million. During that period, we used $12.8 million of cash for operating activities, primarily for the funding of $39.6 million of investments, which was partially offset by the proceeds from sales and repayments of investments of $24.7 million. During the same period, we used $0.1 million for financing activities resulting from proceeds received from stock offerings, net of expenses, of $0.9 million, proceeds from the issuance of SBA debentures of $5.0 million and net borrowings under the Credit Facility of $0.8 million, which were partially offset by cash dividends paid to stockholders of $5.9 million and payments of financing costs totaling $0.9 million.

For the three months ended March 31, 2014, we experienced a net decrease in cash and cash equivalents in the amount of $12.7 million. During that period, we used $4.8 million of cash for operating activities, primarily for the funding of $17.3 million of investments, which was partially offset by $13.6 million of repayments and sales proceeds received. During the same period, we used $7.9 million for financing activities, consisting of cash dividends paid to stockholders of $5.0 million and a $2.9 million payment for taxes related to the 2013 deemed distribution which was paid on behalf of the stockholders.

Capital Resources

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

The Funds are licensed SBICs, and have the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the Small Business Investment Act and the SBA rules applicable to SBICs, an SBIC can have outstanding at any time debentures guaranteed by the SBA in an amount up to twice its regulatory capital. The SBA regulations currently limit the amount that is available to be borrowed by any SBIC and guaranteed by the SBA to 200.0% of an SBIC’s regulatory capital or $150.0 million, whichever is less. For two or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $225.0 million. SBA debentures have fixed interest rates that approximate prevailing 10-year Treasury Note rates plus a spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the SBA debentures is not required to be paid before maturity but may be pre-paid at any time. As of March 31, 2015, Fund I had $150.0 million of outstanding SBA debentures. Based on its $75.0 million of regulatory capital as of March 31, 2015, Fund I cannot issue additional SBA debentures. As of March 31,

 

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2015, Fund II had $28.5 million of outstanding SBA debentures. Based on its $37.5 million of regulatory capital as of March 31, 2015, Fund II has the current capacity to issue up to an additional $46.5 million of SBA debentures. For more information on the SBA debentures, please see Note 6 to our consolidated financial statements.

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

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

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

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

We have made customary representations and warranties and are required to comply with various affirmative, negative and financial covenants, reporting requirements and other customary requirements for similar credit facilities. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. As of March 31, 2015, we are in compliance with all covenants of the Credit Facility and there was $10.8 million outstanding under the Credit Facility.

As of March 31, 2015, the weighted average interest rate for all SBA debentures and borrowings outstanding under the Credit Facility was 4.2%.

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

As a BDC, we are generally not permitted to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common stock if our board of directors, including Independent Directors, determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve such sale. On June 4, 2014, our stockholders voted to allow us to sell or otherwise issue common stock at a price below net asset value per share for a period of one year ending on the earlier of June 4, 2015 or the date of our 2015 Annual Meeting of Stockholders. We expect to present to our stockholders a similar proposal at our 2015 Annual Meeting of Stockholders. Our stockholders specified that the cumulative number of shares sold in each offering during the one-year period ending on the earlier of June 4, 2015 or the date of our 2015 Annual Meeting of Stockholders may not exceed 25.0% of our outstanding common stock immediately prior to each such sale.

Current Market Conditions

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

 

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Valuation of Portfolio Investments

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

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

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

 

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

 

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

 

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

 

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

 

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

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

We perform detailed valuations of our debt and equity investments, using both the market and income approaches as appropriate. Under the market approach, we typically use the enterprise value methodology to determine the fair value of an investment. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is generally best expressed as a range of values, from which we derive a single estimate of enterprise value. Under the income approach, we typically prepare and analyze discounted cash flow models to estimate the present value of future cash flows of either an individual debt investment or of the underlying portfolio company itself.

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

For our debt investments, including senior secured loans and subordinated notes, the primary valuation technique used to estimate the fair value is the discounted cash flow method. However, if there is deterioration in credit quality or a debt investment is in workout status, we may consider other methods in determining the fair value, including the value attributable to the debt investment from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis. Our discounted cash flow models estimate a range of fair values by applying an appropriate discount rate to the future cash flow streams of our debt investments, based on future interest and principal payments as set forth in the associated loan agreements. We prepare a weighted average cost of capital for use in the discounted cash flow model for each investment, based on factors including, but not limited to: current pricing and credit

 

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metrics for similar proposed or executed investment transactions of private companies; the portfolio company’s historical financial results and outlook; and the portfolio company’s current leverage and credit quality as compared to leverage and credit quality as of the date the investment was made. We may also consider the following factors when determining the fair value of debt investments: the portfolio company’s ability to make future scheduled payments; prepayment penalties; estimated remaining life; the nature and realizable value of any collateral; and changes in the interest rate environment and the credit markets that generally may affect the price at which similar investments may be made. We estimate the remaining life of our debt investments to generally be the legal maturity date of the instrument, as we generally intend to hold loans to maturity. However, if we have information available to us that the loan is expected to be repaid in the near term, we would use an estimated remaining life based on the expected repayment date.

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

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

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

Revenue Recognition

Investments and related investment income. Realized gains or losses on investments are recorded upon the sale or disposition of a portfolio investment and are calculated as the difference between the net proceeds from the sale or disposition and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Changes in the fair value of investments from the prior period, as determined by our board of directors through the application of our valuation policy, are included as net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

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

Payment-in-kind interest. We have investments in our portfolio that contain a PIK income provision. The PIK income, computed at the contractual rate specified in the applicable investment agreement, is added to the principal balance of the investment, rather than being paid in cash, and recorded as interest or dividend income on the consolidated statements of operations. Generally, PIK can be paid-in-kind or all in cash. We stop accruing PIK income when it is determined that PIK income is no longer collectible. In addition, to maintain our status as a RIC and to avoid paying corporate federal income tax, substantially all of this income must be paid out to stockholders in the form of distributions, even though we have not yet collected the cash. We may have difficulty paying our required distributions if we recognize income before, or without, receiving cash representing such income.

Non-accrual. Loans or preferred equity investments are placed on non-accrual status and we will generally cease recognizing interest or dividend income when principal, interest or dividend payments become materially past due, or when there is reasonable doubt that principal, interest or dividends will be collected. Interest payments received on

 

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non-accrual investments may be recognized as income or applied to the investment principal balance based on management’s judgment. Non-accrual investments are restored to accrual status when past due principal, interest or dividends are paid and, in management’s judgment, are likely to remain current.

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

Fee income. All transaction fees earned in connection with our investments are recognized as fee income. Such fees typically include fees for services, including structuring and advisory services, provided to portfolio companies. We recognize income from fees for providing such structuring and advisory services when the services are rendered or the transactions are completed. Upon the prepayment of a loan or debt security, any prepayment penalties are recorded as fee income when earned. Prior to the Formation Transactions, and in accordance with the prior limited partnership agreement, we historically recorded transaction fees provided in connection with our investments as a direct offset to management fee expense.

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

Recently Issued Accounting Standards

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

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

Off-Balance Sheet Arrangements

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of March 31, 2015, we had off-balance sheet arrangements consisting of six unfunded revolving loan commitments totaling $4.6 million to portfolio companies and two unfunded loan commitments totaling $4.5 million to a portfolio company. As of December 31, 2014, we had off-balance sheet arrangements consisting of consisting of five unfunded revolving loan commitments totaling $4.1 million to portfolio companies and two unfunded loan commitment totaling $5.4 million to a portfolio company.

Related Party Transactions

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

 

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In connection with the Formation Transactions, Fund I terminated its management services agreement with Fidus Capital, LLC and we entered into the Investment Advisory Agreement with Fidus Investment Advisors, LLC, as our investment advisor. The investment professionals of Fidus Investment Advisors, LLC were also the investment professionals of Fidus Capital, LLC. We entered into the Investment Advisory Agreement with Fidus Investment Advisors, LLC to manage our day-to-day operating and investing activities. We pay our investment advisor a fee for its services under the Investment Advisory Agreement consisting of two components — a base management fee and an incentive fee. See Note 5 to our consolidated financial statements.

 

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Edward H. Ross, our Chairman and Chief Executive Officer and Thomas C. Lauer, one of our directors, are managers of Fidus Investment Advisors, LLC.

 

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

 

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

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

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

Recent Developments

On April 1, 2015, we exited our debt and equity investments in Connect-Air International, Inc. (Connect) in connection with the sale of Connect. We received payment in full on our subordinated note and recognized a gain of approximately $5.3 million on our common equity investment.

On April 1, 2015, we exited our equity investment in Acentia, LLC in connection with the sale of Acentia, LLC. We recognized a loss of less than $0.1 million on our common equity investment.

Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. Changes in interest rates affect both our cost of funding and the valuation of our investment portfolio. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. In the future, our investment income may also be affected by changes in various interest rates, including LIBOR and prime rates, to the extent of any debt investments that include floating interest rates. As of March 31, 2015 and December 31, 2014, our debt portfolio was entirely comprised of fixed rate investments. Our pooled SBA debentures bear interest at fixed rates. Our Credit Facility bears interest, subject to our election, on a per annum basis equal to (i) the alternate base rate plus 2.5% or (ii) the applicable LIBOR rate plus 3.5%. The alternate base rate is equal to the greater of (i) prime rate, (ii) the federal funds rate plus 0.5% or (iii) the three-month LIBOR rate plus 1.0%.

Assuming that the consolidated statements of assets and liabilities as of March 31, 2015 and December 31, 2014 were to remain constant, a hypothetical 100 basis point change in interest rates would not have a material effect on our level of interest income from debt investments or interest expense.

Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the

 

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funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio.

 

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SALE OF COMMON STOCK BELOW NET ASSET VALUE

On June 4, 2014, our stockholders approved our ability to sell or otherwise issue an unlimited number of shares of our common stock at a discount from net asset value per share for a period of one year ending on the earlier of June 4, 2015 or the date of our 2015 Annual Meeting of Stockholders. We will seek this approval again in connection with our 2015 Annual Meeting of Stockholders. In order to sell shares pursuant to this authorization a majority of our directors who have no financial interest in the sale or issuance and a majority of our Independent Directors must (a) find that the sale or issuance is in our best interests and in the best interests of our stockholders, and (b) in consultation with any underwriter or underwriters of the offering, make a good faith determination as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares, or immediately prior to the issuance of such shares, that the price at which such shares are to be sold or otherwise issued is not less than a price which closely approximates the market value of such shares, less any distributing commission or discount. It should be noted that the maximum number of shares issuable below net asset value pursuant to this authority that could result in such dilution is limited to 25% of the Company’s then outstanding common stock immediately prior to each such sale. Any offering of common stock below net asset value per share will be designed to raise capital for investment in accordance with our investment objective.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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The leverage available to us.

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

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

 

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

Our common stock began trading on June 21, 2011 on The Nasdaq Global Market under the symbol “FDUS.” Effective January 3, 2012, our common stock is included in the Nasdaq Global Select Market. Prior to June 21, 2011, there was no established public trading market for our common stock. The following table lists the high and low closing sale price for our common stock, and the closing sale price as a percentage of net asset value, or NAV, since shares of our common stock began being regularly quoted on Nasdaq.

 

						Closing Sales Price								Premium/ (Discount) of High Sales Price to				Premium/ (Discount) of Low Sales Price to				Distributions
Period		NAV (1)				High				Low				NAV (2)				NAV (2)				Per Share (3)
Year ended December 31, 2012
First Quarter		$	14.94			$	14.38			$	12.85				(3.7	)%			(14.0	)%		$	0.34
Second Quarter			15.02				15.17				13.22				1.0				(12.0	)			0.36
Third Quarter			15.27				16.78				14.89				9.9				(2.5	)			0.38
Fourth Quarter			15.32				17.00				14.55				11.0				(5.0	)			0.38
Year ended December 31, 2013
First Quarter			15.46				19.15				16.52				23.9				6.9				0.38
Second Quarter			16.06				19.17				17.28				19.4				7.6				0.38
Third Quarter			15.98				19.73				18.60				23.5				16.4				0.42
Fourth Quarter			15.35				22.29				18.64				45.2				21.4				0.76
Year ended December 31, 2014
First Quarter			15.22				21.99				17.86				44.5				17.3				0.38
Second Quarter			15.09				20.54				16.63				36.1				10.2				0.48
Third Quarter			15.18				20.04				16.51				32.0				8.8				0.38
Fourth Quarter			15.16				17.10				13.71				12.8				(9.6	)			0.48
Year ended December 31, 2015
First Quarter			15.18				17.02				14.40				12.1				(5.1	)			0.38
Second Quarter (through April 30, 2015)			*				16.90				15.73				*				*				0.40	(4)

 

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

(2)	Calculated as the difference between the respective high or low closing sales price and the quarter end net asset value divided by the quarter end net asset value.

(3)

Represents the regular and special, if applicable, distribution declared in the specified quarter. We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions. See “Dividend Reinvestment Plan” in the accompanying prospectus.

(4)	Represents a regular quarterly distribution of $0.38 per share and a special distribution of $0.02 per share, both of which are payable on June 25, 2015 to stockholders of record as of June 11, 2015.

*	Not determinable at time of filing

Shares of BDCs may trade at a market price that is less than the net asset value of those shares. The possibilities that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. It is not possible to predict whether any common stock offered pursuant to this prospectus supplement will trade at, above, or below net asset value.

 

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

To maintain our qualification as a RIC, we must, among other things, distribute at least 90.0% of our net ordinary income and our net short-term capital gains in excess of our net long-term capital losses, if any. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98.0% of our net ordinary income for the calendar year, (2) 98.2% of our capital gain net income for the calendar year and (3) any net ordinary income and capital gain net income for the preceding calendar year that were not distributed during such year and on which we paid no U.S. federal income tax. We may retain for investment some or all of our net capital gain (i.e., net long-term capital gains in excess of net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, you will be treated as if you received an actual distribution of the capital gain we retain and then reinvested the net after-tax proceeds in our common stock. You also may be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the capital gain deemed distributed to you. Please refer to “Material U.S. Federal Income Tax Considerations” in the accompanying prospectus for further information regarding the consequences of our retention of net capital gain. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See “Regulation” and “Material U.S. Federal Income Tax Considerations” in the accompanying prospectus.

We may make distributions that are payable in cash or shares of our common stock at the election of each stockholder. Under certain applicable provisions of the Code and the Treasury regulations, distributions payable in cash or in shares of stock at the election of stockholders are treated as taxable dividends to the extent of the distributing corporation’s current and accumulated earnings and profits. The Internal Revenue Service has issued private letter rulings indicating that such treatment may apply under circumstances in which the total amount of cash distributed is limited to as little as 20.0% of the total distribution. Under these rulings, if too many stockholders elect to receive their distributions in cash, each such stockholder would receive a pro-rata share of the total cash to be distributed and would receive the remainder of their distribution in shares of stock. If we decide to make any distributions that are payable in part in shares of our stock, U.S. stockholders receiving such distributions generally will be required to include the full amount of the distribution (whether received in cash, shares of our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits. As a result, a U.S. stockholder may be required to pay tax with respect to such distributions in excess of any cash received. If a U.S. stockholder sells the stock it receives in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. federal tax with respect to such distributions, including in respect of all or a portion of such distributions that are payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on such distributions, it may put downward pressure on the trading price of shares of our stock.

We will report certain U.S. federal income tax information with respect to our distributions to our stockholders on IRS Form 1099-DIV after the end of the year. Our ability to pay distributions could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants.

 

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LEGAL MATTERS

Certain legal matters will be passed upon for us by Morrison & Foerster LLP. Morrison & Foerster LLP also represents our investment advisor. Certain legal matters will be passed upon for the Sales Agents by Sutherland Asbill  & Brennan, LLP.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AVAILABLE INFORMATION

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

AVAILABLE INFORMATION

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

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

PRIVACY NOTICE

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

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

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

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Consolidated Statements of Assets and Liabilities — March 31, 2015 (unaudited) and December  31, 2014			SF-2
Consolidated Statements of Operations — Three Months Ended March  31, 2015 (unaudited) and 2014 (unaudited)			SF-3
Consolidated Statements of Changes in Net Assets — Three Months Ended March  31, 2015 (unaudited) and 2014 (unaudited)			SF-4
Consolidated Statements of Cash Flows — Three Months Ended March  31, 2015 (unaudited) and 2014 (unaudited)			SF-5
Consolidated Schedules of Investments — March 31, 2015 (unaudited) and December 31, 2014			SF-6
Notes to Consolidated Financial Statements (unaudited)			SF-12

 

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PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Assets and Liabilities

(In thousands, except shares and per share data)

 

		March 31, 2015 (unaudited)				December 31, 2014
ASSETS
Investments, at fair value
Control Investments (cost: $10,518 and $10,460, respectively)		$	3,758			$	4,244
Affiliate investments (cost: $82,340 and $81,979, respectively)			86,168				86,200
Non-control/non-affiliate investments (cost: $314,549 and $298,899, respectively)			322,678				305,911
Total investments, at fair value (cost: $407,407 and $391,338, respectively)			412,604				396,355
Cash and cash equivalents			16,367				29,318
Interest receivable			5,435				4,460
Deferred financing costs (net of accumulated amortization of $3,018 and $2,784, respectively)			4,754				4,567
Prepaid expenses and other assets			818				887
Total assets		$	439,978			$	435,587
LIABILITIES
SBA debentures		$	178,500			$	173,500
Borrowings under credit facility			10,800				10,000
Accrued interest and fees payable			600				2,853
Due to affiliates			5,234				5,395
Taxes payable			—				328
Accounts payable and other liabilities			176				248
Total liabilities			195,310				192,324
Commitments and contingencies (Note 7)
NET ASSETS
Common stock, $0.001 par value (100,000,000 shares authorized, 16,113,152 and 16,051,037 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively)			16				16
Additional paid-in capital			244,103				243,008
Undistributed net investment income			12,563				12,433
Accumulated net realized (loss) gain on investments, net of taxes and distributions			(15,999	)			(15,999	)
Accumulated net unrealized appreciation (depreciation) on investments			3,985				3,805
Total net assets			244,668				243,263
Total liabilities and net assets		$	439,978			$	435,587
Net asset value per common share		$	15.18			$	15.16

See Notes to Consolidated Financial Statements (unaudited).

 

SF-2

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Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Operations (unaudited)

(In thousands, except shares and per share data)

 

		Three months ended March 31,
		2015				2014
Investment income:
Interest income
Control investments		$	128			$	—
Affiliate investments			2,345				2,477
Non-control/non-affiliate investments			9,450				7,074
Total interest income			11,923				9,551
Dividend income
Affiliate investments			30				30
Non-control/non-affiliate investments			107				347
Total dividend income			137				377
Fee income
Affiliate investments			—				388
Non-control/non-affiliate investments			764				222
Total fee income			764				610
Interest on idle funds and other income			14				21
Total investment income			12,838				10,559
Expenses:
Interest and financing expenses			2,130				1,753
Base management fee			1,791				1,365
Incentive fee			1,599				842
Administrative service expenses			368				363
Professional fees			439				397
Other general and administrative expenses			293				377
Total expenses			6,620				5,097
Net investment income before income taxes			6,218				5,462
Income tax provision			(11	)			18
Net investment income			6,229				5,444
Net realized and unrealized gains (losses) on investments:
Realized gains on affiliate investments			—				166
Realized gains on non-control/non-affiliate investments			—				1,693
Net change in unrealized appreciation (depreciation) on investments			180				(3,908	)
Income tax (provision) on realized gains on investments			—				(17	)
Net (loss) gain on investments			180				(2,066	)
Net increase in net assets resulting from operations		$	6,409			$	3,378
Per common share data:
Net investment income per share-basic and diluted		$	0.39			$	0.40
Net increase in net assets resulting from operations per share-basic and diluted		$	0.40			$	0.25
Dividends declared per share		$	0.38			$	0.38
Weighted average number of shares outstanding - basic and diluted			16,060,057				13,755,232

See Notes to Consolidated Financial Statements (unaudited).

 

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Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Changes in Net Assets (unaudited)

(In thousands, except shares)

 

		Common Stock								Additional Paid in Capital				Undistributed Net Investment Income				Accumulated Net Realized (Loss) Gain on Investments, net of taxes and distributions				Accumulated Net Unrealized Appreciation (Depreciation) on Investments				Total Net Assets
		Number of Shares				Par Value
Balances at December 31, 2013			13,755,232			$	14			$	206,123			$	3,221			$	11,212			$	(9,445	)		$	211,125
Public offerings of common stock, net of expenses			—				—				—				—				—				—				—
Shares issued under dividend reinvestment plan			10,410				—				199				—				—				—				199
Net increase in net assets resulting from operations			—				—				—				5,444				1,842				(3,908	)			3,378
Dividends declared			—				—				—				(5,227	)			—				—				(5,227	)
Balances at March 31, 2014			13,765,642			$	14			$	206,322			$	3,438			$	13,054			$	(13,353	)		$	209,475
Balances at December 31, 2014			16,051,037			$	16			$	243,008			$	12,433			$	(15,999	)		$	3,805			$	243,263
Public offerings of common stock, net of expenses			49,193				—				882				—				—				—				882
Shares issued under dividend reinvestment plan			12,922				—				213				—				—				—				213
Net increase in net assets resulting from operations			—				—				—				6,229				—				180				6,409
Dividends declared			—				—				—				(6,099	)			—				—				(6,099	)
Balances at March 31, 2015			16,113,152			$	16			$	244,103			$	12,563			$	(15,999	)		$	3,985			$	244,668

See Notes to Consolidated Financial Statements (unaudited).

 

SF-4

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Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

		Three months ended March 31,
		2015				2014
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations		$	6,409			$	3,378
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) operating activities:
Net change in unrealized (appreciation) depreciation on investments			(180	)			3,908
Realized (gain) on investments			—				(1,859	)
Interest and dividend income paid-in-kind			(1,074	)			(1,501	)
Accretion of original issue discount			(151	)			(201	)
Accretion of loan origination fees			(212	)			(116	)
Purchase of investments			(39,561	)			(17,294	)
Proceeds from sales and repayments of investments			24,679				13,558
Proceeds from loan origination fees			250				97
Amortization of deferred financing costs			234				131
Changes in operating assets and liabilities:
Interest receivable			(975	)			(1,197	)
Prepaid expenses and other assets			69				(601	)
Accrued interest and fees payable			(1,753	)			(1,639	)
Due to affiliates			(161	)			(910	)
Taxes payable			(328	)			(684	)
Accounts payable and other liabilities			(72	)			167
Net cash (used in) operating activities			(12,826	)			(4,763	)
Cash Flows from Financing Activities:
Proceeds from stock offerings, net of expenses			882				—
Proceeds received from SBA debentures			5,000				—
Net proceeds received from borrowings under credit facility			800				—
Payment of deferred financing costs			(921	)			—
Dividends paid to stockholders			(6,099	)			(5,028	)
Taxes paid on deemed distribution			—				(2,887	)
Net cash (used in) financing activities			(338	)			(7,915	)
Net (decrease) in cash and cash equivalents			(13,164	)			(12,678	)
Cash and cash equivalents:
Beginning of period			29,318				53,418
End of period		$	16,154			$	40,740
Supplemental disclosure of cash flow information:
Cash payments for interest		$	3,649			$	3,261
Cash payments for taxes, net of tax refunds received		$	317			$	3,606
Non-cash financing activities:
Shares issued under dividend reinvestment plan		$	213			$	199

See Notes to Consolidated Financial Statements (unaudited).

 

SF-5

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Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments (unaudited)

March 31, 2015

(In thousands, except shares)

 

Portfolio Company(1) (2)		Industry		Investment Type (3)		Rate (4) Cash/PIK		Maturity				Principal Amount				Cost				Fair Value				Percent of Net Assets
Control Investments (5)
Paramount Building Solutions, LLC		Retail Cleaning		Subordinated Note		7.0%/3.0%			12/31/2017			$	1,126			$	1,126			$	1,061
				Subordinated Note		7.0%/7.0%			12/31/2017				2,892				2,892				2,628
				Warrant (1,086,035 units) (7)													—				—
				Preferred Equity (5,000,000 units) (7)													5,000				69
				Common Equity (107,143 units) (7)													1,500				—
																	10,518				3,758				2	%
Total Control Investments																	10,518				3,758				2	%
Affiliate Investments (5)
Apex Microtechnology, Inc.		Electronic		Warrant (2,293 units)													220				220
		Components Supplier		Common Equity (11,690 shares)													1,169				1,128
																	1,389				1,348				1	%
FAR Research Inc.		Specialty Chemicals		Senior Secured Loan (10)		11.8%/0.0%			3/31/2019				7,600				7,570				7,600
				Revolving Loan ($1,750 commitment) (9)		11.8%/0.0%			3/31/2019				136				129				136
				Common Equity (10 units)													1,000				720
																	8,699				8,456				3	%
Inflexxion, Inc.		Business Services		Senior Secured Loan		12.5%/0.0%			12/16/2019				4,750				4,728				4,728
				Revolving Loan ($1,000 commitment) (9)		12.5%/0.0%			12/16/2019				300				295				295
				Preferred Equity (1,400 units)													1,400				1,281
																	6,423				6,304				3	%
Malabar International		Aerospace & Defense		Subordinated Note (10)		12.5%/2.5%			5/21/2017				7,310				7,287				7,309
		Manufacturing		Preferred Equity (1,494 shares) (6)		6.0%/0.0%											1,992				3,157
																	9,279				10,466				4	%
Medsurant Holdings, LLC		Healthcare Services		Subordinated Note		9.5%/4.5%			7/12/2016				10,244				9,816				10,244
				Preferred Equity (126,662 units) (7)													1,346				1,066
				Warrant (505,176 units) (7)													4,516				3,855
																	15,678				15,165				6	%
Pfanstiehl, Inc.		Healthcare Products		Subordinated Note		12.0%/1.5%			9/29/2018				6,208				6,170				6,208
				Common Equity (8,500 units) (9)													850				3,227
																	7,020				9,435				4	%
Safety Products Group, LLC		Safety Products		Subordinated Note		12.0%/1.5%			12/30/2018				10,000				9,967				10,000
		Manufacturing		Preferred Equity (749 units) (7) (9)													749				800
				Common Equity (676 units) (7) (9)													1				—
																	10,717				10,800				4	%
Trantech Radiator Products, Inc.		Utility Equipment		Subordinated Note (9)		12.0%/1.8%			5/4/2017				9,560				9,542				9,560
		Manufacturing		Common Equity (6,875 shares) (9)													688				975
																	10,230				10,535				4	%
Westminster Cracker Company, Inc.		Specialty Cracker		Preferred Equity (95,798 units)													70				165
		Manufacturing		Common Equity (1,208,197 units)													1,208				1,836
																	1,278				2,001				1	%
World Wide Packaging, LLC		Consumer Products		Subordinated Note (9)		12.0%/1.8%			10/26/2018				10,141				10,109				10,141
				Common Equity (1,517,573 units) (7) (9)													1,518				1,517
																	11,627				11,658				5	%
Total Affiliate Investments																	82,340				86,168				35	%

 

SF-6

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Table of Contents

Portfolio Company(1) (2)		Industry		Investment Type (3)		Rate (4) Cash/PIK		Maturity				Principal Amount				Cost				Fair Value				Percent of Net Assets
Non-Control/Non-Affiliate Investments (5)
Acentia, LLC		Information Technology Services		Common Units (499 units)													500				472				0	%
ACFP Management, Inc.		Restaurants		Common Units (1,000,000 units) (9)													1,091				1,758				1	%
Allied 100 Group, Inc.		Healthcare Products		Subordinated Note (10)		11.5%/0.0%			5/26/2020				13,000				12,939				12,939
				Common Equity (1,250,000 units) (9)													1,250				1,250
																	14,189				14,189				6	%
Anatrace Products, LLC		Healthcare Products		Senior Secured Loan		11.5%/1.5%			10/11/2018				9,054				9,024				9,054
				Revolving Loan ($500 commitment) (8)		11.5%/1.5%			10/11/2018				—				(2	)			(2	)
				Common Equity (360,000 shares) (9)													360				600
																	9,382				9,652				4	%
Brook & Whittle Limited		Printing Services		Subordinated Note		12.0%/4.8%			12/31/2016				7,385				7,385				7,385
				Subordinated Note		12.0%/2.0%			12/31/2016				2,262				2,262				2,166
				Warrant (1,051 shares)													285				106
				Common Equity - Series A (148 shares)													110				15
				Common Equity - Series D (527 shares)													53				76
																	10,095				9,748				4	%
Caldwell & Gregory, LLC		Laundry Services		Subordinated Note		11.5%/1.0%			11/30/2018				1,528				1,508				1,528
				Subordinated Note		0.0%/12.0%			5/31/2019				3,727				3,514				3,726
				Common Equity (500,000 units) (7)													500				547
				Warrant (242,121 units) (7)													242				265
																	5,764				6,066				2	%
Carlson Systems Holdings, Inc.		Specialty Distribution		Subordinated Note (10)		11.5%/0.0%			5/20/2020				15,000				14,930				14,930
				Common Equity (15,000 units) (9)													1,500				1,500
																	16,430				16,430				7	%
Channel Technologies Group, LLC		Component		Subordinated Note		11.0%/1.3%			4/10/2019				7,000				6,955				7,000
		Manufacturing		Preferred Equity (612 units) (7) (9)													1,139				721
				Common Equity (612,432 units) (7) (9)													—				—
																	8,094				7,721				3	%
Connect-Air International, Inc.		Specialty Distribution		Subordinated Note		12.8%/0.0%			11/5/2018				11,400				11,395				11,400
				Common Equity													—				5,340
																	11,395				16,740				7	%
Continental Anesthesia Management, LLC		Healthcare Services		Senior Secured Loan		10.0%/4.0%			4/15/2015				10,360				10,358				10,208
				Warrant (263 shares)													276				38
																	10,634				10,246				4	%
EBL, LLC (EbLens)		Retail		Common Equity (750,000 units)(7) (9)													750				1,047				0	%
FDS Avionics Corp.		Aerospace & Defense		Subordinated Note		12.3%/0.0%			4/1/2020				5,200				5,176				5,176
(dba Flight Display Systems)		Manufacturing		Common Equity (200 units)(9)													2,000				2,000
																	7,176				7,176				3	%
FTH Acquisition Corp. VII		Information		Subordinated Note		13.0%/0.0%			4/3/2015				8,395				8,395				7,951
		Technology Services		Preferred Equity (887,122 shares)													887				109
																	9,282				8,060				3	%
Grindmaster Corporation		Consumer Products		Subordinated Note		11.5%/0.0%			10/31/2019				10,500				10,458				10,458				4	%
Ice House America, LLC		Vending Equipment		Subordinated Note (9)		12.0%/2.0%			1/1/2020				5,021				4,790				4,790
		Manufacturing		Warrant (1,957,895 units) (7) (9)													216				216
																	5,006				5,006				2	%
IOS Acquisitions, Inc.		Oil & Gas Services		Common Equity (2,152 shares) (9)													211				28				0	%
Jacob Ash Holdings, Inc.		Apparel Distribution		Subordinated Note (10)		13.0%/4.0%			6/30/2018				4,000				3,993				4,000
				Subordinated Note		13.0%/0.0%			6/30/2018				963				953				962
				Preferred Equity (66,138 shares)(6)		0.0%/15.0%			6/30/2018								828				839
				Warrant (63,492 shares)													67				—
																	5,841				5,801				2	%
K2 Industrial Services, Inc.		Industrial Cleaning		Subordinated Note		11.8%/2.8%			5/23/2017				15,318				15,271				15,317
		& Coatings		Preferred Equity - Series A (1,200 shares)													1,200				696
				Preferred Equity - Series B (74 shares)													68				85
																	16,539				16,098				7	%

 

SF-7

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Table of Contents

Portfolio Company(1) (2)		Industry		Investment Type (3)		Rate (4) Cash/PIK		Maturity				Principal Amount				Cost				Fair Value				Percent of Net Assets
Lightning Diversion Systems, LLC		Aerospace & Defense		Senior Secured Loan		9.5%/0.0%			12/20/2018				12,198				12,157				12,197
		Manufacturing		Revolving Loan ($1,000 commitment) (8)		9.5%/0.0%			12/20/2018				—				(2	)			(2	)
				Common Equity (600,000 units)													—				3,012
																	12,155				15,207				6	%
MedPlast, LLC		Healthcare Products		Subordinated Note (9)		11.0%/1.5%			3/31/2019				10,223				10,168				10,223
				Preferred Equity (188 shares) (6) (9)		0.0%/8.0%											210				210
				Common Equity (3,728 shares) (9)													62				55
																	10,440				10,488				4	%
National Truck Protection Co., Inc.		Financial Services		Senior Secured Loan		13.5%/2.0%			9/13/2018				12,662				12,602				12,662
				Common Units (1,109 shares)													758				1,799
																	13,360				14,461				6	%
Oaktree Medical Centre, P.C.		Healthcare Services		Senior Secured Loan (9)		6.5%/0.0%			5/6/2019				700				694				655
(dba Pain Management Associates)				Senior Secured Loan (9)		14.0%/0.0%			5/6/2019				5,339				5,296				5,079
				Revolving Loan ($500 commitment) (9)		6.5%/0.0%			5/6/2019				250				246				250
																	6,236				5,984				2	%
Pinnergy, Ltd.		Oil & Gas Services		Subordinated Note (10)		10.5%/1.3%			1/24/2020				20,000				19,934				18,635				8	%
Plymouth Rock Energy, LLC		Business Services		Senior Secured Loan		11.8%/0.0%			5/14/2017				6,000				5,976				5,976				2	%
Premium Franchise Brands, LLC		Commercial Cleaning		Preferred Equity (1,054,619 shares)													832				659				0	%
Restaurant Finance Co, LLC		Restaurants		Senior Secured Loan ($10,500 commitment) (10)		12.0%/4.0%			7/31/2020				6,152				6,134				6,152				3	%
Simplex Manufacturing Co.		Aerospace & Defense		Subordinated Note		14.0%/0.0%			11/1/2015				4,550				4,541				4,550
		Manufacturing		Warrant (24 shares)													710				1,565
																	5,251				6,115				2	%
Six Month Smiles Holdings, Inc.		Healthcare Products		Subordinated Note (9)		12.0%/1.3%			7/31/2020				8,015				7,981				7,981				3	%
Stagnito Partners, LLC		Business Services		Senior Secured Loan (9)		12.0%/0.0%			6/30/2018				6,361				6,269				6,269				3	%
(dba Stagnito Business Information)
Toledo Molding & Die, Inc.		Component Manufacturing		Subordinated Note (9)		10.5%/0.0%			12/18/2018				10,000				9,861				9,861				4	%
United Biologics, LLC		Healthcare Services		Subordinated Note		12.0%/2.0%			3/5/2017				8,731				8,469				8,731
				Preferred Equity (98,377 units) (7) (9)													1,069				758
				Warrant (57,469 units)													566				198
																	10,104				9,687				4	%
US GreenFiber, LLC		Building Products		Subordinated Note (10)		12.5%/0.0%			1/2/2019				14,000				13,940				14,000
		Manufacturing		Common Equity (1,667 units) (7) (9)													500				1,016
																	14,440				15,016				6	%
US Pack Logistics LLC		Transportation Services		Subordinated Note		12.0%/1.8%			9/27/2020				9,002				8,957				8,957
				Common Equity (5,000 units) (7) (9)													500				500
																	9,457				9,457				4	%
Virginia Tile Company, LLC		Specialty Distribution		Subordinated Note (10)		12.3%/0.0%			5/19/2020				12,000				11,944				11,944
				Common Equity (19.5 shares)													250				250
																	12,194				12,194				5	%
Worldwide Express Operations, LLC		Transportation Services		Subordinated Note		11.5%/1.0%			8/1/2020				12,710				12,614				12,710
				Common Equity (2,500,000 units) (7) (9)													2,500				3,156
																	15,114				15,866				6	%
X5 Opco LLC		Telecommunication		Senior Secured Loan		11.5%/0.0%			3/24/2020				5,500				5,473				5,473
		Services		Revolving Loan ($500 commitment) (8)		11.5%/0.0%			3/24/2020				—				—				—
				Preferred Equity (5,000 units) (6) (7) (9)		5.0%/3.0%											501				501
																	5,974				5,974				2	%
Total Non-Control/Non-Affiliate Investments																	314,549				322,678				132	%
Total Investments																$	407,407			$	412,604				169	%

 

(1)	See Note 3 to the consolidated financial statements for portfolio composition by geographic location.

(2)	Equity ownership may be held in shares or units of companies related to the portfolio companies.

(3)	All debt investments are income producing. Equity investments are non-income producing unless otherwise noted.

(4)	Rate includes the cash interest or dividend rate and paid-in-kind interest or dividend rate, if any, as of March 31, 2015. Generally, payment-in-kind interest can be paid-in-kind or all in cash.

(5)	See Note 2 - Significant Accounting Policies, Investment Classification for definitions of Control and Affiliate classifications.

(6)	Income producing. Maturity date, if any, represents mandatory redemption date.

(7)	Investment is held by a wholly-owned subsidiary of the Company.

(8)	The entire commitment was unfunded at March 31, 2015. As such, no interest is being earned on this investment.

(9)	Investment pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company’s obligations under the Credit Facility (see Note 6 to the consolidated financial statements).

(10)

The portion of the investment not held by the Funds is pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company’s obligations under the Credit Facility (see Note 6 to the consolidated financial statements).

See Notes to Consolidated Financial Statements (unaudited).

 

SF-8

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Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Schedule of Investments

December 31, 2014

(In thousands, except shares)

 

Portfolio Company(1) (2)		Industry		Investment Type (3)		Rate (4) Cash/PIK		Maturity				Principal Amount				Cost				Fair Value				Percent of Net Assets
Control Investments (5)
Paramount Building Solutions, LLC		Retail Cleaning		Subordinated Note		7.0%/3.0%			12/31/2017			$	1,118			$	1,118			$	1,067
				Subordinated Note		7.0%/7.0%			12/31/2017				2,842				2,842				2,687
				Warrant (1,086,035 units) (7)													—				—
				Preferred Equity (5,000,000 units) (7)													5,000				490
				Common Equity (107,143 units) (7)													1,500				—
																	10,460				4,244				2	%
Total Control Investments																	10,460				4,244				2	%
Affiliate Investments (5)
Apex Microtechnology, Inc.		Electronic		Warrant (2,293 units)													220				254
		Components Supplier		Common Equity (11,690 shares)													1,169				1,302
																	1,389				1,556				1	%
FAR Research Inc.		Specialty Chemicals		Senior Secured Loan (10)		11.8%/0.0%			3/31/2019				7,600				7,567				7,600
				Revolving Loan ($1,750 commitment) (9)		11.8%/0.0%			3/31/2019				136				129				136
				Common Equity (10 units)													1,000				938
																	8,696				8,674				4	%
Inflexxion, Inc.		Business Services		Senior Secured Loan		12.5%/0.0%			12/16/2019				4,750				4,726				4,726
				Revolving Loan ($1,000 commitment) (9)		12.5%/0.0%			12/16/2019				300				295				295
				Preferred Equity (1,400 units)													1,400				1,400
																	6,421				6,421				3	%
Malabar International		Aerospace & Defense		Subordinated Note (10)		12.5%/2.5%			5/21/2017				7,264				7,239				7,264
		Manufacturing		Preferred Equity (1,494 shares) (6)		6.0%/0.0%											1,992				3,258
																	9,231				10,522				4	%
Medsurant Holdings, LLC		Healthcare Services		Subordinated Note		9.5%/4.5%			7/12/2016				10,129				9,603				10,129
				Preferred Equity (126,662 units) (7)													1,345				1,027
				Warrant (505,176 units) (7)													4,516				3,715
																	15,464				14,871				6	%
Pfanstiehl, Inc.		Healthcare Products		Subordinated Note		12.0%/1.5%			9/29/2018				6,208				6,168				6,208
				Common Equity (8,500 units) (9)													850				3,088
																	7,018				9,296				4	%
Safety Products Group, LLC		Safety Products		Subordinated Note		12.0%/1.5%			12/30/2018				10,000				9,965				10,000
		Manufacturing		Preferred Equity (749 units) (7) (9)													749				812
				Common Equity (676 units) (7) (9)													1				—
																	10,715				10,812				4	%
Trantech Radiator Products, Inc.		Utility Equipment		Subordinated Note (9)		12.0%/1.8%			5/4/2017				9,518				9,498				9,518
		Manufacturing		Common Equity (6,875 shares) (9)													688				962
																	10,186				10,480				4	%
Westminster Cracker Company, Inc.		Specialty Cracker		Preferred Equity (95,798 units)													70				152
		Manufacturing		Common Equity (1,208,197 units)													1,208				1,804
																	1,278				1,956				1	%
World Wide Packaging, LLC		Consumer Products		Subordinated Note (9)		12.0%/1.8%			10/26/2018				10,097				10,063				10,097
				Common Equity (1,517,573 units) (7) (9)													1,518				1,515
																	11,581				11,612				5	%
Total Affiliate Investments																	81,979				86,200				35	%
Non-Control/Non-Affiliate Investments (5)
Acentia, LLC		Information		Common Units (499 units)													500				243				0	%
		Technology Services
ACFP Management, Inc.		Restaurants		Common Units (1,000,000 units) (9)													1,091				1,587				1	%
Allied 100 Group, Inc.		Healthcare Products		Subordinated Note (10)		11.5%/0.0%			5/26/2020				13,000				12,936				12,936
				Common Equity (1,250,000 units) (9)													1,250				1,250
																	14,186				14,186				6	%
Anatrace Products, LLC		Healthcare Products		Senior Secured Loan		11.5%/1.5%			10/11/2018				9,500				9,469				9,500
				Revolving Loan ($500 commitment) (8)		N/A			10/11/2018				—				(2	)			(2	)
				Common Equity (360,000 shares) (9)													360				520
																	9,827				10,018				4	%

 

SF-9

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Table of Contents

Portfolio Company(1) (2)		Industry		Investment Type (3)		Rate (4) Cash/PIK		Maturity				Principal Amount				Cost				Fair Value				Percent of Net Assets
Brook & Whittle Limited		Printing Services		Subordinated Note		12.0%/4.8%			12/31/2016				7,297				7,297				7,272
				Subordinated Note		12.0%/2.0%			12/31/2016				2,250				2,250				2,153
				Warrant (1,051 shares)													285				134
				Common Equity - Series A (148 shares)													110				20
				Common Equity - Series D (527 shares)													53				71
																	9,995				9,650				4	%
Caldwell & Gregory, LLC		Laundry Services		Subordinated Note		11.5%/1.0%			11/30/2018				1,524				1,502				1,524
				Subordinated Note		0.0%/12.0%			5/31/2019				3,618				3,394				3,618
				Common Equity (500,000 units) (7)													500				568
				Warrant (242,121 units) (7)													242				275
																	5,638				5,985				2	%
Carlson Systems Holdings, Inc.		Specialty Distribution		Subordinated Note (10)		11.5%/0.0%			5/20/2020				12,000				11,941				11,941
				Common Equity (7,500 units) (9)													750				750
																	12,691				12,691				5	%
Channel Technologies Group, LLC		Component Manufacturing		Subordinated Note		11.0%/1.3%			4/10/2019				7,000				6,952				6,619
				Preferred Equity (612 units) (7) (9)													1,139				686
				Common Equity (612,432 units) (7) (9)													—				—
																	8,091				7,305				3	%
Connect-Air International, Inc.		Specialty Distribution		Subordinated Note		12.8%/0.0%			11/5/2018				11,400				11,395				11,400
				Common Equity													—				4,600
																	11,395				16,000				7	%
Continental Anesthesia Management, LLC		Healthcare Services		Senior Secured Loan		8.0%/6.0%			4/15/2015				10,259				10,252				10,130
				Warrant (263 shares)													276				—
																	10,528				10,130				4	%
EBL, LLC (EbLens)		Retail		Subordinated Note (9)		12.0%/3.0%			2/2/2018				9,610				9,584				9,706
				Common Equity (750,000 units)(7) (9)													750				981
																	10,334				10,687				4	%
FDS Avionics Corp.		Aerospace & Defense		Subordinated Note		12.3%/0.0%			4/1/2020				5,200				5,175				5,175
(dba Flight Display Systems)		Manufacturing		Common Equity (200 units)(9)													2,000				2,000
																	7,175				7,175				3	%
FTH Acquisition Corp. VII		Information		Subordinated Note		13.0%/0.0%			2/27/2015				8,395				8,395				8,350
		Technology Services		Preferred Equity (887,122 shares)													887				621
																	9,282				8,971				4	%
Grindmaster Corporation		Consumer Products		Subordinated Note		11.5%/0.0%			10/31/2019				10,500				10,456				10,456				4	%
IOS Acquisitions, Inc.		Oil & Gas Services		Subordinated Note		12.0%/3.3%			6/26/2018				14,263				14,175				13,788
				Common Equity (2,152 shares) (9)													500				364
																	14,675				14,152				6	%
Jacob Ash Holdings, Inc.		Apparel Distribution		Subordinated Note (10)		13.0%/4.0%			6/30/2018				4,000				3,992				4,000
				Subordinated Note		13.0%/0.0%			6/30/2018				963				953				963
				Preferred Equity (66,138 shares)(6)		0.0%/15.0%			6/30/2018								798				810
				Warrant (63,492 shares)													67				—
																	5,810				5,773				2	%
K2 Industrial Services, Inc.		Industrial Cleaning		Subordinated Note		11.8%/2.8%			5/23/2017				15,213				15,162				15,213
		& Coatings		Preferred Equity - Series A (1,200 shares)													1,200				914
				Preferred Equity - Series B (74 shares)													68				83
																	16,430				16,210				7	%
Lightning Diversion Systems, LLC		Aerospace & Defense		Senior Secured Loan		10.5%/0.0%			12/20/2018				12,198				12,154				12,198
		Manufacturing		Revolving Loan ($1,000 commitment) (8)		N/A			12/20/2018				—				(2	)			(2	)
				Common Equity (600,000 units)													—				2,204
																	12,152				14,400				6	%
MedPlast, LLC		Healthcare Products		Subordinated Note (9)		11.0%/1.5%			3/31/2019				10,185				10,126				10,185
				Preferred Equity (188 shares) (6) (9)		0.0%/8.0%											206				206
				Common Equity (3,728 shares) (9)													62				65
																	10,394				10,456				4	%
National Truck Protection Co., Inc.		Financial Services		Senior Secured Loan		13.5%/2.0%			9/13/2018				12,662				12,598				12,662
				Common Units (1,109 shares)													758				1,923
																	13,356				14,585				6	%

 

SF-10

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Table of Contents

Portfolio Company(1) (2)		Industry		Investment Type (3)		Rate (4) Cash/PIK		Maturity				Principal Amount				Cost				Fair Value				Percent of Net Assets
Oaktree Medical Centre, P.C.		Healthcare Services		Senior Secured Loan (9)		6.5%/0.0%			5/6/2019				700				694				675
(dba Pain Management Associates)				Senior Secured Loan (9)		14.0%/0.0%			5/6/2019				5,300				5,254				5,000
				Revolving Loan ($500 commitment) (9)		6.5%/0.0%			5/6/2019				250				246				250
																	6,194				5,925				2	%
Pinnergy, Ltd.		Oil & Gas Services		Subordinated Note (10)		10.5%/0.8%			1/24/2020				20,000				19,931				19,812				8	%
Plymouth Rock Energy, LLC		Business Services		Senior Secured Loan		11.8%/0.0%			5/14/2017				6,000				5,973				5,973				2	%
Premium Franchise Brands, LLC		Commercial Cleaning		Preferred Equity (1,054,619 shares)													832				718				0	%
Restaurant Finance Co, LLC		Restaurants		Senior Secured Loan ($10,500 commitment) (10)		12.0%/4.0%			7/31/2020				5,145				5,133				5,145				2	%
Simplex Manufacturing Co.		Aerospace & Defense		Subordinated Note		14.0%/0.0%			11/1/2015				4,550				4,537				4,537
		Manufacturing		Warrant (24 shares)													710				813
																	5,247				5,350				2	%
Toledo Molding & Die, Inc.		Component		Subordinated Note (9)		10.5%/0.0%			12/18/2018				10,000				9,851				9,851				4	%
		Manufacturing
United Biologics, LLC		Healthcare Services		Subordinated Note		12.0%/2.0%			3/5/2017				8,688				8,393				8,688
				Preferred Equity (98,377 units) (7) (9)													1,069				1,069
				Warrant (57,469 units)													566				281
																	10,028				10,038				4	%
US GreenFiber, LLC		Building Products		Subordinated Note (10)		12.5%/0.0%			1/2/2019				14,000				13,936				13,936
		Manufacturing		Common Equity (1,667 units) (7) (9)													500				500
																	14,436				14,436				6	%
Virginia Tile Company, LLC		Specialty Distribution		Subordinated Note (10)		12.3%/0.0%			5/19/2020				12,000				11,940				11,940
				Common Equity (19.5 shares)													250				250
																	12,190				12,190				5	%
Worldwide Express Operations, LLC		Transportation Services		Subordinated Note		11.5%/1.0%			8/1/2020				12,678				12,578				12,678
				Common Equity (2,500,000 units) (7) (9)													2,500				3,135
																	15,078				15,813				7	%
Total Non-Control/Non-Affiliate Investments																	298,899				305,911				126	%
Total Investments																$	391,338			$	396,355				163	%

 

(1)	See Note 3 to the consolidated financial statements for portfolio composition by geographic location.

(2)	Equity ownership may be held in shares or units of companies related to the portfolio companies.

(3)	All debt investments are income producing. Equity investments are non-income producing unless otherwise noted.

(4)	Rate includes the cash interest or dividend rate and paid-in-kind interest or dividend rate, if any, as of December 31, 2014. Generally, payment-in-kind interest can be paid-in-kind or all in cash.

(5)	See Note 2 - Significant Accounting Policies, Investment Classification for definitions of Control and Affiliate classifications.

(6)	Income producing. Maturity date, if any, represents mandatory redemption date.

(7)	Investment is held by a wholly-owned subsidiary of the Company.

(8)	The entire commitment was unfunded at December 31, 2014. As such, no interest is being earned on this investment.

(9)	Investment pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company’s obligations under the Credit Facility (see Note 6 to the consolidated financial statements).

(10)

The portion of the investment not held by the Funds is pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company’s obligations under the Credit Facility (see Note 6 to the consolidated financial statements).

See Notes to Consolidated Financial Statements (unaudited).

 

SF-11

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Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

Note 1. Organization and Nature of Business

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

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

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

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

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

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

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

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

On August 21, 2014, the Company entered into an equity distribution agreement with Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated through which the Company could sell, by means of at-the-market offerings from time to time, shares of the Company’s common stock having an aggregate offering price of up to $50,000 (the “ATM Program”). During the period from August 21, 2014 through December 31, 2014, 158,353 shares of the Company’s common stock were sold at an average offering price of $18.51 per share resulting in net proceeds of $2,871, after commissions to the sales agent on shares sold and offering costs of $59. During the three months ended March 31, 2015, 49,193 shares of the Company’s common stock were sold at an average offering price of $16.65 per share resulting in net proceeds of $803, after commissions to the sales agent on shares sold and offering costs of $16.

 

SF-12

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Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

As of March 31, 2015 and December 31, 2014, the Company had 16,113,152 and 16,051,037 shares of common stock outstanding, respectively.

Note 2. Significant Accounting Policies

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

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

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

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

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

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

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

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

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

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

 

SF-13

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Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

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

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

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

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

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

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

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

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

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

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

 

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FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

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

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

ASC Topic 740 — Accounting for Uncertainty in Income Taxes (“ASC Topic 740”) provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the consolidated financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be respected by the applicable tax authorities. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax provision, if any. There were no material uncertain income tax positions at March 31, 2015 and December 2014. The 2011 through 2013 tax years remain subject to examination by U.S. federal and most state tax authorities.

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

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

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

Earnings and net asset value per share: The earnings per share calculations for the three months ended March 31, 2015 and 2014, are computed utilizing the weighted average shares outstanding for the period. Net asset value per share is calculated using the number of shares outstanding as of the end of the period.

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

 

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FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

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

Note 3. Portfolio Company Investments

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

As of March 31, 2015, the Company had investments in 47 portfolio companies with an aggregate fair value of $412,604 and a weighted average effective yield on its debt investments of 13.3%. As of March 31, 2015, the Company held equity investments in 83.0% of its portfolio companies and the average fully diluted equity ownership in those portfolio companies was 7.7%. As of December 31, 2014, the Company had investments in 42 portfolio companies with an aggregate fair value of $396,355 and a weighted average effective yield on its debt investments of 13.4%. As of December 31, 2014, the Company held equity investments in 85.7% of its portfolio companies and the average fully diluted equity ownership in those portfolio companies was 8.7%. The weighted average yields were computed using the effective interest rates for debt investments at cost as of March 31, 2015 and December 2014, including accretion of original issue discount and loan origination fees, but excluding investments on non-accrual status, if any.

Purchases of debt and equity investments for the three months ended March 31, 2015 and 2014 totaled $39,561 and $17,294, respectively. Proceeds from sales and repayments, including principal, return of capital distributions and realized gains, of portfolio investments for the three months ended March 31, 2015 and 2014 totaled $24,679 and $13,558, respectively.

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

 

		Fair Value																Cost
		March 31, 2015								December 31, 2014								March 31, 2015								December 31, 2014
Subordinated notes		$	274,471				66.5	%		$	273,711				69.1	%		$	275,242				67.6	%		$	273,347				69.8	%
Senior secured loans			86,730				21.0				74,286				18.7				86,947				21.3				74,486				19.0
Equity			44,940				10.9				42,886				10.8				38,120				9.4				36,623				9.4
Warrants			6,463				1.6				5,472				1.4				7,098				1.7				6,882				1.8
Total		$	412,604				100.0	%		$	396,355				100.0	%		$	407,407				100.0	%		$	391,338				100.0	%

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

 

		Fair Value																Cost
		March 31, 2015								December 31, 2014								March 31, 2015								December 31, 2014
Midwest		$	104,374				25.3	%		$	94,572				23.9	%		$	102,518				25.2	%		$	92,721				23.7	%
Southeast			103,989				25.2				113,516				28.6				105,493				25.9				113,725				29.0
West			87,876				21.3				78,904				19.9				78,266				19.2				71,975				18.4
Northeast			74,906				18.2				66,900				16.9				73,288				18.0				65,248				16.7
Southwest			41,459				10.0				42,463				10.7				47,842				11.7				47,669				12.2
Total		$	412,604				100.0	%		$	396,355				100.0	%		$	407,407				100.0	%		$	391,338				100.0	%

As of March 31, 2015 and December 31, 2014, the Company had no portfolio company investments that represented more than 10% of the total investment portfolio. As of both March 31, 2015 and December 31, 2014, there were no investments on non-accrual status.

 

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FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

Note 4. Fair Value Measurements

Investments

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

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

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

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

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

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

 

•

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

 

•

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

 

•

the Board also engages one or more independent valuation firm(s) to conduct independent appraisals of a selection of our investments for which market quotations are not readily available. The Company will consult with independent valuation firm(s) relative to each portfolio company at least once in every calendar year, and for new portfolio companies, at least once in the twelve-month period subsequent to the initial investment. In certain instances, the Company may determine that it is not cost-effective, and as a result it is not in the Company’s stockholders’ best interest, to request the valuation firm(s) to perform independent valuations on one or more portfolio companies. Such instances include, but are not limited to, situations where the fair value of the investment in the portfolio company is determined to be insignificant relative to the total investment portfolio. The Board consulted with the independent valuation firm in arriving at the Company’s determination of fair value on 13 and 9 of its portfolio company investments representing 32.1% and 20.7% of the total portfolio investments at fair value (exclusive of new portfolio company investments made during the three months ended March 31, 2015 and December 31, 2014, respectively) as of March 31, 2015 and December 31, 2014, respectively.

 

•

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

 

•

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

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

 

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FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

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

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

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

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

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

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

The Company reviews the fair value hierarchy classifications on a quarterly basis. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. There were no transfers among Levels 1, 2, and 3 during the three months ended March 31, 2015 and 2014.

 

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FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

The following tables present a reconciliation of the beginning and ending balances for fair valued investments measured using significant unobservable inputs (Level 3) for the three months ended March 31, 2015 and 2014:

 

		Subordinated Notes				Senior Secured Loans				Equity				Warrants				Royalty Rights				Total
Balance, December 31, 2013		$	214,400			$	53,387			$	32,560			$	6,634			$	—			$	306,981
Realized gain on investments			166				—				1,693				—				—				1,859
Net change in unrealized (depreciation) appreciation on investments			(3,890	)			17				283				(318	)			—				(3,908	)
Purchase of investments			1,500				9,824				5,615				355				—				17,294
Proceeds from sales and repayments of investments			(10,936	)			(62	)			(2,560	)			—				—				(13,558	)
Interest and dividend income paid-in-kind			1,333				44				124				—				—				1,501
Proceeds from loan origination fees			(8	)			(66	)			(23	)			—				—				(97	)
Accretion of loan origination fees			100				13				3				—				—				116
Accretion of original issue discount			157				42				2				—				—				201
Balance, March 31, 2014		$	202,822			$	63,199			$	37,697			$	6,671			$	—			$	310,389
Balance, December 31, 2014		$	273,711			$	74,286			$	42,886			$	5,472			$	—			$	396,355
Realized gain on investments			—				—				—				—				—				—
Net change in unrealized (depreciation) appreciation on investments			(1,135	)			(17	)			557				775				—				180
Purchase of investments			24,784				12,811				1,750				216				—				39,561
Proceeds from sales and repayments of investments			(23,943	)			(447	)			(289	)			—				—				(24,679	)
Interest and dividend income paid-in-kind			842				198				34				—				—				1,074
Proceeds from loan origination fees			(120	)			(130	)			—				—				—				(250	)
Accretion of loan origination fees			187				24				1				—				—				212
Accretion of original issue discount			145				5				1				—				—				151
Balance, March 31, 2015		$	274,471			$	86,730			$	44,940			$	6,463			$	—			$	412,604

Net change in unrealized (depreciation) of $(85) and $(2,030) for the three months ended March 31, 2015 and 2014 were attributable to Level 3 investments held at March 31, 2015 and 2014, respectively.

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

 

		Fair Value at March 31, 2015				Valuation Techniques		Unobservable Inputs		Range (weighted average)
Debt investments:
Subordinated notes		$	274,471			Discounted cash flow		Weighted average cost of capital		11.4% - 18.5% (14.1%)
Senior secured loans			86,730			Discounted cash flow		Weighted average cost of capital		6.7% - 17.0% (13.9%)
Equity investments:
Equity			44,940			Enterprise value		EBITDA multiples		4.3x – 11.1x (7.1x)
Warrants			6,463			Enterprise value		EBITDA multiples		5.0x – 9.5x (6.6x)
		Fair Value at December 31, 2014				Valuation Techniques		Unobservable Inputs		Range (weighted average)
Debt investments:
Subordinated notes		$	273,711			Discounted cash flow		Weighted average cost of capital		11.4% - 18.1% (13.6 %)
Senior secured loans			74,286			Discounted cash flow		Weighted average cost of capital		6.7% - 17.0% (14.0%)
Equity investments:
Equity			42,886			Enterprise value		EBITDA multiples		4.5x – 10.4x (6.8x)
Warrants			5,472			Enterprise value		EBITDA multiples		5.0x – 9.5x (7.0x)

 

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FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

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

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

Other Financial Assets and Liabilities

ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments such as cash and cash equivalents, receivables and payables approximate the fair value of such items due to the short maturity of such instruments. The fair value of borrowings under the Credit Facility (as defined in Note 6) are based on a market yield approach and current interest rates, which are level 3 inputs to the market yield model, and is estimated to be $10,800 and $10,000 as of March 31, 2015 and December 31, 2014, respectively, which is the same as the Company’s carrying value of the borrowings. SBA debentures are carried at cost and with their longer maturity dates, fair value is estimated by discounting remaining payments using current market rates for similar instruments and considering such factors as the legal maturity date and the ability of market participants to prepay the debentures. As of March 31, 2015 and December 31, 2014, the fair value of the Company’s SBA debentures using Level 3 inputs is estimated at $178,500 and $173,500, respectively, which is the same as the Company’s carrying value of the debentures.

Note 5. Related Party Transactions

Investment Advisory Agreement: Concurrent with the Formation Transactions, the Company entered into the Investment Advisory Agreement with the Investment Advisor. On June 4, 2014, the Board approved the renewal of the Investment Advisory Agreement through June 20, 2015. Pursuant to the Investment Advisory Agreement and subject to the overall supervision of the Board, the Investment Advisor provides investment advisory services to the Company. For providing these services, the Investment Advisor receives a fee, consisting of two components — a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.75% based on the average value of total assets (other than cash or cash equivalents but including assets purchased with borrowed amounts) at the end of the two most recently completed calendar quarters. The base management fee is payable quarterly in arrears. The base management fee under the Investment Advisory Agreement for the three months ended March 31, 2015 and 2014 totaled $1,791 and $1,365 respectively.

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

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

Pre-incentive fee net investment income, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 2.0% per quarter. If market interest rates rise, the Company may be able to invest funds in debt instruments that provide for a higher return, which would increase the Company’s pre-incentive fee net investment income and make it easier for the Investment Advisor to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. The Company’s pre-incentive fee net investment income used to calculate this part of the incentive fee is also included in the total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts) used to calculate the 1.75% base management fee.

 

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FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

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

 

•

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

 

•

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

 

•

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

The sum of the calculations above equals the income incentive fee. The income incentive fee is appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the calendar quarter. The income incentive fee for the three months ended March 31, 2015 and 2014 totaled $1,563 and $1,226, respectively.

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

In addition, the Company accrues, but does not pay, a capital gains incentive fee in connection with any unrealized capital appreciation, as appropriate. If, on a cumulative basis, the sum of net realized gains/(losses) plus net unrealized appreciation/(depreciation) decreases during a period, the Company will reverse any excess capital gains incentive fee previously accrued such that the amount of capital gains incentive fee accrued is no more than 20.0% of the sum of net realized gains/(losses) plus net unrealized appreciation/(depreciation). During the three months ended March 31, 2015, the Company accrued capital gains incentive fees of $36. During the three months ended March 31, 2014, the Company reversed previously accrued capital gains incentive fees of $384.

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

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

Administration Agreement: Concurrent with the Formation Transactions, the Company also entered into an administration agreement (the “Administration Agreement”) with the Investment Advisor. On June 4, 2014, the Board approved the renewal of the Administrative Agreement through June 20, 2015. Under the Administration Agreement, the Investment Advisor furnishes the Company with office facilities and equipment, provides it clerical, bookkeeping and record keeping services at such facilities and provides the Company with other administrative services necessary to conduct its day-to-day operations. The Company reimburses the Investment Advisor for the allocable portion of overhead expenses incurred in performing its obligations under the Administration Agreement, including rent and the Company’s allocable portion of the cost of its chief financial officer and chief compliance officer and their respective staffs. Under the Administration Agreement, the Investment Advisor also provides

 

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FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

managerial assistance to those portfolio companies to which the Company is required to provide such assistance and the Company reimburses the Investment Advisor for fees and expenses incurred with providing such services. In addition, the Company reimburses the Investment Advisor for fees and expenses incurred while performing due diligence on the Company’s prospective portfolio companies. Under the Administration Agreement, administrative expenses for services provided for the three months ended March 31, 2015 and 2014 totaled $368 and $363, respectively. Accrued administrative expenses are reported in the due to affiliates line in the consolidated statements of assets and liabilities.

Note 6. Debt

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

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

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

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

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

As of March 31, 2015 and December 31, 2014, the Company had outstanding borrowings under the Credit Facility of $10,800 and $10,000, respectively. For the three months ended March 31, 2015 and 2014, interest and financing expenses related to the Credit Facility amounted to $226 and $0, respectively. As of March 31, 2015 and December 31, 2014, accrued interest and fees payable related to the Credit Facility totaled $14 and $97, respectively.

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

Under the SBA debenture program, the SBA commits to purchase debentures issued by SBICs and such debentures are guaranteed by the SBA. The SBA has made commitments to purchase $225,000 of SBA debentures from the Company on or before September 30, 2019. Unused commitments as of March 31, 2015 and December 31, 2014 were $46,500 and $51,500, respectively. The SBA may limit the amount that may be drawn each year under these commitments, and each issuance of leverage is conditioned on the Company’s full compliance, as determined by the SBA, with the terms and conditions set forth in the SBIC Act.

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

 

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FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

(In thousands, except shares and per share data)

 

 

Pooling Date(1)		Maturity Date				Fixed Interest Rate				March 31, 2015				December 31, 2014
3/26/2008			3/1/2018				6.188	%		$	24,750			$	24,750
9/24/2008			9/1/2018				6.442				11,950				11,950
3/25/2009			3/1/2019				5.337				19,750				19,750
9/23/2009			9/1/2019				4.950				10,000				10,000
3/24/2010			3/1/2020				4.825				13,000				13,000
9/22/2010			9/1/2020				3.932				12,500				12,500
3/29/2011			3/1/2021				4.801				1,550				1,550
9/21/2011			9/1/2021				3.594				3,250				3,250
3/21/2012			3/1/2022				3.483				3,250				3,250
3/21/2012			3/1/2022				3.051				19,000				19,000
9/19/2012			9/1/2022				2.530				11,000				11,000
9/19/2012			9/1/2022				3.049				11,500				11,500
3/27/2013			3/1/2023				3.155				3,000				3,000
9/24/2014			9/1/2024				3.775				1,000				1,000
3/25/2015			3/1/2025				3.321				1,000				1,000
3/25/2015			3/1/2025				3.321				1,000				1,000
3/25/2015			3/1/2025				3.321				1,000				1,000
3/25/2015			3/1/2025				3.321				1,500				1,500
3/25/2015			3/1/2025				3.321				1,000				1,000
3/25/2015			3/1/2025				3.277				6,000				6,000
3/25/2015			3/1/2025				3.277				7,500				7,500
3/25/2015			3/1/2025				3.277				2,500				2,500
3/25/2015			3/1/2025