Sierra Income Corp - FORM 10-Q

Sierra Income Corp - FORM 10-Q - May 8, 2014

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Sierra Income Corp Reports

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EX-32.1 - EX-32.1 - Sierra Income Corp	d720248dex321.htm
EX-31.2 - EX-31.2 - Sierra Income Corp	d720248dex312.htm
EX-31.1 - EX-31.1 - Sierra Income Corp	d720248dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2014

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

For the transition period from to

Commission File Number 814-00924

Sierra Income Corporation

(Exact name of registrant as specified in its charter)

Maryland

45-2544432

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

375 Park Avenue, 33^rd Floor

New York, NY 10152

(Address of principal executive offices)

(212) 759-0777

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of May 8, 2014, the Registrant had 27,800,093 shares of common stock, $0.001 par value, outstanding.

TABLE OF CONTENTS


		Page
Part I. Financial Information

Item 1. Financial Statements			F-1

	Consolidated Statements of Assets and Liabilities as of March 31, 2014 (unaudited) and December 31, 2013		F-1

	Consolidated Statements of Operations for the three months ended March 31, 2014 (unaudited) and March 31, 2013 (unaudited)		F-2

	Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2014 (unaudited) and March 31, 2013 (unaudited)		F-3

	Consolidated Statements of Cash Flows for the three months ended March 31, 2014 (unaudited) and March 31, 2013 (unaudited)		F-4

	Consolidated Schedules of Investments as of March 31, 2014 (unaudited) and December 31, 2013		F-5

	Notes to Financial Statements (unaudited)		F-15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1

Item 3. Quantitative and Qualitative Disclosures About Market Risk			17

Item 4. Controls and Procedures			17

Part II. Other Information

Item 1. Legal Proceedings			18

Item 1A. Risk Factors			18

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			19

Item 3. Defaults Upon Senior Securities			19

Item 4. Mine Safety Disclosures			19

Item 5. Other Information			19

Item 6. Exhibits			19

SIGNATURES			20

Sierra Income Corporation

Consolidated Statements of Assets and Liabilities


	As of
	March 31, 2014			December 31, 2013
	(unaudited)
ASSETS
Non-controlled/non-affiliated investments, at fair value (amortized cost of $215,577,555 and $137,332,276, respectively)	$	215,845,732		$	137,801,537
Cash collateral on total return swap (Note 5)		20,221,331			6,706,159
Cash		11,427,035			34,939,948
Unsettled trades receivable		6,410,625			496,250
Due from affiliate (Note 7)		2,939,318			2,592,989
Interest receivable		1,791,916			1,989,128
Deferred financing costs		1,431,331			1,150,139
Unrealized appreciation on total return swap (Note 5)		798,417			351,396
Receivable due on total return swap (Note 5)		298,557			155,317
Prepaid expenses and other assets		40,601			23,975

Total assets	$	261,204,863		$	186,206,838

LIABILITIES
Revolving credit facility payable	$	25,000,000		$	16,000,000
Unsettled trades payable		6,046,961			15,492,500
Management fee		1,142,771			814,655
Accounts payable and accrued expenses		556,274			495,893
Provisional incentive fee		295,480			182,989
Administrator fees		228,216			152,162
Interest payable		47,456			33,055
Directors fees		31,589			—
Due to affiliate		26,607			33,311

Total liabilities	$	33,375,354		$	33,204,565

Commitments (Note 11)
NET ASSETS
Common shares, par value $.001 per share, 250,000,000 common shares authorized, 24,767,652 and 16,663,500 common shares issued and outstanding, respectively	$	24,768		$	16,664
Capital in excess of par value		227,126,107			152,552,912
Distribution in excess of net realized gain/(loss) from investments and total return swap		(138,783	)		(138,783	)
Distributions in excess of net investment income		(249,177	)		(249,177	)
Net unrealized appreciation on investments and total return swap		1,066,594			820,657

Total net assets		227,829,509			153,002,273

Total liabilities and net assets	$	261,204,863		$	186,206,838

NET ASSET VALUE PER SHARE	$	9.20		$	9.18

See accompanying notes to the consolidated financial statements.

F-1

Sierra Income Corporation

Consolidated Statements of Operations


	For the three months ended March 31,
	2014			2013
	(unaudited)			(unaudited)
INVESTMENT INCOME
Interest from non-controlled/non-affiliated investments	$	3,757,861		$	992,525
Other fee income		834,649			64,710
Paid-in-kind interest income		3,704			580
Interest from cash		—			262

Total investment income		4,596,214			1,058,077

EXPENSES
Base management fee		1,142,771			245,499
Organizational and offering costs reimbursed to SIC Advisors (Note 7)		983,785			178,167
General and administrative expenses		465,527			131,170
Professional fees		255,328			295,276
Administrator expenses		228,216			138,090
Interest and financing expenses		163,401			28,645
Provisional incentive fee		112,491			148,636
Directors fees		41,189			43,765
Insurance expenses		24,327			—

Total gross expenses		3,417,035			1,209,248
Expense support reimbursement (Note 7)		(1,313,470	)		(685,404	)

Net expenses		2,103,565			523,844

NET INVESTMENT INCOME		2,492,649			534,233

Net realized gain from investments		1,270,253			110,635
Net realized gain on total return swap (Note 5)		438,709			—
Net change in unrealized appreciation/(depreciation) on investments		(201,084	)		746,319
Net change in unrealized appreciation/(depreciation) on total return swap (Note 5)		447,021			—

Net gain on investments and total return swap		1,954,899			856,954

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	4,447,548		$	1,391,187

WEIGHTED AVERAGE — BASIC AND DILUTED EARNINGS PER COMMON SHARE	$	0.22		$	0.43
WEIGHTED AVERAGE — BASIC AND DILUTED NET INVESTMENT INCOME PER COMMON SHARE	$	0.12		$	0.17
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING — BASIC AND DILUTED (Note 10)		20,369,602			3,226,281
DIVIDENDS DECLARED PER COMMON SHARE	$	0.20		$	0.20

See accompanying notes to the consolidated financial statements.

F-2

Sierra Income Corporation

Consolidated Statements of Changes in Net Assets


	For the three months ended March 31,
	2014			2013
	(unaudited)			(unaudited)
INCREASE FROM OPERATIONS
Net investment income	$	2,492,649		$	534,233
Net realized gain on investments		1,270,253			110,635
Net realized gain on total return swap (Note 5)		438,709			—
Net change in unrealized appreciation/(depreciation) on investments		(201,084	)		746,319
Net change in unrealized appreciation/(depreciation) on total return swap (Note 5)		447,021			—

Net increase in net assets resulting from operations		4,447,548			1,391,187

SHAREHOLDER DISTRIBUTIONS
Distributions from net realized gains		(1,708,962	)		(110,635	)
Distributions from net investment income (Note 2)		(2,492,649	)		(534,233	)

Net decrease in net assets from shareholder distributions		(4,201,611	)		(644,868	)

COMMON SHARE TRANSACTIONS
Issuance of common shares, net of underwriting costs		72,777,647			14,056,126
Issuance of common shares pursuant to distribution reinvestment plan		1,831,192			152,864
Repurchase of common shares		(27,540	)		—

Net increase in net assets resulting from common share transactions		74,581,299			14,208,990

Total increase in net assets		74,827,236			14,955,309
Net assets at beginning of period		153,002,273			20,622,982

Net assets at end of period (including accumulated undistributed net investment income/(loss) of $(249,177) and $203,132, respectively)	$	227,829,509		$	35,578,291

Net asset value per common share	$	9.20		$	9.18
Common shares outstanding, beginning of period		16,663,500			2,300,573
Issuance of common shares		7,907,676			1,556,962
Issuance of common shares pursuant to distribution reinvestment plan		199,476			16,850
Repurchase of common shares		(3,000	)		—

Common shares outstanding, end of period		24,767,652			3,874,385

See accompanying notes to the consolidated financial statements.

F-3

Sierra Income Corporation

Consolidated Statements of Cash Flows


	For the three months ended March 31,
	2014			2013
	(unaudited)			(unaudited)
Cash flows from operating activities
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	4,447,548		$	1,391,187
ADJUSTMENT TO RECONCILE NET INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS TO NET CASH USED IN OPERATING ACTIVITIES
Paid-in-kind interest income		(3,704	)		(580	)
Net amortization of premium on investments		14,561			(522	)
Net realized gain on investments		(1,270,253	)		(110,635	)
Net change in unrealized appreciation/(depreciation) on investments		201,084			(746,319	)
Net change in unrealized appreciation/(depreciation) on total return swap (Note 5)		(447,021	)		—
Purchases of investments		(122,821,433	)		(22,293,965	)
Proceeds from sale of investments and principal repayments		45,835,550			4,137,935
(Increase)/decrease in operating assets:
Cash collateral on total return swap (Note 5)		(13,515,172	)		—
Unsettled trades receivable		(5,914,375	)		(503,750	)
Due from affiliate		(346,329	)		(182,281	)
Interest receivable		197,212			(308,593	)
Deferred financing costs		(281,192	)		—
Receivable due on total return swap (Note 5)		(143,240	)		—
Prepaid expenses and other assets		(16,626	)		(32,099	)
Increase/(decrease) in operating liabilities:
Unsettled trades payable		(9,445,539	)		6,585,675
Management fee		328,116			74,182
Accounts payable and accrued expenses		60,381			192,076
Provisional incentive fee		112,491			148,635
Administrator fees		76,054			9,631
Interest payable		14,401			183
Directors fee		31,589			—
Due to affiliate		(6,704	)		(15,237	)

NET CASH USED IN OPERATING ACTIVITIES		(102,892,601	)		(11,654,477	)

Cash flows from financing activities
Borrowings under revolving credit facility		25,000,000			—
Repayments of revolving credit facility		(16,000,000	)		—
Borrowings under prime broker margin account		—			(4,676,691	)
Proceeds from issuance of common stock, net of underwriting costs		72,777,647			14,056,126
Payment of cash dividends		(2,370,419	)		(492,004	)
Repurchase of common shares		(27,540	)		—

NET CASH PROVIDED BY FINANCING ACTIVITIES		79,379,688			8,887,431

TOTAL INCREASE/(DECREASE) IN CASH		(23,512,913	)		(2,767,046	)
CASH AT BEGINNING OF PERIOD		34,939,948			6,651,767

CASH AT END OF PERIOD	$	11,427,035		$	3,884,721

Supplemental Information
Cash paid during the period for interest	$	149,000		$	28,645
Supplemental non-cash information
Paid-in-kind interest income	$	3,704		$	580
Amortization of deferred financing costs	$	281,192		$	—
Net amortization of premium on investments	$	(14,561	)	$	522
Issuance of common shares in connection with distribution reinvestment plan	$	1,831,192		$	152,864

See accompanying notes to the consolidated financial statements.

F-4

Sierra Income Corporation

Consolidated Schedule of Investments

As of March 31, 2014

(unaudited)


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Non-controlled/non-affiliated investments – 94.7%
Access Media 3, Inc.	Telecommunications	Senior Secured First Lien Term Loans 10.000%⁽³⁾⁽¹²⁾		10/22/2018	$	6,975,092	$	6,975,092	$	6,975,092		3.1	%

						6,975,092		6,975,092		6,975,092
Aderant North America, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor^{(3) (4)}		6/20/2019		450,000		450,000		451,769		0.2	%

						450,000		450,000		451,769
Alcatel — Lucent USA, Inc.⁽⁵⁾	Telecommunications	Senior Secured First Lien Term Loans LIBOR + 3.500% and 1.000% Floor⁽⁶⁾		1/30/2019		987,500		983,344		983,344		0.4	%

						987,500		983,344		983,344
ALG USA Holdings, Inc.	Leisure, Amusement, Motion Pictures, and Entertainment	Senior Secured Second Lien Term Loans LIBOR + 9.000%, 1.250% Floor⁽⁴⁾		2/28/2020		2,000,000		1,964,148		2,019,820		0.9	%

						2,000,000		1,964,148		2,019,820
Allen Edmonds Corp.	Retail Stores	Senior Secured Second Lien Term Loans LIBOR + 9.000%, 1.000% Floor⁽³⁾⁽⁶⁾		5/27/2019		7,000,000		7,000,000		7,029,960		3.1	%

						7,000,000		7,000,000		7,029,960
American Pacific Corp.	Chemicals, Plastics, and Rubber	Senior Secured First Lien Term Loans LIBOR + 6.000%, 1.000% Floor⁽⁶⁾		2/27/2019		8,000,000		7,940,687		7,940,687		3.5	%

						8,000,000		7,940,687		7,940,687
Anaren, Inc.	Aerospace and Defense	Senior Secured First Lien Term Loans LIBOR + 4.500%, 1.000% Floor⁽⁴⁾		2/18/2021		3,990,000		3,950,493		3,950,493		1.7	%

		Senior Secured Second Lien Term Loans LIBOR + 8.250%, 1.000% Floor⁽⁴⁾		8/18/2021		10,000,000		9,901,150		9,901,150		4.4	%

						13,990,000		13,851,643		13,851,643
Ascensus, Inc.	Finance	Senior Secured Second Lien Term Loans LIBOR + 8.000%, 1.000% Floor⁽⁴⁾		12/2/2020		4,000,000		3,942,051		3,961,000		1.7	%

						4,000,000		3,942,051		3,961,000
Associated Asphalt Partners, LLC	Chemicals, Plastics, and Rubber	Senior Secured First Lien Notes 8.500%⁽⁷⁾		2/15/2018		2,000,000		2,016,246		2,088,000		0.9	%

						2,000,000		2,016,246		2,088,000
Atrium Innovations, Inc.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 6.750%, 1.000% Floor⁽⁶⁾		8/13/2021		5,000,000		4,975,433		4,975,433		2.2	%

						5,000,000		4,975,433		4,975,433

See accompanying notes to consolidated financial statements.

F-5


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Bennu Oil & Gas, LLC	Oil and Gas	Senior Secured Second Lien Term Loans LIBOR + 9.000%, 1.250% Floor⁽⁸⁾		11/1/2018		4,481,428		4,504,910		4,468,835		2.0	%

						4,481,428		4,504,910		4,468,835
Bon-Ton Stores, Inc.⁽⁵⁾	Retail Stores	Senior Secured Second Lien Notes 10.625%		7/15/2017		1,698,000		1,626,845		1,702,754		0.8	%

						1,698,000		1,626,845		1,702,754
Caesars Entertainment Operating Co., Inc.⁽⁵⁾	Hotels, Motels, Inns, and Gaming	Senior Secured First Lien Notes 11.250%⁽¹¹⁾		6/1/2017		6,000,000		6,213,150		5,775,000		2.5	%

						6,000,000		6,213,150		5,775,000
Charming Charlie, Inc.	Retail Stores	Senior Secured First Lien Term Loans LIBOR + 8.000%, 1.000% Floor⁽⁴⁾		1/9/2019		7,000,000		7,002,483		7,000,000		3.1	%

						7,000,000		7,002,483		7,000,000
Collective Brands Finance, Inc.⁽⁹⁾	Retail Stores	Senior Secured Second Lien Term Loans LIBOR + 7.500%, 1.000% Floor⁽⁶⁾		3/11/2022		6,000,000		6,020,000		6,020,000		2.6	%

						6,000,000		6,020,000		6,020,000
Cornerstone Chemical Company	Chemicals, Plastics, and Rubber	Senior Secured First Lien Notes 9.375%⁽⁷⁾		3/15/2018		2,500,000		2,605,850		2,644,400		1.2	%

						2,500,000		2,605,850		2,644,400
Deltek, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor⁽⁴⁾		10/10/2019		3,000,000		2,978,863		3,050,970		1.3	%

						3,000,000		2,978,863		3,050,970
Drew Marine Partners LP	Cargo Transport	Senior Secured Second Lien Term Loans LIBOR + 7.000%, 1.000% Floor⁽⁴⁾		5/19/2021		8,500,000		8,562,001		8,531,535		3.8	%

						8,500,000		8,562,001		8,531,535
Dynamic Energy Services International LLC	Oil and Gas	Senior Secured First Lien Term Loans LIBOR + 8.500%, 1.000% Floor⁽⁶⁾		3/6/2018		10,000,000		10,000,000		10,000,000		4.4	%

						10,000,000		10,000,000		10,000,000
EarthLink, Inc.⁽⁵⁾	Telecommunications	Senior Secured First Lien Notes 7.375%⁽⁷⁾⁽¹¹⁾		6/1/2020		2,450,000		2,437,870		2,548,000		1.1	%

						2,450,000		2,437,870		2,548,000
Gastar Exploration USA, Inc.⁽⁵⁾	Oil and Gas	Senior Secured First Lien Notes 8.625%⁽⁷⁾		5/15/2018		5,400,000		5,416,321		5,535,000		2.4	%

						5,400,000		5,416,321		5,535,000
Great Atlantic & Pacific Tea Company	Grocery	Senior Secured First Lien Term Loans LIBOR + 9.000%, 2.000% Floor⁽³⁾⁽⁶⁾		3/13/2017		929,786		944,805		950,744		0.4	%

						929,786		944,805		950,744
Green Field Energy Services, Inc.	Oil and Gas	Senior Secured First Lien Notes 13.000%⁽³⁾⁽⁷⁾⁽¹³⁾		11/15/2016		766,616		755,561		318,145		0.1	%

Green Field Energy Services, Inc., Warrants, expires 11/15/21	Oil and Gas	Warrants/Equity ^(3)(10)				709		29,000		—		0.0	%

						767,325		784,561		318,145

See accompanying notes to consolidated financial statements.

F-6


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Greenway Medical Technologies, Inc.⁽⁹⁾	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 8.250%, 1.000% Floor⁽⁴⁾		11/4/2021		1,000,000		985,532		992,630		0.4	%

						1,000,000		985,532		992,630
Healogics, Inc.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 8.000%, 1.250% Floor⁽⁸⁾		2/5/2020		2,000,000		1,996,461		2,047,960		0.9	%

						2,000,000		1,996,461		2,047,960
Holland Acquisition Corp.	Oil and Gas	Senior Secured First Lien Term Loans LIBOR + 9.000%, 1.000% Floor⁽⁴⁾		5/29/2018		5,000,000		4,908,568		4,985,500		2.2	%

						5,000,000		4,908,568		4,985,500
IDQ Holdings, Inc.	Automobile	Senior Secured First Lien Notes 11.500%⁽⁷⁾		4/1/2017		1,000,000		1,033,512		1,064,440		0.5	%

						1,000,000		1,033,512		1,064,440
Integra Telecom, Inc.	Telecommunications	Senior Secured Second Lien Term Loans LIBOR + 8.500%, 1.250% Floor⁽³⁾⁽⁴⁾		2/22/2020		1,618,000		1,608,194		1,659,356		0.7	%

						1,618,000		1,608,194		1,659,356
Interface Security Systems, Inc.	Electronics	Senior Secured First Lien Notes 9.250%⁽³⁾⁽⁷⁾		1/15/2018		3,417,000		3,472,923		3,499,486		1.5	%

						3,417,000		3,472,923		3,499,486
IronGate Energy Services LLC	Oil and Gas	Senior Secured First Lien Notes 11.000%⁽⁷⁾		7/1/2018		3,000,000		2,949,523		2,993,160		1.3	%

						3,000,000		2,949,523		2,993,160
Isola USA Corp.⁽⁹⁾	Electronics	Senior Secured First Lien Term Loans LIBOR + 8.250%, 1.000% Floor⁽⁴⁾		11/23/2018		1,987,500		2,036,425		2,036,425		0.9	%

						1,987,500		2,036,425		2,036,425
Kik Custom Products, Inc.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 8.250%, 1.250% Floor⁽⁸⁾		10/29/2019		5,000,000		4,990,496		5,008,600		2.2	%

						5,000,000		4,990,496		5,008,600
Linc Energy Finance (USA), Inc.	Oil and Gas	Senior Secured First Lien Notes 12.500%^{(3) (7)}		10/31/2017		500,000		498,519		549,050		0.2	%
		Senior Secured First Lien Notes 12.500%⁽³⁾		10/31/2017		500,000		486,048		549,050		0.2	%

						1,000,000		984,567		1,098,100
Liquidnet Holdings, Inc.	Finance	Senior Secured First Lien Term Loans LIBOR + 8.000%, 1.250% Floor⁽⁴⁾		5/7/2017		5,197,538		5,194,779		5,182,725		2.3	%

						5,197,538		5,194,779		5,182,725
Livingston International, Inc.⁽⁵⁾⁽⁹⁾	Cargo Transport	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.250% Floor⁽⁴⁾		4/18/2020		2,658,504		2,653,862		2,694,846		1.2	%

						2,658,504		2,653,862		2,694,846
Newpage Corp.	Containers, Packaging, and Glass	Senior Secured First Lien Term Loans LIBOR + 8.250%, 1.000% Floor⁽⁶⁾		2/11/2019		8,000,000		7,841,596		7,841,596		3.4	%

						8,000,000		7,841,596		7,841,596

See accompanying notes to consolidated financial statements.

F-7


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Omnitracs, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.000% Floor⁽⁴⁾		4/29/2020		7,000,000		7,015,249		7,044,940		3.1	%

						7,000,000		7,015,249		7,044,940
Reddy Ice Group, Inc.	Beverage, Food, and Tobacco	Senior Secured Second Lien Term Loans LIBOR + 9.500%, 1.250% Floor⁽³⁾⁽⁴⁾		10/1/2019		2,000,000		2,000,000		1,957,420		0.9	%

						2,000,000		2,000,000		1,957,420
Renaissance Learning, Inc.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.000% Floor⁽⁴⁾		5/14/2021		3,500,000		3,449,120		3,512,635		1.5	%

						3,500,000		3,449,120		3,512,635
Response Team Holdings, LLC	Buildings and Real Estate	Preferred Equity 12% PIK⁽³⁾				2,781,481		2,524,074		2,523,722		1.1	%
		Warrants to purchase 3.70% of the outstanding common units⁽¹⁰⁾		3/28/2019		—		257,407		257,407		0.1	%
		Senior Secured First Lien Term Loans LIBOR + 8.500%, 2.000% Floor, 1% PIK⁽³⁾⁽⁴⁾⁽¹²⁾		3/28/2019		11,111,111		11,111,111		11,111,111		4.8	%

						13,892,592		13,892,593		13,892,240
School Specialty, Inc.	Healthcare, Education, and Childcare	Senior Secured First Lien Term Loans LIBOR + 8.500%, 1.000% Floor⁽⁶⁾		6/11/2019		5,969,962		5,855,473		5,759,939		2.6	%

						5,969,962		5,855,473		5,759,939
Securus Technologies, Inc.	Telecommunications	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.250% Floor⁽⁴⁾		4/30/2021		2,000,000		1,981,669		2,002,040		0.9	%

						2,000,000		1,981,669		2,002,040
Sesac Holdco II, Inc.	Broadcasting and Entertainment	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor⁽³⁾⁽⁶⁾		7/12/2019		2,250,000		2,292,885		2,308,883		1.0	%

						2,250,000		2,292,885		2,308,883
Sizzling Platter, LLC	Beverage, Food, and Tobacco	Senior Secured First Lien Notes 12.250%⁽³⁾⁽⁷⁾		4/15/2016		2,063,000		2,119,164		2,189,359		1.0	%

						2,063,000		2,119,164		2,189,359
Tectum Holdings, Inc.	Automobile	Senior Secured Second Lien Term Loans LIBOR + 8.000%, 1.000% Floor⁽⁴⁾		3/12/2019		12,500,000		12,500,000		12,500,000		5.5	%

						12,500,000		12,500,000		12,500,000
Tempel Steel Company	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured First Lien Notes 12.000%⁽³⁾⁽⁷⁾		8/15/2016		1,115,000		1,106,512		1,086,579		0.5	%

						1,115,000		1,106,512		1,086,579
True Religion Apparel, Inc.	Personal and Nondurable Consumer Products (Manufacturing Only)	Senior Secured Second Lien Term Loans LIBOR + 10.000%, 1.000% Floor⁽⁴⁾		1/30/2020		4,000,000		3,839,724		3,886,120		1.7	%

						4,000,000		3,839,724		3,886,120

See accompanying notes to consolidated financial statements.

F-8


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
U.S. Well Services, LLC⁽⁵⁾	Oil and Gas	Senior Secured First Lien Notes 14.500%⁽³⁾⁽⁷⁾		2/15/2017		3,816,605		3,797,874		3,848,245		1.7	%
U.S. Well Services, LLC, Warrants, expires 2/15/19	Oil and Gas	Warrants/Equity^(3)(10)				1,731		173		55,998		0.0	%

						3,818,336		3,798,047		3,904,243
YP LLC⁽⁹⁾	Business Services	Senior Secured First Lien Term Loans LIBOR + 6.750%, 1.000% Floor⁽⁶⁾		6/4/2018		5,826,087		5,874,379		5,874,379		2.6	%

						5,826,087		5,874,379		5,874,379
Total non-controlled/non-affiliated investments							$	215,577,555	$	215,845,732		94.7	%


							Notional Amount		Unrealized Gain (Loss)
Derivative Instrument — Long Exposure
Total return swap with Citibank, N.A. (Note 5)		Total Return Swap					$	73,431,806	$	798,417

							$	73,431,806	$	798,417

(1)	All of our investments are domiciled in the United States except for Atrium Innovations, Inc. and Livingston International, Inc. which are domiciled in Canada.

(2)	Percentage is based on net assets of $227,829,509 as of March 31, 2014.

(3)	An affiliated fund that is managed by an affiliate of SIC Advisors LLC also holds an investment in this security.

(4)

The interest rate on these loans is subject to a base rate plus 3M LIBOR, which at March 31, 2014 was 0.23%. As the interest rate is subject to a minimum LIBOR floor which was greater than the 3M LIBOR rate at March 31, 2014, the prevailing rate in effect at March 31, 2014 was the Base rate plus the LIBOR floor.

(5)	The investment is not a qualifying asset under Section 55 of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 10.7% of the Company’s portfolio at fair value.

(6)

The interest rate on these loans is subject to a base rate plus 1Y LIBOR, which at March 31, 2014 was 0.56%. As the interest rate is subject to a minimum LIBOR floor which was greater than the 1Y LIBOR rate at March 31, 2014, the prevailing rate in effect at March 31, 2014 was the Base rate plus the LIBOR floor.

(7)	Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent a fair value of $28,363,864 and 12.4% of net assets as of March 31, 2014 and are considered restricted.

(8)

The interest rate on these loans is subject to a base rate plus 6M LIBOR, which at March 31, 2014 was 0.33%. As the interest rate is subject to a minimum LIBOR floor which was greater than the 6M LIBOR rate at March 31, 2014, the prevailing rate in effect at March 31, 2014 was the Base rate plus the LIBOR floor.

(9)

Security is also held in the underlying portfolio of the total return swap with Citibank, N.A. (see Note 5). The Company’s total commitment to Collective Brands Finance, Inc., Greenway Medical Technologies, Inc., Isola USA Corp., Livingston International, Inc., and YP, LLC is $11,997,500 or 5.3%, $2,477,630 or 1.1%, $5,976,425 or 2.6%, $4,664,289 or 2.0%, and $11,919,379 or 5.2%, respectively, of Net Assets as of March 31, 2014.

(10)	Security is non-income producing.

(11)	Represents securities in Level 2 in the ASC 820 table (see Note 4).

(12)	The investment has an unfunded commitment as of March 31, 2014 which is excluded from the presentation (see Note 11).

(13)	The investment was on non-accrual status as of March 31, 2014.

See accompanying notes to consolidated financial statements.

F-9

Sierra Income Corporation

Consolidated Schedule of Investments

As of December 31, 2013


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Non-controlled/non-affiliated investments — 90.1%
Access Media 3, Inc.	Telecommunications	Senior Secured First Lien Term Loans 10.00%⁽³⁾		10/22/2018	$	7,000,000	$	7,000,000	$	7,000,000		4.6	%

						7,000,000		7,000,000		7,000,000
Aderant North America, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor⁽³⁾		6/20/2019		450,000		450,000		453,861		0.3	%

						450,000		450,000		453,861
Alcatel — Lucent USA, Inc.	Telecommunications	Senior Secured First Lien Term Loans LIBOR + 4.750%, 1.000% Floor		1/30/2019		990,000		985,662		993,712		0.6	%

						990,000		985,662		993,712
ALG USA Holdings, Inc.	Leisure, Amusement, Motion Pictures, and Entertainment	Senior Secured Second Lien Term Loans LIBOR + 9.000%, 1.250% Floor		2/28/2020		2,000,000		1,963,092		2,007,080		1.3	%

						2,000,000		1,963,092		2,007,080
Allen Edmonds Corp.	Retail Stores	Senior Secured Second Lien Term Loans LIBOR + 9.00%, 1.00% Floor⁽³⁾		5/27/2019		7,000,000		7,000,000		7,000,000		4.6	%

						7,000,000		7,000,000		7,000,000
American Apparel, Inc.	Retail Stores	Senior Secured First Lien Notes 13.000%⁽³⁾⁽⁴⁾		4/15/2020		2,500,000		2,459,496		2,300,000		1.5	%

						2,500,000		2,459,496		2,300,000
Ascensus, Inc.	Finance	Senior Secured Second Lien Term Loans LIBOR + 8.00%, 1.00% Floor		12/2/2020		4,000,000		3,940,522		3,940,522		2.6	%

						4,000,000		3,940,522		3,940,522
Associated Asphalt Partners LLC	Chemicals, Plastics, and Rubber	Senior Secured First Lien Notes 8.500%⁽⁴⁾		2/15/2018		5,000,000		5,036,563		5,130,000		3.3	%

						5,000,000		5,036,563		5,130,000
Bennu Oil & Gas, LLC	Oil and Gas	Senior Secured Second Lien Term Loans LIBOR + 9.00%, 1.25% Floor		11/1/2018		1,122,857		1,113,148		1,113,148		0.7	%

						1,122,857		1,113,148		1,113,148
Bon-Ton Stores, Inc.⁽⁵⁾	Retail Stores	Senior Secured Second Lien Notes 10.625%		7/15/2017		1,698,000		1,622,374		1,695,844		1.1	%

						1,698,000		1,622,374		1,695,844
Caesars Entertainment Operating Co., Inc.	Hotels, Motels, Inns, and Gaming	Senior Secured First Lien Notes 11.250%⁽⁵⁾		6/1/2017		3,000,000		3,153,543		3,056,250		2.0	%

						3,000,000		3,153,543		3,056,250

F-10


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Charming Charlie, Inc.	Retail Stores	Senior Secured First Lien Term Loans LIBOR + 8.00%, 1.00% Floor		1/9/2019		6,000,000		6,000,000		6,000,000		3.9	%

						6,000,000		6,000,000		6,000,000
Checkers Drive-In Restaurants, Inc.	Beverage, Food, and Tobacco	Senior Secured First Lien Notes 11.000%⁽⁴⁾		12/1/2017		1,500,000		1,504,143		1,614,675		1.1	%

						1,500,000		1,504,143		1,614,675
Cornerstone Chemical Company	Chemicals, Plastics, and Rubber	Senior Secured First Lien Notes 9.375%		3/15/2018		2,000,000		2,000,000		2,080,000		1.4	%
		Senior Secured First Lien Notes 9.375%⁽⁴⁾		3/15/2018		2,500,000		2,611,122		2,600,000		1.7	%

						4,500,000		4,611,122		4,680,000
Deltek, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor		10/10/2019		3,000,000		2,978,006		3,034,560		2.0	%

						3,000,000		2,978,006		3,034,560
Dispensing Dynamics International, Inc.	Personal and Nondurable Consumer Products (Manufacturing Only)	Senior Secured First Lien Notes 12.500%⁽⁴⁾		1/1/2018		2,200,000		2,179,668		2,223,342		1.4	%

						2,200,000		2,179,668		2,223,342
Drew Marine Partners LP	Cargo Transport	Senior Secured Second Lien Term Loans LIBOR + 7.00%, 1.00% Floor		5/19/2021		3,000,000		2,992,638		2,992,638		2.0	%

						3,000,000		2,992,638		2,992,638
EarthLink, Inc.	Telecommunications	Senior Secured First Lien Notes 7.375%⁽⁴⁾⁽⁵⁾		6/1/2020		2,450,000		2,437,636		2,453,062		1.6	%

						2,450,000		2,437,636		2,453,062
Erickson Air-Crane, Inc.⁽⁵⁾	Aerospace and Defense	Senior Secured Second Lien Notes 8.250%⁽⁴⁾		5/1/2020		1,953,000		1,966,979		2,016,472		1.3	%

						1,953,000		1,966,979		2,016,472
Gastar Exploration USA, Inc.⁽⁵⁾	Oil and Gas	Senior Secured First Lien Notes 8.625%⁽⁴⁾		5/15/2018		3,000,000		3,000,000		2,958,750		1.9	%

						3,000,000		3,000,000		2,958,750
Gibson Brands, Inc.	Personal and Nondurable Consumer Products (Manufacturing Only)	Senior Secured First Lien Notes 8.875%⁽⁴⁾		8/1/2018		3,000,000		3,056,289		3,069,270		2.0	%

						3,000,000		3,056,289		3,069,270
Great Atlantic & Pacific Tea Company	Grocery	Senior Secured First Lien Term Loans LIBOR + 9.000%, 2.000% Floor⁽³⁾		3/13/2017		932,467		948,787		952,002		0.6	%

						932,467		948,787		952,002
Green Field Energy Services, Inc.	Oil and Gas	Senior Secured First Lien Notes 13.000%⁽³⁾⁽⁴⁾		11/15/2016		766,616		755,914		322,744		0.2	%

						766,616		755,914		322,744

F-11


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Green Field Energy Services, Inc., Warrants, expires 11/15/21	Oil and Gas	Warrants/Equity⁽³⁾⁽⁶⁾				709		29,000		—		0.0	%

						709		29,000		—
Greenway Medical Technologies, Inc.⁽⁷⁾	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 8.25%, 1.00% Floor		11/4/2021		1,000,000		985,218		985,218		0.6	%

						1,000,000		985,218		985,218
Healogics, Inc.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 8.000%, 1.250% Floor		2/5/2020		2,000,000		1,996,440		2,040,000		1.3	%

						2,000,000		1,996,440		2,040,000
Holland Acquisition Corp.	Oil and Gas	Senior Secured First Lien Term Loans LIBOR + 9.000%, 1.000% Floor		5/29/2018		5,000,000		4,904,352		4,917,000		3.2	%

						5,000,000		4,904,352		4,917,000
IDQ Holdings, Inc.	Automobile	Senior Secured First Lien Notes 11.500%⁽⁴⁾		4/1/2017		1,000,000		1,035,523		1,066,250		0.7	%

						1,000,000		1,035,523		1,066,250
Integra Telecom, Inc.	Telecommunications	Senior Secured Second Lien Term Loans LIBOR + 8.500%, 1.250% Floor⁽³⁾		2/22/2020		1,618,000		1,607,900		1,650,360		1.1	%

						1,618,000		1,607,900		1,650,360
Interface Security Systems, Inc.	Electronics	Senior Secured First Lien Notes 9.250%⁽³⁾⁽⁴⁾		1/15/2018		3,417,000		3,476,530		3,492,550		2.3	%

						3,417,000		3,476,530		3,492,550
IronGate Energy Services LLC	Oil and Gas	Senior Secured First Lien Notes 11.000%⁽⁴⁾		7/1/2018		3,000,000		2,948,441		3,029,850		2.0	%

						3,000,000		2,948,441		3,029,850
Keystone Automotive Operations, Inc.	Automobile	Senior Secured Second Lien Term Loans LIBOR + 9.500%, 1.250% Floor		8/15/2020		5,000,000		5,000,000		5,053,000		3.3	%

						5,000,000		5,000,000		5,053,000
Kik Custom Products, Inc.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 8.25%, 1.25% Floor		10/29/2019		3,000,000		2,970,000		2,970,000		1.9	%

						3,000,000		2,970,000		2,970,000
Linc Energy Finance (USA), Inc.	Oil and Gas	Senior Secured First Lien Notes 12.500%⁽³⁾⁽⁴⁾		10/31/2017		500,000		498,368		545,925		0.4	%

		Senior Secured First Lien Notes 12.500%⁽³⁾		10/31/2017		500,000		485,222		545,925		0.4	%

						1,000,000		983,590		1,091,850

F-12


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount		Cost		Fair Value		% of Net Assets⁽²⁾
Liquidnet Holdings, Inc.	Finance	Senior Secured First Lien Term Loans LIBOR + 8.000%, 1.250% Floor		5/7/2017		2,887,500		2,862,362		2,867,576		1.9	%

						2,887,500		2,862,362		2,867,576
Livingston International, Inc.⁽⁷⁾	Cargo Transport	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.250% Floor⁽⁵⁾		4/18/2020		2,658,504		2,653,733		2,685,089		1.8	%

						2,658,504		2,653,733		2,685,089
Maxim Crane Works Holdings, Inc.⁽⁷⁾	Oil and Gas	Senior Secured Second Lien Notes 12.250%⁽⁴⁾		4/15/2015		1,500,000		1,519,124		1,542,360		1.0	%

						1,500,000		1,519,124		1,542,360
Michael Baker International, Inc.	Diversified/Conglomerate Service	Senior Secured First Lien Notes 8.25%⁽⁴⁾		10/15/2018		2,500,000		2,500,000		2,511,528		1.6	%

						2,500,000		2,500,000		2,511,528
Omnitracs, Inc.	Electronics	Senior Secured Second Lien Term Loans LIBOR + 7.75%, 1.00% Floor		4/29/2020		7,000,000		7,015,128		7,015,128		4.6	%

						7,000,000		7,015,128		7,015,128
Prince Minerals Holding Corp.	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured First Lien Notes 11.500%⁽³⁾⁽⁴⁾		12/15/2019		1,200,000		1,187,246		1,310,568		0.9	%

						1,200,000		1,187,246		1,310,568
Reddy Ice Group, Inc.	Beverage, Food, and Tobacco	Senior Secured Second Lien Term Loans LIBOR + 9.500%, 1.250% Floor⁽³⁾		10/1/2019		2,000,000		2,000,000		1,942,460		1.3	%

						2,000,000		2,000,000		1,942,460
Renaissance Learning, Inc.	Healthcare, Education, and Childcare	Senior Secured Second Lien Term Loans LIBOR + 7.75%, 1.00% Floor		5/14/2021		3,500,000		3,447,888		3,447,888		2.3	%

						3,500,000		3,447,888		3,447,888
School Specialty, Inc.	Healthcare, Education, and Childcare	Senior Secured First Lien Term Loans LIBOR + 8.500%, 1.000% Floor		6/11/2019		2,985,000		2,936,006		2,864,585		1.9	%

						2,985,000		2,936,006		2,864,585
Securus Technologies, Inc.	Telecommunications	Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.250% Floor		4/30/2021		2,000,000		1,981,227		1,988,280		1.3	%

						2,000,000		1,981,227		1,988,280
Sesac Holdco II, Inc.	Broadcasting and Entertainment	Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor⁽³⁾		7/12/2019		2,250,000		2,294,369		2,300,535		1.5	%

						2,250,000		2,294,369		2,300,535
Sizzling Platter, LLC	Beverage, Food, and Tobacco	Senior Secured First Lien Notes 12.250%⁽³⁾⁽⁴⁾		4/15/2016		2,063,000		2,124,725		2,198,601		1.4	%

						2,063,000		2,124,725		2,198,601

F-13


Company⁽¹⁾	Industry	Type of Investment	Maturity		Par Amount/ Quantity		Cost		Fair Value		% of Net Assets⁽²⁾
Sorenson Communications	Telecommunications	Senior Secured First Lien Term Loans LIBOR + 8.250%, 1.250% Floor		10/31/2014		2,979,987		2,979,987		2,988,451		2.0	%

						2,979,987		2,979,987		2,988,451
Tempel Steel Company	Mining, Steel, Iron, and Nonprecious Metals	Senior Secured First Lien Notes 12.000%⁽³⁾⁽⁴⁾		8/15/2016		1,115,000		1,105,791		1,085,921		0.7	%

						1,115,000		1,105,791		1,085,921
True Religion Apparel, Inc.	Personal and Nondurable Consumer Products (Manufacturing Only)	Senior Secured Second Lien Term Loans LIBOR + 10.000%, 1.000% Floor		1/30/2020		4,000,000		3,835,240		3,861,480		2.5	%

						4,000,000		3,835,240		3,861,480
U.S. Well Services, LLC⁽⁵⁾	Oil and Gas	Senior Secured First Lien Notes 14.500%⁽³⁾⁽⁴⁾		2/15/2017		3,816,605		3,796,701		3,832,100		2.5	%

						3,816,605		3,796,701		3,832,100
U.S. Well Services, LLC, Warrants, expires 2/15/19	Oil and Gas	Warrants/Equity⁽³⁾⁽⁶⁾				1,731		173		54,977		0.0	%

						1,731		173		54,977
Total non-controlled/non-affiliated investments							$	137,332,276	$	137,801,537		90.1	%


							Notional Amount		Unrealized Gain (Loss)
Derivative Instrument — Long Exposure
Total return swap with Citibank, N.A. (Note 5)		Total Return Swap					$	24,855,700	$	351,396

							$	24,855,700	$	351,396

⁽¹⁾	All of our investments are domiciled in the United States except for Livingston International, Inc. which is domiciled in Canada.

⁽²⁾	Percentage is based on net assets of $153,002,273 as of December 31, 2013.

⁽³⁾	An affiliated fund that is managed by an affiliate of SIC Advisors LLC also holds an investment in this security.

⁽⁴⁾	Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent a fair value of $45,303,968 and 29.6% of net assets as of December 31, 2013 and are considered restricted.

⁽⁵⁾	The investment is not a qualifying asset under Section 55 of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 11.5% of the Company’s portfolio at fair value.

⁽⁶⁾	Security is non-income producing.

⁽⁷⁾

Security is also held in the underlying portfolio of the total return swap with Citibank, N.A. (see Note 5). The Company’s total commitment to Greenway Medical Technologies, Inc., Livingston International, Inc. and Maxim Crane Works Holdings, Inc. is $2,470,218 or 1.6%, $4,654,532 or 3.0% and $2,034,860 or 1.3%, respectively, of Net Assets as of December 31, 2013.

F-14

SIERRA INCOME CORPORATION

Notes to Consolidated Financial Statements

March 31, 2014

(unaudited)

Note 1. Organization

Sierra Income Corporation (the “Company”) was incorporated under the general corporation laws of the State of Maryland on June 13, 2011 and formally commenced operations on April 17, 2012. The Company is an externally managed, non-diversified closed-end management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is externally managed by SIC Advisors LLC (“SIC Advisors”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Company has elected and intends to continue to qualify to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s fiscal year-end is December 31st.

On April 17, 2012, the Company successfully reached its minimum escrow requirement and officially commenced operations by issuing 1,108,033 shares of common stock to SIC Advisors for gross proceeds of $10,000,000. The Company’s offering period is currently scheduled to terminate on April 17, 2015, unless further extended. Since commencing its operations, the Company has sold a total of 24,767,652 shares of common stock, which includes shares issued as part of the distribution reinvestment plan (see Note 12), for total proceeds of $249.2 million, which includes the shares sold to SIC Advisors. The proceeds from the issuance of common stock are presented in the Company’s consolidated statements of changes in net assets and consolidated statements of cash flows and are presented net of selling commissions and dealer manager fees.

On August 15, 2013, the Company formed Arbor Funding LLC, a wholly-owned financing subsidiary.

“The Company has formed and expects to continue to form certain taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes. These Taxable Subsidiaries allow us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.”

The Company’s investment objective is to generate current income, and to a lesser extent, long-term capital appreciation. The Company intends to meet its investment objective by investing primarily in the debt of privately owned U.S. companies with a focus on senior secured debt, second lien debt and, to a lesser extent, subordinated debt. The Company will originate transactions sourced through SIC Advisors’ direct origination network, and also expects to acquire debt securities through the secondary market. The Company may make equity investments in companies that it believes will generate appropriate risk adjusted returns, although it does not expect this to be a substantial portion of the portfolio.

Note 2. Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries, Arbor Funding LLC and SIC RT1 LLC. Additionally, the accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited interim financial results included herein contain all adjustments and reclassifications that are necessary for the fair presentation of financial statements for the periods included herein: “Therefore, this Form 10-Q should be read in conjunction with the Company’s annual

F-15

report on Form 10-K for the year ended December 31, 2013, which was filed with the U.S. Securities and Exchange Commission on March 13, 2014”. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31 2014. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Cash

The Company deposits its cash in a financial institution which, at times, may be in excess of the Federal Deposit Insurance Corporation insurance limits.

Offering Costs

Offering costs incurred directly by the Company will be recorded in the period incurred. See Note 7 regarding offering costs paid for by SIC Advisors.

Use of Estimates in the Preparation of Financial Statements

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Deferred Financing Costs

Financing costs, incurred in connection with our credit facility, are deferred and amortized over the life of the facility.

Indemnification

In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

New Accounting Pronouncements

In June 2013, the FASB issued Accounting Standards Update 2013-08 “Financial Services-Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”). ASU 2013-08 more closely aligns US GAAP with International Financial Reporting Standards by clarifying the characteristics of an investment company and requiring certain new disclosures. The new disclosures required include information about the following items: (i) the type and amount of financial support provided to investee companies, including situations in which the Company assisted an investee in obtaining financial support, (ii) the primary reasons for providing the financial support, (iii) the type and amount of financial support the Company is contractually required to provide to an investee, but has not yet provided, and (iv) the primary reasons for the contractual requirement to provide the financial support. As of March 31, 2014, the Company has not provided and is not contractually obligated to provide financial support to investee companies.

Revenue Recognition

Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. We record amortized or accreted discounts or premiums as interest income using the effective interest method. Dividend income, if any, is recognized on an accrual basis to the extent that the Company expects to collect such amount.

F-16

Origination/closing, amendment and transaction break-up fees associated with investments in portfolio companies are recognized as income in the period that we become entitled to such fees. Other fees are capitalized as deferred revenue and recorded into income over the respective period. Other fee income for the three months ended March 31, 2014 and March 31, 2013 was $834,649 and $64,710, respectively.

Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. For the three months ended March 31, 2014 and March 31, 2013 the Company earned $3,704 and $580 in PIK interest, respectively.

Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. The Company reports 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. For total return swap transactions, periodic payments are received or made at the end of each settlement period, but prior to settlement are recorded as realized gains or losses on total return swap in the consolidated statements of operations.

Management reviews all loans that become 90 days or more past due on principal and interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although the Company may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. At March 31, 2014, one portfolio company was on non-accural status with a fair value of $318,145, or 0.1% of the fair value of our portfolio. At December 31, 2013, one portfolio company was on non-accrual status with a fair value of $322,744, or 0.2% of the fair value of our portfolio.

Investment Classification

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, the Company would be deemed to “control” a portfolio company if it owns more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. The Company refers to such investments in portfolio companies that it “controls” as “Control Investments.” Under the 1940 Act, the Company would be deemed to be an “Affiliated Person” of a portfolio company if it owns between 5% and 25% of the portfolio company’s outstanding voting securities or if it is under common control with such portfolio company. The Company refers to such investments in Affiliated Persons as “Affiliated Investments.” As of March 31, 2014 and December 31, 2013, the Company has no Controlled Investments or Affiliated Investments.

Valuation of Investments

The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is

F-17

a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. The Company weighs the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Investments for which market quotations are not readily available are valued at fair value as determined by the Company’s board of directors based upon input from management and third party valuation firms. Because these investments are illiquid and because there may not be any directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and consistently applied across all loans and through time.

The Company uses third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party valuation firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. Based on market data obtained from the third-party valuation firms, the Company uses a combined market yield analysis and an enterprise model of valuation. In applying the market yield analysis, the value of the Company’s loans is determined based upon inputs such as the coupon rate, current market yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, the Company uses a waterfall analysis which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower’s capital structure into consideration. To estimate the enterprise value of the portfolio company, the Company weighs some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities using an expected recovery model. We may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.

Over-the-counter (OTC) derivative contracts, such as total return swaps (discussed in Note 5) are fair valued using models that measure the change in fair value of reference assets underlying the swaps offset against any fees payable to the swap counterparty. The fair values of the reference assets underlying the swap are determined using similar methods as described above for debt and equity investments where the Company also invests directly in such assets.

The Company undertakes a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

•

the Company’s quarterly valuation process begins with each portfolio investment being initially valued by the investment professionals responsible for monitoring the portfolio investment;

•

conclusions are then documented and discussed with senior management; and

•

F-18

quarterly basis on non fiscal year-end quarters, such that each of these investments will be valued by an independent valuation firm at least twice per annum when combined with the fiscal year-end review of all the investments by independent valuation firms.

In addition, all of the Company’s investments are subject to the following valuation process:

•

management reviews preliminary valuations and their own independent assessment;

•

the audit committee of the Company’s board of directors reviews the preliminary valuations of senior management and independent valuation firms; and

•

the Company’s board of directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of SIC Advisors, the respective independent valuation firms and the audit committee.

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 the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and accounts payable and accrued expenses, approximate fair value due to their short-term nature. The carrying amounts and fair values of our long term obligations are discussed in Note 4.

Federal Income Taxes

The Company has elected to be treated as a RIC under subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of its investment company taxable income (“ICTI”) including PIK, as defined by the Code, and net tax exempt interest income (which is the excess of the Company’s gross tax exempt interest income over certain disallowed deductions) for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.

The Company will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.

The Company’s Taxable Subsidiaries accrue income taxes payable based on the applicable corporate rates on the unrealized gains generated by the investments held by the Taxable Subsidiaries. There were no such deferred tax liabilities for the three months ended March 31, 2014 or March 31, 2013.

ICTI generally differs from net investment income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. The Company may be required to recognize ICTI in certain circumstances in which it does not receive cash. For example, if the Company holds debt obligations that are treated under applicable tax rules as having original issue discount, the Company must

F-19

include in ICTI each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by the Company in the same taxable year. The Company may also have to include in ICTI other amounts that it has not yet received in cash, such as 1) PIK interest income and 2) interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. Because any original issue discount or other amounts accrued will be included in the Company’s ICTI for the year of accrual, the Company may be required to make a distribution to its stockholders in order to satisfy the minimum distribution requirements, even though the Company will not have received and may not ever receive any corresponding cash amount. ICTI also excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.

Although we file federal and state tax returns, our major tax jurisdiction is federal. The Company’s federal tax returns from inception-to-date remain subject to examination by the Internal Revenue Service.

The Company accounts for income taxes in conformity with ASC Topic 740 — Income Taxes (“ASC 740”). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. There were no material uncertain income tax positions at March 31, 2014.

The following table reflects, for tax purposes, the sources of the cash distributions that the Company has paid on its common stock during the three months ended March 31, 2014 and three months ended March 31, 2013:


	Three months ended March 31, 2014					Three months ended March 31, 2013
Source of Distribution	Distribution Amount⁽¹⁾		Percentage			Distribution Amount		Percentage
Return of capital from offering proceeds	$	—		—	%	$	—		—	%
Return of capital from borrowings		—		—			—		—
Ordinary income		4,201,611		100.0			644,868		100.0
Return of capital (other)		—		—			—		—

Distributions on a tax basis:	$	4,201,611		100.0	%	$	644,868		100.0	%

⁽¹⁾	The Distribution Amount and Percentage reflected for March 31, 2014 are estimated figures. The actual source of distributions for the fiscal year ending 2014 will be calculated in connection with the Company’s year-end procedures.

Segments

The Company invests in various industries. The Company separately evaluates the performance of each of its investment relationships. However, because each of these investment relationships has similar business and economic characteristics, they have been aggregated into a single investment segment. All applicable segment disclosures are included in or can be derived from the Company’s consolidated financial statements. See Note 3 for further information.

Company Investment Risk, Concentration of Credit Risk, and Liquidity Risk

SIC Advisors has broad discretion in making investments for the Company. Investments generally consist of debt instruments that may be affected by business, financial market or legal uncertainties. Prices of investments

F-20

may be volatile, and a variety of factors that are inherently difficult to predict, such as domestic or international economic and political developments, may significantly affect the results of the Company’s activities and the value of its investments. In addition, the value of the Company’s portfolio may fluctuate as the general level of interest rates fluctuates.

The value of the Company’s investments in loans and bonds may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient collateral and/or there are extensive legal and other costs incurred in collecting on a defaulted loan, observable secondary or primary market yields for similar instruments issued by comparable companies increase materially or risk premiums required in the market between smaller companies, such as the Company’s borrowers, and those for which market yields are observable increase materially. SIC Advisors may attempt to minimize these risks by maintaining low loan-to-liquidation values with each loan and the collateral underlying the loan.

The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.

Note 3. Investments

The following table shows the composition of the Company’s portfolio investments by industry classification at fair value at March 31, 2014:


	Fair Value		Percentage
Oil and Gas	$	33,302,983		15.4	%
Healthcare, Education, and Childcare		22,297,197		10.3	%
Retail Stores		21,752,714		10.1	%
Electronics		16,083,590		7.5	%
Telecommunications		14,167,832		6.6	%
Buildings and Real Estate		13,892,240		6.4	%
Aerospace and Defense		13,851,643		6.4	%
Automobile		13,564,440		6.3	%
Chemicals, Plastics, and Rubber		12,673,087		5.9	%
Cargo Transport		11,226,381		5.2	%
Finance		9,143,725		4.2	%
Containers, Packaging, and Glass		7,841,596		3.6	%
Business Services		5,874,379		2.7	%
Hotels, Motels, Inns, and Gaming		5,775,000		2.7	%
Beverage, Food, and Tobacco		4,146,779		1.9	%
Personal and Nondurable Consumer Products (Manufacturing Only)		3,886,120		1.8	%
Broadcasting and Entertainment		2,308,883		1.1	%
Leisure, Amusement, Motion Pictures, and Entertainment		2,019,820		0.9	%
Mining, Steel, Iron, and Nonprecious Metals		1,086,579		0.5	%
Grocery		950,744		0.5	%

Total	$	215,845,732		100.0	%

See Note 5 for industry classifications of the underlying TRS reference assets as of March 31, 2014.

F-21

The following table shows the composition of the Company’s portfolio investments by industry classification at fair value at December 31, 2013:


	Fair Value		Percentage
Oil and Gas	$	18,862,779		13.7	%
Telecommunications		17,073,865		12.4	%
Retail Stores		16,995,844		12.3	%
Electronics		13,996,099		10.2	%
Healthcare, Education, and Childcare		12,307,691		8.9	%
Chemicals, Plastics, and Rubber		9,810,000		7.1	%
Personal and Nondurable Consumer Products (Manufacturing Only)		9,154,092		6.7	%
Finance		6,808,098		4.9	%
Automobile		6,119,250		4.4	%
Beverage, Food, and Tobacco		5,755,736		4.2	%
Cargo Transport		5,677,727		4.1	%
Hotels, Motels, Inns, and Gaming		3,056,250		2.2	%
Diversified/Conglomerate Service		2,511,528		1.8	%
Mining, Steel, Iron, and Nonprecious Metals		2,396,489		1.7	%
Broadcasting and Entertainment		2,300,535		1.7	%
Aerospace and Defense		2,016,472		1.5	%
Leisure, Amusement, Motion Pictures, and Entertainment		2,007,080		1.5	%
Grocery		952,002		0.7	%

Total	$	137,801,537		100.0	%

See Note 5 for industry classifications of the underlying TRS reference assets as of December 31, 2013.

The following table summarizes the amortized cost and the fair value of the Company’s portfolio investments as of March 31, 2014:


	Amortized Cost		Percentage			Fair Value		Percentage
Senior secured first lien term loans	$	80,619,234		37.4	%	$	80,592,035		37.3	%
Senior secured first lien notes		34,909,073		16.2			34,687,914		16.1
Senior secured second lien term loans		95,611,748		44.3			96,025,902		44.5
Senior secured second lien notes		1,626,845		0.8			1,702,754		0.8
Warrants/Equity		2,810,655		1.3			2,837,127		1.3

Total	$	215,577,555		100.0	%	$	215,845,732		100.0	%

The following table summarizes the amortized cost and the fair value of the Company’s portfolio investments as of December 31, 2013:


	Amortized Cost		Percentage			Fair Value		Percentage
Senior secured first lien term loans	$	28,617,156		20.9	%	$	28,583,326		20.8	%
Senior secured first lien notes		47,352,921		34.5			47,427,311		34.4
Senior secured second lien term loans		56,224,549		40.9			56,481,247		41.0
Senior secured second lien notes		5,108,477		3.7			5,254,676		3.8
Warrants/Equity		29,173		—			54,977		—

Total	$	137,332,276		100.0	%	$	137,801,537		100.0	%

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The following table shows the composition of the Company’s portfolio investments by geography classification at fair value at March 31, 2014:


Geography	Fair Value		Percentage
United States	$	208,175,453		96.4	%
Canada		7,670,279		3.6

Total	$	215,845,732		100.0	%

The following table shows the composition of the Company’s portfolio investments by geography classification at fair value at December 31, 2013:


Geography	Fair Value		Percentage
United States	$	135,116,448		98.1	%
Canada		2,685,089		1.9

Total	$	137,801,537		100.0	%

Opportunities for co-investments may arise when SIC Advisors or an affiliated adviser becomes aware of investment opportunities that may be appropriate for the Company and other clients, or affiliated funds. As a BDC, the Company was substantially limited in its ability to co-invest in privately negotiated transactions with affiliated funds until it obtained an exemptive order from the SEC on November 25, 2013 (the “Exemptive Order”). The Exemptive Order permits the Company to participate in negotiated co-investment transactions with certain affiliates, each of whose investment adviser is Medley, LLC, the parent company of Medley Capital LLC and SIC Advisors, or an investment adviser controlled by Medley, LLC in a manner consistent with its investment objective, strategies and restrictions, as well as regulatory requirements and other pertinent factors. Co-investment under the Exemptive Order is subject to certain conditions therein, including the condition that, in the case of each co-investment transaction, the Company’s board of directors determines that it would be advantageous for the Company to co-invest in a manner described in the Exemptive Order. Before receiving the Exemptive Order, the Company only participated in co-investments that were allowed under existing regulatory guidance, such as syndicated loan transactions where price was the only negotiated term, which limited the types of investments that the Company could make. Please refer to footnote 3 to the Schedule of Investments as of March 31, 2014 for disclosures regarding securities also held by affiliated funds.

In June 2013, the FASB issued Accounting Standards Update 2013-08 “Financial Services-Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”). ASU 2013-08 clarifies the characteristics of an investment company and requires reporting entities to disclose information about the following items: (i) the type and amount of financial support provided to investee companies, including situations in which the Company assisted an investee in obtaining financial support, (ii) the primary reasons for providing the financial support, (iii) the type and amount of financial support the Company is contractually required to provide to an investee, but has not yet provided, and (iv) the primary reasons for the contractual requirement to provide the financial support. The Company adopted ASU 2013-08 for the fiscal year ending December 31, 2014 as the amendments in ASU 2013-08 are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013.

As part of the Company’s investment objective, in addition to purchasing loans on the secondary market, it makes loans directly to privately-held middle market companies to help provide these companies with capital as the trend of bank consolidation that has occurred over the last 20 years has reduced the amount of capital available for such companies. As of March 31, 2014, the Company holds loans it has made directly to 26 investee companies with aggregate principal amounts of $134,890,024. As of December 31, 2013, the Company holds loans it has made to 28 investee companies with aggregate principal amounts of $80,807,327. During the three month period ended March 31, 2014, the Company made 10 loans to investee companies in aggregate principal amounts of $69,202,105. During the three month period ended March 31, 2013, the Company has made 7 loans to investee companies in aggregate principal amounts of $7,559,200. The details of the Company’s loans have

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been disclosed on the consolidated schedule of investments as well as in Note 4. In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by leading a syndicate of lenders to provide the investee companies with financing. During the three month periods ended March 31, 2014 and March 31, 2013, the Company did not make any such introductions or lead any syndicates. Affiliates of the Company’s Advisor do not serve as officers or directors of any investee companies or provide managerial direction as part of their roles.

In addition to the loans that the Company has provided, the Company has unfunded commitments to provide additional financings through undrawn term loans or revolving lines of credit. The details of such arrangements are disclosed in Note 8 (Commitments and Contingencies).

Note 4. Fair Value Measurements

The Company follows ASC 820 for measuring the fair value of portfolio investments. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The Company’s fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in the consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows:

•

Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date.

•

Level 2 — Valuations based on inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities.

•

Level 3 — Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date. The inputs for the determination of fair value may require significant management judgment or estimation and is based upon management’s assessment of the assumptions that market participants would use in pricing the assets or liabilities. These investments include debt and equity investments in private companies or assets valued using the market or income approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta and EBITDA multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.

In addition to using the above inputs in investment valuations, the Company employs the valuation policy approved by the board of directors that is consistent with ASC 820 (see Note 2). Consistent with the Company’s valuation policy, the Company evaluates the source of inputs, including any markets in which the Company’s investments are trading, in determining fair value.

F-24

The following table presents the fair value measurements of the Company’s total investments, by major class according to the fair value hierarchy, as of March 31, 2014:


Type of Investment	Level 1		Level 2		Level 3		Total
Senior secured first lien term loans	$	—	$	—	$	80,592,035	$	80,592,035
Senior secured first lien notes		—		8,323,000		26,364,914		34,687,914
Senior secured second lien term loans		—		—		96,025,902		96,025,902
Senior secured second lien notes		—		—		1,702,754		1,702,754
Warrants/Equity		—		—		2,837,127		2,837,127

Total	$	—	$	8,323,000	$	207,522,732	$	215,845,732


Derivative Instrument- Long Exposure	Level 1		Level 2		Level 3		Total
Asset
Total return swap with Citibank, N.A.	$	—	$	—	$	798,417	$	798,417

The following table presents the fair value measurements of the Company’s total investments, by major class according to the fair value hierarchy, as of December 31, 2013:


Type of Investment	Level 1		Level 2		Level 3		Total
Senior secured first lien term loans	$	—	$	—	$	28,583,326	$	28,583,326
Senior secured first lien notes		—		5,509,312		41,917,999		47,427,311
Senior secured second lien term loans		—		—		56,481,247		56,481,247
Senior secured second lien notes		—		—		5,254,676		5,254,676
Warrants/Equity		—		—		54,977		54,977

Total	$	—	$	5,509,312	$	132,292,225	$	137,801,537


Derivative Instrument-Long Exposure	Level 1		Level 2		Level 3		Total
Asset
Total return swap with Citibank, N.A.	$	—	$	—	$	351,396	$	351,396

F-25

The following table provides a reconciliation of the beginning and ending balances for total investments that use Level 3 inputs for the three months ended March 31, 2014 based off of fair value hierarchy at March 31, 2014:


	Senior Secured First Lien Notes			Senior Secured Second Lien Notes			Senior Secured First Lien Term Loans			Senior Secured Second Lien Term Loans			Warrants/ Equity		Total Return Swap		Total
Balance, December 31, 2013	$	41,917,999		$	5,254,676		$	28,583,326		$	56,481,247		$	54,977	$	351,396	$	132,643,621
Purchases		3,016,876			—			61,104,611			44,387,842			2,777,778		—		111,287,107
Sales		(19,261,999	)		(3,559,512	)		(9,125,539	)		(5,010,000	)		—		—		(36,957,050	)
Transfers in		—			—			—			—			—		—		—
Transfers out		—			—			—			—			—		—		—
Amortization of discount/(premium)		(15,965	)		1,283			7,906			9,262			—		—		2,486
Paid-in-kind interest income		—			—			—			—			3,074		—		3,074
Net realized gains		757,401			76,597			15,100			93			—		—		849,191
Net change in unrealized appreciation/ (depreciation)		(49,398	)		(70,290	)		6,631			157,458			1,298		447,021		492,720

Balance, March 31, 2014	$	26,364,914		$	1,702,754		$	80,592,035		$	96,025,902		$	2,837,127	$	798,417	$	208,321,149

Change in net unrealized appreciation (depreciation) in investments held as of March 31, 2014⁽¹⁾	$	220,955		$	2,439		$	15,012		$	210,458		$	1,298	$	447,021	$	897,183

⁽¹⁾	Amount is included in the related amount on investments and derivative instruments in the condensed consolidated statements of operations.

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the three months ended March 31, 2014, the Company recorded no transfers between levels.

F-26

The following table provides a reconciliation of the beginning and ending balances for total investments that use Level 3 inputs for the three months ended March 31, 2013 based off of fair value hierarchy at March 31, 2013:


	Senior Secured Notes			Senior Secured First Lien Term Loans			Senior Secured Second Lien Term Loans		Warrants/ Equity		Total
Balance, December 31, 2012	$	22,551,198		$	1,962,630		$	2,928,247	$	15,115	$	27,457,190
Purchases		9,652,029			3,490,000			8,417,675		9,021		21,568,725
Sales		(2,633,135	)		(1,504,800	)		—		—		(4,137,935	)
Transfers in		—			—			—		—		—
Transfers out		(1,508,330	)		—			—		—		(1,508,330	)
Amortization of discount/(premium)		(24,771	)		(970	)		2,070		—		(23,671	)
Paid-in-kind interest income		—			580			—		—		580
Net realized gains		101,885			8,750			—		—		110,635
Net change in unrealized appreciation/(depreciation)		530,708			(6,074	)		136,620		4,224		665,478

Balance, March 31, 2013⁽¹⁾	$	28,669,584		$	3,950,116		$	11,484,612	$	28,360	$	44,132,672

⁽¹⁾	Amount is included in the related amount on investments and derivative instruments in the condensed consolidated statements of operations.

During the three months ended March 31, 2013, the Company recorded $1,508,330 of transfers from Level 3 to Level 2 due to an increase of observable inputs in market data.

The following table presents the quantitative information about level 3 fair value measurements of our total investments, as of March 31, 2014:

Fair Value

Valuation techniques

Unobservable input

Range (weighted average)

Senior secured first
lien term loans

80,592,035

Income approach (DLF)

Market yield

4.60% – 10.50% (9.11%)

Senior secured first
lien notes

26,364,914

Income approach (DLF)

Market yield

7.17% – 14.13% (9.58%)

Senior secured second
lien term loans

96,025,902

Enterprise valuation analysis

Income approach (DLF)

Liquidation proceeds

Market yield

$189.0M – $222.4M ($205.8M)

7.84% – 11.70% (9.18%)

Senior secured second
lien notes

1,702,754

Income approach (DLF)

Market yield

10.52% – 10.52% (10.52%)

Warrants/Equity

2,837,127

Enterprise valuation analysis

EBITDA multiple⁽¹⁾

Liquidation proceeds

5.00x (5.00x)

$189.0M – $222.4M ($205.8M)

Total return swap

798,417

Income approach (DLF)

Market yield of
underlying assets

4.06% – 12.76% (7.31%)

⁽¹⁾	Represents amounts used when the Company has determined that market participants would use such multiples when measuring the fair value of these investments.

F-27

The following table presents the quantitative information about level 3 fair value measurements of our total investments, as of December 31, 2013:

Fair Value

Valuation techniques

Unobservable input

Range (weighted average)

Senior secured first
lien term loans

28,583,326

Income approach (DLF)

Market yield

5.66% – 10.51% (9.52%)

Senior secured first
lien notes

41,917,999

Income approach (DLF)

Market yield

7.35% – 15.05% (10.22%)

$189.0M – $222.4M

Enterprise valuation analysis

Liquidation Proceeds

($205.8M)

Senior secured second
lien term loans

56,481,247

Income approach (DLF)

Market yield

8.05% – 11.83% (9.65%)

Senior secured second
lien notes

5,254,676

Income approach (DLF)

Market yield

7.59% – 10.67% (9.23%)

Warrants/Equity

54,977

Enterprise valuation analysis

EBITDA multiple⁽¹⁾

5.00x (5.00x)

$189.0M – $222.4M

Liquidation Proceeds

($205.8M)

Total return swap

351,396

Income approach (DLF)

Market yield of
underlying assets

5.16% – 10.18% (8.49%)

⁽¹⁾	Represents amounts used when the Company has determined that market participants would use such multiples when measuring the fair value of these investments.

The significant unobservable inputs used in the fair value measurement of the Company’s debt and derivative investments are market yields. Significant increases in market yields would result in significantly lower fair value measurements.

The significant unobservable inputs used in the fair value measurement of the Company’s warrants/equity investments are comparable company EBITDA multiples. Significant decreases in EBITDA multiples in isolation would result in significantly lower fair value measurements.

Note 5. Total Return Swap

On August 27, 2013, the Company, through its wholly-owned financing subsidiary, Arbor Funding LLC (“Arbor”), entered into a total return swap (“TRS”) with Citibank, N.A. (“Citibank”).

The TRS with Citibank enables Arbor, to obtain the economic benefit of the loans underlying the TRS, despite the fact that such loans will not be directly held or otherwise owned by Arbor, in return for an interest-type payment to Citibank. Accordingly, the TRS is analogous to Arbor utilizing leverage to acquire loans and incurring an interest expense to a lender.

SIC Advisors acts as the investment manager of Arbor and has discretion over the composition of the basket of loans underlying the TRS. The terms of the TRS are governed by an ISDA 2002 Master Agreement, the Schedule thereto and Credit Support Annex to such Schedule, and the Confirmation exchanged thereunder, between Arbor and Citibank, which collectively establish the TRS, and are collectively referred to herein as the “TRS Agreement”.

Pursuant to the terms of the TRS Agreement, and subject to conditions customary for transactions of this nature, Arbor may select a portfolio of loans with a maximum market value (determined at the time each such loan becomes subject to the TRS) of $200,000,000, which is also referred to as the maximum notional amount of the TRS. Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the TRS Agreement. Arbor receives from Citibank a periodic payment on set dates that is based upon any coupons, both earned and accrued, generated by the loans underlying the TRS, subject to limitations described in the TRS Agreement as well as any fees associated with the loans included in the portfolio. Arbor pays to Citibank interest at a rate equal to one-month LIBOR + 1.35% per annum. In addition, upon the termination or repayment of any loan subject to the TRS, Arbor either receives from Citibank the appreciation in the value of such loan, or pays to Citibank any depreciation in the value of such loan.

F-28

Citibank may terminate the TRS on or after the second anniversary of the effectiveness of the TRS. SIC Advisors may terminate the TRS on behalf of Arbor at any time upon providing 10 days prior notice to Citibank. Any termination by SIC Advisors on behalf of Arbor prior to the second anniversary of the effectiveness of the TRS will result in payment of an early termination fee to Citibank. The early termination fee shall equal the present value of the following two cash flows: (a) interest payments at a rate equal 1.35% based on 70% of the maximum notional amount of $200,000,000, payable from the later of the first anniversary of the effectiveness of the TRS or the termination date until the second anniversary of the effectiveness of the TRS and (b) interest payments at a rate equal to 0.15% based on the maximum notional amount of $200,000,000, payable from the later of the first anniversary of the effectiveness of the TRS or the termination date until the second anniversary of the effectiveness of the TRS.

Arbor is required to pay a minimum usage fee in connection with the TRS of 1.35% on the amount equal to 85% of the average daily unused portion of the maximum amount permitted under the TRS. Such minimum usage fee will not apply during the first 365 days and last 60 days of the term of the TRS. Arbor will also pay Citibank customary fees in connection with the establishment and maintenance of the TRS.

Arbor is required to initially cash collateralize a specified percentage of each loan (generally 25% to 35% of the market value of such loan) included under the TRS in accordance with margin requirements described in the TRS Agreement. As of March 31, 2014 and December 31, 2013, Arbor has posted $20,221,331 and $6,706,159, respectively, in collateral to Citibank in relation to the TRS which is recorded on the consolidated statements of assets and liabilities as cash collateral on total return swap. Arbor may be required to post additional collateral from time to time as a result of a decline in the mark-to-market value of the portfolio of loans subject to the TRS. The obligations of Arbor under the TRS Agreement are non-recourse to the Company and the Company’s exposure under the TRS Agreement is limited to the value of the Company’s investment in Arbor, which generally equals the value of cash collateral provided by Arbor under the TRS Agreement.

In connection with the TRS, Arbor has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default and termination events included in the form ISDA 2002 Master Agreement, the TRS Agreement contains the following termination events: (a) a failure to satisfy the portfolio criteria for at least 30 days; (b) a failure to post initial cash collateral or additional collateral as required by the TRS Agreement; (c) a default by Arbor or the Company with respect to indebtedness in an amount equal to or greater than the lesser of $10,000,000 and 2% of the Company’s net asset value at such time; (d) a merger of Arbor or the Company meeting certain criteria; (e) the Company or Arbor amending their respective constituent documents to alter their investment strategy in a manner that has or could reasonably be expected to have a material adverse effect; and (f) SIC Advisors ceasing to be the investment manager of Arbor or to have authority to enter into transactions under the TRS Agreement on behalf of Arbor, and not being replaced by an entity reasonably acceptable to Citibank. As of March 31, 2014 and December 31, 2013 the Company did not have any derivatives with contingent features in net liability positions. Therefore, if a trigger event had occurred, no amount would have been required to be posted by the Company.

The Company’s maximum derivative risk exposure as of March 31, 2014 and December 31, 2013 is $20,221,331 and $6,706,159, respectively, which is recorded on the consolidated statements of assets and liabilities as cash collateral on total return swap.

The Company’s derivative asset due from Citibank, net of amounts available for offset under a master netting agreement as of March 31, 2014 and December 31, 2013 was $298,557 and $155,317, respectively, which is recorded on the consolidated statements of assets and liabilities as receivable due on total return swap. The Company did not offset collateral posted in relation to the TRS with any unrealized appreciation or depreciation outstanding in the consolidated statements of assets and liabilities as of March 31, 2014 or December 31, 2013.

F-29

Transactions in total return swap contracts during the three months ended March 31, 2014 and the year ended December 31, 2013 were $438,709 and $155,317 in realized gains and $447,021 and $351,396 in unrealized gains, respectively, which is recorded on the consolidated statements of operations.

The Company only held one derivative position during the three months ended March 31, 2014 and the year ended December 31, 2013 and the derivative held is subject to a netting arrangement. The following table represents the Company’s gross and net amounts after offset under Master Agreements (“MA”) of the derivative assets and liabilities presented by derivative type net of the related collateral pledged by the Company as of March 31, 2014 and December 31, 2013:


	Gross Derivative Assets Subject to MA		Derivative Amount Available for Offset		Net Amount Presented in the Consolidated Statements of Assets and Liabilities		Cash Collateral Received		Net Amount of Derivative Assets
March 31, 2014
Total Return Swap⁽¹⁾	$	798,417	$	—	$	798,417	$	—	$	798,417

December 31, 2013
Total Return Swap⁽¹⁾	$	351,396	$	—	$	351,396	$	—	$	351,396

⁽¹⁾	Cash was posted for initial margin requirements for the total return swap as of March 31, 2014 and December 31, 2013 and is reported on the consolidated statements of assets and liabilities as cash collateral on total return swap.

The following represents the volume of the Company’s derivative transactions during three months ended March 31, 2014 and the year ended December 31, 2013:


	March 31, 2014		December 31, 2013
Average notional par amount of contracts	$	44,836,562	$	13,545,525	⁽¹⁾

⁽¹⁾	Position was open for four months during the year ended December 31, 2013.

The following is a summary of the TRS reference assets as of March 31, 2014 (unaudited):

Company⁽¹⁾

Industry

Type of
Investment

Coupon
Rate

Maturity

Par
Amount

Initial
Notional
Cost⁽²⁾

Fair
Value

Unrealized
Appreciation
(Depreciation)

AMF Bowling Worldwide, Inc.

Broadcasting and
Entertainment

Senior Secured
First Lien
Term Loan

LIBOR + 7.500%,
1.250% Floor

6/29/2018

2,962,500

2,947,688

3,014,344

66,656

ANVC Merger Corp.

Aerospace and
Defense

Senior Secured
First Lien
Term Loan

LIBOR + 4.500%,
1.00% Floor

2/18/2021

5,000,000

4,950,000

4,950,493

493

AP Gaming I, LLC

Electronics

Senior Secured
Second Lien
Term Loan

LIBOR + 8.250%,
1.000% Floor

12/18/2020

6,750,000

6,547,500

6,699,375

151,875

Asurion Corporation

Insurance

Senior Secured
Second Lien
Term Loan

LIBOR + 3.750%,
1.25% Floor

5/24/2019

1,000,000

997,500

1,001,250

3,750

Collective Brands Finance Inc.

Retail Stores

Senior Secured
First Lien
Term Loan

LIBOR + 4.000%,
1.00% Floor

3/6/2021

6,000,000

5,977,500

5,955,000

(22,500

)

Deluxe Entertainment Services
Group Inc.

Broadcasting and
Entertainment

Senior Secured
Second Lien
Term Loan

LIBOR + 5.500%,
1.00% Floor

2/28/2020

1,000,000

995,000

1,001,670

6,670

El Pollo Loco Inc.

Personal, Food and
miscellaneous

Senior Secured
Second Lien
Term Loan

LIBOR + 8.500%,
1.00% Floor

4/9/2019

1,500,000

1,485,000

1,522,500

37,500

F-30


Company⁽¹⁾	Industry	Type of Investment	Coupon Rate	Maturity		Par Amount		Initial Notional Cost⁽²⁾		Fair Value		Unrealized Appreciation (Depreciation)
Fieldwood Energy LLC	Oil and Gas	Senior Secured First Lien Term Loan	LIBOR + 7.125%, 1.250% Floor⁽³⁾		9/30/2020		4,246,305		4,317,500		4,417,049		99,549
Greenway Medical Technologies, Inc.	Healthcare, Education and Childcare	Senior Secured First Lien Term Loan	LIBOR + 5.000%, 1.000% Floor		11/2/2020		1,500,000		1,485,000		1,497,615		12,615
Caesars Entertainment Operating Co.	Hotels, Motels, Inns and Gaming	Senior Secured First Lien Term Notes	11.25%		6/1/2017		3,000,000		3,067,500		2,887,500		(180,000	)
Iqor US Inc.	Diversified/ Conglomerate Service	Senior Secured First Lien Term Loan	LIBOR + 8.250%, 1.250% Floor⁽³⁾		2/19/2021		8,000,000		7,840,000		7,760,000		(80,000	)
Isola USA	Electronics	Senior Secured First Lien Term Loan	LIBOR + 8.250%, 1.000% Floor		11/23/2018		4,000,000		3,940,000		4,098,465		158,465
Livingston International, Inc.	Cargo Transport	Senior Secured Second Lien Term Loan	LIBOR + 7.750%, 1.250% Floor⁽¹⁾⁽⁴⁾		4/16/2020		1,954,783		1,969,443		1,981,504		12,061
Maxim Crane Works LP	Diversified/ Conglomerate Service	Senior Secured Second Lien Term Loan	LIBOR + 9.250%, 1.000% Floor		11/26/2018		500,000		492,500		509,065		16,565
Mitel Networks Corporation	Telecommunications	Senior Secured First Lien Term Loan	LIBOR + 4.250%, 1.000% Floor		1/31/2020		2,000,000		1,990,000		2,018,760		28,760
Mohegan Tribal Gaming	Hotels, Motels, Inns and Gaming	Senior Secured First Lien Term Loan	LIBOR + 4.500%, 1.000% Floor		11/19/2019		2,000,000		1,980,000		2,038,760		58,760
Nine West Holdings, Inc.	Retail Stores	Senior Secured First Lien Term Loan	LIBOR + 3.750%, 1.000% Floor⁽³⁾		9/5/2019		3,000,000		3,000,000		3,008,760		8,760
Pharmed Group Corporation	Healthcare, Education and Childcare	Senior Secured First Lien Term Loan	LIBOR + 6.750%, 1.000% Floor		1/28/2022		5,500,000		5,472,500		5,555,940		83,440
Polymer Group Inc.	Containers, Packaging and Glass	Senior Secured First Lien Term Loan	LIBOR + 4.250%, 1.000% Floor		12/13/2019		1,000,000		995,000		1,005,000		10,000
Viking Acquisition Inc.	Automobile	Senior Secured First Lien Term Loan	LIBOR + 4.250%, 1.250% Floor⁽³⁾		11/5/2016		1,984,694		1,987,175		1,995,868		8,693
YP LLC	Printing and Publishing	Senior Secured First Lien Term Loan	LIBOR + 6.750%, 1.250% Floor⁽³⁾		6/4/2018		6,000,000		6,045,000		6,049,734		4,734
YRC Worldwide Inc.	Cargo Transport	Senior Secured First Lien Term Loan	LIBOR + 7.000%, 1.000% Floor		2/13/2019		5,000,000		4,950,000		5,043,751		93,751

								$	73,431,806	$	74,012,403	$	580,597
Total accrued interest income, net of expenses													217,820

Total unrealized appreciation on total return swap												$	798,417

⁽¹⁾	All investments are domiciled in the United States except for Livingston International, Inc., which is domiciled in Canada.

⁽²⁾	Represents the initial amount of par of an investment in which the TRS is referenced.

⁽³⁾	The referenced asset or portion thereof is unsettled as of March 31, 2014.

⁽⁴⁾	The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.

F-31

The following is a summary of the TRS reference assets as of December 31, 2013:


Company⁽¹⁾	Industry	Type of Investment	Coupon Rate	Maturity		Par Amount		Initial Notional Cost⁽²⁾		Fair Value		Unrealized Appreciation (Depreciation)
AMF Bowling Worldwide, Inc.	Broadcasting and Entertainment	Senior Secured First Lien Term Loan	LIBOR + 7.500%, 1.250% Floor		6/29/2018		2,981,250	$	2,966,344	$	2,988,703	$	22,358
AP Gaming I, LLC	Electronics	Senior Secured First Lien Term Loan	LIBOR + 8.250%, 1.000% Floor⁽³⁾		12/18/2020		6,750,000		6,547,500		6,581,250		33,750
El Pollo Loco Inc.	Personal, Food, and Miscellaneous Services	Senior Secured Second Lien Term Loan	LIBOR + 8.500%, 1.000% Floor		4/9/2019		1,500,000		1,485,000		1,507,500		22,500
Fieldwood Energy LLC	Oil and Gas	Senior Secured Second Lien Term Loan	LIBOR + 7.125%, 1.250% Floor		9/30/2020		1,000,000		970,000		1,020,000		50,000
Greenway Medical Technologies, Inc.	Healthcare, Education, and Childcare	Senior Secured First Lien Term Loan	LIBOR + 5.000%, 1.000% Floor		11/2/2020		1,500,000		1,485,000		1,492,500		7,500
Isola USA	Diversified/ Conglomerate Service	Senior Secured First Lien Term Loan	LIBOR + 8.250%, 1.000% Floor		11/23/2018		4,000,000		3,940,000		4,020,000		80,000
Livingston International, Inc.	Diversified/ Conglomerate Manufacturing	Senior Secured Second Lien Term Loan	LIBOR + 7.750%, 1.250% Floor⁽¹⁾⁽⁴⁾		4/18/2020		1,954,783		1,969,443		1,976,813		7,370
Maxim Crane Works Holdings, Inc.	Diversified/ Conglomerate Service	Senior Secured Second Lien Term Loan	LIBOR + 9.250%, 1.000% Floor⁽³⁾		11/26/2018		500,000		492,500		501,250		8,750
McGraw-Hill Companies, Inc.	Healthcare, Education, and Childcare	Senior Secured First Lien Term Loan	LIBOR + 7.750%, 1.250% Floor		3/22/2019		1,994,987		2,024,912		2,029,062		4,150
Mohegan Tribal Gaming Authority	Hotels, Motels, Inns, and Gaming	Senior Secured First Lien Term Loan	LIBOR + 4.500%, 1.000% Floor		11/19/2019		2,000,000		1,980,000		2,028,760		48,760
Polymer Group Inc.	Containers, Packaging, and Glass	Senior Secured First Lien Term Loan	LIBOR + 4.250%, 1.000% Floor⁽³⁾		12/13/2019		1,000,000		995,000		1,004,380		9,380

								$	24,855,700	$	25,150,218	$	294,518
Total accrued interest income, net of expenses													56,878

Total unrealized appreciation on total return swap												$	351,396

(1)	All investments are domiciled in the United States except for Livingston International, Inc., which is domiciled in Canada.

(2)	Represents the initial amount of par of an investment in which the TRS is referenced.

(3)	The referenced asset or portion thereof is unsettled as of December 31, 2013.

(4)	The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.

Note 6. Borrowings

As a BDC, the Company is only allowed to employ leverage to the extent that its asset coverage, as defined in the 1940 Act, equals at least 200% after giving effect to such leverage. The amount of leverage that the Company employs at any time depends on its assessment of the market and other factors at the time of any proposed borrowing.

The fair value of the Company’s debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s margin

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borrowings are estimated based upon market interest rates for its own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. The Company’s debt obligation is recorded at its carrying value, which approximates fair value.

Prime Brokerage Agreement

Prior to December 4, 2013 the Company maintained a prime brokerage account and margin borrowing facility (the “Margin Facility”) with Barclays Capital Inc. (“Barclays”) for investment purposes that was based on the fair value of investments held at Barclays as determined by Barclays. The prime brokerage account and margin borrowing facility was closed on December 4, 2013.

Revolving Credit Facility

On December 4, 2013, the Company entered into a three-year senior secured syndicated revolving credit facility with a one-year term out period (the “ING Facility”) pursuant to a Senior Secured Revolving Credit Agreement (the “Revolving Credit Agreement”) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING Facility matures on December 4, 2017 and is secured by substantially all of the Company’s assets, subject to certain exclusions as further set forth in a Guarantee, Pledge and Security Agreement (the “Security Agreement”) entered into in connection with the Revolving Credit Agreement, among the Company, the Subsidiary Guarantors party thereto, ING Capital LLC, as Administrative Agent, each Financial Agent and Designated Indebtedness Holder party thereto and ING Capital LLC, as Collateral Agent. The ING Facility also includes usual and customary representations, covenants and events of default for senior secured revolving credit facilities of this nature.

The ING Facility allows for the Company, at its option, to borrow money at a rate of either (i) an alternate base rate plus 2.50% per annum or (ii) LIBOR plus 3.00% per annum. The interest rate margins are subject to certain step-downs upon the satisfaction of certain conditions described in the Revolving Credit Agreement. The alternate base rate will be the greatest of (i) the U.S. Prime Rate set forth in the Wall Street Journal, (ii) the federal funds effective rate plus 1/2 of 1%, and (iii) three month LIBOR plus 1%. The current commitment under the ING Facility is $95,000,000, and the ING Facility includes an accordion feature that allows for potential future expansion of the ING Facility up to a total of $100,000,000. Availability of loans under the ING Facility is linked to the valuation of the collateral pursuant to a borrowing base mechanism.

The Company is also required to pay a commitment fee to the lenders based on the daily unused portion of the aggregate commitments under the ING Facility. The commitment fee is (x) 0.50% for the initial six month period commencing on the closing date and (y) thereafter, 1% of the aggregate unused commitments if the used portion of the aggregate commitments is less than or equal to 35% of the aggregate commitments, or 0.50% if the used portion of the aggregate commitments is greater than 35% of the aggregate commitments. The ING Facility provides that the Company may use the proceeds of the facility for general corporate purposes, including making investments in accordance with the Company’s investment objective and strategy.

Borrowings under the Revolving Credit Agreement are subject to, among other things, a minimum borrowing base. Substantially all of the Company’s assets are pledged as collateral under the Revolving Credit Agreement. The ING Facility requires the Company to, among other things (i) make representations and warranties regarding the collateral as well the Company’s business and operations, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants. The documents for the Revolving Credit Agreement also include default provisions, such as the failure to make timely payments under the Revolving Credit Agreement, the occurrence of a change in control, and the failure by the Company to materially perform under the operative agreements governing the Revolving Credit Agreement, which, if not complied with, could accelerate repayment under the Revolving Credit Agreement, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations.

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In connection with the security interest established under the Security Agreement, the Company, ING Capital LLC, in its capacity as collateral agent, and State Street Bank and Trust Company, in its capacity as the Company’s custodian, entered into a Control Agreement dated as of December 4, 2013 (the “Control Agreement”), in order to, among other things, perfect the security interest granted pursuant to the Security Agreement in, and provide for control over, the related collateral.

As of March 31, 2014 and December 31, 2013 the carrying amount of the Company’s borrowings under the ING Facility approximated the fair value of our debt obligation. The fair value of the Company’s debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s borrowing under the ING Facility is estimated based upon market interest rates of the Company’s borrowing or entities with similar credit risk, adjusted for nonperformance risk, if any. At March 31, 2014 and December 31, 2013, the ING Facility would be deemed to be level 3, as defined in Note 4.

As of March 31, 2014 and December 31, 2013, $1,431,331 and $1,150,139 of financing costs related to the ING Facility have been capitalized and are being amortized over the respective terms, respectively. For the three months ended March 31, 2014, the Company recorded $163,401 of interest and financing expenses related to the ING Facility, of which $46,343 was attributable to interest and $117,058 was attributable to amortization of deferred financing costs. For the three months ended March 31, 2013, the Company recorded no interest and financing expenses related to the ING Facility. As of March 31, 2014 and December 31, 2013, the Company’s outstanding borrowings under the ING Facility was $25,000,000 and $16,000,000, respectively. For the three months ended March 31, 2014, our weighted average outstanding debt balance and interest rate on the ING Facility was $14,366,367 and 3.2%, respectively. For the year ended December 31, 2013, our weighted average debt balance and interest rate on the ING Facility was $1,008,219 and 0.2%, respectively.

Note 7. Agreements

Investment Advisory Agreement

On April 5, 2012, the Company entered into an investment advisory agreement (“IAA”) with SIC Advisors to manage the Company’s investment activities. The IAA became effective as of April 17, 2012, the date that the Company met its minimum offering requirement. Pursuant to the 1940 Act, the initial term of the IAA was for two years from its effective date, with one-year renewals subject to approval by the Company’s board of directors, a majority of whom must be independent directors. On March 12, 2014, the Company’s board of directors approved the renewal of the IAA for an additional one-year term at an in-person meeting. Pursuant to the IAA, SIC Advisors implements the Company’s business strategy on a day-to-day basis and performs certain services for the Company, subject to oversight by the Company’s board of directors. SIC Advisors is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the IAA, the Company has agreed to pay SIC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.75% of the Company’s gross assets payable quarterly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. “Gross assets” also includes any cash collateral posted with respect to the TRS, adjusted for realized and unrealized appreciation. For the first quarter of the Company’s operations, the base management fee was calculated based on the initial value of the Company’s gross assets. Subsequently, the base management fee is calculated based on the gross assets at the end of each completed calendar quarter. Base management fees for any partial quarter are appropriately prorated. For the three months ended March 31, 2014 and March 31, 2013, the Company recorded an expense for base management fees of $1,142,771 and $245,499, and $1,142,771 and $814,655 were payable at March 31, 2014 and December 31, 2013, respectively.

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The incentive fee consists of the following two parts:

An incentive fee on net investment income (“subordinated incentive fee on income”) is calculated and payable quarterly in arrears and is based upon pre-incentive fee net investment income for the immediately preceding quarter. No subordinated incentive fee on income is payable in any calendar quarter in which pre-incentive fee net investment income does not exceed a quarterly return to stockholders of 1.75% per quarter on the Company’s net assets at the end of the immediately preceding fiscal quarter, (the “preferred quarterly return.”) All pre-incentive fee net investment income, if any, that exceeds the quarterly preferred return, but is less than or equal to 2.1875% of net assets at the end of the immediately preceding fiscal quarter in any quarter, will be payable to SIC Advisors. The Company refers to this portion of its subordinated incentive fee on income as the catch up. It is intended to provide an incentive fee of 20% on pre-incentive fee net investment income when pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter in any quarter. For any quarter in which the Company’s pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter, the subordinated incentive fee on income shall equal 20% of the amount of pre-incentive fee net investment income, because the preferred return and catch up will have been achieved.

A capital gains incentive fee will be earned on realized investments and shall be payable in arrears as of the end of each calendar year during which the IAA is in effect. If the IAA is terminated, the fee will also become payable as of the effective date of such termination. The fee equals 20% of the realized capital gains, less the aggregate amount of any previously paid capital gains incentive fees. Incentive fee on capital gains is equal to realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis.

Under GAAP, the Company calculates capital gains incentive fees as if the Company had realized all assets at their fair values and liabilities at their settlement amounts as of the reporting date. GAAP requires that the capital gains incentive fee accrual assume the cumulative aggregate unrealized capital appreciation is realized, even though such unrealized capital appreciation is not payable under the IAA. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. There can be no assurance that such unrealized capital appreciation will be realized in the future and that the provisional capital gains incentive fee will become payable.

For the three months ended March 31, 2014 and March 31, 2013, the Company recorded a provisional capital gains incentive fee of $112,491 and $148,636, respectively. As of March 31, 2014 and December 31, 2013, the Company recorded a provisional capital gains incentive fee payable of $295,480 and $182,989, respectively.

Under the terms of the IAA, SIC Advisors bears all organization and offering expenses, as defined in the IAA, on behalf of the Company. Upon such time that the Company has either raised $300,000,000 in gross proceeds in connection with the sale of shares of its common stock or the offering period has expired, SIC Advisors shall no longer be obligated to bear, pay or otherwise be responsible for any ongoing organization and offering expenses on behalf of the Company, and the Company will be responsible for paying or otherwise incurring all such organization and offering expenses.

Pursuant to the terms of the IAA, the Company has agreed to reimburse SIC Advisors for any such organizational and offering expenses incurred by SIC Advisors not to exceed 1.25% of the gross subscriptions raised by the Company over the course of the offering period, which is currently scheduled to terminate April 17, 2015, unless further extended.

In the event that other organizational and offering expenses exceed 5.25% of the gross proceeds from the sale of shares of the Company’s common stock pursuant to its public offering or one or more private offerings at the time of the completion of the offering or other organizational and offering expenses, together with selling

F-35

commissions, dealer manager fees and any discounts paid to members of the Financial Industry Regulatory Authority, exceed 15% of the gross proceeds from the sale of shares of the Company’s common stock pursuant to its public offering or one or more private offerings at the time of the completion of the offering, then SIC Advisors shall be required to pay without reimbursement from the Company, or, if already paid by the Company, reimburse the Company, for amounts exceeding such 5.25% and 15% limit, as appropriate.

For the three months ended March 31, 2014 and the year ended December 31, 2013, SIC Advisors incurred organizational and offering costs of $1,077,448 and $1,066,517, respectively. Of the total $5,128,641 organizational and offering costs incurred from inception through March 31, 2014, $990,489 and $1,784,559 were reimbursed to SIC Advisors during the three months ended March 31, 2014 and the year ended December 31, 2013, respectively. For the three months ended March 31, 2014, $997,193 was reimbursed to SIC Advisors of which $33,311 relates to expense reimbursements incurred as of December 31, 2013 and of which, $26,607 has been accrued and is reflected in the consolidated statements of assets and liabilities as due to affiliate. The remaining unreimbursed amount will be eligible for reimbursement to the extent the Company receives subscriptions until April 16, 2014, which is the currently scheduled date that the offering period ends, unless it is extended. Organizational and offering expenses paid for by SIC Advisors and reimbursed by the Company will be expensed on the Company’s consolidated statements of operations.

Administration Agreement

On April 5, 2012, the Company entered into an administration agreement (the “Administration Agreement”) with Medley Capital LLC, with an initial term of two years pursuant to which Medley Capital LLC furnishes the Company with administrative services necessary to conduct its day-to-day operations. On March 12, 2014, the Company’s board of directors approved the renewal of the administration Agreement for an additional one-year term at an in-person meeting. Medley Capital LLC is reimbursed for administrative expenses it incurs on the Company’s behalf in performing its obligations. Such costs are reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. The Company does not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC. Medley Capital LLC is an affiliate of SIC Advisors. For the three months ended March 31, 2014 and March 31, 2013, the Company recorded an expense of $228,216 and $138,090, of which $228,216 and $152,162 were payable at March 31, 2014 and December 31, 2013, respectively, relating to administrator expenses.

Expense Support and Reimbursement Agreement

On June 29, 2012, the Company entered into an Expense Support and Reimbursement Agreement (the “Expense Support Agreement”) with SIC Advisors. Pursuant to the Expense Support Agreement, SIC Advisors has agreed to reimburse the Company for operating expenses in an amount equal to the difference between distributions paid to the Company’s stockholders in each month, less the sum of the Company’s net investment income, the Company’s net realized capital gains and dividends paid to the Company from its portfolio companies during such period (“Expense Support Reimbursement”). To the extent that no dividends or other distributions are paid to the Company’s stockholders in any given month, then the Expense Support Reimbursement for such month shall be equal to such amount necessary in order for Available Operating Funds for the month to equal zero. The terms of the Expense Support Agreement commenced as of the date that the Company’s registration statement was declared effective by the SEC and continued monthly thereafter until December 31, 2012. Subsequently, the Company’s board of directors approved amendments to the Expense Support Agreement that extended the term from December 31, 2012 to June 30, 2014.

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the amount of any dividends and other distributions paid to the Company from its portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders. The purpose of the Expense Support Agreement is to avoid such distributions being characterized as returns of capital for GAAP purposes and to reduce operating expenses until the Company has raised sufficient capital to be able to absorb such expenses.

Pursuant to the Expense Support Agreement, the Company will reimburse SIC Advisors for expense support payments it previously made following any calendar quarter in which the Company received net investment income, net capital gains and dividends from its portfolio companies in excess of the distributions paid to the Company’s stockholders during such calendar quarter (the “Excess Operating Funds”). Any such reimbursement will be made within three years of the date that the expense support payment obligation was incurred by SIC Advisors, subject to the conditions described below. The amount of the reimbursement during any calendar quarter will equal the lesser of (i) the Excess Operating Funds received during the quarter and (ii) the aggregate amount of all expense payments made by SIC Advisors that have not yet been reimbursed. In addition, the Company will only make reimbursement payments if its “operating expense ratio” (as described in footnote 1 to the table below) is equal to or less than its operating expense ratio at the time the corresponding expense payment was incurred and if the annualized rate of its regular cash distributions to the Company’s stockholders is equal to or greater than the annualized rate of the Company’s regular cash distributions to stockholders at the time the corresponding expense payment was incurred.

For the three months ended March 31, 2014 and March 31, 2013, the Company recorded Expense Support Reimbursements of $1,313,470 and $685,404, respectively, on the consolidated statements of operations, which includes $125,000 that SIC Advisors elected to reimburse on June 27, 2013 related to expenses from prior periods. Repayments of amounts paid by SIC Advisors to the Company under the Expense Support Agreement will be accrued as they become probable and estimable. As of March 31, 2014 and December 31, 2013, the Company recorded $2,939,318 and $2,592,989, respectively, in its consolidated statements of assets and liabilities as due from affiliate relating to the Expense Support and Reimbursement Agreement. From inception through March 31, 2014, the company did not record any reimbursement to SIC Advisors for Expense Support Reimbursements.

The following table provides information regarding liabilities incurred by SIC Advisors pursuant to the Expense Support Agreement as well as other information relating to the Company’s ability to reimburse SIC Advisors for such payments:


Quarter Ended	Amount of Expense Payment Obligation		Operating Expense Ratio⁽¹⁾			Annualized Distribution Rate⁽²⁾			Eligible to be Repaid Through
June 30, 2012	$	454,874		6.13	%		8.00	%	June 30, 2015
September 30, 2012		437,303		4.05	%		8.00	%	September 30, 2015
December 31, 2012		573,733		3.91	%		8.00	%	December 31, 2015
March 31, 2013		685,404		1.71	%		8.00	%	March 31, 2016
June 30, 2013		732,425		1.00	%		7.84	%	June 30, 2016
September 30, 2013		1,277,853		0.83	%		7.84	%	September 30, 2016
December 31, 2013		1,243,569		0.45	%		7.84	%	December 31, 2016
March 31, 2014		1,313,470		0.45	%		7.80	%	March 31, 2017

⁽¹⁾

“Operating Expense Ratio” is as of the date the expense support payment obligation was incurred by our Advisor and includes all expenses borne by the Company, except for organizational and offering expenses, base management and incentive fees owed to SIC Advisors, and interest expense, as a percentage of net assets.

⁽²⁾

“Annualized Distribution Rate” equals the annualized rate of distributions paid to stockholders based on the amount of the regular cash distribution paid immediately prior to the date the expense support payment obligation was incurred by SIC Advisors. “Annualized Distribution Rate” does not include special cash or stock distributions paid to stockholders.

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Note 8. Related Party Transactions

On October 19, 2011, SIC Advisors entered into a subscription agreement to purchase 110.80 shares of common stock for cash consideration of $1,000. The consideration represents $9.025 per share.

On March 31, 2012, SIC Advisors entered into a subscription agreement to purchase 1,108,033.24 shares of common stock for cash consideration of $10,000,000. The purchase was made on April 17, 2012. The consideration represents $9.025 per share.

Due from affiliate relates to amounts due from SIC Advisors pursuant to the Expense Support Agreement as discussed in Note 7.

Due to affiliate relates to reimbursements of organizational and offering expenses pursuant to the IAA paid to SIC Advisors as discussed in Note 7.

An affiliate of the Company’s dealer manager has an ownership interest in SIC Advisors.

Note 9. Directors Fees

The Company’s independent directors receive an annual retainer fee of $30,000 and further receive a fee of $2,500 ($1,000 for telephonic attendance) for each regularly scheduled board meeting and a fee of $1,000 for each special board meeting and all committee meetings as well as reimbursement of reasonable and documented out-of-pocket expenses incurred in connection with attending each board or committee meeting. In addition, the chairman of the audit committee receives an annual retainer of $10,000, while the chairman of any other committee receives an annual retainer of $2,500. For the three months ended March 31, 2014 and March 31, 2013, the Company recorded directors’ fees expenses of $41,189 and $43,765, respectively, of which $31,589 and $0 was payable at March 31, 2014 and December 31, 2013, respectively.

Note 10. Earnings Per Share

In accordance with the provisions of ASC Topic 260—Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three months ended March 31, 2014 and March 31, 2013:


	For the three months ended March 31,
Basic and diluted	2014		2013
Net increase in net assets from operations	$	4,447,548	$	1,391,187
Weighted average common shares outstanding		20,369,602		3,226,281
Earnings per common share-basic and diluted	$	0.22	$	0.43

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Note 11. Commitments and Contingencies

The Company’s investment portfolio may contain debt investments that are in the form of lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of March 31, 2014 the Company had two unfunded commitments under loan and financing agreements. As of December 31, 2013 the Company had no unfunded commitments under loan and financing agreements.


	As of
	March 31, 2014		December 31, 2013
Access Media 3, Inc.	$	24,908	$	—
Response Team Holdings, LLC		1,111,111		—

Total	$	1,136,019	$	—

Note 12. Distributions and Share Repurchase Plan Distributions

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the Company’s board of directors.

The Company has adopted an “opt in” distribution reinvestment plan (“DRIP”) pursuant to which the Company’s common stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of the Company’s common stock. As a result, if the Company declares a cash dividend or other distribution, each stockholder that has “opted in” to the Company’s reinvestment plan will have their distributions automatically reinvested in additional shares of the Company’s common stock rather than receiving cash distributions. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions. For the three months ended March 31, 2014, the Company distributed a total of $4,201,611, of which, $2,370,419 was in cash and $1,831,192 was in the form of common shares associated with the DRIP. For the quarter ended March 31, 2013, the Company distributed a total of $644,868 of which, $492,004 was in cash and $152,864 was in the form of common shares associated with the DRIP.

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The following table reflects the cash distributions per share that the Company declared or paid to its stockholders since it commenced operations in April 2012. Stockholders of record as of each respective record date were entitled to receive the distribution.


Record Date	Payment Date		Amount per share
July 13 and 31, 2012		August 1, 2012	$	0.03333
August 15 and 31, 2012		September 4, 2012		0.03333
September 14 and 28, 2012		October 1, 2012		0.03333
October 15 and 30, 2012		October 31, 2012		0.03333
November 15 and 29, 2012		November 30, 2012		0.03333
December 14 and 28, 2012		December 31, 2012		0.03333
January 15 and 31, 2013		January 31, 2013		0.03333
February 15 and 28, 2013		February 28, 2013		0.03333
March 15 and 29, 2013		March 29, 2013		0.03333
April 15 and 30, 2013		April 30, 2013		0.03333
May 15 and 31, 2013		May 31, 2013		0.03333
June 14 and 28, 2013		June 28, 2013		0.03333
July 15 and 31, 2013		July 31, 2013		0.03333
August 15 and 30, 2013		August 30, 2013		0.03333
September 13 and 30, 2013		September 30, 2013		0.03333
October 15 and 31, 2013		October 31, 2013		0.03333
November 15 and 29, 2013		November 29, 2013		0.03333
December 13 and 31, 2013		December 31, 2013		0.03333
January 15 and 31, 2014		January 31, 2014		0.03333
February 14 and 28, 2014		February 28, 2014		0.03333
March 14 and 31, 2014		March 31, 2014		0.03333
April 15 and 30, 2014		April 30, 2014		0.03333
May 15 and 30, 2014		May 30, 2014		0.03333
June 13 and 30, 2014		June 30, 2014		0.03333

The Company’s distributions may be funded from offering proceeds or borrowings, which may constitute a return of capital and reduce the amount of capital available to the Company for investment. Any capital returned to stockholders through distributions will be distributed after payment of fees and expenses.

The Company’s previous distributions to stockholders were funded from temporary Expense Support Reimbursements that are subject to repayment to SIC Advisors. These distributions were not based on our investment performance and may not continue in the future. If SIC Advisors had not agreed to make Expense Support Reimbursements, these distributions would have come from paid in capital. The reimbursement of these payments owed to SIC Advisors will reduce the future distributions to which stockholders would otherwise be entitled.

The determination of the tax attributes (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) of distributions is made annually as of the end of the Company’s fiscal year based upon its taxable income for the full year and distributions paid for the full year.

Share Repurchase Program

In June 2013, the Company commenced a share repurchase program pursuant to which it intends to conduct quarterly share repurchases, of up to 2.5% of the weighted average number of outstanding shares in any 3-month period or 10% of the weighted average number of outstanding shares in any 12-month period. The purpose of the share repurchase program is to allow stockholders to sell their shares back to the Company at a price equal to the most recently disclosed net asset value per share of the Company’s common stock immediately prior to the date of repurchase. Shares will be purchased from stockholders participating in the program on a pro rata basis.

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Unless the Company’s board of directors determines otherwise, the number of shares to be repurchased during any calendar year will be limited to the proceeds received in association with the sale of shares of common stock under the distribution reinvestment plan.

On June 4, 2013, the Company offered to repurchase up to 16,652 shares at a price per share of $9.18, which represented the Company’s net asset value per share as of March 31, 2013. No stockholders elected to participate in this quarterly repurchase, and the Company did not purchase any shares.

On August 8, 2013, the Company offered to repurchase up to 32,627 shares at a price per share of $9.13, which represented the Company’s net asset value per share as of June 30, 2013. On September 27, 2013, the Company repurchased 3,642 shares.

On November 7, 2013, the Company offered to repurchase up to 60,966 shares at a price per share of $9.14, which represented the Company’s net asset value per share as of September 30, 2013. On December 19, 2013, the Company repurchased 5,826 shares.

On March 12, 2014, the Company offered to repurchase up to 120,816 shares at a price per share of $9.18, which represented the Company’s net asset value per share as of December 31, 2013.

Note 13. Financial Highlights

The following is a schedule of financial highlights of the Company for the three months ended March 31:


	2014			2013
Per Share Data:⁽¹⁾
Net asset value at beginning of period	$	9.18		$	8.96
Net investment income/(loss)		0.12			0.17
Net realized gains/(losses) on investments and total return swap		0.08			0.03
Net unrealized appreciation/(depreciation) on investments and total return swap		0.02			0.22

Net increase/(decrease) in net assets		0.22			0.42
Distributions declared from net investment income⁽²⁾		(0.12	)		(0.17	)
Distributions from net realized capital gains		(0.08	)		(0.03	)

Total distributions to stockholders		(0.20	)		(0.20	)
Issuance of common stock above net asset value⁽³⁾		—			—
Net asset value at end of period		9.20			9.18
Total return based on net asset value⁽⁴⁾⁽⁵⁾		2.39	%		4.73	%
Portfolio turnover rate		29.17	%		10.83	%
Shares outstanding at end of period		24,767,652			3,874,385
Net assets at end of period		227,829,509			35,578,291
Ratio/Supplemental Data (annualized):
Ratio of net investment income/(loss) to average net assets⁽⁵⁾		5.47	%		7.63	%
Ratio of net expenses (including incentive fees) to average net assets⁽⁵⁾		4.62	%		7.48	%
Ratio of incentive fees to average net assets		0.25	%		2.12	%
Supplemental data (annualized):
Ratio of operating expenses to average net assets		4.37	%		5.36	%
Ratio of interest and financing related expenses to average net assets		0.36	%		0.41	%

⁽¹⁾	The per share data was derived by using the weighted average shares outstanding during the three months ended March 31, 2014 and March 31, 2013, which were 20,369,602 and 3,226,281, respectively.

⁽²⁾	The per share data for distributions is the actual amount of paid distributions per share during the period.

⁽³⁾	Shares issued under the DRIP (see Note 12) as well as the continuous issuance of shares of common stock may cause on incremental increase/decrease in net asset value per share due to the effect of issuing shares at amounts that differ from the prevailing net asset value at each issuance.

F-41

⁽⁴⁾	Total annual returns are historical and assume reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales charge.

⁽⁵⁾

Total returns, ratios of net investment income/(loss), and ratios of net expenses to average net assets for the three months ended March 31, 2014 and March 31, 2013 prior to the effect of the Expense Support and Reimbursement Agreement were as follows: total return 1.80% and (2.71%), ratio of net investment income/(loss): 2.61% and (2.24%) and ratio of net expenses to average net assets: 7.56% and 17.95%, respectively.

Note 14. Subsequent Events

Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the consolidated financial statements as of and for the three months ended March 31, 2014, except as disclosed below.

The Company issued common shares and received gross proceeds of approximately $30.8 million subsequent to March 31, 2014.

On April 28, 2014, the Company repurchased 9,835 shares in connection with the repurchase approved on March 12, 2014.

F-42

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

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including, but not limited to, statements as to:

•

our future operating results;

•

our business prospects and the prospects of our portfolio companies;

•

changes in the economy;

•

risk associated with possible disruptions in our operations or the economy generally;

•

the effect of investments that we expect to make;

•

our contractual arrangements and relationships with third parties;

•

actual and potential conflicts of interest with SIC Advisors and its affiliates;

•

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

•

the ability of our portfolio companies to achieve their objectives;

•

the use of borrowed money to finance a portion of our investments;

•

the adequacy of our financing sources and working capital;

•

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

•

the ability of SIC Advisors to locate suitable investments for us and to monitor and administer our investments;

•

the ability of SIC Advisors and its affiliates to attract and retain highly talented professionals;

•

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

•

the effect of changes in laws or regulations affecting our operations or to tax legislation and our tax position.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. The forward looking statements contained in this annual report involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” in this annual report on Form 10-K.

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K.

Overview

We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. We are externally managed by SIC Advisors LLC, or SIC Advisors, which is a registered investment adviser under the Advisers Act. SIC Advisors is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments and monitoring our portfolio on an ongoing basis. In addition, we have elected and intend to qualify to be treated, for U.S. federal income tax purposes, as a RIC under subchapter M of the Code.

On April 17, 2012 we successfully reached the minimum escrow requirement and officially commenced operations by receiving gross proceeds of $10 million in exchange for 1,108,033.24 shares of our common stock sold to SIC Advisors. As of March 31, 2014, we have combined proceeds, as well as a modest amount of leverage through a revolving credit facility with ING Capital LLC, which we have used to invest $215.6 million across 49 transactions.

Under our Investment Advisory Agreement, we pay SIC Advisors an annual management fee as well as an incentive fee based on our investment performance. Also, under the Administration Agreement, we reimburse Medley for the allocable portion of overhead and other expenses incurred by Medley Capital LLC in performing its obligations under the Administration Agreement, including our allocable portion of the costs of compensation and related expenses of our chief compliance officer, chief financial officer and their respective staffs.

Our investment objective is to generate current income and, to a lesser extent, long-term capital appreciation. We intend to meet our investment objective by investing primarily in the debt of privately owned U.S. companies with a focus on senior secured debt, second lien debt and, to a lesser extent, subordinated debt. We will originate transactions sourced through SIC Advisors’ network, and expect to acquire debt securities through the secondary market. Our debt investments may take the form of corporate loans or bonds, may be secured or unsecured and may, in some cases, be accompanied by warrants, options or other forms of equity participation. We may separately purchase common or preferred equity interests in transactions.

The level of our investment activity depends on many factors, including the amount of debt and equity capital available to prospective portfolio companies, the level of merger, acquisition and refinancing activity for such companies, the availability of credit to finance transactions, the general economic environment and the competitive environment for the types of investments we make. Based on prevailing market conditions, we anticipate that we will invest the proceeds from each subscription closing generally within 30-90 days. The precise timing will depend on the availability of investment opportunities that are consistent with our investment objective and strategies. Any distributions we make during such period may be substantially lower than the distributions that we expect to pay when our portfolio is fully invested.

As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing, with certain limited exceptions. To obtain and maintain our RIC status, we must meet specified source-of-income and asset diversification requirements. To be eligible for tax treatment under Subchapter M for U.S. federal income tax purposes, we must distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.

Revenues

We generate revenue in the form of interest on the debt securities that we hold and distributions and capital gains on other interests that we acquire in our portfolio companies. We expect that the senior debt we invest in will generally have stated terms of three to ten years and that the subordinated debt we invest in will generally have stated terms of five to ten years. Our senior and subordinated debt investments bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semiannually. In addition, some of our investments provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally will become due at the maturity date. In addition, we may generate revenue in the form of commitment and other fees in connection with transactions. Original issue discounts and market discounts or premiums will be capitalized, and we will accrete or amortize such amounts as interest income. We will record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.

Expenses

Our primary annual operating expenses consist of the payment of advisory fees and the reimbursement of expenses under our Investment Advisory Agreement with SIC Advisors (the “Investment Advisory Agreement”) and our Administration Agreement with Medley Capital LLC (the “Administration Agreement”). We bear other expenses, which include, among other things:

•

corporate, organizational and offering expenses relating to offerings of our common stock, subject to limitations included in our Investment Advisory Agreement;

•

the cost of calculating our net asset value, including the related fees and cost of any third-party valuation services;

•

the cost of effecting sales and repurchases of shares of our common stock and other securities;

•

fees payable to third parties relating to, or associated with, monitoring our financial and legal affairs, making investments, and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;

•

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

•

transfer agent and custodial fees;

•

fees and expenses associated with marketing efforts;

•

federal and state registration fees and any stock exchange listing fees;

•

federal, state and local taxes;

•

independent directors’ fees and expenses, including travel expenses;

•

costs of director and stockholder meetings, proxy statements, stockholders’ reports and notices;

•

costs of fidelity bonds, directors and officers/errors and omissions liability insurance and other types of insurance;

•

direct costs, including those relating to printing of stockholder reports and advertising or sales materials, mailing, long distance telephone and staff;

•

fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act of 2002, the 1940 Act and applicable federal and state securities laws;

•

brokerage commissions for our investments;

•

all other expenses incurred by us or the Advisor in connection with administering our investment portfolio, including expenses incurred by our Advisor in performing certain of its obligations under the Investment Advisory Agreement; and

•

the reimbursement of the compensation of our chief financial officer and chief compliance officer, whose salary is paid by Medley, to the extent that each such reimbursement amount is annually approved by our independent director committee and subject to the limitations included in our Administration Agreement.

Reimbursement of Medley for Administrative Services

We reimburse Medley Capital LLC for the administrative expenses necessary for its performance of services to us. However, such reimbursement is made at an amount equal to the lower of Medley Capital LLC’s actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location. Also, such costs will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We will not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC.

Portfolio and Investment Activity

As of March 31, 2014, our portfolio consisted of investments in 49 portfolio companies with a fair value of $215.8 million, and was comprised of 37.4% Senior Secured first lien term loans, 44.3% Senior Secured second lien term loans, 16.2% Senior Secured first lien notes, 0.8% Senior Secured second lien notes and 1.3% warrants and equity.

As of December 31, 2013, our portfolio consisted of investments in 49 portfolio companies with a fair value of $137.8 million, and was comprised of 20.8% Senior Secured first lien term loans, 41.0% Senior Secured second lien term loans, 34.4% senior secured notes, 3.8% Senior Secured second lien notes and 0.0% warrants.

As of March 31, 2014, our income-bearing investment portfolio, which represented 99.9% of our total portfolio, had a weighted average yield based upon the cost of our portfolio investments of approximately 9.79%, and 21.4% of our income-bearing portfolio bore interest based on fixed rates, and 78.6% of our income-bearing portfolio bore interest on floating rates, such as LIBOR.

As of December 31, 2013, our income-bearing investment portfolio, which represented 99.9% of our total portfolio, had a weighted average yield based upon the cost of our portfolio investments of approximately 9.9%, and 43.3% of our income-bearing portfolio bore interest based on fixed rates, and 56.7% of our income-bearing portfolio bore interest on floating rates, such as LIBOR.

The following table summarizes the amortized cost and the fair value of investments as of March 31, 2014:


	Amortized Cost		Percentage			Fair Value		Percentage
Senior secured first lien term loans	$	80,619,234		37.4	%	$	80,592,035		37.3	%
Senior secured first lien notes		34,909,073		16.2			34,687,914		16.1
Senior secured second lien term loans		95,611,748		44.3			96,025,902		44.5
Senior secured second lien notes		1,626,845		0.8			1,702,754		0.8
Warrants/Equity		2,810,655		1.3			2,837,127		1.3

Total	$	215,577,555		100.0	%	$	215,845,732		100.0	%

The following table summarizes the amortized cost and the fair value of investments, not including cash as of December 31, 2013:


	Amortized Cost		Percentage			Fair Value		Percentage
Senior secured first lien term loans	$	28,617,156		20.9	%	$	28,583,326		20.8	%
Senior secured first lien notes		47,352,921		34.5			47,427,311		34.4
Senior secured second lien term loans		56,224,549		40.9			56,481,247		41.0
Senior secured second lien notes		5,108,477		3.7			5,254,676		3.8
Warrants/Equity		29,173		—			54,977		—

Total	$	137,332,276		100.0	%	$	137,801,537		100.0	%

Our portfolio composition, based on fair value, including the value of the TRS underlying loans, at March 31, 2014 was as follows:


	Percentage of Total Investments			Weighted Average Current Yield for Total Investments
Senior Secured First Lien Term Loans		34.1	%		9.1	%
Senior Secured First Lien Notes		14.7			10.4
Senior Secured Second Lien Term Loans		40.7			10.5
Senior Secured Second Lien Notes		0.7			9.2
Equity/Warrants		9.8			24.4

Total		100.0	%		11.4	%

The following table shows the portfolio composition by industry grouping, including the TRS underlying loans, based on fair value at March 31, 2014:


	Investments at Fair Value⁽¹⁾		Percentage of Total Portfolio⁽¹⁾			Value of TRS Underlying Loans		Percentage of TRS Underlying Loans			Total Investments at Fair Value including the value of TRS Underlying Loans		Percentage of Total Portfolio Including the value of TRS Underlying Loans
Oil and Gas	$	33,302,982		15.4	%	$	4,417,049		6.0	%	$	37,720,031		13.1	%
Retail Stores		21,752,714		10.1			8,963,760		12.1			30,716,474		10.6
Healthcare, Education, and Childcare		22,297,197		10.3			7,053,555		9.5			29,350,752		10.2
Electronics		16,083,590		7.5			10,797,840		14.6			26,881,430		9.3
Aerospace and Defense		13,851,644		6.4			4,950,493		6.7			18,802,137		6.5
Cargo Transport		11,226,381		5.2			7,025,255		9.5			18,251,636		6.3
Telecommunications		14,167,832		6.6			2,018,760		2.7			16,186,592		5.6
Automobile		13,564,440		6.3			1,995,868		2.7			15,560,308		5.4
Buildings and Real Estate		13,892,240		6.4			—		—			13,892,240		4.8
Chemicals, Plastics and Rubber		12,673,087		5.9			—		—			12,673,087		4.4
Hotels, Motels, Inns, and Gaming		5,775,000		2.7			4,926,260		6.7			10,701,260		3.7
Finance		9,143,725		4.2			—		—			9,143,725		3.2
Diversified Conglomerate Service							8,269,065		11.2			8,269,065		2.9
Containers, Packaging, and Glass		7,841,596		3.6			1,005,000		1.4			8,846,596		2.7
Broadcasting and Entertainment		2,308,883		1.1			4,016,014		5.4			6,324,897		2.2
Printing and Publishing							6,049,734		8.2			6,049,734		2.1
Business Services		5,874,379		2.7			—		—			5,874,379		2.0
Beverage, Food and Tobacco		4,146,779		1.9			—		—			4,146,779		1.4
Personal and Nondurable Consumer Products (Manufacturing Only)		3,886,120		1.8			—		—			3,886,120		1.3
Leisure, Amusement, Motion Pictures, Entertainment		2,019,820		0.9			—		—			2,019,820		0.7
Personal, Food and Miscellaneous							1,522,500		2.1			1,522,500		0.5
Mining, Steel, Iron and Nonprecious Metals		1,086,579		0.5			—		—			1,086,579		0.4
Insurance							1,001,250		1.4			1,001,250		0.3
Grocery		950,744		0.4			—		—			950,744		0.3

Total	$	215,845,732		100.0	%	$	74,012,403		100	%	$	289,858,135		100.0	%

⁽¹⁾	Does not include TRS underlying loans

SIC Advisors regularly assesses the risk profile of each of our investments and rates each of them based on the following categories, which we refer to as SIC Advisors’ investment credit rating:


Credit Rating		Definition
1		Investments that are performing above expectations.

2		Investments that are performing within expectations, with risks that are neutral or favorable compared to risks at the time of origination or purchase.

		All new loans are rated ‘2’.

3		Investments that are performing below expectations and that require closer monitoring, but where no loss of interest, dividend or principal is expected.

		Companies rated ‘3’ may be out of compliance with financial covenants, however, loan payments are generally not past due.

4		Investments that are performing below expectations and for which risk has increased materially since origination or purchase.

		Some loss of interest or dividend is expected, but no loss of principal.

		In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 180 days past due).

5		Investments that are performing substantially below expectations and whose risks have increased substantially since origination or purchase.

		Most or all of the debt covenants are out of compliance and payments are substantially delinquent.

		Some loss of principal is expected.

The following table shows the distribution of our investments, not including cash, on the 1 to 5 investment performance rating scale at fair value as of March 31, 2014:


	March 31, 2014					December 31, 2013
Investment Performance Rating	Investments at Fair Value		Percentage			Investments at Fair Value		Percentage
1	$	2,189,359		1.0	%	$	2,198,601		1.6	%
2		213,338,228		98.9			99,713,280		98.2
3		—		—			—		0.2
4		—		—			—		—
5		318,145		0.1			322,745		—

Total	$	215,845,732		100.0	%	$	137,801,537		100.0	%

Results of Operations

Operating results for the three months ended March 31, 2014 and 2013 are as follows:


	For the three months ended March 31
	2014		2013
Total investment income	$	4,596,214	$	1,058,077
Total expenses, net		2,103,565		523,844
Net investment income/(loss)		2,492,649		534,233
Net realized gain/(loss) on investments and total return swap		1,708,962		110,635
Net unrealized gain/(loss) on investments and total return swap		245,937		746,319

Net increase/(decrease) in net assets resulting from operations	$	4,447,548	$	1,391,187

Investment Income

For the three months ended March 31, 2014, investment income totaled $4,596,214, of which $3,757,861 was attributable to portfolio interest, $834,649 was attributable to other fee income, and $3,704 was attributable to PIK interest. For the three months ended March 31, 2013, investment income totaled $1,058,077, of which $993,105 was attributable to portfolio interest, $64,710 was attributable to other fee income, and $262 to interest earned on cash.

Operating Expenses

Operating expenses for the three months ended March, 2014 and 2013 were as follows:


	For the three months ended March 31
	2014		2013
Base management fees	$	1,142,771	$	245,499
Provisional incentive fees		112,491		148,636
Administrator expenses		228,216		138,090
Professional fees		255,328		295,276
Interest and financing expenses		163,401		28,645
Insurance expense		24,327		—
Directors fees		41,189		43,765
Organizational and offering costs reimbursed to an affiliate		983,785		178,167
General and administrative expenses		465,527		131,170

Expenses before expense reimbursement	$	3,417,035	$	1,209,248

Expense Support and Reimbursement Agreement

Pursuant to the Expense Support Agreement, the Company has a conditional obligation to reimburse SIC Advisors for any amounts funded by SIC Advisors under the Expense Support Agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which SIC Advisors incurred a liability for such amount, the sum of the Company’s net investment income, the Company’s net capital gains and the amount of any dividends and other distributions paid to the Company from its portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders. The purpose of the Expense Support Agreement is to avoid such distributions being characterized as returns of capital for GAAP purposes and to reduce operating expenses until the Company has raised sufficient capital to be able to absorb such expenses.

income, net capital gains and dividends from its portfolio companies in excess of the distributions paid to the Company’s stockholders during such calendar quarter (the “Excess Operating Funds”). Any such reimbursement will be made within three years of the date that the expense support payment obligation was incurred by SIC Advisors, subject to the conditions described below. The amount of the reimbursement during any calendar quarter will equal the lesser of (i) the Excess Operating Funds received during the quarter and (ii) the aggregate amount of all expense payments made by SIC Advisors that have not yet been reimbursed. In addition, the Company will only make reimbursement payments if its “operating expense ratio” (as described in footnote 1 to the table below) is equal to or less than its operating expense ratio at the time the corresponding expense payment was incurred and if the annualized rate of its regular cash distributions to the Company’s stockholders is equal to or greater than the annualized rate of the Company’s regular cash distributions to stockholders at the time the corresponding expense payment was incurred.

As of March 31, 2014, we recorded $2,939,318 in our statements of assets and liabilities as due from affiliate relating to the Expense Support Agreement. For the three months ended March 31, 2014, we recorded an expense reimbursement of $1,313,470 on the statement of operations. Expense reimbursements to SIC Advisors will be accrued as they become probable and estimable. For the three months ended March 31, 2014, we did not record any expense reimbursements to SIC Advisors. As of December 31, 2013, we recorded $2,592,989 in our statement of assets and liabilities as due from affiliate relating to the Expense Support Agreement. For the three months ended March 31, 2013, we recorded an expense reimbursement of $685,404 on the statement of operations. For the three months ended March 31, 2013 we did not record any expense reimbursements to SIC Advisors.

For the three months ended March 31, 2013, total expense reimbursement from SIC Advisors pursuant to the Expense Support and Reimbursement Agreement was $685,404 and net expenses after taking into account the expense reimbursement from SIC Advisors, was $523,844.

For the three months ended March 31, 2014 total expense reimbursement from SIC Advisors pursuant to the Expense Support and Reimbursement Agreement was $1,313,470 and net expenses after taking into account the expense reimbursement from SIC Advisors, was $2,103,565.

Net Realized Gains/Losses from Investments

We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of an investment, without regard to unrealized gains or losses previously recognized.

During the quarter ended March 31, 2014, we recognized $1,708,962 in net realized gains on total investments. During the quarter ended March 31, 2013, we recognized $110,635 of realized gains on our portfolio investments.

Net Unrealized Appreciation/Depreciation on Investments

Net change in unrealized appreciation on investments reflects the net change in the fair value of our total investments. For the quarter ended March 31, 2014, we had unrealized appreciation of $245,937 on total investments. For the quarter ended March 31, 2013, we had unrealized appreciation of $746,319 on our portfolio investments.

Changes in Net Assets from Operations

For the three months ended March 31, 2014, we recorded a net increase in net assets resulting from operations of $4,457,548 compared to a net increase in net assets resulting from operations of $1,391,187 for the three months ended March 31, 2013. Based on 20,369,602 and 3,226,281 weighted average common shares outstanding for the three months ended March 31, 2014 and 2013, respectively, our per share net increase in net

assets resulting from operations was $0.22 for the three months ended March 31, 2014 compared to a per share net increase in net assets from operations of $0.43 for the three months ended March 31, 2013.

Financial Condition, Liquidity and Capital Resources

As a BDC, we distribute substantially all of our net income to our stockholders and have an ongoing need to raise additional capital for investment purposes. To fund growth, we have a number of alternatives available to increase capital; including raising equity, increasing debt, and funding from operational cash flow.

Our liquidity and capital resources have been generated primarily from the net proceeds of our public offering of common stock.

As of March 31, 2014, we had $11,427,035 in cash. In the future, we may generate cash from future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes.

In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow.

On December 4, 2013, we entered into a three-year senior secured syndicated revolving credit facility with a one-year term out period (the “ING Facility”) pursuant to a Senior Secured Revolving Credit Agreement (the “Revolving Credit Agreement”) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING Facility matures on December 4, 2017 and is secured by substantially all of our assets, subject to certain exclusions as further set forth in a Guarantee, Pledge and Security Agreement (the “Security Agreement”) entered into in connection with the Revolving Credit Agreement, among us, the Subsidiary Guarantors party thereto, ING Capital LLC, as Administrative Agent, each Financial Agent and Designated Indebtedness Holder party thereto and ING Capital LLC, as Collateral Agent. The ING Facility also includes usual and customary representations, covenants and events of default for senior secured revolving credit facilities of this nature. As of March 31, 2014, our borrowings under the ING Facility totaled $25,000,000 and were recorded as revolving credit facility payable on our consolidated statements of assets and liabilities.

Contractual Obligations and Off-Balance Sheet Arrangements

We have entered into certain contracts under which we have material future commitments. On April 5, 2012, we entered into the Investment Advisory Agreement with SIC Advisors in accordance with the 1940 Act. The Investment Advisory Agreement became effective as of April 17, 2012, the date that we met the minimum offering requirement. Pursuant to the 1940 Act, the initial term of the Investment Advisory Agreement was for two years from its effective date, with one-year renewals subject to approval by our board of directors, a majority of whom must be independent directors. On March 12, 2014, the board of directors approved the renewal of the Investment Advisory Agreement for an additional one-year term at an in-person meeting. SIC Advisors serves as our investment advisor in accordance with the terms of the Investment Advisory Agreement. Payments under our Investment Advisory Agreement in each reporting period consist of (i) a management fee equal to a percentage of the value of our gross assets and (ii) an incentive fee based on our performance.

On April 5, 2012, we entered into the Administration Agreement with Medley Capital LLC with an initial term of two years, pursuant to which Medley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. On March 12, 2014, the board of directors approved the renewal of the

Administration Agreement for an additional one-year term at an in-person meeting. Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC.

If any of our contractual obligations discussed above are terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services we expect to receive under the investment advisory agreement and administration agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.

Off-Balance Sheet Arrangements

On August 27, 2013, Arbor Funding LLC (“Arbor”), a newly-formed, wholly-owned financing subsidiary of the Company, entered into a total return swap (“TRS”) with Citibank, N.A. (“Citibank”).

The TRS with Citibank enables Arbor to obtain the economic benefit of the loans underlying the TRS, despite the fact that such loans will not be directly held or otherwise owned by Arbor, in return for an interest-type payment to Citibank. Accordingly, the TRS is analogous to Arbor utilizing leverage to acquire loans and incurring an interest expense to a lender.

Our derivative asset due from Citibank, net of amounts available for offset under a master netting agreement as of March 31, 2014 was $298,557, which is recorded on the consolidated statements of assets and liabilities as receivable due on total return swap.

Transactions in total return swap contracts during the quarter ended March 31, 2014 were $438,709 in realized gains and $447,021 in unrealized gains, which is recorded on the consolidated statements of operations.

For the three months ended March 31, 2014, the average notional par amount of total return swap contracts was $44,836,562.

Distributions

We have elected and intend to continue to qualify to be treated, for U.S. federal income tax purposes, as a RIC under subchapter M of the Code. To obtain and maintain RIC tax treatment, we must, among others things, distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period generally ending on October 31 of the calendar year (unless an election is made by us to use our taxable year) and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax.

While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.

We currently intend to distribute net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually out of the assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens, you will be treated for U.S. federal income tax purposes as if you had received an actual distribution of the capital gains that we retain and reinvested the net after tax proceeds in us. In this situation, you would 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 gains deemed distributed to you. We can offer no assurance that we will continue to achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may 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.

Subject to our board of directors’ discretion and applicable legal restrictions, we expect to authorize and pay monthly distributions to our stockholders. Any distributions to our stockholders will be declared out of assets legally available for distribution. We expect to continue making monthly distributions unless our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from doing so. From time to time, but not less than quarterly, we will review our accounts to determine whether distributions to our stockholders are appropriate. We have not established limits on the amount of funds we may use from available sources to make distributions. We expect that for a significant time after the commencement of this offering, substantially all of our distributions will result from expense support payments made by SIC Advisors that may be subject to repayment by us within three years. The purpose of this arrangement is to avoid such distributions being characterized as returns of capital for GAAP purposes. We may still have distributions which could be characterized as a return of capital for tax purposes. Such distributions are not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods and/or SIC Advisors continues to make Expense Support Payments under the Expense Support Agreement. Any future reimbursements to SIC Advisors will reduce the distributions that may otherwise be available for distribution to stockholders. There can be no assurance that we will achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at all. SIC Advisors has no obligation to make Expense Support Payments pursuant to the Expense Support Agreement after December 31, 2013, unless the Expense Support Agreement is extended. For the three months ended March 31, 2014 and 2013, if Expense Support Payments of $1,313,470 and $685,404, respectively were not made by SIC Advisors, 100% percent of the distributions would have been a return of capital.

Our distributions may exceed our earnings, which we refer to as a return of capital, especially during the period before we have invested substantially all of the proceeds of this offering. As a result, a portion of the distributions we make may represent a return of capital for tax purposes. Our use of the term “return of capital” merely means distributions in excess of our earnings and as such may constitute a return on your individual investments and does not mean a return on capital. Therefore stockholders are advised that they should be aware of the differences with our use of the term “return of capital” and “return on capital.”

The following table reflects the cash distributions per share that we have declared or paid to our stockholders since we commenced operations in April 2012. Stockholders of record as of each respective record date were entitled to receive the distribution.


Record Date	Payment Date	Amount per share
July 13 and 31, 2012	August 1, 2012	$	0.03333
August 15 and 31, 2012	September 4, 2012		0.03333
September 14 and 28, 2012	October 1, 2012		0.03333
October 15 and 30, 2012	October 31, 2012		0.03333
November 15 and 29, 2012	November 30, 2012		0.03333
December 14 and 28, 2012	December 31, 2012		0.03333
January 15 and 31, 2013	January 31, 2013		0.03333
February 15 and 28, 2013	February 28, 2013		0.03333
March 15 and 29, 2013	March 29, 2013		0.03333
April 15 and 30, 2013	April 30, 2013		0.03333
May 15 and 31, 2013	May 31, 2013		0.03333
June 14 and 28, 2013	June 28, 2013		0.03333
July 15 and 31, 2013	July 31, 2013		0.03333
August 15 and 30, 2013	August 30, 2013		0.03333
September 13 and 30, 2013	September 30, 2013		0.03333
October 15 and 31, 2013	October 31, 2013		0.03333
November 15 and 29, 2013	November 29, 2013		0.03333
December 13 and 31, 2013	December 31, 2013		0.03333
January 15 and 31, 2014	January 31, 2014		0.03333
February 14 and 28, 2014	February 28, 2014		0.03333
March 14 and 31, 2014	March 31, 2014		0.03333
April 15 and 30, 2014	April 30, 2014		0.03333
May 15 and 30, 2014	May 30, 2014		0.03333
June 13 and 30, 2014	June 30, 2014		0.03333

We have adopted an “opt in” distribution reinvestment plan pursuant to which our common stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of our common stock. As a result, if we declare a cash distribution, stockholders that have “opted in” to our distribution reinvestment plan will have their distribution automatically reinvested in additional shares of our common stock rather than receiving cash dividends. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions.

Each year a statement on Internal Revenue Service Form 1099-DIV (or such successor form) identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, or a return of capital) will be mailed to our stockholders. The tax basis of shares must be reduced by the amount of any return of capital distributions, which will result in an increase in the amount of any taxable gain (or a reduction in any deductible loss) on the sale of shares.

Related Party Transactions

On October 19, 2011, SIC Advisors entered into a subscription agreement to purchase 110.80 shares of common stock for cash consideration of $1,000. The consideration represents $9.025 per share.

On April 17, 2012, SIC Advisors purchased 1,108,033.24 shares of our common stock for aggregate gross proceeds of $10,000,000. The consideration represents $9.025 per share.

We have entered into an Investment Advisory Agreement and Expense Support and Reimbursement Agreement with SIC Advisors in which our senior management holds an equity interest. Members of our senior management also serve as principals of other investment managers affiliated with SIC Advisors that do, and may in the future, manage investment funds, accounts or other investment vehicles with investment objectives similar to ours.

We have entered into an Administration Agreement with Medley Capital LLC, pursuant to which Medley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf. We do not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC. Medley Capital LLC is an affiliate of SIC Advisors.

We have entered into a dealer manager agreement with SC Distributors, LLC and pay them a dealer manager fee of up to 2.75% of gross proceeds raised in the offering. An affiliated entity of SC Distributors, LLC owns an equity interest in SIC Advisors, which provides the right to receive a fixed percentage of the management fees received by SIC Advisors.

We have entered into a license agreement with SIC Advisors under which SIC Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name “Sierra” for specified purposes in our business. Under this agreement, we will have a right to use the “Sierra” name, subject to certain conditions, for so long as SIC Advisors or one of its affiliates remains our investment advisor. Other than with respect to this limited license, we will have no legal right to the “Sierra” name.

Management Fee

We pay SIC Advisors a fee for its services under the Investment Advisory Agreement. The fee consists of two components: a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.75% of our gross assets and is payable quarterly in arrears. The incentive fee consists of :

•

An incentive fee on net investment income (“subordinated incentive fee on income”) is calculated and payable quarterly in arrears and is based upon pre-incentive fee net investment income for the immediately preceding quarter. No subordinated incentive fee on income is payable in any calendar quarter in which pre-incentive fee net investment income does not exceed a quarterly return to stockholders of 1.75% per quarter on the Company’s net assets at the end of the immediately preceding fiscal quarter, or the preferred quarterly return. All pre-incentive fee net investment income, if any, that exceeds the quarterly preferred return, but is less than or equal to 2.1875% of net assets at the end of the immediately preceding fiscal quarter in any quarter, will be payable to SIC Advisors. The Company refers to this portion of its subordinated incentive fee on income as the catch up. It is intended to provide an incentive fee of 20% on pre-incentive fee net investment income when pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter in any quarter. For any quarter in which the Company’s pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter, the subordinated incentive fee on income shall equal 20% of the amount of pre-incentive fee net investment income, because the preferred return and catch up will have been achieved.

•

A capital gains incentive fee will be earned on realized investments and shall be payable in arrears as of the end of each calendar year during which the IAA is in effect. If the IAA is terminated, the fee will become payable as of the effective date of such termination. The capital gains incentive fee is based on our realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, which we refer to as “net realized capital gains.” The capital gains incentive fee equals’ 20% of net realized capital gains, less the aggregate amount of any previously paid capital gains incentive fee.

Under the terms of the investment advisory agreement, SIC Advisors bears all organization and offering expenses on our behalf. Upon such time that we have raised $300 million in gross proceeds in connection with the sale of shares of our common stock, SIC Advisors shall no longer be obligated to bear, pay or otherwise be

responsible for any ongoing organization and offering expenses on our behalf, and we will be responsible for paying or otherwise incurring all such organization and offering expenses. Pursuant to the terms of the Investment Advisory Agreement, we have agreed to reimburse SIC Advisors for any such organizational and offering expenses incurred by SIC Advisors not to exceed 1.25% of the gross subscriptions raised by us over the course of the offering period, which was initially scheduled to terminate two years from the initial offering date, unless extended. At a meeting held on March 12, 2014, our board of directors approved an extension of our offering for an additional year. Notwithstanding the foregoing, in the event that organizational and offering expenses, together with sales commissions, the dealer manager fee and any discounts paid to members of the Financial Industry Regulatory Authority, exceed 15% of the gross proceeds from the sale of shares of our common stock pursuant to our registration statement or otherwise at the time of the completion of our offering, then SIC Advisors shall be required to pay or, if already paid by us, reimburse us for amounts exceeding such 15% limit.

Critical Accounting Policies

This discussion of our expected operating plans is based upon our expected consolidated financial statements, which will be prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements will require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we will describe our critical accounting policies in the notes to our future consolidated financial statements.

Valuation of Investments

•

Level 1 — Quoted prices are available in active markets for identical investments as of the reporting date. Publicly listed equities and publicly listed derivatives will be included in Level 1. In addition, securities sold, but not yet purchased and call options will be included in Level 1. We will not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably affect the quoted price.

•

Level 2 — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. In certain cases, debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments, and various relationships between investments. Investments which are generally expected to be included in this category include corporate bonds and loans, convertible debt indexed to publicly listed securities, and certain over-the-counter derivatives.

•

Level 3 — Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation. Investments that are expected to be included in this category are our private portfolio companies.

Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. We weight the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Investments for which market quotations are not readily available are valued at fair value as determined by the Company’s board of directors based upon input from management and third party valuation firms. Because these investments are illiquid and because there may not be any directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and consistently applied across all loans and through time.

The Company uses third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party valuation firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. Based on market data obtained from the third-party valuation firms, the Company uses a combined market yield analysis and an enterprise model of valuation. In applying the market yield analysis, the value of the Company’s loans is determined based upon inputs such as the coupon rate, current market yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, the Company uses a waterfall analysis which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower’s capital structure into consideration. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities using an expected recovery model. We may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.

The Company undertakes a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

•

the Company’s quarterly valuation process begins with each portfolio investment being initially valued by the investment professionals responsible for monitoring the portfolio investment;

•

conclusions are then documented and discussed with senior management; and

•

an independent valuation firm engaged by the Company’s board of directors prepares an independent valuation report for approximately one third of the portfolio investments each quarter on a rotating quarterly basis on non fiscal year-end quarters, such that each of these investments will be valued by an independent valuation firm at least twice per annum when combined with the fiscal year-end review of all the investments by independent valuation firms, exclusive of TRS underlying portfolio.

In addition, all of the Company’s investments are subject to the following valuation process:

•

management reviews preliminary valuations and their own independent assessment;

•

the audit committee of the Company’s board of directors reviews the preliminary valuations of senior management and independent valuation firms; and

•

We will value the TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS will be based on the increase or decrease in the value of the assets underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The assets underlying the TRS will be valued by Citibank. Citibank will base its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations will be sent to us for review and testing. Our board of directors will review and approve the value of the TRS, as well as the value of the assets underlying the TRS, on a quarterly basis as part of their quarterly determination of net asset value. To the extent our board of directors has any questions or concerns regarding the valuation of the assets underlying the TRS, such valuation will be discussed or challenged pursuant to the terms of the TRS. For additional disclosures on the TRS, see “—Financial Condition, Liquidity and Capital Resources — Total Return Swap.”

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities or accounting purposes if we have reason to doubt our ability to collect such interest. Original issue discounts, market discounts or premiums are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Payment-in-Kind Interest

We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash.

Organization and Offering Expenses

Organization and offering expenses are expensed by SIC Advisors, and we may be required to reimburse SIC Advisors for such expenses subject to the terms of the Investment Advisory Agreement. Until such time that we raise $300 million in gross proceeds in connection with the sale of shares of our common stock, continuous offering expenses will be expensed by SIC Advisors. After such time, continuous offering expenses, excluding sales load, will be capitalized on our balance sheet as deferred offering expenses and expensed to our statement of operations in the period incurred.

Federal Income Taxes

We have elected to be treated for federal income tax purposes, and intend to qualify annually thereafter, as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders from our tax earnings and profits. To obtain and maintain our RIC tax treatment, we must, among other things, meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.

Recent Developments

We do not believe that any recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on our condensed financial statements.

Item 3: Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. Under the terms of the TRS between Arbor and Citibank, Arbor will pay fees to Citibank at a floating rate based on LIBOR in exchange for the right to receive the economic benefit of a portfolio of assets having a maximum notional amount of $200,000,000. We expect any future credit facilities, total return swap agreements or other financing arrangements that we or any of our subsidiaries may enter into will also be based on a floating interest rate. As a result, we are subject to risks relating to changes in market interest rates. In periods of rising interest rates, when we or our subsidiaries have debt outstanding or swap agreements in effect, our cost of funds would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.

In addition, any investments we make that are denominated in a foreign currency will be subject to risks associated with changes in currency exchange rates. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved.

Item 4: Controls and Procedures.

Disclosure Controls

In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that the disclosure controls and procedures are effective.

Change In Internal Control Over Financial Reporting

No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information

Item 1:

Legal Proceedings.

We are not currently subject to any legal proceedings, nor, to our knowledge, are any legal proceedings threatened against us or our subsidiaries.

Item 1A:

Risk Factors.

Economic recessions or downturns may have a material adverse effect on our business, financial condition and results of operations, and could impair the ability of our portfolio companies to repay loans.

Economic recessions or downturns may result in a prolonged period of market illiquidity which could have a material adverse effect on our business, financial condition and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results.

In addition, to the extent that recessionary conditions return, the financial results of small and mid-sized companies, like those in which we invest, will likely experience deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. Additionally, the end markets for certain of our portfolio companies’ products and services would likely experience negative economic trends. The performances of certain of our portfolio companies have been, and may continue to be, negatively impacted by these economic or other conditions, which may ultimately result in our receipt of a reduced level of interest income from our portfolio companies and/or losses or charge offs related to our investments, and, in turn, may adversely affect distributable income. Further, adverse economic conditions may decrease the value of collateral securing some of our loans and the value of our equity investments. As a result, we may need to modify the payment terms of our investments, including changes in payment-in-kind interest provisions and/or cash interest rates. These factors may result in our receipt of a reduced level of interest income from our portfolio companies and/or losses or charge offs related to our investments, and, in turn, may adversely affect distributable income and have a material adverse effect on our results of operations.

Further downgrades of the U.S. credit rating, impending automatic spending cuts or another government shutdown could negatively impact our liquidity, financial condition and earnings.

Recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economic slowdowns. Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States, or the US, from “AAA” to “AA+” in August 2011. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. Absent further quantitative easing by the Federal Reserve, these developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.

Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.

The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, may continue to contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties or deterioration in the United States and worldwide. Since 2010, several European Union (“EU”) countries,

including Greece, Ireland, Italy, Spain, and Portugal, have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal policy of foreign nations, such as China, may have a severe impact on the worldwide and United states financial markets. Moreover, there are concerns that the recent economic slowdown in China could have a negative impact on markets throughout the world. We do not know how long the financial markets will continue to be affected by these events and cannot predict the effects of these or similar events in the future on the United States economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3:

Defaults Upon Senior Securities.

None.

Item 4:

Mine Safety Disclosures.

None.

Item 5:

Other Information.

None.

Item 6:

Exhibits.

EXHIBIT INDEX


Number		Description

31.1		Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Dated: May 8, 2014	Sierra Income Corporation.

	By	/s/ Seth Taube
		Seth Taube Chief Executive Officer (Principal Executive Officer)

Dated: May 8, 2014	By	/s/ Richard T. Allorto, Jr.
		Richard T. Allorto, Jr. Chief Financial Officer (Principal Accounting and Financial Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company