GLADSTONE INVESTMENT CORPORATION All statements contained herein, other than historical facts, may constitute "forward-looking statements." These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest withGladstone Management Corporation (the "Adviser") and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as "estimate," "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "project," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particularDavid Gladstone ,David Dullum , orTerry Lee Brubaker ; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates, regulation, or the general economy, including inflation; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company ("RIC") and as a business development company ("BDC"); (12) the impact of COVID-19 generally and on the economy, the capital markets and our portfolio companies, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties; and (13) those factors described in Item 1A. "Risk Factors" herein and the "Risk Factors" sections of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 , filed with theU.S. Securities and Exchange Commission ("SEC") onMay 11, 2022 (the "Annual Report"). We caution readers not to place undue reliance on 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. We have based forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q (the "Quarterly Report"). Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report. 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 theSEC , including subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended. In this Quarterly Report, the "Company," "we," "us," and "our" refer toGladstone Investment Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. Dollar amounts, except per share amounts, are in thousands, unless otherwise indicated. The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report and in our Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationships for any future periods. 42
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Table of Contents OVERVIEW General We were incorporated under the General Corporation Law of theState of Delaware onFebruary 18, 2005 . OnJune 22, 2005 , we completed our initial public offering and commenced operations. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the "1940 Act"). ForU.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To continue to qualify as a RIC forU.S. federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. We were established for the purpose of investing in debt and equity securities of established private businesses operating inthe United States ("U.S."). Our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness, and make distributions to our stockholders that grow over time; and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses, generally in combination with the aforementioned debt securities, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to$70 million , although investment size may vary depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 75% in debt investments and 25% in equity investments, at cost. As ofSeptember 30, 2022 , our investment portfolio was comprised of 76.6% in debt investments and 23.4% in equity investments, at cost. We focus on investing in lower middle market private businesses (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization ("EBITDA") of$3 million to$20 million ) ("Lower Middle Market") in theU.S. that meet certain criteria, including: the sustainability of the business' free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company's stock, or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We invest in portfolio companies that seek funds for management buyouts and/or growth capital to finance acquisitions, recapitalize or, to a lesser extent, refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. InJuly 2012 , theSEC granted us an exemptive order (the "Co-Investment Order") that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone. We are externally managed by the Adviser, an investment adviser registered with theSEC and an affiliate of ours, pursuant to an investment advisory and management agreement (the "Advisory Agreement"). The Adviser manages our investment activities. We have also entered into an administration agreement withGladstone Administration, LLC , an affiliate of ours and the Adviser, whereby we pay separately for administrative services.
Our shares of common stock, our 5.00% Notes due 2026 ("2026 Notes"), and our 4.875% Notes due 2028 ("2028 Notes") are traded on the Nasdaq Global Select Market ("Nasdaq") under the trading symbols "GAIN," "GAINN," and "GAINZ," respectively.
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Table of Contents siness Portfolio Activity While the business environment remains competitive, we continue to see new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and independent sponsor-led buyouts ofLower Middle Market companies in theU.S. During the six months endedSeptember 30, 2022 , we invested in one new portfolio company and exited one portfolio company. From our initial public offering inJune 2005 throughSeptember 30, 2022 , we invested in 56 companies, excluding investments in syndicated loans, for a total of approximately$1.6 billion , before giving effect to principal repayments and divestitures. The majority of the debt securities in our portfolio have a success fee component, which enhances the yield on our debt investments. Unlike paid-in-kind ("PIK") income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as ofSeptember 30, 2022 , we had unrecognized, contractual success fees of$50.7 million , or$1.53 per common share. Consistent with accounting principles generally accepted in theU.S. ("GAAP"), we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned. From inception throughSeptember 30, 2022 , we completed sales of 28 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated$267.3 million in net realized gains and$39.4 million in other income upon exit, for a total increase to our net assets of$306.7 million . We believe, in aggregate, these transactions were equity-oriented investment successes and exemplify our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. The 28 liquidity events have offset any realized losses since inception, which were primarily incurred during the 2008-2009 recession in connection with the sale of performing syndicated loans at a realized loss to pay off a former lender. The successful exits, in part, enabled us to increase the monthly distribution by 87.5% fromMarch 2011 throughSeptember 30, 2022 , and allowed us to declare and pay 16 supplemental distributions to common stockholders throughSeptember 30, 2022 . Capital Raising Efforts We have been able to meet our capital needs through extensions of and increases to the Fifth Amended and Restated Credit Agreement datedApril 30, 2013 , as amended from time to time (the "Credit Facility"), and by accessing the capital markets in the form of public offerings of unsecured notes, as well as common and preferred stock. We have successfully extended the Credit Facility's revolving period multiple times, most recently toFebruary 2024 , and currently have a total commitment amount of$180.0 million (with a potential total commitment of$300.0 million through additional commitments from new or existing lenders). During the year endedMarch 31, 2022 , we issued our 2028 Notes for gross proceeds of$134.6 million . During the three and six months endedSeptember 30, 2022 , we sold 29,640 shares of our common stock under our "at-the-market" program (the "Common Stock ATM Program") for gross proceeds of approximately$0.5 million . Refer to "Liquidity and Capital Resources - Revolving Line of Credit" for further discussion of the Credit Facility and to "Liquidity and Capital Resources - Equity - Common Stock" further discussion of our common stock. Although we have been able to access the capital markets historically, market conditions, including the impact of COVID-19, inflation, and rising interest rates, may continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of common equity. OnSeptember 30, 2022 , the closing market price of our common stock was$12.10 per share, representing a 9.1% discount to our net asset value ("NAV") of$13.31 per share as ofSeptember 30, 2022 . When our common stock trades below NAV, our ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock at an issuance price below the then-current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering. ATM sales during the three and six months endedSeptember 30, 2022 were above our then-current estimated NAV per share. 44
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Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have asset coverage (as defined in Sections 18 and 61 of the 1940 Act), of at least 150% on each of our senior securities representing indebtedness and our senior securities that are stock (such as our previously outstanding series of term preferred stock). OnApril 10, 2018 , our Board of Directors, including a "required majority" (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, our asset coverage requirements for senior securities changed from 200% to 150%, which was effective as ofApril 10, 2019 , one year after the date of the Board of Directors' approval.
As of
Investment Highlights
Investment Activity
During the six months ended
•InMay 2022 , we invested an additional$6.4 million in the form of secured first lien debt inNocturne Villa Rentals, Inc. ("Nocturne") to fund an add-on acquisition. •InJune 2022 , we sold our investment inBassett Creek Services, Inc. ("Bassett Creek"), which resulted in success fee income of$3.0 million and a realized gain on preferred equity of$4.7 million . In connection with the sale, we received net cash proceeds of$57.6 million , including the repayment of our debt investment of$48.0 million at par. •InJune 2022 , we invested$21.0 million in a new portfolio company,Dema/Mai Holdings, Inc. ("Dema/Mai"), in the form of preferred equity to acquireMai Mechanical, LLC , a leading provider of plumbing and mechanical services focused on multi-family residential construction headquartered inDenver, Colorado , fromJ.R. Hobbs Co. - Atlanta, LLC ("J.R. Hobbs"), an existing portfolio company. InJuly 2022 , we invested an additional$39.1 million in the form of secured first lien debt in Dema/Mai to fund the acquisition of Dema Plumbing, a plumbing and mechanical systems installation and service provider to single-family residential homebuilders. •InJuly 2022 , we recapitalized our investment inHorizon Facilities Services, Inc. ("Horizon") and invested an additional$30.0 million in the form of secured first lien debt. In connection with this investment, we received equity proceeds of$12.3 million , which were recognized as a$10.1 million return of preferred equity cost basis and a realized gain of$2.2 million , as well as dividend income of$3.1 million and success fee income of$1.7 million . •InAugust 2022 , in conjunction with a refinancing atGinsey Home Solutions, Inc. ("Ginsey"), our outstanding$13.3 million of secured second lien debt was reduced to$12.2 million and converted to secured first lien debt. The reduction in our cost basis was the result of a$5.1 million payment made by Ginsey to extinguish our secured borrowing liability, which was partially offset by an additional investment in Ginsey of$4.0 million .
Subsequent to
Recent Developments
Distributions and Dividends
In
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Record Date Payment Date Distribution per Common Share
October 21, 2022 October 31, 2022 $ 0.080
November 18, 2022 November 30, 2022 0.080
December 6, 2022 December 15, 2022 0.120 (A)
December 20, 2022 December 30, 2022 0.080
Total for the Quarter: $ 0.360
(A) Represents a supplemental distribution to common stockholders.
Election of Director
Effective
LIBOR Transition
In general, our investments in debt securities have a term of five years, accrue
interest at variable rates (based on the one-month London Interbank Offered Rate
("LIBOR")) and, to a lesser extent, at fixed rates. Most U.S. dollar LIBOR are
currently anticipated to be phased out in June 2023 . LIBOR may transition to a
new standard rate, the Secured Overnight Financing Rate ("SOFR"), which will
incorporate certain overnight repo market data collected from multiple data
sets. To attain an equivalent one-month rate, we currently intend to adjust the
SOFR to minimize the difference between the interest that a borrower would be
paying using LIBOR versus what it will be paying using SOFR. We are currently
monitoring the transition and cannot assure you whether SOFR will become a
standard rate for variable rate debt. We have amended all outstanding loan
agreements with our portfolio companies to include fallback language providing a
mechanism for the parties to negotiate a new reference interest rate in the
event that LIBOR ceases to exist. Assuming that SOFR replaces LIBOR and is
appropriately adjusted to equate to one-month LIBOR, we expect that there should
be minimal impact on our operations.
COVID-19 Impact
We continue to closely monitor and work with our portfolio companies to navigate the significant challenges created by the continuing COVID-19 pandemic, and remain focused on ensuring the safety of the Adviser's and Administrator's personnel and of the employees of our portfolio companies, while also managing our ongoing business activities. While we are closely monitoring all of our portfolio companies, our portfolio continues to be diverse from a geographic and industry perspective. Through proactive measures and continued diligence, the management teams of our portfolio companies have demonstrated their ability to respond effectively and efficiently to the challenges posed by COVID-19, including its variants, related orders imposed by state and local governments, including paused or reversed reopening orders, and operating challenges, including but not limited to, labor shortages, supply chain delays and increased material costs. We believe we have sufficient levels of liquidity to support our existing portfolio companies, as necessary, and continue our buyout strategy by deploying capital in new investment opportunities.
Impact of Inflation
We believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. During the six months endedSeptember 30, 2022 , general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees; however, the broad based impact of these pricing changes have largely been mitigated by price adjustments without adverse sales implications, and thus, have not materially impacted our portfolio companies' ability to service their indebtedness, including our loans. Notwithstanding the results to date, we expect that the cumulative effect of these inflationary pressures may impact the profit margins or sales of certain portfolio companies and their ability to service their debts. We continue to monitor the current inflationary environment to anticipate any impact on our portfolio companies, including their availability to pay interest on our loans. We cannot assure you that our results of operations and financial condition or that of our portfolio companies will not be materially impacted by inflation in the future. 46
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RESULTS OF OPERATIONS
Comparison of the Three Months Ended
For the
Three Months Ended
2022 2021 $ Change % Change
INVESTMENT INCOME
Interest income $ 14,237 $ 14,298 $ (61) (0.4) %
Dividend and success fee income 6,558 4,240 2,318 54.7 %
Total investment income 20,795 18,538 2,257 12.2 %
EXPENSES
Base management fee 3,613 3,577 36 1.0 %
Loan servicing fee 1,916 1,794 122 6.8 %
Incentive fee 768 7,351 (6,583) (89.6) %
Administration fee 562 571 (9) (1.6) %
Interest and dividend expense 3,857 3,884 (27) (0.7) %
Amortization of deferred financing costs
and discounts 450 452 (2) (0.4) %
Other 1,754 1,468 286 19.5 %
Expenses before credits from Adviser 12,920 19,097 (6,177) (32.3) %
Credits to fees from Adviser (3,541) (2,724) (817) 30.0 %
Total expenses, net of credits to fees 9,379 16,373 (6,994) (42.7) %
NET INVESTMENT INCOME (LOSS) 11,416 2,165 9,251 NM
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investments 2,302 464 1,838 396.1 %
Net realized loss on other - (1,998) 1,998 100.0 %
Net unrealized (depreciation) appreciation
of investments (10,643) 27,504 (38,147) (138.7) %
Net realized and unrealized (loss) gain (8,341) 25,970 (34,311) (132.1) %
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 3,075 $ 28,135 $ (25,060) (89.1) %
WEIGHTED-AVERAGE SHARES OF COMMON STOCK
OUTSTANDING
Basic and diluted 33,218,901 33,205,023 13,878 NM
BASIC AND DILUTED PER COMMON SHARE:
Net investment income (loss) $ 0.34 $ 0.07 $ 0.27 385.7 %
Net increase in net assets resulting from
operations $ 0.09 $ 0.85 $ (0.76) (89.4) %
NM = Not Meaningful
Investment Income
Total investment income increased 12.2% for the three months ended September 30,
2022 , as compared to the prior year period, due to an increase in dividend and
success fee income, partially offset by a decrease in interest income.
Interest income from our investments in debt securities decreased 0.4% for the
three months ended September 30, 2022 , as compared to the prior year period.
During the three months ended September 30, 2021 , we received $1.6 million of
past due interest from certain loans that were previously on non-accrual status
compared to no such collection in the current year period. Generally, the level
of interest income from investments is directly related to the principal balance
of our interest-bearing investment portfolio outstanding during the period
multiplied by the weighted-average yield.
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The weighted-average principal balance of our interest-bearing investment
portfolio during the three months ended September 30, 2022 was $467.0 million ,
compared to $425.5 million for the prior year period. This increase was
primarily due to the $84.4 million of follow-on debt investments in existing
portfolio companies, the origination of $57.3 million of new debt investments,
and $11.7 million of loans returned to accrual status, partially offset by $90.4
million of pay-offs, restructurings, or write-offs of debt investments, and
$52.5 million of loans placed on non-accrual status, after June 30, 2021 , and
their respective impact on the weighted-average principal balance when
considering timing of new investments, pay-offs, restructurings, write-offs, and
accrual status changes, as applicable.
The weighted-average yield on our interest-bearing investments, excluding cash
and cash equivalents and receipts recorded as dividend and success fee income,
was 12.1% for the three months ended September 30, 2022 , compared to 13.3% for
the prior year period. The weighted-average yield may vary from period to
period, based on the current stated interest rate on interest-bearing
investments, coupled with any collection of past due interest during the period.
During the three months ended September 30, 2021 , we collected $1.6 million in
past due interest from portfolio companies that were previously on non-accrual
status, including $1.5 million from B+T Group Acquisition, Inc. ("B+T"), $0.1
million from Horizon and $45 thousand from PSI Molded Plastics, Inc. ("PSI
Molded"). We had no collections of past due interest during the three months
ended September 30, 2022 .
As of September 30, 2022 , our loans to J.R. Hobbs and The Mountain Corporation
("The Mountain") were on non-accrual status, with an aggregate debt cost basis
of $63.4 million . As of September 30, 2021 , our loans to J.R. Hobbs , The
Mountain and SFEG Holdings, Inc. ("SFEG") were on non-accrual status, with an
aggregate debt cost basis of $81.3 million .
Dividend and success fee income for the three months ended September 30, 2022
increased $2.3 million from the prior year period. During the three months ended
September 30, 2022 , dividend and success fee income consisted of $4.8 million of
dividend income and $1.7 million of success fee income. During the three months
ended September 30, 2021 , dividend and success fee income consisted of $2.6
million of success fee income and $1.6 million of dividend income.
As of September 30, 2022 , our investment in Horizon represented 10.7% of the
total investment portfolio at fair value. As of March 31, 2022 , no single
investment represented greater than 10% of the total investment portfolio at
fair value.
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable
credits from the Adviser, decreased 42.7% during the three months ended
In accordance with GAAP, we recorded a$1.7 million reversal of previously accrued capital gains-based incentive fee during the three months endedSeptember 30, 2022 , compared to a capital gains-based incentive fee of$5.6 million during the three months endedSeptember 30, 2021 . The capital gains-based incentive fee was a result of the net impact of net realized gains and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee increased by$0.7 million for the three months endedSeptember 30, 2022 , as compared to the prior year period, primarily due to an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate. 48
-------------------------------------------------------------------------------- Table of Contents The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Three
Months Ended
2022 2021
Average total assets subject to base management fee(A)
$ 715,400 Multiplied by prorated annual base management fee of 2.0% 0.5 % 0.5 % Base management fee(B) $ 3,613$ 3,577 Credits to fees from Adviser - other(B) (1,625) (930) Net base management fee $ 1,988$ 2,647 Loan servicing fee(B) $ 1,916$ 1,794 Credits to base management fee - loan servicing fee(B) (1,916) (1,794) Net loan servicing fee $ - $ - Incentive fee - income-based $ 2,437$ 1,757 Incentive fee - capital gains-based(C) (1,669) 5,594 Total incentive fee(B) $ 768$ 7,351 Credits to fees from Adviser - other(B) - - Net total incentive fee $ 768$ 7,351 (A)Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B)Reflected as a line item on our Consolidated Statements of Operations. (C)The capital gains-based incentive fees are recorded in accordance with GAAP and do not necessarily reflect amounts contractually due under the terms of the Advisory Agreement. Interest and dividend expense decreased 0.7% during the three months endedSeptember 30, 2022 , as compared to the prior year period, due to a decrease in dividend expense, partially offset by an increase in interest expense. Dividend expense decreased by$0.8 million as a result of the 6.375% Series E Cumulative Term Preferred Stock ("Series E Term Preferred Stock") redemptionAugust 2021 . Interest expense increased by$0.8 million primarily due to the issuance of the 2028 Notes inAugust 2021 , which was partially offset by lower interest expense related to the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the three months endedSeptember 30, 2022 , was$11.7 million as compared to$24.4 million in the prior year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the three months endedSeptember 30, 2022 was 20.1%, as compared to 10.0% in the prior year period. The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in unused commitment fees on the undrawn portion of the Credit Facility as well as increased interest rates on the drawn portion of the Credit Facility. 49
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Realized and Unrealized Gain (Loss)
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months endedSeptember 30, 2022 and 2021 were as follows:
Three Months Ended
Reversal of
Unrealized Unrealized
Realized Gain Appreciation (Appreciation) Net Gain
Portfolio Company (Loss) (Depreciation) Depreciation (Loss)
Old World Christmas, Inc. $ - $ 6,460 $ - $ 6,460
Nth Degree Investment Group, LLC - 5,055 - 5,055
Nocturne Villas Rentals, Inc. - 2,670 - 2,670
Brunswick Bowling Products, Inc. - 1,592 - 1,592
Horizon Facilities Service, Inc. 2,218 (1,776) - 442
ImageWorks Display and Marketing Group, - - (1,222)
Inc. (1,222)
The Maids International, LLC - (1,424) - (1,424)
Galaxy Technologies Holding, Inc. - (1,549) - (1,549)
Counsel Press, Inc. - (2,119) - (2,119)
PSI Molded Plastics, Inc. - (2,976) - (2,976)
B+T Group Acquisition, Inc - (3,033) - (3,033)
Edge Adhesives Holdings, Inc. - (5,144) - (5,144)
J.R. Hobbs Co. - Atlanta, LLC - (6,410) - (6,410)
Other, net (<$1.0 million , net) 84 (752) (15) (683)
Total $ 2,302 $ (10,628) $ (15) $ (8,341) Three Months Ended
Reversal of
Unrealized Unrealized
Realized Gain Appreciation (Appreciation) Net Gain
Portfolio Company (Loss) (Depreciation) Depreciation (Loss)
Schylling, Inc. $ - $ 6,277 $ - $ 6,277
Bassett Creek Services, Inc. - 5,474 - 5,474
Counsel Press, Inc. - 4,903 - 4,903
Old World Christmas, Inc. - 3,986 - 3,986
B +T Group Acquisition, Inc. - 3,971 - 3,971
Educators Resources, Inc. - 3,607 - 3,607
Horizon Facilities Service, Inc. - 2,983 - 2,983
ImageWorks Display and Marketing Group, - - 2,938
Inc. 2,938
Brunswick Bowling Products, Inc. - 2,326 - 2,326 Mason West, LLC - 2,064 - 2,064 The Maids International, LLC - 1,873 - 1,873 SOG Specialty Knives and Tools, LLC - 1,796 - 1,796 Nocturne Villa Rentals, Inc. - 892 - 892 Diligent Delivery Systems - 525 - 525 J.R. Hobbs Co. - Atlanta, LLC - (2,625) (2,625) SBS Industries Holdings, Inc. - (3,278) - (3,278) Ginsey Home Solutions, Inc. - (3,903) - (3,903) Galaxy Technologies Holdings, Inc. - (6,320) - (6,320) Other, net (<$1.0 million , net) 464 15 - 479 Total$ 464 $ 27,504 $ -$ 27,968 50
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Net Realized Gain (Loss) on Investments
During the three months endedSeptember 30, 2022 , we recorded net realized gains on investments of$2.3 million , primarily due to a$2.2 million realized gain from the recapitalization of Horizon and realized gains related to prior period exits of certain investments. During the three months endedSeptember 30, 2021 , we recorded net realized gains on investments of$0.5 million , primarily related to previous exits of certain investments.
Net Realized Loss on Other
During the three months endedSeptember 30, 2021 , we recorded a net realized loss on other of$2.0 million , related to unamortized deferred issuance costs written off upon the redemption of our Series E Term Preferred Stock inAugust 2021 . During the three months endedSeptember 30, 2022 , there were no realized gains or losses on other.
Net Unrealized Appreciation (Depreciation) of Investments
Net unrealized depreciation of investments of$10.6 million for the three months endedSeptember 30, 2022 was primarily due to the decreased performance of certain of our portfolio companies and decreased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies. These amounts were partially offset by increased performance of certain of our other portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels. Net unrealized appreciation of investments of$27.5 million for the three months endedSeptember 30, 2021 was primarily due to the increased performance of certain portfolio companies and an increase in comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by a decline in performance of certain other portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, current and future shutdowns and reopening restrictions, as well as demand for their products and general economic outlook. Across our entire investment portfolio, we recorded net unrealized depreciation of$16.1 million on our debt positions and appreciation of$5.5 million million on our equity positions, for the three months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , the fair value of our investment portfolio was more than the cost basis by$34.7 million , as compared toJune 30, 2022 , when the fair value of our investment portfolio was more than the cost basis by$45.4 million , representing net unrealized depreciation of$10.6 million for the three months endedSeptember 30, 2022 . Our entire portfolio had a fair value of 104.9% of cost as ofSeptember 30, 2022 . 51
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Comparison of the Six Months Ended
For the
Six Months Ended
2022 2021 $ Change % Change
INVESTMENT INCOME
Interest income $ 26,978 $ 30,290 $ (3,312) (10.9) %
Dividend and success fee income 13,114 6,274 6,840 109.0 %
Total investment income 40,092 36,564 3,528 9.6 %
EXPENSES
Base management fee 7,176 6,897 279 4.0 %
Loan servicing fee 3,674 3,662 12 0.3 %
Incentive fee 3,777 19,599 (15,822) NM
Administration fee 942 970 (28) (2.9) %
Interest and dividend expense 7,641 7,688 (47) (0.6) %
Amortization of deferred financing costs
and discounts 898 908 (10) (1.1) %
Other 3,246 2,822 424 15.0 %
Expenses before credits from Adviser 27,354 42,546 (15,192) (35.7) %
Credits to fees from Adviser (6,049) (5,843) (206) 3.5 %
Total expenses, net of credits to fees 21,305 36,703 (15,398) (42.0) %
NET INVESTMENT INCOME (LOSS) 18,787 (139) 18,926 NM
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investments 6,754 2,393 4,361 182.2 %
Net realized loss on other - (1,998) 1,998 (100.0) %
Net unrealized (depreciation) appreciation
of investments (10,431) 75,018 (85,449) (113.9) %
Net realized and unrealized (loss) gain (3,677) 75,413 (79,090) (104.9) %
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 15,110 $ 75,274 $ (60,164) (79.9) %
WEIGHTED-AVERAGE SHARES OF COMMON STOCK
OUTSTANDING
Basic and diluted 33,212,000 33,205,023 6,977 NM
BASIC AND DILUTED PER COMMON SHARE:
Net investment income (loss) $ 0.57 $ - $ 0.57 NM
Net increase in net assets resulting from
operations $ 0.45 $ 2.27 $ (1.82) (80.2) %
NM = Not Meaningful
Investment Income
Total investment income increased 9.6% for the six months ended September 30,
2022 , as compared to the prior year period, due to an increase in dividend and
success fee income, partially offset by a decrease in interest income.
Interest income from our investments in debt securities decreased 10.9% for the
six months ended September 30, 2022 , as compared to the prior year period.
During the six months ended September 30, 2021 , we received $3.9 million of past
due interest from certain loans that were previously on non-accrual status
compared to no such collection in the current year period. Generally, the level
of interest income from investments is directly related to the principal balance
of our interest-bearing investment portfolio outstanding during the period
multiplied by the weighted-average yield.
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The weighted-average principal balance of our interest-bearing investment
portfolio during the six months ended September 30, 2022 was $449.1 million ,
compared to $445.7 million for the prior year period. This increase was
primarily due to the $91.2 million of follow-on debt investments in existing
portfolio companies, the origination of $60.7 million of new debt investments,
and $11.7 million of loans returned to accrual status, partially offset by
$104.5 million of pay-offs, restructurings, or write-offs of debt investments
and $64.2 million of loans placed on non-accrual status after March 31, 2021 ,
and their respective impact on the weighted-average principal balance when
considering timing of new investments, pay-offs, restructurings, write-offs, and
accrual status changes, as applicable.
The weighted-average yield on our interest-bearing investments, excluding cash
and cash equivalents and receipts recorded as dividend and success fee income,
was 12.0% for the six months ended September 30, 2022 , compared to 13.6% for the
prior year period. The weighted-average yield may vary from period to period,
based on the current stated interest rate on interest-bearing investments,
coupled with any collection of past due interest during the period. During the
six months ended September 30, 2021 , we collected $3.9 million in past due
interest from portfolio companies that were previously on non-accrual status,
including $2.8 million from B+T, $1.0 million from SOG Specialty Knives and
Tools, LLC , $0.1 million from PSI, and $0.1 million from Horizon. We had no
collections of past due interest during six months ended September 30, 2022 .
As of
Dividend and success fee income for the six months endedSeptember 30, 2022 increased$6.8 million from the prior year period. During the six months endedSeptember 30, 2022 , dividend and success fee income consisted of$6.7 million of success fee income and$6.4 million of dividend income. During the six months endedSeptember 30, 2021 , dividend and success fee income consisted primarily of$4.7 million of success fee income and$1.6 million of dividend income. As ofSeptember 30, 2022 , our investment in Horizon represented 10.7% of the total investment portfolio at fair value. As ofMarch 31, 2022 , no single investment represented greater than 10% of the total investment portfolio at fair value. Expenses Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased 42.0% during the six months endedSeptember 30, 2022 , as compared to the prior year period, primarily due to a decrease in the incentive fee. In accordance with GAAP, we recorded a$0.7 million reversal of previously accrued capital gains-based incentive fee during the six months endedSeptember 30, 2022 , compared to a$15.9 million capital gains-based incentive fee recorded during the six months endedSeptember 30, 2021 . The capital gains-based incentive fee was a result of the net impact of net realized gains and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee increased by$0.8 million for the six months endedSeptember 30, 2022 , as compared to the prior year period, primarily due to an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate. 53
-------------------------------------------------------------------------------- Table of Contents The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Six Months
Ended
2022 2021
Average total assets subject to base management fee(A)
$ 689,700 Multiplied by prorated annual base management fee of 2.0% 1.0 % 1.0 % Base management fee(B)$ 7,176 $ 6,897 Credits to fees from Adviser - other(B) (2,375) (2,181) Net base management fee$ 4,801 $ 4,716 Loan servicing fee(B)$ 3,674 $ 3,662 Credits to base management fee - loan servicing fee(B) (3,674) (3,662) Net loan servicing fee $ - $ - Incentive fee - income-based$ 4,513 $ 3,695 Incentive fee - capital gains-based(C) (736) 15,904 Total incentive fee(B)$ 3,777 $ 19,599 Credits to fees from Adviser - other(B) - - Net total incentive fee$ 3,777 $ 19,599 (A)Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B)Reflected as a line item on our Consolidated Statements of Operations. (C)The capital gains-based incentive fees are recorded in accordance with GAAP and do not necessarily reflect amounts contractually due under the terms of the Advisory Agreement. Interest and dividend expense decreased 0.6% during the six months endedSeptember 30, 2022 , as compared to the prior year period, due to a decrease in dividend expense, partially offset by an increase in interest expense. Dividend expense decreased by$2.3 million as a result of the Series E Term Preferred Stock redemptionAugust 2021 . Interest expense increased by$2.3 million primarily due to the issuance of the 2028 Notes inAugust 2021 , which was partially offset by lower interest expense related to the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the six months endedSeptember 30, 2022 , was$5.9 million as compared to$25.4 million in the prior year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the six months endedSeptember 30, 2022 was 35.5%, as compared to 9.6% in the prior year period. The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in unused commitments fees on the undrawn portion of the Credit Facility as well as increased interest rates on the drawn portion of the Credit Facility. 54
-------------------------------------------------------------------------------- Table of Contents Realized and Unrealized Gain (Loss) The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the six months endedSeptember 30, 2022 and 2021 were as follows: Six Months Ended September 30, 2022 Unrealized Reversal of Unrealized Appreciation (Appreciation) Net Gain Portfolio Company Realized Gain (Loss) (Depreciation) Depreciation (Loss) Horizon Facilities Service, Inc. $ 2,218 $ 13,728 $ -$ 15,946 Nocturne Villa Rentals, Inc. - 8,817 - 8,817 Nth Degree Investment Group, LLC - 7,680 - 7,680 Brunswick Bowling Products, Inc. - 6,495 - 6,495 Old World Christmas, Inc. - 5,786 - 5,786 Specialized Fabrication Equipment Group, - - 3,584 LLC 3,584 Counsel Press, Inc. - 1,871 - 1,871 Utah Pacific Bridge & Steel, Ltd. - (882) - (882) Schylling Inc. - (1,345) - (1,345) Galaxy Technologies Holdings, Inc. - (1,549) - (1,549) Mason West, LLC - (1,938) - (1,938) ImageWorks Display and Marketing Group, - - (2,354) Inc. (2,354) The Maids International, LLC - (2,679) - (2,679) The Mountain, Inc. - (2,930) - (2,930) PSI Molded Plastics, Inc. - (2,976) - (2,976) Ginsey Home Solutions, Inc. - (3,263) - (3,263) Edge Adhesives Holdings, Inc. - (5,247) - (5,247) Bassett Creek Services, Inc. 4,728 - (12,250) (7,522) B+T Group Acquisition, Inc. - (9,267) - (9,267) J.R. Hobbs Co. - Atlanta, LLC - (11,568) - (11,568) Other, net (<$1.0 million , net) (192) (128) (16) (336) Total $ 6,754 $ 1,835 $ (12,266)$ (3,677) 55
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Six Months Ended
Reversal of
Unrealized Unrealized
Realized Gain Appreciation (Appreciation) Net Gain
Portfolio Company (Loss) (Depreciation) Depreciation (Loss)B+T Group Acquisition, Inc. $ - $ 15,268 $ -$ 15,268 Old World Christmas, Inc. - 12,636 12,636 Schylling, Inc. - 10,522 - 10,522 Educators Resource, Inc. - 8,811 - 8,811 Bassett Creek Services, Inc. - 8,487 - 8,487 SOG Specialty Knives and Tools, LLC - 7,580 - 7,580 Counsel Press, Inc. - 7,045 - 7,045 Horizon Facilities Service, Inc. - 6,417 - 6,417 ImageWorks Display and Marketing Group, - - 5,302 Inc. 5,302 PSI Molded Plastics, Inc. - 3,633 - 3,633 Brunswick Bowling Products, Inc. - 3,498 - 3,498 Galaxy Tool Holding Corporation - 1,404 - 1,404 Mason West, LLC - 1,172 - 1,172 Head Country, Inc. 3,627 - (2,469) 1,158 The Maids International, LLC - 1,054 - 1,054 Channel Technologies Group, LLC (1,841) - 1,841 - Pioneer Square Brands, Inc. - (1,244) - (1,244) J.R. Hobbs Co. - Atlanta, LLC - (2,511) - (2,511) SBS Industries Holdings, Inc. - (3,167) - (3,167) Ginsey Homes Solutions, Inc. - (4,305) - (4,305) Galaxy Technologies Holdings, Inc. - (6,320) - (6,320) Other, net (<$1.0 million , net) 607 312 52 971 Total$ 2,393 $ 75,594 $ (576)$ 77,411
Net Realized Gain (Loss) on Investments
During the six months endedSeptember 30, 2022 , we recorded net realized gains on investments of$6.8 million , primarily due to a$4.7 million realized gain from the exit of Bassett Creek, a$2.2 million realized gain from the recapitalization of Horizon and realized gains related to prior period exits of certain investments. During the six months endedSeptember 30, 2021 , we recorded net realized gains on investments of$2.4 million , primarily related to a$3.6 million realized gain from the exit ofHead Country, Inc. ("Head Country") and$0.5 million of realized gains related to previous exits of certain investments, partially offset by a$1.8 million realized loss from the dissolution ofChannel Technologies Group, LLC ("CTG").
Net Realized Gain Loss on Other
During the six months endedSeptember 30, 2021 , we recorded a net realized loss on other of$2.0 million related to unamortized deferred issuance costs written off upon the redemption of our Series E Term Preferred Stock inAugust 2021 . During the six months endedSeptember 30, 2022 , there were no realized gains or losses on other.
Net Unrealized Appreciation (Depreciation) of Investments
Net unrealized depreciation of investments of$10.4 million for the six months endedSeptember 30, 2022 was primarily due to the reversal of unrealized appreciation of our investment inBassett Creek upon its exit, partially offset by net unrealized appreciation across our portfolio. The net appreciation was driven primarily by increased performance of certain of our portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate. These amounts were partially offset by decreased performance of certain of our other portfolio companies and decreased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies. These amounts were partially offset by increased performance of certain of our other portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, has had or is expected to have on our portfolio companies and the markets in which they 56
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operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels. Net unrealized appreciation of investments of$75.0 million for the six months endedSeptember 30, 2021 was primarily due to the increased performance of certain portfolio companies, the reversal of previously recorded unrealized depreciation of our investment in CTG upon its dissolution, and an increase in comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized appreciation of our investment in Head Country and a decline in performance of certain other portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, current and future shutdowns and reopening restrictions, as well as demand for their products and general economic outlook. Across our entire investment portfolio, we recorded net unrealized depreciation of$23.3 million on our debt positions and appreciation of$12.9 million on our equity positions, for the six months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , the fair value of our investment portfolio was more than the cost basis by$34.7 million , as compared toMarch 31, 2022 , when the fair value of our investment portfolio was more than the cost basis by$45.1 million , representing net unrealized depreciation of$10.4 million for the six months endedSeptember 30, 2022 . Our entire portfolio had a fair value of 104.9% of cost as ofSeptember 30, 2022 .
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operating activities for the six months endedSeptember 30, 2022 was$9.4 million , as compared to net cash used in operating activities of$6.3 million for the six months endedSeptember 30, 2021 . This change was primarily due to an increase in purchase of investments, partially offset by an increase in principal repayments of investments and net proceeds from the sale of investments.
Purchases of investments were
As of
The following table summarizes our total portfolio investment activity during
the six months ended
Six
Months Ended
2022 2021
Beginning investment portfolio, at fair value $ 714,396 $ 633,829
New investments 60,050 34,200
Disbursements to existing portfolio companies 41,996 13,350
Unscheduled principal repayments (A) (53,096) (14,060)
Net proceeds from sale and recapitalization of investments (21,690) (7,648)
Net realized gain on investments 6,701 1,805
Net unrealized appreciation (depreciation) of investments 1,835 75,594
Reversal of net unrealized appreciation of investments (12,266) (576)
Amortization of premiums, discounts, and acquisition costs, 9 9
net
Ending investment portfolio, at fair value $
737,935
(A)The six months ended
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The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as ofSeptember 30, 2022 : Amount For the remaining six months ending March 31, 2023$ 87,050 For the fiscal years endingMarch 31 : 2024 54,268 2025 85,834 2026 136,369 2027 135,295 Thereafter 39,750 Total contractual repayments$ 538,566 Adjustments to cost basis of debt investments (3) Investments in equity securities 164,655 Total cost basis of investments held as of September 30, 2022:$ 703,218 Financing Activities Net cash used in financing activities for the six months endedSeptember 30, 2022 was$2.1 million , which consisted primarily of$18.9 million in distributions to common stockholders, partially offset by$16.6 million of net borrowings under the Credit Facility. Net cash provided by financing activities for the six months endedSeptember 30, 2021 was$6.3 million , which consisted primarily of$134.6 million in gross proceeds from the issuance of our 2028 Notes, partially offset by the redemption of our Series E Term Preferred Stock of$94.4 million ,$16.9 million in distributions to common stockholders,$13.5 million of net repayments under the Credit Facility, and$3.4 million of deferred financing and offering costs.
Distributions and Dividends to Stockholders
Common Stock Distributions
To qualify to be taxed as a RIC and thus avoid corporate level federal income
tax on the income we distribute to our stockholders, we are required, among
other requirements, to distribute to our stockholders on an annual basis at
least 90% of our taxable ordinary income plus the excess of our net short-term
capital gains over net long-term capital losses ("Investment Company Taxable
Income"), determined without regard to the dividends paid deduction.
Additionally, the Credit Facility generally restricts the amount of
distributions to stockholders that we can pay out to be no greater than the sum
of certain amounts, including our net investment income, plus net capital gains,
plus amounts elected by the Company to be considered as having been paid during
the prior fiscal year in accordance with Section 855(a) of the Code. In
accordance with these requirements, our Board of Directors declared, and we
paid, monthly cash distributions of $0.075 per common share for each of the six
months from April through September 2022 , and a supplemental distribution of
$0.12 per common share in June 2022 . See also "Recent Developments -
Distributions and Dividends" for a discussion of cash distributions to common
stockholders declared by our Board of Directors in October 2022 .
For the fiscal year ended March 31, 2022 , Investment Company Taxable Income
exceeded distributions declared and paid, and, in accordance with Section 855(a)
of the Code, we elected to treat $13.9 million of the first distributions paid
subsequent to fiscal year-end as having been paid in the prior year. In
addition, for the fiscal year ended March 31, 2022 , net capital gains exceeded
distributions declared and paid, and, in accordance with Section 855(a) of the
Code, we elected to treat $15.7 million of the first distributions paid
subsequent to fiscal year-end as having been paid in the prior year. For the
year ended March 31, 2022 , we recorded $2.8 million of net adjustments for
estimated permanent book-tax differences to reflect tax character, which
decreased Capital in excess of par value and Underdistributed net investment
income and increased Accumulated net realized gain in excess of distributions.
For the six months ended September 30, 2022 , we recorded $1.3 million of net
adjustments for estimated permanent book-tax differences to reflect tax
character, which decreased Capital in excess of par value and increased
Overdistributed net investment income and Accumulated net realized gain in
excess of distributions.
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Preferred Stock Dividends
Our Board of Directors declared and we paid monthly cash dividends of$0.1328125 per share to holders of our Series E Term Preferred Stock per month from April throughJuly 2021 and$0.07968750 per share of our Series E Term Preferred Stock for the period fromAugust 1, 2021 up to, but excluding, the redemption date ofAugust 19, 2021 . In accordance with GAAP, we treat these monthly dividends as an operating expense. Dividend Reinvestment Plan Our common stockholders who hold their shares through our transfer agent,Computershare, Inc. ("Computershare"), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an "opt in" dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do not make such election will receive their distributions in cash. Any distributions reinvested under the plan will be taxable to a common stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in cash. The common stockholder generally will have an adjusted basis in the additional common shares purchased through the plan equal to the dollar amount that would have been received if theU.S. stockholder had received the dividend or distribution in cash. The additional common shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder's account. Computershare purchases shares in the open market in connection with the obligations under the plan. The Computershare dividend reinvestment plan is not open to holders of our preferred stock.
Equity
Registration Statement
OnSeptember 3, 2021 , we filed a registration statement on Form N-2 (File No. 333-259302), which theSEC declared effective onOctober 15, 2021 . The registration statement permits us to issue, through one or more transactions, up to an aggregate of$300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. As of the date of this report, we have the ability to issue up to$299.5 million of the securities registered under the registration statement. Common Stock InDecember 2019 , we entered into equity distribution agreements withWedbush Securities, Inc. ,Cantor Fitzgerald & Co. , andLadenburg Thalmann & Co., Inc. , under which we have the ability to issue and sell shares of our common stock, from time to time, through such sales agents, up to an aggregate offering price of$35.0 million . OnAugust 11, 2021 , we terminated the equity distribution agreements with each of such sales agents. We did not sell any shares of our common stock under this ATM program during the year endedMarch 31, 2022 . InAugust 2022 , we entered into equity distribution agreements withOppenheimer & Co. andVirtu Americas LLC (each a "Sales Agent"), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Sales Agents, up to an aggregate offering price of$50.0 million in what is commonly referred to as an "at-the-market" program ("Common Stock ATM Program"). As ofSeptember 30, 2022 , we had remaining capacity to sell up to an additional$49.5 million of common stock under the Common Stock ATM program. During the three and six months endedSeptember 30, 2022 , we sold 29,640 shares of our common stock under the Common Stock ATM Program at a weighted-average gross price of$15.75 per share and raised approximately$0.5 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was$15.59 and resulted in total net proceeds of approximately$0.5 million . These sales were above our then current estimated NAV per share. 59
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We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. When our common stock is trading at a price below NAV per share, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then-existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors and meeting other stated requirements. OnSeptember 30, 2022 , the closing market price of our common stock was$12.10 per share, representing a 9.1% discount to our NAV per share of$13.31 as ofSeptember 30, 2022 . Term Preferred Stock InAugust 2018 , we completed a public offering of 2,990,000 shares of our Series E Term Preferred Stock at a public offering price of$25.00 per share. Gross proceeds totaled$74.8 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were$72.1 million . Total underwriting discounts and offering costs related to this offering were$2.7 million , which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and were amortized over the period endingAugust 31, 2025 , the mandatory redemption date, prior to redemption inAugust 2021 . Prior to redemption inAugust 2021 , the Series E Term Preferred Stock provided for a fixed dividend equal to 6.375% per year, payable monthly. InMay 2020 , we entered into sales agreements withWedbush Securities, Inc. andVirtu Americas LLC (each a "Series E ATM Sales Agent"), under which we had the ability to issue and sell shares of our Series E Term Preferred Stock, from time to time, through the Series E ATM Sales Agents, up to$50.0 million aggregate liquidation preference in the Series E ATM Program. OnAugust 10, 2021 , we terminated our sales agreements with each of the Series E ATM Sales Agents. We did not sell any shares of our Series E Term Preferred Stock under the Series E ATM Program during the year endedMarch 31, 2022 . InMarch 2021 , we used a portion of the proceeds from the issuance of our 2026 Notes, to voluntarily redeem all outstanding shares of our Series D Term Preferred Stock, which had a liquidation preference of$25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of$0.8 million , which was recorded in Realized loss on other in our Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption. Prior to redemption inMarch 2021 , the Series D Term Preferred Stock provided for a fixed dividend equal to 6.25% per year, payable monthly, and would have otherwise been subject to mandatory redemption onSeptember 30, 2023 . InAugust 2021 , we used a portion of the proceeds from the issuance of our 2028 Notes, to voluntarily redeem all outstanding shares of our Series E Term Preferred Stock, which had a liquidation preference of$25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of$2.0 million , which was recorded in Realized loss on other in our accompanying Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption.
Revolving Line of Credit
OnMarch 8, 2021 , we, through our wholly-owned subsidiary,Gladstone Business Investment, LLC ("Business Investment "), entered into Amendment No. 6 to the Credit Facility withKeyBank National Association ("KeyBank") as administrative agent, lead arranger, managing agent and lender, the Adviser, as servicer, and certain other lenders party thereto. The revolving period was extended toFebruary 29, 2024 , and if not renewed or extended by such date, all principal and interest will be due and payable onFebruary 28, 2026 (two years after the revolving period end date). As ofSeptember 30, 2022 , the Credit Facility provided a one-year extension option that may be exercised on or beforeMarch 8, 2023 , subject to approval by all lenders. OnAugust 10, 2020 , we, throughBusiness Investment , entered into Amendment No. 5 to the Credit Facility. Among other things, Amendment No. 5 amended the Credit Facility to (i) add LIBOR replacement language; (ii) implement a 0.5% LIBOR floor; (iii) reduce the facility size from$200.0 million to$180.0 million , which may be expanded to$300.0 million through additional commitments; and (iv) provide certain other changes to existing terms and covenants. 60
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Advances under the Credit Facility generally bear interest at 30-day LIBOR, subject to a floor of 0.5%, plus 2.85% per annum untilFebruary 29, 2024 , with the margin then increasing to 3.10% for the period fromFebruary 29, 2024 toFebruary 28, 2025 , and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee on the daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount. AtSeptember 30, 2022 , we had$16.6 million borrowings outstanding on the Credit Facility and as of the date of this report, we had$29.2 million outstanding under the Credit Facility. Interest is payable monthly during the term of the Credit Facility. Available borrowings are subject to various constraints and applicable advance rates, which are generally based on the size, characteristics, and quality of the collateral pledged byBusiness Investment . The Credit Facility also requires that any interest and principal payments on pledged loans be remitted directly by the borrower into a lockbox account withKeyBank .KeyBank is also the trustee of the account and generally remits the collected funds to us once a month. Among other things, the Credit Facility contains covenants that requireBusiness Investment to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders' consent. The Credit Facility also generally seeks to restrict distributions to stockholders to the sum of (i) our net investment income, (ii) net capital gains, and (iii) amounts deemed by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. Loans eligible to be pledged as collateral are subject to certain limitations, including, among other things, restrictions on geographic concentrations, industry concentrations, loan size, payment frequency and status, average life, portfolio company leverage, and lien property. The Credit Facility also requiresBusiness Investment to comply with other financial and operational covenants, which obligateBusiness Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base. Additionally, the Credit Facility contains a performance guaranty that requires the Company to maintain (i) a minimum net worth (defined in the Credit Facility to include our mandatory redeemable term preferred stock) of the greater of$210.0 million or$210.0 million plus 50% of all equity and subordinated debt raised, minus 50% of any equity or subordinated debt redeemed or retired afterNovember 16, 2016 , which equated to$286.5 million as ofSeptember 30, 2022 , (ii) asset coverage with respect to senior securities representing indebtedness of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As ofSeptember 30, 2022 , and as defined in the performance guaranty of the Credit Facility, we had a net worth of$698.6 million , asset coverage on our senior securities representing indebtedness of 254.1%, calculated in compliance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As ofSeptember 30, 2022 , we had availability, after adjustments for various constraints based on collateral quality, of$163.4 million under the Credit Facility and were in compliance with all covenants under the Credit Facility. As of the date of this report, we had$29.2 million outstanding under the Credit Facility. Notes Payable 5.00% Notes due 2026 InMarch 2021 , we completed a public offering of the 2026 Notes with an aggregate principal amount of$127.9 million , which resulted in net proceeds of approximately$123.8 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2026 Notes are traded under the ticker symbol "GAINN" on Nasdaq. The 2026 Notes will mature onMay 1, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or afterMay 1, 2023 . The 2026 Notes bear interest at a rate of 5.00% per year (which equates to$6.4 million per year), payable quarterly in arrears. 61
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The indenture relating to the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company's asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company's asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we will provide the holders of the 2026 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. The 2026 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities. Total underwriting discounts, commissions, and offering costs related to this offering were$4.1 million , which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period endingMay 1, 2026 , the maturity date.
4.875% Notes due 2028
InAugust 2021 , we completed a public offering of the 2028 Notes with an aggregate principal amount of$134.6 million , which resulted in net proceeds of approximately$131.3 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2028 Notes are traded under the ticker symbol "GAINZ" on Nasdaq. The 2028 Notes will mature onNovember 1, 2028 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or afterNovember 1, 2023 . The 2028 Notes bear interest at a rate of 4.875% per year (which equates to$6.6 million per year), payable quarterly in arrears. The indenture relating to the 2028 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company's asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company's asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2028 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. The 2028 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities. Total underwriting discounts, commissions, and offering costs related to this offering were$3.3 million , which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period endingNovember 1, 2028 , the maturity date.
OFF-BALANCE SHEET ARRANGEMENTS
Unlike PIK income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as ofSeptember 30, 2022 andMarch 31, 2022 , we had unrecognized, contractual off-balance sheet success fee receivables of$50.7 million and$50.5 million (or approximately$1.53 and$1.52 per common share), respectively, on our debt investments. Consistent with GAAP, we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned.
CONTRACTUAL OBLIGATIONS
We have line of credit and delayed draw term debt commitments to certain of our portfolio companies that have not been fully drawn. Since these line of credit and delayed draw term debt commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term debt commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused line of credit and delayed draw term debt commitments as ofSeptember 30, 2022 to be immaterial. 62
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As ofSeptember 30, 2022 , we have extended a guaranty on behalf of one of our portfolio companies,Country Club Enterprises, LLC ("CCE"), whereby we have guaranteed$1.0 million of CCE's obligations. As ofSeptember 30, 2022 , we have not been required to make payments on this or any previous guaranty, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial. The following table shows our contractual obligations as ofSeptember 30, 2022 , at cost: Payments Due by Period Less than More than Contractual Obligations(A) Total 1 Year
1-3 Years 3-5 Years 5 Years Credit Facility(B)$ 16,600 $ - $ -$ 16,600 $ - Notes payable 262,488 - - 127,938 134,550 Interest payments on obligations(C) 74,827 15,621 31,249 17,953 10,004 Total$ 353,915 $ 15,621 $ 31,249 $ 162,491 $ 144,554 (A)Excludes unused line of credit and delayed draw term debt commitments and guaranties to our portfolio companies in the aggregate principal amount of$9.2 million . (B)Principal balance of borrowings outstanding under the Credit Facility, based on the maturity date following the current contractual revolving period end date. (C)Includes interest payments due on the Credit Facility, 2026 Notes, and 2028 Notes, as applicable. The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as ofSeptember 30, 2022 . Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2 - Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report. Additionally, refer to Note 3 - Investments in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, "Fair Value Measurements and Disclosures." We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2 - Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report.
Investment Valuation
Credit Monitoring and Risk Rating
The Adviser monitors a wide variety of key credit statistics that provide
information regarding our portfolio companies to help us assess credit quality
and portfolio performance and, in some instances, are used as inputs in our
valuation techniques. Generally, we, through the Adviser, participate in
periodic board meetings of our portfolio companies in which we hold board seats
and also require them to provide annual audited and monthly unaudited financial
statements. Using these statements or comparable information and board
discussions, the Adviser calculates and evaluates certain credit statistics.
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The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate equity securities. For loans that have been rated by aSEC-registered Nationally Recognized Statistical Rating Organization ("NRSRO"), the Adviser generally uses the average of two corporate level NRSRO's risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser's risk rating system will provide the same risk rating as an NRSRO for these securities. The Adviser's risk rating system is used to estimate the probability of default on debt securities and the expected loss, if there is a default. The Adviser's risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser's understanding that most debt securities ofLower Middle Market companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the Lower Middle Market that would meet the definition ofAAA , AA or A. Therefore, the Adviser's scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser's scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser's risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.
The following table reflects risk ratings for all loans in our portfolio as of
Rating September 30, 2022 March 31, 2022 Highest 9.0 9.0 Average 6.4 6.5 Weighted-average 7.3 7.0 Lowest 3.0 3.0 Tax Status We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code forU.S. federal income tax purposes. As a RIC, we generally are not subject toU.S. federal income tax on the portion of our taxable income and gains distributed to our stockholders. To maintain our qualification as a RIC, we must maintain our status as a BDC and meet certain source-of-income and asset diversification requirements. In addition, to qualify to be taxed as a RIC, we must distribute to stockholders at least 90% of our Investment Company Taxable Income, determined without regard to the dividends paid deduction. Our policy generally is to make distributions to our stockholders in an amount up to 100% of Investment Company Taxable Income. We may retain some or all of our net long-term capital gains, if any, and designate them as deemed distributions, or distribute such gains to stockholders in cash. See "- Liquidity and Capital Resources - Distributions and Dividends to Stockholders." In an effort to limit federal excise taxes, we have to distribute to stockholders, during each calendar year, an amount close to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our net capital gains (both long-term and short-term), if any, for the one-year period ending onOctober 31 of the calendar year, and (3) any income realized, but not distributed, in the preceding period (to the extent that income tax was not imposed on such amounts), less certain reductions, as applicable. Under the RIC Modernization Act, we are permitted to carryforward any capital losses that we may incur for an unlimited period, and such capital loss carryforwards will retain their character as either short-term or long-term capital losses. Our capital loss carryforward balance was$0 as of bothSeptember 30, 2022 andMarch 31, 2022 .
Recent Accounting Pronouncements
Refer to Note 2 - Summary of Significant Accounting Policies in the accompanying
Notes to Consolidated Financial Statements included elsewhere in this Quarterly
Report for a description of recent accounting pronouncements.
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