CAPITAL SOUTHWEST CORP 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Statements we make in the following discussion which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks and uncertainties we have referred to under the headings “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” in Part I of this report. OVERVIEW We are an internally managed closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. We specialize in providing customized debt and equity financing to LMM companies in a broad range of investment segments located primarily in the United States. Our investment objective is to produce attractive risk-adjusted returns by generating current income from our debt investments and capital appreciation from our equity and equity related investments. Our investment strategy is to partner with business owners, management teams and financial sponsors to provide flexible financing solutions to fund growth, changes of control, or other corporate events. We invest primarily in senior debt securities, secured by security interests in portfolio company assets. We also may invest in equity interests in our portfolio companies alongside our debt securities. We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management teams with strong operating discipline. We primarily target senior debt and equity investments in LMM companies. Our target companies typically have annual EBITDA between $3.0 million and $25.0 million, and our investments generally range in size from $5.0 million to $35.0 million. We seek to fill the financing gap for LMM companies, which, historically, have had more limited access to financing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunity for us to meet the financing needs of LMM companies while also negotiating favorable transaction terms and equity participations. Our ability to invest across a LMM company’s capital structure, from secured loans to equity securities, allows us to offer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions is important to LMM companies. We generally seek to partner directly with financial sponsors, entrepreneurs, management teams and business owners in making our investments. Our LMM debt investments typically include senior loans with a first lien on the assets of the portfolio company. Our LMM debt investments typically have a term of up to five years from the original investment date. We also often seek to invest in the equity securities of our LMM portfolio companies. Because we are internally managed, we do not pay any external investment advisory fees, but instead directly incur the operating costs associated with employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly traded and privately held investment firms that are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. For the years ended March 31, 2024, 2023, and 2022, the ratio of our last twelve months ("LTM") operating expenses, excluding interest expense, as a percentage of our LTM average total assets was 1.72%, 1.91%, and 2.20%, respectively. CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods covered by the consolidated financial statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. On an on-going basis, we evaluate our estimates, including those related to the matters below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows. Valuation of Investments 54 Table of Contents The most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our investment portfolio and the related amounts of unrealized appreciation and depreciation. As of March 31, 2024 and March 31, 2023, our investment portfolio at fair value represented approximately 94.8% and 95.9% of our total assets, respectively. We are required to report our investments at fair value. We follow the provisions of ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. See Note 4 — Fair Value Measurements in the notes to consolidated financial statements for a detailed discussion of our investment portfolio valuation process and procedures. Due to the inherent uncertainty in the valuation process, our determination of fair value for our investment portfolio may differ materially from the values that would have been determined had a ready market for the securities actually existed. In addition, changes in the market environment, portfolio company performance, and other events may occur over the lives of the investments that may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. We determine the fair value of each individual investment and record changes in fair value as unrealized appreciation or depreciation. As of March 31, 2023, our Board of Directors was responsible for determining, in good faith, the fair value for our investment portfolio and our valuation procedures, consistent with 1940 Act requirements. Beginning as of the fiscal quarter ended June 30, 2023, pursuant to Rule 2a-5 under the 1940 Act, the Board of Directors designated a Valuation Committee comprised of certain officers of the Company as its valuation designee to determine the fair value of the Company's investments that do not have readily available market quotations, subject to the oversight of the Board of Directors. Our Valuation Committee and the Board of Directors believe that our investment portfolio as of March 31, 2024 and March 31, 2023, respectively, reflects the fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates. Revenue Recognition Interest and Dividend Income Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. Dividend income is recognized on the date dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Discounts/premiums received to par on loans purchased are capitalized and accreted or amortized into income over the life of the loan using the effective interest method. In accordance with our valuation policy, accrued interest and dividend income is evaluated quarterly for collectability. When we do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding its ability to service debt or other obligations, it will be restored to accrual basis. As of March 31, 2024, investments on non-accrual status represented approximately 2.3% of our total investment portfolio's fair value and approximately 3.9% of its cost. As of March 31, 2023, investments on non-accrual status represented approximately 0.3% of our total investment portfolio's fair value and approximately 1.3% of its cost. Recently Issued Accounting Standards In June 2022, the FASB issued Accounting Standards Update ("ASU") 2022-03, “Fair Value Measurement (Topic 820) - Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASC 820”), which was issued to (1) clarify the guidance in ASC 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) amend a related illustrative example, and (3) introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with ASC 820. The new guidance is effective for interim and annual periods beginning after December 15, 2023. The Company adopted the guidance during the year ended March 31, 2024 and its adoption did not have a material impact on its consolidated financial statements or its disclosures. In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures," which was issued to enhance the transparency and decision usefulness of income tax disclosures, including an annual requirement to (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold. The new guidance is effective for annual periods beginning after December 55 Table of Contents 15, 2024. The Company is currently evaluating the impact of the new standard on the Company's consolidated financial statements and related disclosures and does not believe it will have a material impact on its consolidated financial statements or its disclosure. INVESTMENT PORTFOLIO COMPOSITION The total value of our investment portfolio was $1,476.6 million as of March 31, 2024, as compared to $1,206.4 million as of March 31, 2023. As of March 31, 2024, we had investments in 116 portfolio companies with an aggregate cost of $1,476.7 million. As of March 31, 2023, we had investments in 86 portfolio companies with an aggregate cost of $1,220.2 million. These balances are inclusive of our investment in I-45 SLF as of March 31, 2023. During the quarter ended March 31, 2024, the board of managers of I-45 SLF approved the dissolution and liquidation of I-45 SLF and the wind up of its affairs. See Note 13 - Related Party Transactions for more information. As of March 31, 2024 and March 31, 2023, approximately $1,310.0 million, or 97.4%, and $1,002.9 million, or 96.7%, respectively, of our debt investment portfolio (at fair value) bore interest at floating rates, of which 96.5% and 100.0%, respectively, were subject to contractual minimum interest rates. As of March 31, 2024 and March 31, 2023, the weighted average contractual minimum interest rate is 1.28% and 1.15%, respectively. As of March 31, 2024 and March 31, 2023, approximately $34.5 million, or 2.6%, and $34.7 million, or 3.3%, respectively, of our debt investment portfolio (at fair value) bore interest at fixed rates. The following tables provide a summary of our investments in portfolio companies as of March 31, 2024 and March 31, 2023 (excluding our investment in I-45 SLF (as defined below): March 31, 2024 March 31, 2023 (dollars in thousands) Number of portfolio companies (a) 116 85 Fair value $ 1,476,561 $ 1,155,132 Cost $ 1,476,703 $ 1,139,352 % of portfolio at fair value - debt 91.1 % 89.8 % % of portfolio at fair value - equity 8.9 % 10.2 % % of investments at fair value secured by first lien 88.7 % 86.7 % Weighted average annual effective yield on debt investments (b) 13.3 % 12.8 % Weighted average annual effective yield on total investments (c) 12.7 % 12.1 % Weighted average EBITDA (d) $ 22,988 $ 21,049 Weighted average leverage through CSWC security (e) 3.6x 4.0x (a) At March 31, 2024 and March 31, 2023, we had equity ownership in approximately 56.0% and 62.4%, respectively, of our investments. (b) The weighted average annual effective yield of debt investments is not the same as a return on investment for CSWC's shareholders, but rather relates to CSWC's investment portfolio and is calculated before the payment of all of CSWC's and subsidiaries' fees and expenses. The weighted average annual effective yields were computed using the effective interest rates during the quarter for all debt investments at cost as of March 31, 2024 and March 31, 2023, respectively, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments. As of March 31, 2024, investments on non-accrual status represented approximately 2.3% of our total investment portfolio's fair value and approximately 3.9% of its cost. As of March 31, 2023, investments on non-accrual status represented approximately 0.3% of our total investment portfolio's fair value and approximately 1.3% of its cost. Weighted average annual effective yield is not a return to shareholders and is higher than what an investor in shares in our common stock will realize on its investment because it does not reflect our expenses or any sales load paid by an investor. (c) The weighted average annual effective yield of total investments is not the same as a return on investment for CSWC's shareholders, but rather relates to CSWC's investment portfolio and is calculated before the payment of all of CSWC's and subsidiaries' fees and expenses. The weighted average annual effective yields on total investments were calculated by dividing total investment income, exclusive of non-recurring fees, by average total investments at fair value. (d) Includes CSWC debt investments only. Weighted average EBITDA metric is calculated using investment cost basis weighting. For the year ended March 31, 2024, 12 portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. For the year ended March 31, 2023, nine portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. (e) Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debt senior or pari passu to CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by each portfolio company’s adjusted EBITDA. Weighted average leverage is calculated using investment cost basis weighting. Management 56 Table of Contents uses this metric as a guide to evaluate relative risk of its position in each portfolio debt investment. For the year ended March 31, 2024, 12 portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. For the year ended March 31, 2023, nine portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. Portfolio Asset Quality We utilize an internally developed investment rating system to rate the performance and monitor the expected level of returns for each debt investment in our portfolio. The investment rating system takes into account both quantitative and qualitative factors of the portfolio company and the investments held therein, including each investment's expected level of returns and the collectability of our debt investments, comparisons to competitors and other industry participants and the portfolio company's future outlook. The ratings are not intended to reflect the performance or expected level of returns of our equity investments. • Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing materially above underwriting expectations and the trends and risk factors are generally favorable. The investment generally has a higher probability of being prepaid in part or in full. • Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trends and risk factors are generally favorable to neutral. All new loans are initially rated 2. • Investment Rating 3 involves an investment performing below underwriting expectations and the trends and risk factors are generally neutral to negative. The investment may be out of compliance with financial covenants and interest payments may be impaired, however principal payments are generally not past due. • Investment Rating 4 indicates that the investment is performing materially below underwriting expectations, the trends and risk factors are generally negative and the risk of the investment has increased substantially. Interest and principal payments on our investment are likely to be impaired. We continue to observe supply chain disruptions, labor and resource shortages, commodity inflation, elements of financial market instability (including elevated interest rates and volatility in the banking systems, particularly with small and regional banks), an uncertain economic outlook for the United States (which may include a recession), and elements of geopolitical instability (including the ongoing war in Ukraine, conflict in the Middle East, and U.S. and China relations). I n the event that the U.S. economy enters into a protracted recession, it is possible that the results of certain U.S. middle market companies could experience deterioration. We are closely monitoring the effect of such market volatility may have on our portfolio companies and our investment activities, and we have also increased oversight of credits in vulnerable industries to mitigate any decline in loan performance and reduce credit risk. The following table shows the distribution of our debt portfolio investments on the 1 to 4 investment rating scale at fair value as of March 31, 2024 and March 31, 2023: As of March 31, 2024 Investment Rating Debt Investments at Fair Value Percentage of Debt Portfolio (dollars in thousands) 1 $ 197,212 14.7 % 2 1,075,717 80.0 3 68,690 5.1 4 2,940 0.2 Total $ 1,344,559 100.0 % 57 Table of Contents As of March 31, 2023 Investment Rating Debt Investments at Fair Value Percentage of Debt Portfolio (dollars in thousands) 1 $ 153,118 14.8 % 2 839,456 80.9 3 44,726 4.3 4 295 0.0 Total $ 1,037,595 100.0 % Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. When we do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. As of March 31, 2024, investments on non-accrual status represented approximately 2.3% of our total investment portfolio's fair value and approximately 3.9% of its cost. As of March 31, 2023, investments on non-accrual status represented approximately 0.3% of our total investment portfolio's fair value and approximately 1.3% of its cost. Investment Activity During the year ended March 31, 2024, we made debt investments totaling $403.4 million and equity investments totaling $16.6 million. We received contractual principal repayments totaling approximately $52.5 million and full prepayments of approximately $99.9 million. We funded $39.9 million on revolving loans and received $27.3 million in repayments on revolving loans. In addition, we received proceeds from sales of debt and equity investments totaling $18.0 million. During the quarter ended March 31, 2024, the board of managers of I-45 SLF LLC ("I-45 SLF"), the joint venture between CSWC and Main Street Capital Corporation ("Main Street"), approved the dissolution and liquidation of I-45 SLF and the wind up of its affairs, including distributing all of the assets to CSWC and Main Street in accordance with their respective residual percentage. In connection with the paydown of I-45 SLF's credit facility, the members of I-45 SLF made additional capital commitments totaling $47.0 million, of which $37.6 million was contributed by us. We received return of capital distributions totaling $13.6 million, of which $0.8 million is receivable as of March 31, 2024. We also received distributions-in-kind of investments from I-45 SLF totaling $78.9 million, of which $6.4 million remains receivable as of March 31, 2024. On January 24, 2024, I-45 SLF paid down the full outstanding balance and terminated its credit facility. During the year ended March 31, 2023, we made debt investments totaling $374.6 million and equity investments totaling $13.5 million. We also funded $4.8 million on our existing equity commitment to I-45 SLF. We received contractual principal repayments totaling approximately $29.4 million and full prepayments of approximately $89.7 million. We funded $40.3 million on revolving loans and received $22.1 million in repayments on revolving loans. In addition, we received proceeds from sales of debt and equity investments totaling $3.4 million. 58 Table of Contents Total portfolio investment activity for the year ended March 31, 2024 and 2023 was as follows (dollars in thousands): Year ended March 31, 2024 First Lien Loans Second Lien Loans Subordinated Debt Preferred & Common Equity I-45 SLF LLC Total Fair value, beginning of period $ 1,000,984 $ 35,820 $ 791 $ 117,537 $ 51,256 $ 1,206,388 New investments 443,326 — — 16,560 37,600 497,486 Proceeds from sales of investments (13,875) — — (4,131) — (18,006) Proceeds from return of capital — — — — (13,645) (13,645) Principal repayments received (176,763) (2,913) (19) — — (179,695) Distributions-in-kind 1 71,919 — 562 — (78,891) (6,410) Conversion/exchange of security 2 (6,961) — — 6,961 — — PIK interest earned 10,845 356 33 — — 11,234 Accretion of loan discounts 4,994 169 — — — 5,163 Realized (loss) gain (22,674) 3 — (1,859) (15,047) (39,577) Unrealized gain (loss) (2,346) 339 (31) (3,066) 18,727 13,623 Fair value, end of period $ 1,309,449 $ 33,774 $ 1,336 $ 132,002 $ — $ 1,476,561 1 In connection with the dissolution and liquidation of I-45 SLF, the Company received distributions-in-kind of investments, of which $6.4 million remains receivable as of March 31, 2024. 2 Includes $3.8 million of cost basis allocated from first lien debt to warrants. Year ended March 31, 2023 First Lien Loans Second Lien Loans Subordinated Debt Preferred & Common Equity I-45 SLF LLC Total Fair value, beginning of period $ 739,872 $ 52,645 $ 1,317 $ 85,177 $ 57,603 $ 936,614 New investments 411,745 2,735 385 13,535 4,800 433,200 Proceeds from sales of investments — (692) — (2,664) — (3,356) Principal repayments received (128,932) (12,310) — — — (141,242) Conversion of security (13,715) — (587) 14,302 — — PIK interest earned 5,577 314 74 — — 5,965 Accretion of loan discounts 3,587 255 — — — 3,842 Realized (loss) gain (4,957) (2,239) (104) (9,260) — (16,560) Unrealized (loss) gain (12,193) (4,888) (294) 16,447 (11,147) (12,075) Fair value, end of period $ 1,000,984 $ 35,820 $ 791 $ 117,537 $ 51,256 $ 1,206,388 59 Table of Contents RESULTS OF OPERATIONS The composite measure of our financial performance in the Consolidated Statements of Operations is captioned “Net increase in net assets from operations” and consists of four elements. The first is “Net investment income,” which is the difference between income from interest, dividends and fees and our combined operating and interest expenses, net of applicable income taxes. The second element is “Net realized (loss) gain on investments, net of tax,” which is the difference between the proceeds received from the disposition of portfolio securities and their stated cost. The third element is the “Net unrealized (depreciation) appreciation on investments, net of tax,” which is the net change in the market or fair value of our investment portfolio, compared with the stated cost. The “Net realized (loss) gain on investments before income tax” and “Net unrealized appreciation (depreciation) on investments, net of tax” are directly related in that when an appreciated portfolio security is sold to realize a gain, a corresponding decrease in net unrealized appreciation occurs by transferring the gain associated with the transaction from being “unrealized” to being “realized.” Conversely, when a loss is realized on a depreciated portfolio security, an increase in net unrealized appreciation occurs. The fourth element is the “Realized loss on extinguishment of debt”, which is the acceleration of unamortized deferred fees associated with amendments to the Corporate Credit Facility (as defined below) that trigger a debt extinguishment or, in relation to notes payable, the difference between the principal amount due at maturity adjusted for any unamortized debt issuance costs and any "make-whole" premium payable at the time of the debt extinguishment. Set forth below is a comparison of the results of operations for the years ended March 31, 2024 and 2023. For the comparison of the results of operations for the years ended March 31, 2023 and 2022, see the Company's Annual Report on Form 10-K for the year ended March 31, 2023, which was filed with the SEC on May 23, 2023, located within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein. Comparison of year ended March 31, 2024 and March 31, 2023 Years Ended March 31, Net Change 2024 2023 Amount % (in thousands) Total investment income $ 178,135 $ 119,300 $ 58,835 49.3 % Interest expense (43,088) (28,873) (14,215) 49.2 % Other operating expenses (24,098) (21,387) (2,711) 12.7 % Income before taxes 110,949 69,040 41,909 60.7 % Income tax provision (benefit) 944 329 615 186.9 % Net investment income 110,005 68,711 41,294 60.1 % Net realized (loss) gain on investments, net of tax (39,895) (17,029) (22,866) 134.3 % Net unrealized appreciation (depreciation) on investments, net of tax 13,640 (18,589) 32,229 173.4 % Realized loss on extinguishment of debt (361) — (361) 100.0 % Net increase in net assets from operations $ 83,389 $ 33,093 $ 50,296 152.0 % Investment Income Total investment income for the year ended March 31, 2024 was approximately $178.1 million, a $58.8 million, or 49.3%, increase as compared to the year ended March 31, 2023. Investment income primarily consists of interest income, dividend income, fee income and other income for each applicable period. The following table summarizes the components of investment income for the years ended March 31, 2024 and 2023: 60 Table of Contents Years Ended March 31, 2024 2023 Interest income $ 145,815 $ 95,798 PIK interest income 9,766 5,442 Amortization of purchase discounts and fees 5,165 3,842 Dividend income 11,746 9,302 Fee income 5,098 4,795 Other investment income 545 121 Total investment income $ 178,135 $ 119,300 Interest income (including PIK interest income and amortization of purchase discounts and fees) for the year ended March 31, 2024 totaled $160.7 million as compared to $105.1 million for the year ended March 31, 2023. The increase was primarily due to a 29.0% increase in the average monthly cost basis of debt investments held by us from $922.2 million to $1,189.2 million year-over-year and an increase in weighted average yield on debt investments from 12.8% to 13.3% year-over-year primarily due to an increase in benchmark interest rates. Dividend income for the year ended March 31, 2024 increased $2.4 million as compared to the year ended March 31, 2023 primarily due to an increase in distributions received from our equity investments. Operating Expenses Due to the nature of our business, the majority of our operating expenses are related to interest and fees on our borrowings, employee compensation (including both cash and share-based compensation) and general and administrative expenses. Interest and Fees on our Borrowings For the year ended March 31, 2024, our total interest expense was $43.1 million, an increase of $14.2 million, as compared to the total interest expense of $28.9 million for the year ended March 31, 2023. The increase was primarily attributable to an increase in average borrowings outstanding and an increase in the weighted average interest rate on our total debt from 4.32% to 5.45% for the year ended March 31, 2023 and March 31, 2024, respectively. The increase in the weighted average interest rate was primarily due to an increase to the base rate on our Corporate Credit Facility and the issuance of the August 2028 Notes. Salaries, General and Administrative Expenses For the year ended March 31, 2024, our total employee compensation expense (including both cash and share-based compensation) increased by $1.6 million, or 11.6%, as compared to the total employee compensation expense for the year ended March 31, 2023. The increase was primarily due to an increase in headcount year over year. For the year ended March 31, 2024, our total general and administrative expense was $8.9 million, an increase of $1.1 million, or 14.6%, as compared to the total general and administrative expense of $7.8 million for the year ended March 31, 2023. The increase was primarily attributable to an increase in costs associated with holding a special meeting of shareholders, an increase in insurance costs and an increase in expenses related to the Company's new office space. Net Investment Income For the year ended March 31, 2024, income before taxes increased by $41.9 million, or 60.7%. Net investment income increased from the prior year period by $41.3 million, or 60.1%, to $110.0 million as a result of a $58.8 million increase in total investment income, partially offset by a $14.2 million increase in interest expense and a $0.6 million increase in income tax provision. Net Realized Gains (Losses) on Investments The following table provides a summary of the primary components of the total net realized loss on investments of $39.9 million for the year ended March 31, 2024: 61 Table of Contents Year Ended March 31, 2024 Full Exits Partial Exits Restructuring Other (1) Total Net Gain (Loss) Net Gain (Loss) Net Gain (Loss) Net Gain (Loss) Net Gain (Loss) Debt $ (9,868) $ 861 $ (13,998) $ 260 $ (22,745) Equity 1,858 — (3,615) (346) (2,103) I-45 SLF LLC (15,047) — — — (15,047) Total net realized (loss) gain $ (23,057) $ 861 $ (17,613) $ (86) $ (39,895) (1) Included in other is a $0.3 million income tax provision related to realized gains on equity investments, as well as realized gains and losses from transactions, which are not considered to be significant individually or in the aggregate. The following table provides a summary of the primary components of the total net realized loss on investments of $17.0 million for the year ended March 31, 2023: Year Ended March 31, 2023 Full Exits Partial Exits Restructuring Other (1) Total Net Gain (Loss) Net Gain (Loss) Net Gain (Loss) Net Gain (Loss) Net Gain (Loss) Debt $ (1,220) $ 420 $ (6,983) $ 302 $ (7,481) Equity 853 — (10,107) (294) (9,548) Total net realized (loss) gain $ (367) $ 420 $ (17,090) $ 8 $ (17,029) (1) Included in other is a $0.1 million income tax provision related to realized gains on equity investments, as well as realized gains and losses from transactions, which are not considered to be significant individually or in the aggregate. Net Unrealized Gains (Losses) on Investments The following table provides a summary of the total net unrealized appreciation on investments of $13.6 million for the year ended March 31, 2024 (amounts in thousands): Years Ended March 31, 2024 Debt Equity I-45 SLF LLC Total Accounting reversals of net unrealized (appreciation) depreciation recognized in prior periods due to net realized (gains) losses recognized during the current period $ 23,148 $ 1,988 $ 15,783 $ 40,919 Net unrealized (depreciation) appreciation relating to portfolio investments (25,185) (5,038) 1 2,944 (27,279) Total net unrealized appreciation (depreciation) on investments $ (2,037) $ (3,050) $ 18,727 $ 13,640 1 Includes a deferred tax benefit of $17.0 thousand associated with the Taxable Subsidiary. The following table provides a summary of the total net unrealized depreciation on investments of $18.6 million for the year ended March 31, 2023 (amounts in thousands): Years Ended March 31, 2023 Debt Equity I-45 SLF LLC Total Accounting reversals of net unrealized depreciation (appreciation) recognized in prior periods due to net realized losses (gains) recognized during the current period $ (2,009) $ (1,257) $ — $ (3,266) Net unrealized (depreciation) appreciation relating to portfolio investments (15,366) 11,190 1 (11,147) (15,323) Total net unrealized (depreciation) appreciation on investments $ (17,375) $ 9,933 $ (11,147) $ (18,589) 1 Includes a deferred tax provision of $6.5 million associated with the Taxable Subsidiary . 62 Table of Contents Realized Losses on Extinguishment of Debt During the year ended March 31, 2024, we recognized a loss on extinguishment of debt of $0.4 million due to two non-extending lenders in connection with an amendment to the credit agreement relating to the Corporate Credit Facility on August 2, 2023. During the year ended March 31, 2023, we did not recognize any loss on extinguishment of debt. 63 Table of Contents FINANCIAL LIQUIDITY AND CAPITAL RESOURCES Our liquidity and capital resources are generated primarily from cash flows from operations, the net proceeds of public offerings of debt and equity securities, advances from our credit facilities and our continued access to the debentures guaranteed by the Small Business Administration (the "SBA Debentures"). Management believes that the Company’s cash and cash equivalents, cash available from investments, and commitments under our credit facilities are adequate to meet its needs for the next twelve months. We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents, cash flows generated through our ongoing operating activities, utilization of available borrowings under our credit facilities and future issuances of debt and equity on terms we believe are favorable to the Company and our shareholders (including our Equity ATM Program, as described below). Our primary uses of funds will be investments in portfolio companies and operating expenses. Due to the diverse capital sources available to us at this time, we believe we have adequate liquidity to support our near-term capital requirements. We continually evaluate our overall liquidity position and take proactive steps to maintain that position based on the current circumstances. This "Financial Liquidity and Capital Resources" section should be read in conjunction with the notes of our consolidated financial statements. In accordance with the 1940 Act, effective April 25, 2019, the Company is only allowed to borrow amounts such that its asset coverage (i.e., the ratio of assets less liabilities not represented by senior securities to senior securities such as borrowings), calculated pursuant to the 1940 Act, is at least 150% after such borrowing. The Board of Directors also approved a resolution that limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, which became effective April 25, 2019. On August 11, 2021, we received an exemptive order from SEC to permit us to exclude the senior securities issued by SBIC I or any future SBIC subsidiary of the Company from the definition of senior securities in the asset coverage requirement applicable to the Company under the 1940 Act. As of March 31, 2024, the Company’s asset coverage was 221 %. Cash Flows For the year ended March 31, 2024, we experienced a net increase in cash and cash equivalents in the amount of $10.7 million. During the foregoing period, our operating activities used $188.5 million in cash, consisting primarily of new portfolio investments of $497.5 million, partially offset by $191.4 million from sales and repayments received from debt investments in portfolio companies, $ 12.8 million from a return of capital relating to our investment in I-45 SLF and $4.1 million from sales and return of capital relating to our equity investments in portfolio companies. In addition, our financing activities provided cash of $199.2 million, consisting primarily of net proceeds from the Equity ATM Program of $181.5 million, net proceeds from the issuance of the August 2028 Notes (as defined below) of $69.7 million, net proceeds from the issuance of SBA Debentures of $32.2 million and net borrowings on our Corporate Credit Facility of $30.0 million, partially offset by cash dividends paid in the amount of $102.9 million. At March 31, 2024, the Company had cash and cash equivalents of approximately $32.3 million. For the year ended March 31, 2023, we experienced a net increase in cash and cash equivalents in the amount of $10.2 million. During that period, our operating activities used $227.1 million in cash, consisting primarily of new portfolio investments of $433.2 million, partially offset by $139.1 million from sales and repayments received from debt investments in portfolio companies and $2.7 million from sales and return of capital relating to our equity investments in portfolio companies. In addition, our financing activities provided cash of $237.5 million, consisting primarily of net proceeds from the Equity ATM Program of $158.9 million, net proceeds from an underwritten equity offering of $44.1 million, net proceeds from the issuance of SBA debentures of $78.1 million and net borrowings on our Corporate Credit Facility of $30.0 million, partially offset by cash dividends paid in the amount of $71.1 million. At March 31, 2023, the Company had cash and cash equivalents of approximately $21.6 million. Capital Resources As of March 31, 2024, we had $32.3 million in cash and cash equivalents and $344.2 million of unused capacity under the Corporate Credit Facility and the SPV Credit Facility that we maintain to support our investment and operating activities. Credit Facilities As of March 31, 2024, we had $ 265.0 million outstanding and $194.2 million of undrawn commitments under the Corporate Credit Facility, and no borrowings outstanding and $150.0 million of undrawn commitments under the SPV Credit Facility. Availability under the credit facilities is subject to certain leverage and borrowing base limitations, various covenants, reporting requirements and other customary requirements for similar credit facilities. For more information on our credit 64 Table of Contents facilities, including material terms and financial covenants, refer to Note 5. Borrowings included in Item 8. Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Unsecured Notes In December 2020, the Company issued $ 75.0 million in aggregate principal amount of 4.50 % Notes due 2026 (the "January 2026 Notes"). In February 2021, the Company issued an additional $ 65.0 million in aggregate principal amount of the January 2026 Notes. The outstanding aggregate principal amount of January 2026 Notes was $140.0 million as of both March 31, 2024 and 2023. In August 2021, the Company issued $ 100.0 million in aggregate principal amount of 3.375 % Notes due 2026 (the "October 2026 Notes"). In November 2021, the Company issued an additional $ 50.0 million in aggregate principal amount of the October 2026 Notes. The outstanding aggregate principal amount of October 2026 Notes was $ 150.0 million as of both March 31, 2024 and 2023. In June 2023, the Company issued approximately $ 71.9 million in aggregate principal amount, including the underwriters' full exercise of their option to purchase an additional $9.4 million in aggregate principal amount to cover over-allotments, of 7.75 % notes due 2028 (the "August 2028 Notes"). The outstanding aggregate principal amount of August 2028 Notes was $71.9 million as of March 31, 2024 and $0 as of March 31, 2023. For more information on each of the January 2026 Notes, the October 2026 Notes, and the August 2028 Notes, including material terms, refer to Note 5. Borrowings included in Item 8. Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10-K. SBA Debentures On April 20, 2021, SBIC I received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958, as amended. The license allows SBIC I to obtain leverage by issuing SBA Debentures, subject to the issuance of a leverage commitment by the SBA. Current SBA regulations permit SBIC I to borrow up to $175 million in SBA Debentures with at least $87.5 million in regulatory capital (as defined in the SBA regulations). As of March 31, 2024, SBIC I had a total leverage commitment from the SBA in the amount of $ 175.0 million, of which $153.0 million is outstanding. SBA Debentures have interest payable semi-annually and a ten-year maturity. The interest rate is fixed shortly after issuance at a market-drive spread over U.S. Treasury Notes with ten-year maturities. Interest on SBA Debentures is payable semi-annually on March 1 and September 1. The first maturity related to the SBA Debentures occurs in September 2031. For more information on the SBA Debentures, refer to Note 5. Borrowings included in Item 8. Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Equity Capital Activities Equity ATM Program On March 4, 2019, the Company established an at-the-market offering (the "Equity ATM Program") pursuant to which the Company may offer and sell, from time to time through sales agents, shares of its common stock having an aggregate offering price of up to $50.0 million. On February 4, 2020, the Company (i) increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $100.0 million from $50.0 million and (ii) added two additional sales agents to the Equity ATM Program. On May 26, 2021, the Company (i) increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $250.0 million from $100.0 million and (ii) reduced the commission paid to the sales agents for the Equity ATM Program to 1.5% from 2.0% of the gross sales price of shares of the Company's common stock sold through the sales agents pursuant to the Equity ATM Program on and after May 26, 2021. On August 2, 2022, the Company increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $650.0 million from $250.0 million. 65 Table of Contents The following table summarizes certain information relating to shares sold under the Equity ATM Program: Years Ended March 31, 2024 2023 Number of shares sold 8,733,315 8,435,462 Gross proceeds received (in thousands) $ 184,217 $ 161,216 Net proceeds received (in thousands) 1 $ 181,453 $ 158,798 Weighted average price per share $ 21.09 $ 19.11 1 Net proceeds reflects proceeds after deducting commissions to the sales agents on shares sold and offering expenses. As of March 31, 2024 and 2023, no amounts remained receivable. Cumulative to date, the Company has sold 25,346,437 shares of its common stock under the Equity ATM Program at a weighted-average price of $ 20.87 , raising $ 528.9 million of gross proceeds. Net proceeds were $ 520.5 million after commissions to the sales agents on shares sold. As of March 31, 2024, the Company has $ 121.1 million available under the Equity ATM Program. Public Equity Offering On November 17, 2022, the Company completed an underwritten public equity offering of 2,534,436 shares of common stock, including shares issuable pursuant to the underwriters' option to purchase additional shares, at a public offering price of $18.15 per share, raising $46.0 million of gross proceeds. Net proceeds were $44.1 million after deducting underwriting discounts and offering expenses. Share Repurchases On July 28, 2021, the Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $20 million of its outstanding shares of common stock in the open market at certain thresholds below its NAV per share, in accordance with guidelines specified in Rules 10b5-1(c)(1)(i)(B) and 10b-18 under the Exchange Act. On August 31, 2021, the Company entered into a share repurchase agreement, which became effective immediately, and the Company will cease purchasing its common stock under the share repurchase program upon the earlier of, among other things: (1) the date on which the aggregate purchase price for all shares equals $20 million including, without limitation, all applicable fees, costs and expenses; or (2) upon written notice by the Company to the broker that the share repurchase agreement is terminated. During the years ended March 31, 2024 and 2023, the Company did not repurchase any shares under the share repurchase program. Authorized Shares On April 26, 2023, the Board of Directors approved the cancellation of 2,339,512 shares of treasury stock, which increased authorized and unissued shares by the same amount. On October 11, 2023, after receiving the requisite shareholder approval, the Company filed an amendment to its Amended and Restated Articles of Incorporation with the office of the Secretary of State of the State of Texas to increase the amount of authorized shares of common stock from 40,000,000 to 75,000,000. OFF-BALANCE SHEET ARRANGEMENTS We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and fund equity capital and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. Because commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Additionally, our commitment to fund delayed draw term loans generally is triggered upon the satisfaction of certain pre-negotiated terms and conditions, such as meeting certain financial performance hurdles or financial covenants, which may limit a borrower's ability to draw on such delayed draw term loans. At March 31, 2024 and March 31, 2023, we had a total of approximately $140.1 million and $125.2 million, respectively, in currently unfunded commitments (as discussed in Note 11 - Commitments and Contingencies to the Consolidated Financial Statements). As of March 31, 2024, the total unfunded commitments included commitments to issue 66 Table of Contents letters of credit through a financial intermediary on behalf of certain portfolio companies. As of March 31, 2024 , we had $0.9 million in letters of credit issued and outstanding under these commitments on behalf of the portfolio companies. For the letters of credit issued and outstanding, we would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. Of these letters of credit, $0.4 million expire in February 2025, $0.3 million expire in March 2025, and $0.2 million expire in April 2025. As of March 31, 2024, none of the letters of credit issued and outstanding were recorded as a liability on the Company's balance sheet as such letters of credit are considered in the valuation of the investments in the portfolio company. Contractual Obligations As shown below, we had the following contractual obligations as of March 31, 2024. For information on our unfunded investment commitments, see Note 11 - Commitments and Contingencies of the Notes to Consolidated Financial Statements. Payments Due By Period (in thousands) Total Less than 1-3 Years 3-5 Years More Than Contractual Obligations 1 Year 5 Years Operating lease obligations $ 5,792 $ 416 $ 862 $ 903 $ 3,611 Corporate Credit Facility 265,000 — — 265,000 — Interest due on Corporate Credit Facility (1) 84,725 19,523 39,046 26,156 — January 2026 Notes 140,000 — 140,000 — — Interest due on January 2026 Notes 12,600 6,300 6,300 — — October 2026 Notes 150,000 — 150,000 — — Interest due on October 2026 Notes 15,187 5,062 10,125 — — August 2028 Notes 71,875 — — 71,875 — Interest due on August 2028 Notes 25,066 5,570 11,141 8,355 — SBA Debentures 153,000 — — — 153,000 Interest due on SBA Debentures (2) 55,240 6,206 12,493 12,510 24,031 $ 978,485 $ 43,077 $ 369,967 $ 384,799 $ 180,642 (1) Amounts include interest payments calculated at an average rate of 7.66% of outstanding borrowings under the Corporate Credit Facility, which were $265.0 million as of March 31, 2024. (2) Includes only fixed interest on pooled debt. RECENT DEVELOPMENTS On April 24, 2024, the Board of Directors declared a total dividend of $0.63 per share, comprised of a regular dividend of $0.57 and a supplemental dividend of $0.06, for the quarter ending June 30, 2024. The record date for the dividend is June 14, 2024. The payment date for the dividend is June 28, 2024.