10-Q
1
d43496d10q.htm
10-Q
10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from to
Commission file number: 814-00704
GLADSTONE INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
83-0423116
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
1521 WESTBRANCH DRIVE, SUITE 100
MCLEAN, VIRGINIA
22102
(Address of principal executive offices)
(Zip Code)
(703) 287-5800
(Registrants telephone number, including area code)
Not Applicable
(Former
name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading
Symbol(s)
Name of Each Exchange
on Which Registered
Common Stock, $0.001 par value per share
GAIN
The Nasdaq Stock Market LLC
6.250% Series D Cumulative Term Preferred Stock, $0.001 par value per share
GAINM
The Nasdaq Stock Market LLC
6.375% Series E Cumulative Term Preferred Stock, $0.001 par value per share
GAINL
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☒ No ☐
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting
company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ☐ No ☒
The number of shares of the
issuers Common Stock, $0.001 par value per share, outstanding as of February 1, 2021 was 33,205,023.
GLADSTONE INVESTMENT CORPORATION
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION:
Item 1.
Financial Statements (Unaudited)
Consolidated Statements of Assets and Liabilities as of December 31, 2020 and March 31, 2020
2
Consolidated Statements of Operations for the three and nine months ended December 31, 2020 and 2019
3
Consolidated Statements of Changes in Net Assets for the three and nine months ended December 31, 2020 and 2019
5
Consolidated Statements of Cash Flows for the nine months ended December 31, 2020 and 2019
6
Consolidated Schedules of Investments as of December 31, 2020 and March 31, 2020
7
Notes to Consolidated Financial Statements
19
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
44
Results of Operations
49
Liquidity and Capital Resources
57
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
64
Item 4.
Controls and Procedures
64
PART II.
OTHER INFORMATION:
Item 1.
Legal Proceedings
65
Item 1A.
Risk Factors
65
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
65
Item 3.
Defaults Upon Senior Securities
65
Item 4.
Mine Safety Disclosures
65
Item 5.
Other Information
65
Item 6.
Exhibits
66
SIGNATURES
67
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
December 31,
March 31,
2020
2020
ASSETS
Investments at fair value
Non-Control/Non-Affiliate
investments (Cost of $292,968 and $276,589, respectively)
$
290,136
$
292,129
Affiliate investments (Cost of $340,401 and $311,481, respectively)
289,421
247,637
Control investments (Cost of $24,512 and $21,512, respectively)
31,331
26,158
Cash and cash equivalents
1,794
2,778
Restricted cash and cash equivalents
866
1,282
Interest receivable
1,775
3,429
Due from administrative agent
4,379
771
Deferred financing costs, net
586
991
Other assets, net
1,414
1,202
TOTAL ASSETS
$
621,702
$
576,377
LIABILITIES
Borrowings:
Line of credit at fair value (Cost of $84,000 and $49,200, respectively)
$
84,000
$
49,200
Secured borrowing
5,096
5,096
Total borrowings
89,096
54,296
Mandatorily redeemable preferred stock, $0.001 par value per share, $25.00 liquidation preference
per share; 8,990,000 and 6,500,000 shares authorized; 6,074,853 and 5,290,000 shares issued and outstanding, respectively, net
148,753
129,160
Accounts payable and accrued expenses
1,239
1,222
Fees due to Adviser (A)
11,871
7,178
Fee due to Administrator (A)
462
582
Other liabilities
1,458
14,908
TOTAL LIABILITIES
$
252,879
$
207,346
Commitments and contingencies (B)
NET ASSETS
$
368,823
$
369,031
ANALYSIS OF NET ASSETS
Common stock, $0.001 par value per share, 100,000,000 shares authorized,
33,205,023 and 33,049,463 shares issued and outstanding, respectively
$
33
$
33
Capital in excess of par value
401,755
401,023
Cumulative net unrealized depreciation of investments
(46,993
)
(43,658
)
Underdistributed net investment income
3,622
6,370
Accumulated net realized gain in excess of distributions
10,406
5,263
Total distributable earnings
(32,965
)
(32,025
)
TOTAL NET ASSETS
$
368,823
$
369,031
NET ASSET VALUE PER SHARE AT END OF PERIOD
$
11.11
$
11.17
(A)
Refer to Note 4 Related Party Transactions in the accompanying Notes to Consolidated
Financial Statements for additional information.
(B)
Refer to Note 10 Commitments and Contingencies in the accompanying Notes to
Consolidated Financial Statements for additional information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
2
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
December 31,
Nine Months Ended
December 31,
2020
2019
2020
2019
INVESTMENT INCOME
Interest income
Non-Control/Non-Affiliate
investments
$
6,804
$
7,234
$
19,782
$
19,710
Affiliate investments
5,123
4,668
14,087
17,751
Control investments
220
211
639
639
Cash and cash equivalents
1
13
5
44
Total interest income
12,148
12,126
34,513
38,144
Dividend income
Non-Control/Non-Affiliate
investments
908
3,622
908
6,349
Affiliate investments
4,127
4,127
3,080
Total dividend income
5,035
3,622
5,035
9,429
Success fee income
Non-Control/Non-Affiliate
investments
189
248
371
248
Affiliate investments
2,121
Total success fee income
189
248
371
2,369
Total investment income
17,372
15,996
39,919
49,942
EXPENSES
Base management fee (A)
3,116
2,970
8,961
9,285
Loan servicing fee (A)
1,786
1,794
5,242
5,139
Incentive fee (A)
3,756
2,873
3,454
6,042
Administration fee (A)
382
369
1,218
1,106
Interest expense on borrowings
1,092
964
3,064
3,230
Dividends on mandatorily redeemable preferred stock
2,291
2,089
6,551
6,269
Amortization of deferred financing costs and discounts
451
373
1,291
1,119
Professional fees
322
384
1,147
1,355
Other general and administrative expenses
496
633
2,031
2,587
Expenses before credits from Adviser
13,692
12,449
32,959
36,132
Credits to base management fee loan servicing fee (A)
(1,786
)
(1,794
)
(5,242
)
(5,139
)
Credits to fees from
Adviserother (A)
(789
)
(817
)
(2,594
)
(2,647
)
Total expenses, net of credits to fees
11,117
9,838
25,123
28,346
NET INVESTMENT INCOME
6,255
6,158
14,796
21,596
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss):
Non-Control/Non-Affiliate
investments
5,816
33,509
5,876
34,830
Affiliate investments
3,289
496
4,603
20,852
Total net realized gain
9,105
34,005
10,479
55,682
Net unrealized appreciation (depreciation):
Non-Control/Non-Affiliate
investments
(5,358
)
(29,063
)
(18,372
)
(21,598
)
Affiliate investments
4,894
(4,513
)
12,864
(30,631
)
Control investments
375
6,577
2,173
5,329
Other
154
(10
)
Total net unrealized depreciation
(89
)
(26,845
)
(3,335
)
(46,910
)
Net realized and unrealized gain (loss)
9,016
7,160
7,144
8,772
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$
15,271
$
13,318
$
21,940
$
30,368
(A)
Refer to Note 4 Related Party Transactions in the accompanying Notes to Consolidated
Financial Statements for additional information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
December 31,
Nine Months Ended
December 31,
2020
2019
2020
2019
BASIC AND DILUTED PER COMMON SHARE:
Net investment income
$
0.19
$
0.19
$
0.45
$
0.66
Net increase in net assets resulting from operations
$
0.46
$
0.41
$
0.66
$
0.93
WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic and diluted
33,205,023
32,822,459
33,167,511
32,822,459
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
(UNAUDITED)
2020
2019
NET ASSETS, MARCH 31
$
369,031
$
407,110
OPERATIONS
Net investment income
4,173
8,855
Net realized gain on investments
753
533
Net unrealized depreciation of investments
(4,887
)
(3,047
)
Net unrealized appreciation of other
(295
)
Net increase in net assets from operations
39
6,046
DISTRIBUTIONS (A)
Distributions to common stockholders from net investment income ( $0.28 and $0.20 per share,
respectively)
(9,272
)
(6,523
)
Distributions to common stockholders from net realized gains ( $0.02 and $0.09 per share,
respectively)
(666
)
(3,127
)
Net decrease in net assets from distributions
(9,938
)
(9,650
)
CAPITAL ACTIVITY
Issuance of common stock
1,772
Discounts, commissions, and offering costs for issuance of common stock
(35
)
Net increase in net assets from capital activity
1,737
NET DECREASE IN NET ASSETS
(8,162
)
(3,604
)
NET ASSETS, JUNE 30
$
360,869
$
403,506
OPERATIONS
Net investment income
4,368
6,583
Net realized gain on investments
621
21,144
Net unrealized appreciation (depreciation) of investments
1,641
(16,854
)
Net unrealized depreciation of other
131
Net increase in net assets from operations
6,630
11,004
DISTRIBUTIONS (A)
Distributions to common stockholders from net investment income ( $0.20 and $0.16 per share,
respectively)
(6,553
)
(5,236
)
Distributions to common stockholders from net realized gains ( $0.01 and $0.07 per share,
respectively)
(420
)
(2,444
)
Net decrease in net assets from distributions
(6,973
)
(7,680
)
NET (DECREASE) INCREASE IN NET ASSETS
(343
)
3,324
NET ASSETS, SEPTEMBER 30
$
360,526
$
406,830
OPERATIONS
Net investment income
$
6,255
$
6,158
Net realized gain on investments
9,105
34,005
Net unrealized depreciation of investments
(89
)
(26,999
)
Net unrealized depreciation of other
154
Net increase in net assets from operations
15,271
13,318
DISTRIBUTIONS (A)
Distributions to common stockholders from net investment income ( $0.20 and $0.20 per
share, respectively)
(6,619
)
(6,533
)
Distributions to common stockholders from realized gains ( $0.01 and $0.09 per share,
respectively)
(355
)
(3,117
)
Net decrease in net assets from distributions
(6,974
)
(9,650
)
NET INCREASE IN NET ASSETS
8,297
3,668
NET ASSETS, DECEMBER 31
$
368,823
$
410,498
(A)
Refer to Note 9 Distributions to Common Stockholders in the accompanying Notes to Consolidated
Financial Statements for additional information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
December 31,
2020
2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations
$
21,940
$
30,368
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used
in) provided by operating activities:
Purchase of investments
(89,571
)
(95,304
)
Principal repayments of investments
20,734
79,216
Net proceeds from the sale of investments
30,515
87,781
Net realized gain on investments
(10,479
)
(55,682
)
Net unrealized depreciation of investments
3,335
46,900
Net unrealized appreciation of other
10
Amortization of premiums, discounts, and acquisition costs, net
(14
)
(14
)
Amortization of deferred financing costs and discounts
1,291
1,119
Bad debt expense, net of recoveries
61
311
Changes in assets and liabilities:
Decrease in interest receivable
1,610
158
Increase in due from administrative agent
(3,608
)
(1,176
)
Decrease (increase) in other assets, net
1
(373
)
Increase in accounts payable and accrued expenses
17
1,163
Increase in fees due to
Adviser (A)
4,663
1,655
(Decrease) increase in fee due to
Administrator (A)
(120
)
138
Decrease in other liabilities
(12,934
)
(9,934
)
Net cash (used in) provided by operating activities
(32,559
)
86,336
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock
1,772
Discounts, commissions, and offering costs for issuance of common stock
(31
)
Proceeds from line of credit
111,700
131,400
Repayments on line of credit
(76,900
)
(180,200
)
Proceeds from issuance of mandatorily redeemable preferred stock
19,276
Deferred financing and offering costs
(773
)
(133
)
Distributions paid to common stockholders
(23,885
)
(26,980
)
Net cash provided by (used in) financing activities
31,159
(75,913
)
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH
EQUIVALENTS
(1,400
)
10,423
CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS AT BEGINNING OF
PERIOD
4,060
3,605
CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS AT END OF
PERIOD
$
2,660
$
14,028
CASH PAID FOR INTEREST
$
2,370
$
2,204
(A)
Refer to Note 4 Related Party Transactions in the accompanying Notes to Consolidated Financial
Statements for additional information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
6
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
NON-CONTROL/NON-AFFILIATE
INVESTMENTS (N) 78.8%
Secured First Lien Debt 49.6%
Diversified/Conglomerate Manufacturing 1.2%
Phoenix Door Systems, Inc. Line of Credit, $200 available (L+7.0%, 9.0% Cash (0.3% Unused
Fee), Due 3/2022) (L)
$
950
$
950
$
950
Phoenix Door Systems, Inc. Term Debt (L+11.0%, 13.0% Cash, Due 9/2024) (L)
3,200
3,200
3,200
4,150
4,150
Diversified/Conglomerate Services 30.5%
Bassett Creek Services, Inc. Term Debt (L+10.0%, 12.0% Cash, Due 4/2023) (K)
37,500
37,500
36,141
Counsel Press, Inc. Term Debt (L+11.8%, 12.8% Cash, Due 3/2023) (L)
18,000
18,000
18,000
Counsel Press, Inc. Term Debt (L+13.0%, 14.0% Cash, Due 3/2023) (L)
5,500
5,500
5,500
Horizon Facilities Services, Inc. Term Debt (L+9.5%, 12.0% Cash, Due 6/2024) (G)(L)
27,700
27,700
27,700
Mason West, LLC Line of Credit, $3,000 available (L+8.0%, 10.0% Cash, Due 7/2021) (L)
Mason West, LLC Term Debt (L+10.0%, 12.5% Cash, Due 7/2025) (L)
25,250
25,250
25,250
113,950
112,591
Healthcare, Education, and Childcare 5.4%
Educators Resource, Inc. Term Debt (L+10.5%, 13.0% Cash, Due 11/2023) (L)
20,000
20,000
20,000
Home and Office Furnishings, Housewares, and Durable Consumer Products 6.7%
Brunswick Bowling Products, Inc. Term Debt (L+10.0%, 12.0% Cash, Due 1/2023) (L)
17,700
17,700
17,700
Brunswick Bowling Products, Inc. Term Debt (L+10.0%, 12.0% Cash, Due 1/2023) (L)
6,850
6,850
6,850
24,550
24,550
Leisure, Amusement, Motion Pictures, and Entertainment 5.8%
Schylling, Inc. Term Debt (L+11.0%, 13.0% Cash, Due 8/2024) (L)
13,081
13,081
13,081
Schylling, Inc. Term Debt (L+11.0%, 13.0% Cash, Due 8/2024) (L)
8,500
8,500
8,500
21,581
21,581
Total Secured First Lien Debt
$
184,231
$
182,872
Secured Second Lien Debt 11.4%
Automobile 1.1%
Country Club Enterprises, LLC Term Debt (L+8.0%, 10.0% Cash, Due 2/2022) (K)
$
4,000
$
4,000
$
3,880
Country Club Enterprises, LLC Guaranty ($1,000) (T)
4,000
3,880
Cargo Transport 3.5%
Diligent Delivery Systems Term Debt (L+9.0%, 11.0% Cash, Due 11/2022) (Q)
13,000
12,965
13,000
Home and Office Furnishings, Housewares, and Durable Consumer Products 3.6%
Ginsey Home Solutions, Inc. Term Debt (L+10.0%, 13.5% Cash, Due 1/2025) (H)(L)
13,300
13,300
13,300
Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) 3.2%
SBS Industries Holdings, Inc. Term Debt (L+12.0%, 14.0% Cash, Due 11/2024) (L)
11,736
11,736
11,736
Total Secured Second Lien Debt
$
42,001
$
41,916
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
7
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
DECEMBER 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
Preferred Equity 17.0%
Diversified/Conglomerate Services 8.8%
Bassett Creek Services, Inc. Preferred
Stock (C)(L)
$
4,900
$
4,900
$
Counsel Press, Inc. Preferred
Stock (C)(L)
6,995
6,995
18,744
Horizon Facilities Services, Inc. Preferred Stock (C)(L)
10,080
10,080
2,194
Mason West, LLC Preferred
Stock (C)(L)
11,206
11,206
11,360
33,181
32,298
Healthcare, Education, and Childcare 2.4%
Educators Resource, Inc. Preferred
Stock (C)(L)
8,560
8,560
8,898
Home and Office Furnishings, Housewares, and Durable Consumer Products 3.9%
Brunswick Bowling Products, Inc. Preferred Stock (C)(L)
6,653
6,653
3,509
Ginsey Home Solutions, Inc. Preferred
Stock (C)(L)
19,280
9,583
10,570
16,236
14,079
Leisure, Amusement, Motion Pictures, and Entertainment 1.5%
Schylling, Inc. Preferred
Stock (C)(L)
4,000
4,000
5,401
Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) 0.4%
SBS Industries Holdings, Inc. Preferred
Stock (C)(L)
27,705
2,771
1,580
Total Preferred Equity
$
64,748
$
62,256
Common Equity/Equivalents 0.8%
Cargo Transport 0.7%
Diligent Delivery Systems Common Stock Warrants (C)(L)(Q)
8
%
$
500
$
2,738
Diversified/Conglomerate Manufacturing 0.1%
Phoenix Door Systems, Inc. Common
Stock (C)(L)
2,515
1,200
269
Home and Office Furnishings, Housewares, and Durable Consumer Products 0.0%
Ginsey Home Solutions, Inc. Common
Stock (C)(L)
63,747
8
Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) 0.0%
SBS Industries Holdings, Inc. Common
Stock (C)(L)
221,500
222
Personal and Non-Durable Consumer Products
(Manufacturing Only) 0.0%
Funko Acquisition Holdings, LLC (M)
Common Units (C)(S)
12,180
58
85
Total Common Equity/Equivalents
$
1,988
$
3,092
Total
Non-Control/Non-Affiliate Investments
$
292,968
$
290,136
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
8
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
DECEMBER 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
AFFILIATE INVESTMENTS (O)
78.5%
Secured First Lien Debt 48.6%
Beverage, Food, and Tobacco 2.5%
Head Country, Inc. Term Debt (L+10.5%, 12.5% Cash, Due 2/2021) (L)
$
9,050
$
9,050
$
9,050
Chemicals, Plastics, and Rubber 5.7%
PSI Molded Plastics, Inc. Term Debt (L+5.5%, 7.0% Cash, Due 1/2024) (G)(L)
26,618
26,618
20,981
Diversified/Conglomerate Manufacturing 5.6%
D.P.M.S., Inc. Line of Credit, $250 available (L+6.5%, 9.0% Cash (0.5% Unused Fee), Due
10/2021) (L)
1,250
1,250
1,250
D.P.M.S., Inc. Term Debt (10.0% Cash, Due 10/2023) (I)(L)
10,796
10,796
6,354
Edge Adhesives Holdings, Inc. (M) Line
of Credit, $0 available (L+8.0%, 10.0% Cash, Due 9/2021) (K)
1,020
1,020
992
Edge Adhesives Holdings, Inc. (M) Term
Debt (L+10.5%, 12.5% Cash, Due 2/2022) (K)
9,300
9,300
9,044
Edge Adhesives Holdings, Inc. (M) Term
Debt (L+11.8%, 13.8% Cash, Due 2/2022) (K)
3,000
3,000
2,918
25,366
20,558
Diversified/Conglomerate Services 13.7%
ImageWorks Display and Marketing Group, Inc. Term Debt (L+11.0%, 13.0% Cash, Due 11/2022) (L)
22,000
22,000
22,000
The Maids International, LLC Line of Credit, $1,000 available (L+7.5%, 9.5% Cash (0.3%
Unused Fee), Due 3/2021) (L)
The Maids International, LLC Term Debt (L+10.5%, 12.0% Cash, Due 3/2025) (L)
28,560
28,560
28,560
50,560
50,560
Home and Office Furnishings, Housewares, and Durable Consumer Products 7.3%
Old World Christmas Secured First Lien Term Loan (L+9.5%, 11.0% Cash, Due
12/2025) (L)
27,000
27,000
27,000
Leisure, Amusement, Motion Pictures, and Entertainment 2.4%
SOG Specialty Knives & Tools, LLC Term Debt (Due 12/2023) (L)(R)
538
538
538
SOG Specialty Knives & Tools, LLC Term Debt (L+4.0%, 6.0% Cash, Due 12/2023) (G)(L)
8,399
8,399
8,399
8,937
8,937
Personal and Non-Durable Consumer Products
(Manufacturing Only) 7.2%
The Mountain Corporation Line of Credit, $0 available (L+5.0%, 9.0% Cash, Due
4/2021) (G)(L)
3,400
3,400
3,400
Pioneer Square Brands, Inc. Term Debt (L+12.0%, 13.0% Cash, Due 8/2022) (L)
23,100
23,100
23,100
26,500
26,500
Telecommunications 4.2%
B+T Group Acquisition, Inc. (M) Line of
Credit, $0 available (L+11.0%, 13.0% Cash, Due 12/2021) (G)(K)
2,800
2,800
2,569
B+T Group Acquisition, Inc. (M) Term
Debt (L+11.0%, 13.0% Cash, Due 12/2021) (G)(K)
14,000
14,000
12,845
16,800
15,414
Total Secured First Lien Debt
$
190,831
$
179,000
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
9
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
DECEMBER 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair
Value
Secured Second Lien Debt 13.1%
Diversified/Conglomerate Services 12.5%
J.R. Hobbs Co. Atlanta, LLC Line of Credit, $0 available (L+6.0%, 8.0% Cash, Due
10/2024) (L)
$
10,000
$
10,000
$
10,000
J.R. Hobbs Co. Atlanta, LLC Term Debt (L+10.3%, 11.8% Cash, Due 10/2024) (L)
36,000
36,000
36,000
46,000
46,000
Personal and Non-Durable Consumer Products
(Manufacturing Only) 0.6%
The Mountain Corporation Term Debt (L+4.0%, 7.0% Cash, Due 4/2024) (G)(L)
11,700
11,700
2,349
The Mountain Corporation Delayed Draw Term Debt, $1,000 available (L+4.0%, 7.0% Cash, Due
4/2024) (G)(L)
500
500
100
12,200
2,449
Total Secured Second Lien Debt
$
58,200
$
48,449
Preferred Equity 16.8%
Beverage, Food, and Tobacco 1.4%
Head Country, Inc. Preferred
Stock (C)(L)
4,000
$
4,000
$
5,258
Chemicals, Plastics, and Rubber 0.0%
PSI Molded Plastics, Inc. Preferred
Stock (C)(L)
158,598
19,730
Diversified/Conglomerate Manufacturing 0.0%
Channel Technologies Group, LLC Preferred Stock (C)(L)
2,279
1,841
Edge Adhesives Holdings, Inc. (M)
Preferred Stock (C)(L)
8,199
8,199
10,040
Diversified/Conglomerate Services 3.4%
ImageWorks Display and Marketing Group, Inc. Preferred Stock (C)(L)
67,490
6,749
6,953
J.R. Hobbs Co. Atlanta, LLC Preferred Stock (C)(L)
10,920
10,920
The Maids International, LLC Preferred
Stock (C)(L)
6,640
6,640
5,568
24,309
12,521
Home and Office Furnishings, Housewares, and Durable Consumer Products 3.6%
Old World Christmas, Inc. Preferred
Stock (C)(L)
6,180
13,445
Leisure, Amusement, Motion Pictures, and Entertainment 1.2%
SOG Specialty Knives & Tools, LLC Preferred Stock (C)(L)
14,949
14,949
4,354
Personal and Non-Durable Consumer Products
(Manufacturing Only) 7.2%
The Mountain Corporation Preferred
Stock (C)(L)
6,899
6,899
Pioneer Square Brands, Inc. Preferred
Stock (C)(L)
5,502
5,500
26,394
12,399
26,394
Telecommunications 0.0%
B+T Group Acquisition, Inc. (M)
Preferred Stock (C)(L)
14,304
4,722
Total Preferred Equity
$
90,149
$
61,972
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
10
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
DECEMBER 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
Common Equity/Equivalents 0.0%
Diversified/Conglomerate Manufacturing 0.0%
Channel Technologies Group, LLC Common
Stock (C)(L)
2,319,184
$
$
D.P.M.S., Inc. Common
Stock (C)(L)
627
1
1
Diversified/Conglomerate Services 0.0%
Nth Degree Investment Group, LLC Common Stock (C)(L)
14,360,000
1,219
Personal and Non-Durable Consumer Products
(Manufacturing Only) 0.0%
The Mountain Corporation Common
Stock (C)(L)
751
1
Telecommunications 0.0%
B+T Group Acquisition, Inc. (M)
Common Stock Warrant (C)(L)
3.5
%
Total Common Equity/Equivalents
$
1,221
$
Total Affiliate Investments
$
340,401
$
289,421
CONTROL INVESTMENTS (P)
8.6%:
Secured Second Lien Debt 3.6%
Aerospace and Defense 3.6%
Galaxy Technologies, Inc. Line of Credit, $0 available (L+4.5%, 6.5% Cash (0.5% Unused
Fee), Due 8/2023) (L)
$
5,000
$
5,000
$
5,000
Galaxy Technologies, Inc. Term Debt (L+6.0%, 10.0% Cash, Due 8/2023) (L)
8,000
8,000
8,000
$
13,000
$
13,000
Preferred Equity 5.0%
Aerospace and Defense 5.0%
Galaxy Technologies, Inc. Preferred
Stock (C)(L)
5,517,444
$
11,464
$
18,331
Common Equity 0.0%
Aerospace and Defense 0.0%
Galaxy Technologies, Inc. Common
Stock (C)(L)
88,843
$
48
$
Total Control Investments
$
24,512
$
31,331
TOTAL INVESTMENTS 165.9%
$
657,881
$
610,888
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
11
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
DECEMBER 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
(A)
Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The
majority of the securities listed, totaling $507.2 million at fair value, are pledged as collateral to our revolving line of credit, as described further in Note 5 Borrowings in the accompanying Notes to Consolidated
Financial Statements . Additionally, under Section 55 of the Investment Company Act of 1940, as amended (the 1940 Act), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets
represent at least 70% of our total assets. As of December 31, 2020, our investment in Funko Acquisition Holdings, LLC (Funko) was considered a non-qualifying asset under Section 55 of the 1940 Act and represented less than 0.1% of total
investments, at fair value.
(B)
Unless indicated otherwise, all cash interest rates are indexed to
30-day London Interbank Offered Rate (LIBOR or L), which was 0.1% as of December 31, 2020. If applicable,
paid-in-kind interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the
greater of the floor or 30-day LIBOR plus a spread. Due dates represent the contractual maturity date.
(C)
Security is non-income producing.
(D)
Category percentages represent the fair value of each category and subcategory as a percentage of net assets as
of December 31, 2020.
(E)
Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the Financial
Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (ASC 820) fair value hierarchy. Refer to Note 3
Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(F)
Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned
within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(G)
Debt security is on non-accrual status.
(H)
$5.1 million of the debt security was participated to a third-party, but is accounted for as collateral
for a secured borrowing under accounting principles generally accepted in the U.S. and presented as Secured borrowing on our accompanying Consolidated Statements of Assets and Liabilities as of December 31, 2020.
(I)
Debt security has a fixed interest rate.
(J)
Represents the principal balance for debt investments and the number of shares/units held for equity
investments. Warrants are represented as a percentage of ownership, as applicable.
(K)
Fair value was based on internal yield analysis or on estimates of value submitted by ICE Data Pricing and
Reference Data, LLC. Refer to Note 3 Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(L)
Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to
the portfolio companys securities in order of their relative priority in the capital structure. Refer to Note 3 Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(M)
One of our affiliated funds, Gladstone Capital Corporation, co-invested
with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.
(N)
Non-Control/Non-Affiliate
investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(O)
Affiliate investments, as defined by the 1940 Act, are those that are not Control investments and in which we
own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(P)
Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling
influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(Q)
Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to
occur imminently.
(R)
Debt security does not have a stated current interest rate.
(S)
Our investment in Funko was valued using Level 2 inputs within the ASC 820 fair value hierarchy. Our
common units in Funko are convertible into class A common stock in Funko, Inc. upon meeting certain requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of
marketability. Funko, Inc. is traded on the Nasdaq Global Select Market under the trading symbol FNKO. Refer to Note 3 Investments in the accompanying Notes to Consolidated Financial Statements for additional
information.
(T)
Refer to Note 10 Commitments and Contingencies in the accompanying Notes to
Consolidated Financial Statements for additional information regarding this guaranty.
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
12
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
MARCH 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
NON-CONTROL/NON-AFFILIATE
INVESTMENTS (N) 79.4%
Secured First Lien Debt 46.8%
Containers, Packaging, and Glass 2.6%
Frontier Packaging, Inc. Term Debt (L+10.0%, 12.0% Cash, Due 3/2021) (L)
$
9,500
$
9,500
$
9,500
Diversified/Conglomerate Manufacturing 1.0%
Phoenix Door Systems, Inc Line of Credit, $380 available (L+7.0%, 9.0% Cash (0.3% Unused
Fee), Due 3/2021) (L)
370
370
370
Phoenix Door Systems, Inc. Term Debt (L+11.0%, 13.0% Cash, Due 9/2024) (L)
3,200
3,200
3,200
3,570
3,570
Diversified/Conglomerate Services 24.1%
Bassett Creek Services, Inc. Term Debt (L+10.0%, 12.0% Cash, Due 4/2023) (L)
37,500
37,500
37,500
Counsel Press, Inc. Term Debt (L+11.8%, 12.8% Cash, Due 3/2023) (L)
18,000
18,000
18,000
Counsel Press, Inc. Term Debt (L+13.0%, 14.0% Cash, Due 3/2023) (L)
5,500
5,500
5,500
Horizon Facilities Services, Inc. Term Debt (L+9.5%, 12.0% Cash, Due 6/2024) (L)
27,700
27,700
27,700
88,700
88,700
Healthcare, Education, and Childcare 5.4%
Educators Resource, Inc. Term Debt (L+10.5%, 13.0% Cash, Due 11/2023) (L)
20,000
20,000
20,000
Home and Office Furnishings, Housewares, and Durable Consumer Products 4.8%
Brunswick Bowling Products, Inc. Term Debt (L+10.0%, 12.0% Cash, Due 1/2023) (L)
17,700
17,700
17,700
Leisure, Amusement, Motion Pictures, and Entertainment 5.8%
Schylling, Inc. Term Debt (L+11.0%, 13.0% Cash, Due 8/2024) (L)
13,081
13,081
13,081
Schylling, Inc. Term Debt (L+11.0%, 13.0% Cash, Due 8/2024) (L)
8,500
8,500
8,500
21,581
21,581
Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) 3.1%
SBS Industries Holdings, Inc. Term Debt (L+12.0%, 14.0% Cash, Due 11/2024) (L)
11,355
11,355
11,355
Total Secured First Lien Debt
$
172,406
$
172,406
Secured Second Lien Debt 13.1%
Automobile 1.0%
Country Club Enterprises, LLC Term Debt (L+8.0%, 10.0% Cash, Due 2/2022) (K)
$
4,000
$
4,000
$
3,600
Country Club Enterprises, LLC Guaranty ($1,000) (U)
4,000
3,600
Cargo Transport 3.4%
Diligent Delivery Systems Term Debt (L+9.0%, 11.0% Cash, Due 11/2022) (K)
13,000
12,951
12,545
Home and Office Furnishings, Housewares, and Durable Consumer Products 5.5%
Brunswick Bowling Products, Inc. Term Debt (L+10.0%, 12.0% Cash, Due 1/2023) (L)
6,850
6,850
6,850
Ginsey Home Solutions, Inc. Term Debt (L+10.0%, 13.5% Cash, Due 1/2021) (H)(L)
13,300
13,300
13,300
20,150
20,150
Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) 3.2%
SBS Industries Holdings, Inc. Term Debt (L+12.0%, 14.0% Cash, Due 11/2024) (L)
11,736
11,736
11,736
Total Secured Second Lien Debt
$
48,837
$
48,031
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
13
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
Preferred Equity 16.5%
Containers, Packaging, and Glass 0.4%
Frontier Packaging, Inc. Preferred
Stock (C)(L)
1,373
$
1,373
$
1.400
Diversified/Conglomerate Services 6.3%
Bassett Creek Services, Inc. Preferred
Stock (C)(L)
4,900
4,900
Counsel Press, Inc. Preferred
Stock (C)(L)
6,995
6,995
20,593
Horizon Facilities Services, Inc. Preferred Stock (C)(L)
10,080
10,080
2,699
21,975
23,292
Healthcare, Education, and Childcare 1.5%
Educators Resource, Inc. Preferred
Stock (C)(L)
8,560
8,560
5,563
Home and Office Furnishings, Housewares, and Durable Consumer Products 7.1%
Brunswick Bowling Products, Inc. Preferred Stock (C)(L)
4,943
4,943
19,848
Ginsey Home Solutions, Inc. Preferred
Stock (C)(L)
19,280
9,583
6,419
14,526
26,267
Leisure, Amusement, Motion Pictures, and Entertainment 1.2%
Schylling, Inc. Preferred
Stock (C)(L)
4,000
4,000
4,332
Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) 0.0%
SBS Industries Holdings, Inc. Preferred
Stock (C)(L)
27,705
2,771
Total Preferred Equity
$
53,205
$
60,854
Common Equity/Equivalents 3.0%
Cargo Transport 0.2%
Diligent Delivery Systems Common Stock Warrants (C)(L)
8
%
$
500
$
771
Containers, Packaging, and Glass 2.6%
Frontier Packaging, Inc. Common
Stock (C)(L)
152
152
9,460
Diversified/Conglomerate Manufacturing 0.2%
Phoenix Door Systems, Inc. Common
Stock (C)(L)
2,515
1,200
574
Home and Office Furnishings, Housewares, and Durable Consumer Products 0.0%
Ginsey Home Solutions, Inc. Common
Stock (C)(L)
63,747
8
Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) 0.0%
SBS Industries Holdings, Inc. Common
Stock (C)(L)
221,500
222
Personal and Non-Durable Consumer Products
(Manufacturing Only) 0.0%
Funko Acquisition Holdings, LLC (M)
Common Units (C)(S)
12,180
59
33
Total Common Equity/Equivalents
$
2,141
$
10,838
Total
Non-Control/Non-Affiliate Investments
$
276,589
$
292,129
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
14
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
AFFILIATE INVESTMENTS (O)
67.0%
Secured First Lien Debt 36.8%
Beverage, Food, and Tobacco 2.5%
Head Country, Inc. Term Debt (L+10.5%, 12.5% Cash, Due 2/2021) (L)
$
9,050
$
9,050
$
9,050
Diversified/Conglomerate Manufacturing 6.4%
D.P.M.S., Inc. Line of Credit, $250 available (L+6.5%, 9.0% Cash (0.5% Unused Fee),
Due 10/2021) (L)
1,250
1,250
1,250
D.P.M.S., Inc. Term Debt (10.0% Cash, Due 10/2021) (I)(L)
10,796
10,796
10,796
Edge Adhesives Holdings, Inc. (M) Line
of Credit, $600 available (L+8.0%, 10.0% Cash, Due 5/2020) (K)
420
420
395
Edge Adhesives Holdings, Inc. (M) Term
Debt (L+10.5%, 12.5% Cash, Due 2/2022) (K)
9,300
9,300
8,742
Edge Adhesives Holdings, Inc. (M) Term
Debt (L+11.8%, 13.8% Cash, Due 2/2022) (K)
3,000
3,000
2,820
24,766
24,003
Diversified/Conglomerate Services 14.0%
ImageWorks Display and Marketing Group, Inc. Term Debt (L+11.0%, 13.0% Cash,
Due 11/2022) (L)
22,000
22,000
22,000
The Maids International, LLC Line of Credit, $0 available (L+7.5%, 9.5% Cash (0.3% Unused
Fee), Due 3/2021) (L)
1,000
1,000
1,000
The Maids International, LLC Term Debt (L+10.5%, 12.0% Cash, Due 3/2025) (L)
28,560
28,560
28,560
51,560
51,560
Leisure, Amusement, Motion Pictures, and Entertainment 2.4%
SOG Specialty Knives & Tools, LLC Term Debt (Due 8/2020) (L)(R)
538
538
538
SOG Specialty Knives & Tools, LLC Term Debt (L+4.0%, 6.0% Cash, Due 8/2022) (G)(L)
8,399
8,399
8,399
8,937
8,937
Personal and Non-Durable Consumer Products
(Manufacturing Only) 7.2%
The Mountain Corporation Line of Credit, $0 available (L+5.0%, 9.0%
Cash,
Due 4/2021) (L)
3,400
3,400
3,400
Pioneer Square Brands, Inc. Term Debt (L+12.0%, 13.0% Cash, Due 8/2022) (L)
23,100
23,100
23,100
26,500
26,500
Telecommunications 4.3%
B+T Group Acquisition, Inc. (M) Line of
Credit, $0 available (L+11.0%, 13.0% Cash, Due 12/2021) (G)(K)
2,800
2,800
2,632
B+T Group Acquisition, Inc. (M) Term
Debt (L+11.0%, 13.0% Cash, Due 12/2021) (G)(K)
14,000
14,000
13,160
16,800
15,792
Total Secured First Lien Debt
$
137,613
$
135,842
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
15
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair
Value
Secured Second Lien Debt 17.7%
Chemicals, Plastics, and Rubber 4.5%
PSI Molded Plastics, Inc. Term Debt (L+12.0%, 13.5% Cash, Due 1/2024) (G)(L)
$
26,618
$
26,618
$
16,737
Diversified/Conglomerate Services 12.5%
J.R. Hobbs Co. Atlanta, LLC Line of Credit, $0 available (L+6.0%, 8.0% Cash, Due
10/2024) (L)
10,000
10,000
10,000
J.R. Hobbs Co. Atlanta, LLC Term Debt (L+10.3%, 11.8% Cash, Due 10/2024) (L)
36,000
36,000
36,000
46,000
46,000
Personal and Non-Durable Consumer Products
(Manufacturing Only) 0.7%
The Mountain Corporation Term Debt (L+4.0%, 7.0% Cash, Due 4/2024) (G)(L)
11,700
11,700
2,572
Total Secured Second Lien Debt
$
84,318
$
65,309
Preferred Equity 11.5%
Beverage, Food, and Tobacco 0.9%
Head Country, Inc. Preferred
Stock (C)(L)
4,000
$
4,000
$
3,495
Chemicals, Plastics, and Rubber 0.0%
PSI Molded Plastics, Inc. Preferred
Stock (C)(L)
78,598
11,730
Diversified/Conglomerate Manufacturing 0.0%
Channel Technologies Group, LLC Preferred Stock (C)(L)
2,279
1,841
Edge Adhesives Holdings, Inc. (M)
Preferred Stock (C)(L)
8,199
8,199
10,040
Diversified/Conglomerate Services 3.6%
ImageWorks Display and Marketing Group, Inc. Preferred Stock (C)(L)
67,490
6,749
8,265
J.R. Hobbs Co. Atlanta, LLC Preferred Stock (C)(L)
10,920
10,920
The Maids International, LLC Preferred
Stock (C)(L)
6,640
6,640
5,339
24,309
13,604
Home and Office Furnishings, Housewares, and Durable Consumer Products 5.3%
Old World Christmas, Inc. Preferred
Stock (C)(L)
6,180
6,180
19,588
Leisure, Amusement, Motion Pictures, and Entertainment 0.1%
SOG Specialty Knives & Tools, LLC Preferred Stock (C)(L)
14,949
14,949
390
Personal and Non-Durable Consumer Products
(Manufacturing Only) 1.6%
The Mountain Corporation Preferred
Stock (C)(L)
6,899
6,899
Pioneer Square Brands, Inc. Preferred
Stock (C)(L)
5,502
5,500
5,760
12,399
5,760
Telecommunications 0.0%
B+T Group Acquisition, Inc. (M)
Preferred Stock (C)(L)
14,304
4,722
Total Preferred Equity
$
88,329
$
42,837
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
16
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
Common Equity/Equivalents 1.0%
Diversified/Conglomerate Manufacturing 0.0%
Channel Technologies Group, LLC Common
Stock (C)(L)
2,319,184
$
$
D.P.M.S., Inc. Common
Stock (C)(L)
627
1
1
Diversified/Conglomerate Services 1.0%
Nth Degree Investment Group, LLC Common Stock (C)(L)
14,360,000
1,219
3,649
Personal and Non-Durable Consumer Products
(Manufacturing Only) 0.0%
The Mountain Corporation Common
Stock (C)(L)
751
1
Telecommunications 0.0%
B+T Group Acquisition, Inc. (M) Common
Stock Warrants (C)(L)
3.5
%
Total Common Equity/Equivalents
$
1,221
$
3,649
Total Affiliate Investments
$
311,481
$
247,637
CONTROL INVESTMENTS (P)
7.2%:
Secured Second Lien Debt 2.8%
Aerospace and Defense 2.8%
Galaxy Tool Holding Corporation Line of Credit, $0 available (L+4.5%, 6.5% Cash (1.0%
Unused Fee), Due 8/2021) (L)
$
5,000
$
5,000
$
5,000
Galaxy Tool Holding Corporation Term Debt (L+6.0%, 10.0% Cash, Due 8/2021) (L)
5,000
5,000
5,000
$
10,000
$
10,000
Preferred Equity 4.4%
Aerospace and Defense 4.4%
Galaxy Tool Holding Corporation Preferred Stock (C)(L)
5,517,444
$
11,464
$
16,158
Common Equity 0.0%
Aerospace and Defense 0.0%
Galaxy Tool Holding Corporation Common Stock (C)(L)
88,843
$
48
$
Total Control Investments
$
21,512
$
26,158
TOTAL INVESTMENTS
153.6% (V)
$
609,582
$
565,924
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
17
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS)
(A)
Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The
majority of the securities listed, totaling $496.4 million at fair value, are pledged as collateral to our revolving line of credit, as described further in Note 5 Borrowings in the accompanying Notes to Consolidated
Financial Statements . Additionally, under Section 55 of the 1940 Act, we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least
70% of our total assets. As of March 31, 2020, our investment in Funko was considered a non-qualifying asset under Section 55 of the 1940 Act and represented less than 0.1% of total investments, at
fair value.
(B)
Unless indicated otherwise, all cash interest rates are indexed to
30-day LIBOR, which was 1.0% as of March 31, 2020. If applicable, paid-in-kind interest rates are noted separately from the
cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or 30-day LIBOR plus a spread. Due dates represent the contractual maturity
date.
(C)
Security is non-income producing.
(D)
Category percentages represent the fair value of each category and subcategory as a percentage of net assets as
of March 31, 2020.
(E)
Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the ASC 820 fair
value hierarchy. Refer to Note 3 Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(F)
Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned
within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(G)
Debt security is on non-accrual status.
(H)
$5.1 million of the debt security was participated to a third-party, but is accounted for as collateral
for a secured borrowing under accounting principles generally accepted in the U.S. and presented as Secured borrowing on our accompanying Consolidated Statements of Assets and Liabilities as of March 31, 2020.
(I)
Debt security has a fixed interest rate.
(J)
Represents the principal balance for debt investments and the number of shares/units held for equity
investments. Warrants are represented as a percentage of ownership, as applicable.
(K)
Fair value was based on internal yield analysis or on estimates of value submitted by ICE Data Pricing and
Reference Data, LLC. Refer to Note 3 Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(L)
Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to
the portfolio companys securities in order of their relative priority in the capital structure. Refer to Note 3 Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(M)
One of our affiliated funds, Gladstone Capital Corporation, co-invested
with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.
(N)
Non-Control/Non-Affiliate
investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(O)
Affiliate investments, as defined by the 1940 Act, are those that are not Control investments and in which we
own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(P)
Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling
influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(Q)
Reserved.
(R)
Debt security does not have a stated current interest rate.
(S)
Our investment in Funko was valued using Level 2 inputs within the ASC 820 fair value hierarchy. Our
common units in Funko are convertible into class A common stock in Funko, Inc. upon meeting certain requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of
marketability. Funko, Inc. is traded on the Nasdaq Global Select Market under the trading symbol FNKO. Refer to Note 3 Investments in the accompanying Notes to Consolidated Financial Statements for additional
information.
(T)
Reserved.
(U)
Refer to Note 10 Commitments and Contingencies in the accompanying Notes to Consolidated
Financial Statements for additional information regarding this guaranty.
(V)
Cumulative gross unrealized depreciation for federal income tax purposes is $105.3 million; cumulative
gross unrealized appreciation for federal income tax purposes is $60.7 million. Cumulative net unrealized depreciation is $44.6 million, based on a tax cost of $610.5 million.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
18
GLADSTONE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
(UNAUDITED)
NOTE 1. ORGANIZATION
Gladstone Investment Corporation (Gladstone Investment) was incorporated under the General Corporation Law of the State of Delaware on
February 18, 2005, and completed an initial public offering on June 22, 2005. The terms the Company, we, our and us all refer to Gladstone Investment and its consolidated subsidiaries. We are
an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (BDC) under
the Investment Company Act of 1940, as amended (the 1940 Act), and are applying the guidance of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 946, Financial
Services-Investment Companies (ASC 946). In addition, we have elected to be treated for U.S. federal income tax purposes as a regulated investment company (RIC) under the Internal Revenue Code of 1986, as amended
(the Code). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (U.S.). Debt investments primarily take the form of two types of loans: secured
first lien loans and secured second lien loans. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. 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 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. We intend that our investment portfolio over time will consist of approximately 75.0% in debt
investments and 25.0% in equity investments, at cost.
Gladstone Business Investment, LLC (Business Investment), a wholly-owned subsidiary of
ours, was established on August 11, 2006 for the sole purpose of holding certain investments pledged as collateral under our line of credit. The financial statements of Business Investment are consolidated with those of Gladstone Investment. We
also have significant subsidiaries (as defined under Rule 1-02(w) of the U.S. Securities and Exchange Commissions (SEC) Regulation S-X) whose financial
statements are not consolidated with ours. Refer to Note 12 Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.
We are externally managed by Gladstone Management Corporation (the Adviser), an affiliate of ours and an
SEC-registered investment adviser, pursuant to an investment advisory and management agreement (the Advisory Agreement). Administrative services are provided by Gladstone Administration, LLC (the
Administrator), an affiliate of ours and the Adviser, pursuant to an administration agreement (the Administration Agreement). Refer to Note 4 Related Party Transactions for more information regarding these
arrangements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements and Basis of Presentation
We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial
information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of SEC Regulation S-X. Accordingly, we have not included in
this quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. In accordance with Article 6 of Regulation S-X, we do not consolidate portfolio company investments. Under the investment company rules
and regulations pursuant to the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another
investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments,
consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and nine months ended December 31, 2020 are not
necessarily indicative of results that ultimately may be achieved for the fiscal year ending March 31, 2021 or any future interim period. The interim financial statements and notes thereto should be read in conjunction with the financial
statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended March 31, 2020, as filed with the SEC on May 12, 2020.
19
Use of Estimates
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated
Financial Statements and these Notes to Consolidated Financial Statements . Actual results may differ from those estimates.
Investment
Valuation Policy
Accounting Recognition
We
record our investments at fair value in accordance with the FASB ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains
or losses are generally measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments
charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or
losses are realized.
Board Responsibility
In
accordance with the 1940 Act, our board of directors (Board of Directors) has the ultimate responsibility for reviewing and determining, in good faith, the fair value of our investments for which market quotations are not readily
available based on our investment valuation policy (which has been approved by our Board of Directors) (the Policy). Such review occurs in three phases. First, prior to its quarterly meetings, the Board of Directors receives written
valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer (the Valuation Team). Second, the Valuation Committee of our
Board of Directors (comprised entirely of independent directors) meets to review the valuation recommendations and supporting materials, presented by the chief valuation officer. Third, after the Valuation Committee concludes its meeting, it and the
chief valuation officer present the Valuation Committees findings to the entire Board of Directors so that the full Board of Directors may review and determine in good faith the fair value of such investments in accordance with the Policy.
There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and
circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy, and each quarter the Valuation Committee and Board of Directors review the Policy
to determine if changes thereto are advisable and whether the Valuation Team has applied the Policy consistently.
Use of Third-Party Valuation Firms
The Valuation Team engages third-party valuation firms to provide independent assessments of fair value of certain of our investments.
ICE Data Pricing and Reference Data, LLC (ICE), a valuation specialist, generally provides estimates of fair value on our debt investments. The
Valuation Team generally assigns ICEs estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates ICEs estimates of fair value
using one or more of the valuation techniques discussed below. The Valuation Teams estimate of value on a specific debt investment may significantly differ from ICEs. When this occurs, our Valuation Committee and Board of Directors
review whether the Valuation Team has followed the Policy and whether the Valuation Teams recommended fair value is reasonable in light of the Policy and other facts and circumstances before determining fair value.
We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for
incorporation into the total enterprise value (TEV) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the valuation of each of our significant equity investments,
which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a
recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value and whether it is reasonable in light of the Policy and other relevant facts and circumstances
before determining fair value.
20
Valuation Techniques
In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:
Total Enterprise Value In determining the fair value using a TEV, the Valuation Team first
calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio companys ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the
trailing or projected twelve month revenue or earnings before interest, taxes, depreciation and amortization (EBITDA)); EBITDA obtained from our indexing methodology whereby the original transaction EBITDA at the time of our closing is
indexed to a general subset of comparable disclosed transactions and EBITDA from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries; and other pertinent
factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team generally allocates the TEV to the portfolio
companys securities based on the facts and circumstances of the securities, which typically results in the allocation of fair value to securities based on the order of their relative priority in the capital structure. Generally, the Valuation
Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.
TEV is primarily calculated using EBITDA; however, TEV may also be calculated using revenue multiples or a discounted cash flow
(DCF) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity
risks. Generally, the Valuation Team uses a DCF analysis to calculate TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit-impaired
portfolio companies.
Yield Analysis The Valuation Team generally determines the fair value of our debt investments for
which we do not have the ability to effectuate a sale of the applicable portfolio company using the yield analysis, which includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, including: estimated
remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon
default, and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by ICE and market quotes.
Market Quotes For our investments for which a limited market exists, we generally base fair value
on readily available and reliable market quotations, which are corroborated by the Valuation Team (generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar investments and
evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price in the bid-to-ask price range obtained from the respective originating syndication agents trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional
information to validate that price in accordance with the Policy. For securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date. For restricted securities that
are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date less a discount for the restriction, which includes consideration of the nature and term to expiration of the
restriction.
Investments in Funds For equity investments in other funds for which we cannot effectuate a sale of
the fund, the Valuation Team generally determines the fair value of our invested capital at the net asset value (NAV) provided by the fund. Any invested capital that is not yet reflected in the NAV provided by the fund is valued at par
value. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.
In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments,
including: the nature and realizable value of the collateral, including external parties guaranties, any relevant offers or letters of intent to acquire the portfolio company, timing of expected loan repayments, and the markets in which the
portfolio company operates.
Fair value measurements of our investments may involve subjective judgments and estimates and, due to the uncertainty
inherent in valuing these securities, the determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially
affected if the determinations
21
regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market
environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally
subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the
value at which it is recorded.
Refer to Note 3 Investments for additional information regarding fair value measurements and our application
of ASC 820.
Revenue Recognition
Interest Income
Recognition
Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded
on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other
obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However,
we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon managements judgment.
Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid and, in managements judgment, are likely to remain
current, or, due to a restructuring, the interest income is deemed to be collectible. As of December 31, 2020, our loans to B+T Group Acquisition, Inc. (B+T), Horizon Facilities Services, Inc. (Horizon), The Mountain
Corporation (The Mountain), PSI Molded Plastics, Inc. (PSI Molded) and SOG Specialty Knives & Tools, LLC (SOG) were on non-accrual status, with an aggregate debt
cost basis of $95.1 million, or 19.5% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $78.3 million, or 16.8% of the fair value of all debt investments in our portfolio. As of March 31, 2020,
certain of our loans to B+T, The Mountain, PSI Molded, and SOG were on non-accrual status, with an aggregate debt cost basis of $63.5 million, or 14.0% of the cost basis of all debt investments in our
portfolio, and an aggregate fair value of $43.5 million, or 10.1% of the fair value of all debt investments in our portfolio.
Paid-in-kind (PIK) interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as
interest income. As of December 31, 2020 and March 31, 2020, we did not have any loans with a PIK interest component.
Success Fee Income
Recognition
We record success fees as income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a
change of control in a portfolio company, typically resulting from an exit or sale, and are non-recurring.
Dividend Income Recognition
We accrue dividend income on
preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration.
Related Party Fees
We are party to the Advisory
Agreement with the Adviser, which is owned and controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an
incentive fee. Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms of the Fifth Amended and Restated Credit Agreement dated April 30, 2013, as amended (the Credit
Facility).
We are also party to the Administration Agreement with the Administrator, which is owned and controlled by our chairman and chief
executive officer, whereby we pay separately for administrative services.
Refer to Note 4 Related Party Transactions for additional
information regarding these related party fees and agreements.
22
Recent Accounting Pronouncements
In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820):
Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value (ASU 2018-13), which modifies the disclosure requirements in ASC 820. ASU 2018-13 was effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted, and we adopted ASU 2018-13 effective April 1, 2020. The adoption of ASU 2018-13 did not have a material impact on our financial position, results of operations or cash flows.
NOTE 3. INVESTMENTS
Fair Value
In accordance with ASC 820, we determine the fair value of our investments to be the price that would be received for an investment in a current sale, which
assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use
of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical financial instruments in active markets;
Level 2 inputs to the valuation methodology include quoted prices for similar
financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are those in markets
for which there are few transactions, the prices are not current, little public information exists, or instances where prices vary substantially over time or among brokered market makers; and
Level 3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Teams assumptions based upon the best available
information.
When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such
determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable
inputs (or components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the
fair value measurement.
As of December 31, 2020 and March 31, 2020, all of our investments were valued using Level 3 inputs within the ASC
820 fair value hierarchy, except for our investment in Funko Acquisition Holdings, LLC (Funko), which was valued using Level 2 inputs.
We transfer investments in and out of Level 1, 2 and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of
observable and unobservable inputs utilized to perform the valuation for the period. There were no transfers in or out of Level 1, 2 and 3 during the nine months ended December 31, 2020 and 2019, respectively.
23
As of December 31, 2020 and March 31, 2020, our investments, by security type, at fair value were
categorized as follows within the ASC 820 fair value hierarchy:
Fair Value Measurements
Fair Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
As of December 31, 2020:
Secured first lien debt
$
361,872
$
$
$
361,872
Secured second lien debt
103,365
103,365
Preferred equity
142,559
142,559
Common equity/equivalents
3,092
85
(A)
3,007
Total Investments as of December 31, 2020
$
610,888
$
$
85
$
610,803
Fair Value Measurements
Fair Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
As of March 31, 2020:
Secured first lien debt
$
308,248
$
$
$
308,248
Secured second lien debt
123,340
123,340
Preferred equity
119,849
119,849
Common equity/equivalents
14,487
33
(A)
14,454
Total Investments as of March 31, 2020
$
565,924
$
$
33
$
565,891
(A)
Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be
converted into common shares of Funko, Inc.) at the reporting date less a discount for lack of marketability, as our investment was subject to certain restrictions.
24
The following table presents our investments, valued using Level 3 inputs within the ASC 820 fair value
hierarchy, and carried at fair value as of December 31, 2020 and March 31, 2020, by caption on our accompanying Consolidated Statements of Assets and Liabilities, and by security type:
Total Recurring Fair Value Measurements
Reported in Consolidated Statements
of Assets and
Liabilities
Valued Using Level 3 Inputs
December 31, 2020
March 31, 2020
Non-Control/Non-Affiliate
Investments
Secured first lien debt
$
182,872
$
172,406
Secured second lien debt
41,916
48,031
Preferred equity
62,256
60,854
Common equity/equivalents (A)
3,007
10,805
Total
Non-Control/Non-Affiliate Investments
290,051
292,096
Affiliate Investments
Secured first lien debt
179,000
135,842
Secured second lien debt
48,449
65,309
Preferred equity
61,972
42,837
Common equity/equivalents
3,649
Total Affiliate Investments
289,421
247,637
Control Investments
Secured first lien debt
Secured second lien debt
13,000
10,000
Preferred equity
18,331
16,158
Common equity/equivalents
Total Control Investments
31,331
26,158
Total investments at fair value using Level 3 inputs
$
610,803
$
565,891
(A)
Excludes our investment in Funko with a fair value of $85 and $33 as of December 31, 2020 and
March 31, 2020, respectively, which was valued using Level 2 inputs.
25
In accordance with ASC 820, the following table provides quantitative information about our investments
valued using Level 3 fair value measurements as of December 31, 2020 and March 31, 2020. The table below is not intended to be all-inclusive, but rather provides information on the significant
Level 3 inputs as they relate to our fair value measurements. The weighted-average calculations in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations
for the particular input.
Quantitative Information about Level 3 Fair Value Measurements
Fair Value as of
Valuation
Technique/
Methodology
Range / Weighted-Average as of
December 31,
2020
March 31,
2020
Unobservable Input
December 31, 2020
March 31, 2020
Secured first lien debt
$
297,363
$
280,499
TEV
EBITDA multiple
4.1x 8.0x /
6.3x
4.2x 8.1x /
6.2x
EBITDA
$1,372 $16,727 /
$7,038
$1,372 $13,042 /
$5,894
Revenue multiple
0.6x 0.7x / 0.7x
0.3x 0.7x / 0.5x
Revenue
$14,635 $28,167 /
$24,438
$14,343 $24,060 /
$18,141
Discount Rate
21.0% 21.0% /
21.0%
64,509
27,749
Yield Analysis
Discount Rate
13.9% 21.7% /
14.4%
16.2% 18.7% /
16.8%
Secured second lien debt (A)
99,485
107,195
TEV
EBITDA multiple
5.1x 6.3x /
5.4x
5.1x 6.2x /
5.6x
EBITDA
$5,041 $10,000 /
$7,848
$4,459 $13,042 /
$7,444
Revenue multiple
0.7x 0.7x /
0.7x
0.7x 0.7x /
0.7x
Revenue
$14,635 $14,635 /
$14,635
$15,267 $15,267 /
$15,267
3,880
16,145
Yield Analysis
Discount Rate
13.0% 13.0% /
13.0%
12.6% 16.4% /
13.5%
Preferred equity
142,559
119,849
TEV
EBITDA multiple
4.5x 8.0x /
6.1x
5.1x 8.1x /
6.1x
EBITDA
$1,363 $16,727 /
$6,332
$356 $13,042 /
$5,596
Revenue multiple
0.6x 0.7x / 0.7x
0.6x 0.7x / 0.6x
Revenue
$14,635 $28,167 /
$23,894
$15,267 $24,060 /
$21,283
Discount Rate
21.0% 21.0% / 21.0%
Common equity/equivalents (B) (C)
3,007
14,454
TEV
EBITDA multiple
4.1x 6.7x / 5.5x
4.2x 7.4x / 5.9x
EBITDA
$1,372 $8,498 /
$4,985
$1,372 $16,061 /
$9,258
Revenue multiple
0.7x 0.7x / 0.7x
0.7x 0.7x / 0.7x
Revenue
$14,635 $14,635 /
$14,635
$15,267 $15,267 /
$15,267
Total
$
610,803
$
565,891
(A)
Fair value as of December 31, 2020 includes one proprietary debt investment with a fair value of
$13.0 million, which was valued at the expected payoff amount as the unobservable input.
(B)
Fair value as of December 31, 2020 includes one proprietary equity investment with a fair value of
$2.7 million, which was valued at the expected payoff amount as the unobservable input.
(C)
Fair value as of both December 31, 2020 and March 31, 2020 excludes our investment in Funko with a
fair value of $85 and $33, respectively, which was valued using Level 2 inputs.
Fair value measurements can be sensitive to
changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in
discount rates or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase in the fair value of certain of our investments.
26
Changes in Level 3 Fair Value Measurements of Investments
The following tables provide our portfolios changes in fair value, broken out by security type, during the three and nine months ended December 31,
2020 and 2019 for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.
Fair Value
Measurements Using Significant Unobservable Inputs (Level 3)
Secured
First Lien
Debt
Secured
Second Lien
Debt
Preferred
Equity
Common
Equity/
Equivalents
Total
Three Months ended December 31, 2020:
Fair value as of September 30, 2020
$
356,496
$
100,076
$
140,076
$
12,266
$
608,914
Total gain (loss):
Net realized gain (loss) (A)
(8,470
)
3,292
14,030
8,852
Net unrealized appreciation
(depreciation) (B)
(700
)
84
9,680
2,678
11,742
Reversal of previously recorded (appreciation) depreciation upon realization (B)
(84
)
(11,785
)
(11,869
)
New investments, repayments and
settlements (C) :
Issuances / originations
27,280
3,205
1,709
32,194
Settlements / repayments
(12,734
)
(12,734
)
Sales
(12,114
)
(14,182
)
(26,296
)
Transfers (D)
Fair value as of December 31, 2020
$
361,872
$
103,365
$
142,559
$
3,007
$
610,803
Secured
First Lien
Debt
Secured
Second Lien
Debt
Preferred
Equity
Common
Equity/
Equivalents
Total
Nine Months ended December 31, 2020:
Fair value as of March 31, 2020
$
308,248
$
123,340
$
119,849
$
14,454
$
565,891
Total gain (loss):
Net realized gain (loss) (A)
(8,470
)
3,292
14,144
8,966
Net unrealized appreciation
(depreciation) (B)
(1,915
)
474
9,432
490
8,481
Reversal of previously recorded (appreciation) depreciation upon realization (B)
(84
)
(11,785
)
(11,869
)
New investments, repayments and
settlements (C) :
Issuances / originations
60,779
3,515
25,290
89,584
Settlements / repayments
(20,734
)
(20,734
)
Sales
(15,220
)
(14,296
)
(29,516
)
Transfers (D)
23,964
(23,964
)
Fair value as of December 31, 2020
$
361,872
$
103,365
$
142,559
$
3,007
$
610,803
Secured
First Lien
Debt
Secured
Second
Lien Debt
Preferred
Equity
Common
Equity/
Equivalents
Total
Three Months ended December 31, 2019:
Fair value as of September 30, 2019
$
300,864
$
106,744
$
183,531
$
17,027
$
608,166
Total gain (loss):
Net realized gain (loss) (A)
33,710
(300
)
33,410
Net unrealized appreciation
(depreciation) (B)
(395
)
(2,994
)
4,621
(2,056
)
(824
)
Reversal of previously recorded (appreciation) depreciation upon realization (B)
(26,447
)
300
(26,147
)
New investments, repayments and
settlements (C) :
Issuances / originations
2,215
19,988
1,726
23,929
Settlements / repayments
(15,290
)
(10,000
)
(25,290
)
Sales
(52,550
)
(52,550
)
Transfers (D)
(8,602
)
8,602
(12,434
)
12,434
Fair value as of December 31, 2019
$
278,792
$
122,340
$
132,157
$
27,405
$
560,694
27
Secured
First Lien
Debt
Secured
Second
Lien Debt
Preferred
Equity
Common
Equity/
Equivalents
Total
Nine Months ended December 31, 2019:
Fair value as of March 31, 2019
$
331,090
$
75,293
$
195,377
$
22,011
$
623,771
Total gain (loss):
Net realized gain (loss) (A)
35,243
18,995
54,238
Net unrealized appreciation
(depreciation) (B)
(2,095
)
(4,319
)
(4,746
)
4,395
(6,765
)
Reversal of previously recorded (appreciation) depreciation upon realization (B)
67
(28,568
)
(11,448
)
(39,949
)
New investments, repayments and
settlements (C) :
Issuances / originations
55,315
24,997
13,806
1,200
95,318
Settlements / repayments
(55,916
)
(23,300
)
(79,216
)
Sales
(66,521
)
(20,182
)
(86,703
)
Transfers (D)
(49,602
)
49,602
(12,434
)
12,434
Fair value as of December 31, 2019
$
278,792
$
122,340
$
132,157
$
27,405
$
560,694
(A)
Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of
Operations for the respective periods ended December 31, 2020 and 2019.
(B)
Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated
Statements of Operations for the respective periods ended December 31, 2020 and 2019.
(C)
Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization
of discounts, PIK and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and
acquisition costs, and other cost-basis adjustments.
(D)
2020: Transfers represent (1) secured second lien debt of Brunswick Bowling Products, Inc. with a total
cost basis and fair value of $6.9 million, which was converted into secured first lien debt during the three months ended June 30, 2020 and (2) secured second lien debt of PSI Molded, with a total cost basis and fair value of
$26.6 million and $17.1 million, respectively, which was converted into secured first lien debt during the three months ended September 30, 2020.
2019: Transfers represent (1) secured first lien debt of B-Dry, LLC with a cost basis of
$11.9 million and a fair value of $0, which was converted into equity during the three months ended June 30, 2019, (2) secured first lien debt of J.R. Hobbs Co. Atlanta, LLC, with a total cost basis and fair value of
$41.0 million, which was converted into secured second lien debt during the three months ended September 30, 2019, (3) secured first lien debt of SBS Investment Holdings, Inc., with a total cost basis and fair value of $8.6 million,
that was converted to secured second lien debt during the three months ended December 31, 2019 and (4) preferred equity of Nth Degree, Inc. with a cost basis of $1.2 million and fair value of $12.4 million, that was converted to
common equity in Nth Degree Investment Group, LLC during the three months ended December 31, 2019.
Investment Activity
During the nine months ended December 31, 2020, the following significant transactions occurred:
In July 2020, we invested $46.9 million in Mason West, LLC (Mason West) through a combination of
secured first lien debt and preferred equity. Mason West, headquartered in Placentia, California, is a provider of engineered seismic restraint and vibration isolation solutions. In September 2020, Mason West repaid $7.0 million of secured
first lien debt and redeemed $3.1 million of preferred equity.
In September 2020, we invested an additional $8.0 million in PSI Molded in the form of preferred equity and
also amended certain terms of our existing debt.
In December 2020, we recapitalized our investment in Old World Christmas, Inc. (Old World) and
invested an additional $27.0 million in the form of secured first lien debt. In connection with this investment, Old World paid dividend income of $3.2 million and additional equity proceeds of $10.8 million, resulting in a
$7.5 million return of preferred equity cost basis and a realized gain of $3.3 million.
In December 2020, we invested an additional $3.0 million in Galaxy Technologies, Inc. (Galaxy)
in the form of secured second lien debt. In connection with this investment, Galaxy purchased SBS Industries, LLC (a subsidiary of SBS Industries Holdings, Inc., one of our other portfolio companies). SBS Industries Holdings, Inc. used proceeds from
the sale to partially repay our $11.4 million first lien debt, resulting in a realized loss of $8.5 million.
In December 2020, we sold our investment in Frontier Packaging, Inc., which resulted in dividend income of
$0.9 million, success fee income of $0.2 million, and a realized gain of $14.0 million. In connection with the sale, we received net cash proceeds of $26.0 million, including the repayment of our debt investment of
$9.5 million at par.
28
Investment Concentrations
As of December 31, 2020, our investment portfolio consisted of investments in 28 portfolio companies located in 17 states across 13 different industries
with an aggregate fair value of $610.9 million. Our investments in Pioneer Square Brands, Inc., J.R. Hobbs Co. Atlanta, LLC, Counsel Press, Inc., Old World, and Mason West represented our five largest portfolio investments at fair value
as of December 31, 2020, and collectively comprised $214.8 million, or 35.1%, of our total investment portfolio at fair value.
The following
table summarizes our investments by security type as of December 31, 2020 and March 31, 2020:
December 31, 2020
March 31, 2020
Cost
Fair Value
Cost
Fair Value
Secured first lien debt
$
375,062
57.0
%
$
361,872
59.2
%
$
310,019
50.9
%
$
308,248
54.5
%
Secured second lien debt
113,201
17.2
103,365
16.9
143,155
23.5
123,340
21.8
Total debt
488,263
74.2
465,237
76.1
453,174
74.4
431,588
76.3
Preferred equity
166,361
25.3
142,559
23.3
152,998
25.1
119,849
21.2
Common equity/equivalents
3,257
0.5
3,092
0.6
3,410
0.5
14,487
2.5
Total equity/equivalents
169,618
25.8
145,651
23.9
156,408
25.6
134,336
23.7
Total investments
$
657,881
100.0
%
$
610,888
100.0
%
$
609,582
100.0
%
$
565,924
100.0
%
Investments at fair value consisted of the following industry classifications as of December 31, 2020 and March 31,
2020:
December 31, 2020
March 31, 2020
Fair Value
Percentage of
Total Investments
Fair Value
Percentage of
Total Investments
Diversified/Conglomerate Services
$
253,969
41.6
%
$
226,805
40.1
%
Home and Office Furnishings, Housewares, and Durable Consumer Products
92,374
15.1
83,705
14.8
Personal and Non-Durable Consumer Products
(Manufacturing Only)
55,429
9.1
34,865
6.2
Leisure, Amusement, Motion Pictures, and Entertainment
40,274
6.6
35,240
6.2
Aerospace and Defense
31,331
5.1
26,158
4.6
Healthcare, Education, and Childcare
28,898
4.7
25,563
4.5
Diversified/Conglomerate Manufacturing
24,976
4.1
28,147
5.0
Chemicals, Plastics, and Rubber
20,981
3.4
16,737
3.0
Cargo Transport
15,738
2.6
13,316
2.4
Telecommunications
15,414
2.5
15,792
2.8
Beverage, Food, and Tobacco
14,308
2.3
12,545
2.2
Machinery (Non-agriculture, Non-construction, and Non-electronic)
13,316
2.2
23,091
4.1
Containers, Packaging, and Glass
20,360
3.6
Other < 2.0%
3,880
0.7
3,600
0.5
Total investments
$
610,888
100.0
%
$
565,924
100.0
%
Investments at fair value were included in the following geographic regions of the U.S. as of December 31, 2020 and
March 31, 2020:
December 31, 2020
March 31, 2020
Location
Fair Value
Percentage of
Total Investments
Fair Value
Percentage of
Total Investments
South
$
175,580
28.7
%
$
182,178
32.2
%
Northeast
153,700
25.2
146,434
25.9
West
147,530
24.2
90,214
15.9
Midwest
134,078
21.9
147,098
26.0
Total investments
$
610,888
100.0
%
$
565,924
100.0
%
The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have
additional business locations in other geographic regions.
29
Investment Principal Repayments
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments,
as of December 31, 2020:
Amount
For the remaining three months ending March 31:
2021
$
9,050
For the fiscal years ending March 31:
2022
39,720
2023
106,150
2024
116,851
2025
164,277
Thereafter
52,250
Total contractual repayments
$
488,298
Adjustments to cost basis of debt investments
(35
)
Investments in equity securities
169,618
Total cost basis of investments held as of December 31, 2020:
$
657,881
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies.
Such receivables, net of any allowance for uncollectible receivables, are included in Other assets, net on our accompanying Consolidated Statements of Assets and Liabilities . We generally maintain an allowance for uncollectible receivables
from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon managements judgment, that the portfolio company is unable to pay its obligations. We
write-off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of December 31, 2020 and March 31, 2020, we had gross receivables from
portfolio companies of $1.3 million and $1.4 million, respectively. As of each of December 31, 2020 and March 31, 2020, the allowance for uncollectible receivables was $0.9 million.
NOTE 4. RELATED PARTY TRANSACTIONS
Transactions
with the Adviser
We pay the Adviser certain fees as compensation for its services under the Advisory Agreement, consisting of a base management fee
and an incentive fee and a loan servicing fee for the Advisers role as servicer pursuant to the Credit Facility, all as described below. On July 14, 2020, our Board of Directors, including a majority of the directors who are not parties
to the Advisory Agreement or interested persons of either party, approved the annual renewal of the Advisory Agreement through August 31, 2021.
Two
of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of the Adviser, which is 100% indirectly owned and
controlled by Mr. Gladstone. David Dullum (our president) is also the executive vice president of private equity (buyouts) of the Adviser. Michael LiCalsi, our general counsel and secretary (who also serves as the Administrators
president, general counsel and secretary), is also the executive vice president of administration of our Adviser.
30
The following table summarizes the base management fees, loan servicing fees, incentive fees, and associated
non-contractual, unconditional, and irrevocable credits reflected in our accompanying Consolidated Statements of Operations :
Three Months Ended
December 31,
Nine Months Ended
December 31,
2020
2019
2020
2019
Average total assets subject to base management fee (A)
$
623,200
$
594,000
$
597,400
$
619,000
Multiplied by prorated annual base management fee of 2.0%
0.5
%
0.5
%
1.5
%
1.5
%
Base management fee (B)
3,116
2,970
8,961
9,285
Credits to fees from
Adviserother (B)
(789
)
(817
)
(2,594
)
(2,647
)
Net base management fee
$
2,327
$
2,153
$
6,367
$
6,638
Loan servicing fee (B)
1,786
1,794
5,242
5,139
Credits to base management feeloan servicing fee (B)
(1,786
)
(1,794
)
(5,242
)
(5,139
)
Net loan servicing fee
$
$
$
$
Incentive fee income-based
$
2,002
$
1,515
$
2,002
$
4,338
Incentive fee capital
gains-based (C)
1,754
1,358
1,452
1,704
Total incentive fee (B)
$
3,756
$
2,873
$
3,454
$
6,042
Credits to fees from
Adviserother (B)
Net total incentive fee
$
3,756
$
2,873
$
3,454
$
6,042
(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 accompanying Consolidated Statement 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.
Base Management Fee
The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 2.0%, computed on the basis
of the value of our average gross assets at the end of the two most recently completed quarters (inclusive of the current quarter), which are 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 period and adjusted appropriately for any share issuances or repurchases during the period.
Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The
Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include: (i) assistance obtaining, sourcing or structuring credit
facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial
modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) taking a primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and
retaining key portfolio company management team members. The Adviser non-contractually, unconditionally, and irrevocably credits 100% of any fees received for such services against the base management fee that
we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $48 and $0.1 million for the three and nine months ended December 31,
2020, respectively, and $0.1 million and $0.2 million for the three and nine months ended December 31, 2019, respectively, was retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the
Adviser, primarily related to the valuation of portfolio companies.
Loan Servicing Fee
The Adviser also services the loans held by our wholly-owned subsidiary, Business Investment (the borrower under the Credit Facility), in return for which the
Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under the Credit Facility. Since Business Investment is a consolidated subsidiary of ours, coupled with the fact that the total base management
fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 2.0% of total assets (less any uninvested cash or cash equivalents resulting from borrowings) during any given calendar year, we treat payment of the loan servicing fee
pursuant to the Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100%
non-contractually, unconditionally, and irrevocably credited back to us by the Adviser.
31
Incentive Fee
The incentive fee payable to the Adviser under our Advisory Agreement consists of two parts: an income-based incentive fee and a capital gains-based incentive
fee.
The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75%
of our net assets, which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted
appropriately for any share issuances or repurchases during the period (the Hurdle Rate). The income-based incentive fee with respect to our pre-incentive fee net investment income is payable
quarterly to the Adviser and is computed as follows:
No incentive fee in any calendar quarter in which our pre-incentive fee
net investment income does not exceed the Hurdle Rate;
100.0% of our pre-incentive fee net investment income with respect to
that portion of such pre-incentive fee net investment income, if any, that exceeds the Hurdle Rate but is less than 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases
during the period, in any calendar quarter; and
20.0% of the amount of our pre-incentive fee net investment income, if
any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter.
The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or
upon termination of the Advisory Agreement, as of the termination date), and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the preceding calendar year. The
capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital losses since our inception, less
(iii) the entire portfolios aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital gains-based incentive fee for such year
equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of
the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit between the net sales price of each
investment, when sold, and the original cost of such investment since our inception. The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of the deficit between the fair value of each investment security as
of the applicable calculation date and the original cost of such investment security. As of December 31, 2020, no capital gains-based incentive fees were contractually due to the Adviser. During the year ended March 31, 2020, capital
gains-based incentive fees of $8.1 million were contractually due and paid to the Adviser.
In accordance with GAAP, accrual of the capital
gains-based incentive fee is determined as if our investments had been liquidated at their fair values as of the end of the reporting period. Therefore, GAAP requires that the capital gains-based incentive fee accrual consider the aggregate
unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that any such unrealized capital appreciation will be
realized in the future. Accordingly, a GAAP accrual is calculated at the end of the reporting period based on (i) cumulative aggregate realized capital gains since our inception, plus (ii) the entire portfolios aggregate unrealized
capital appreciation, if any, less (iii) cumulative aggregate realized capital losses since our inception, less (iv) the entire portfolios aggregate unrealized capital depreciation, if any. If such amount is positive at the end of a
reporting period, a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of capital gains-based incentive fees accrued in all prior years, is recorded, regardless of whether such amount is contractually due
under the terms of the Advisory Agreement. If such amount is negative, then there is no accrual for such period and prior period accruals are reversed, as appropriate. During the three and nine months ended December 31, 2020, we recorded
capital gains-based incentive fees of $1.8 million and $1.5 million, respectively. During the three and nine months ended December 31, 2019, we recorded capital gains-based incentive fees of $1.4 million and $1.7 million,
respectively.
Transactions with the Administrator
We reimburse the Administrator pursuant to the Administration Agreement for our allocable portion of the Administrators expenses incurred while
performing services to us, which are primarily rent and salaries and benefits expenses of the Administrators employees, including: our chief financial officer and treasurer, chief valuation officer, chief compliance officer, and general
counsel and secretary, and their respective staffs. Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating officer) serve as members of the board of
managers and executive officers of the Administrator, which is 100% indirectly owned and controlled by Mr. Gladstone. Another of our officers, Mr. LiCalsi (our general counsel & secretary), serves as the Administrators president as
well as the executive vice president of administration for the Adviser.
32
Our allocable portion of the Administrators expenses is generally derived by multiplying the
Administrators total expenses by the approximate percentage of time during the current quarter the Administrators employees performed services for us in relation to their time spent performing services for all companies serviced by the
Administrator. On July 14, 2020, our Board of Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of either party, approved the annual renewal of the Administration
Agreement through August 31, 2021.
Transactions with Gladstone Securities, LLC
Gladstone Securities, LLC (Gladstone Securities) is a privately held broker dealer registered with the Financial Industry Regulatory Authority and
insured by the Securities Investor Protection Corporation. Gladstone Securities is an affiliate of ours, as its parent company is 100% owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves
on the board of managers of Gladstone Securities.
Dealer Manager Agreement
On May 22, 2020, the Company, entered into a dealer manager agreement (the Dealer Manager Agreement), with Gladstone Securities whereby
Gladstone Securities will serve as the Companys exclusive dealer manager in connection with the Companys offering (the Offering) of up to $350.0 million aggregate principal amount of the Companys 6.00% Notes due
2040 (the Notes) on a reasonable best efforts basis.
Under the Dealer Manager Agreement, Gladstone Securities will
provide certain sales, promotional and marketing services to the Company in connection with the Offering, and the Company will pay (i) selling commissions of up to 6.0% of the gross proceeds from sales of the Notes in the
Offering and (ii) a dealer manager fee of up to 3.0% of the gross proceeds from sales of the Notes in the Offering (the Dealer Manager Fee). Gladstone Securities may, in its sole discretion, reallow a portion of the Dealer Manager
Fee to participating broker-dealers in support of the Offering. During the nine months ended December 31, 2020, no Notes were sold and there were no selling commissions or Dealer Manager Fee incurred pursuant to the Dealer Manager
Agreement.
Other Transactions
From time to time,
Gladstone Securities provides other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which it receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact
the fees we pay to the Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee. During the three and nine months ended December 31, 2020, the fees received
by Gladstone Securities from portfolio companies totaled $0.3 million and $0.6 million, respectively. During the three and nine months ended December 31, 2019, the fees received by Gladstone Securities from portfolio companies totaled
$0.1 million and $0.5 million, respectively.
Related Party Fees Due
Amounts due to related parties on our accompanying Consolidated Statements of Assets and Liabilities were as follows:
As of December 31,
As of March 31,
2020
2020
Base management and loan servicing fee due to Adviser, net of credits
$
987
$
(222
)
Incentive fee due to Adviser (A)
10,841
7,387
Other due to Adviser
43
13
Total fees due to Adviser
$
11,871
$
7,178
Fee due to Administrator
$
462
$
582
Total related party fees due
$
12,333
$
7,760
(A)
Includes a capital gains-based incentive fee of $8.8 million and $7.4 million, respectively, recorded
in accordance with GAAP requirements, and which was not contractually due under the terms of the Advisory Agreement as of December 31, 2020 and March 31, 2020. Refer to Note 4 Related Party Transactions Transactions
with the Adviser Incentive Fee for additional information, including capital gains-based incentive fee payments made.
Net expenses receivable from Gladstone Capital Corporation, one of our affiliated funds, for reimbursement purposes, which includes certain co-investment expenses, totaled $40 and $70 as of December 31, 2020 and March 31, 2020, respectively. These amounts are generally settled in the quarter subsequent to being incurred and have been included
in Other assets, net on the accompanying Consolidated Statements of Assets and Liabilities as of December 31, 2020 and March 31, 2020, respectively.
33
NOTE 5. BORROWINGS
Revolving Line of Credit
On August 22, 2018, we,
through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 4 to the Fifth Amended and Restated Credit Agreement, originally entered into on April 30, 2013 and as previously amended, with KeyBank 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 to August 22, 2021, and if not renewed or
extended by such date, all principal and interest will be due and payable on August 22, 2023 (two years after the revolving period end date). Additionally, the Credit Facility commitment amount was increased from $165.0 million to
$200.0 million and, subject to certain terms and conditions, can be expanded to a total facility amount of $300.0 million through additional commitments from existing or new lenders.
On August 10, 2020, we, through Business Investment, entered into Amendment No. 5 to the Credit Facility. Among other things, Amendment No. 5
amends the Credit Facility to (i) add London Interbank Offered Rate (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. In addition, Amendment No. 5 provides for certain temporary changes during the COVID-19 Relief Period (which began on August 10, 2020 and ends on March 31, 2021, and which may be extended, subject to certain conditions) including: (i) amending the definition of Effective
Advance Rate, provided that during such period the overall effective advance rate does not exceed 55%; and (ii) removing or changing certain Excess Concentration Limits (as defined in the Credit Facility).
Advances under the Credit Facility generally bear interest at 30-day LIBOR, subject to a floor of 0.5%, plus 2.85% per
annum until August 21, 2021, with the margin then increasing to 3.10% for the period from August 22, 2021 to August 21, 2022, 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.
The following tables summarize noteworthy information related to the Credit Facility:
As of December 31,
2020
As of March 31,
2020
Commitment amount
$
180,000
$
200,000
Borrowings outstanding at cost
84,000
49,200
Availability (A)
96,000
150,800
For the Three Months Ended
December 31,
For the Nine Months Ended
December 31,
2020
2019
2020
2019
Weighted-average borrowings outstanding
$
104,829
$
37,507
$
88,652
$
45,777
Effective interest rate (B)
3.8
%
9.3
%
4.2
%
8.6
%
Commitment (unused) fees incurred
$
95
$
414
$
585
$
1,176
(A)
Availability is subject to various constraints, characteristics and applicable advance rates based on
collateral quality under the Credit Facility, which equated to an adjusted availability of $96.0 million and $137.6 million as of December 31, 2020 and March 31, 2020, respectively.
(B)
Excludes the impact of deferred financing costs and includes unused commitment fees.
Among other things, the Credit Facility contains a performance guaranty that requires us 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
after November 16, 2016, which equated to $231.0 million as of December 31, 2020, (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 of December 31, 2020, and as defined in the performance guaranty of the
Credit Facility, we had a net worth of $517.0 million, asset coverage on our senior securities representing indebtedness of 671.0%, 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 of December 31, 2020, we were in compliance with all covenants under the Credit Facility.
34
Notes Offering
In May 2020, we entered into a Dealer Manager Agreement with our affiliated dealer manager, Gladstone Securities, under which we may sell a maximum of
$350.0 million aggregate principal amount of our 6.00% notes due 2040. However, the Company can only offer for sale up to $200.0 million aggregate principal amount of the Notes pursuant to a prospectus supplement dated May 22, 2020
and a base prospectus dated July 24, 2019 relating to the registration statement on Form N-2 (File No. 333- 232124) under the Securities Act of
1933, as amended.
The Notes will mature on November 1, 2040. We will pay interest on the Notes on the first day of each month, commencing on the
first day of the month following the issuance of such Note. Subject to certain limitations, holders of the Notes will have the option to tender their Notes for redemption at a redemption price of $22.50 per Note until the earlier of the date upon
which our Board of Directors, by resolution, suspends or terminates the optional redemption right of the holders or the date, if any, on which the Notes are listed on Nasdaq Global Select Market or another national securities exchange. In addition,
we will repurchase the Notes, upon request, in the event of the holders death at a redemption price of $25.00 per Note. Except upon the occurrence of certain events that would constitute a change in control of us or to comply with applicable
law, we may not redeem the Notes at our option until the later of (1) the one-year anniversary of the termination of the offering of the Notes and (2) July 1, 2025. After such date, we may, at
our sole option, redeem all or a portion of the Notes at a redemption price of $25.00 per Note. The Notes will be our direct unsecured obligations and rank equal in right of payment with all outstanding and future unsecured, unsubordinated
indebtedness issued by us. As of December 31, 2020, no Notes have been issued.
Secured Borrowing
In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our secured second lien term debt investment in
Ginsey Home Solutions, Inc. (Ginsey). In May 2014, we amended the agreement with the third-party to include an additional $0.1 million. ASC Topic 860, Transfers and Servicing requires us to treat the participation
as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual
rate established at origination. Therefore, our accompanying Consolidated Statements of Assets and Liabilities reflect the entire secured second lien term debt investment in Ginsey and a corresponding $5.1 million secured borrowing
liability. The secured borrowing has a stated fixed interest rate of 7.0% and a maturity date of January 3, 2025.
Fair Value
We elected to apply the fair value option of ASC Topic 825, Financial Instruments , to the Credit Facility, which was consistent with our
application of ASC 820 to our investments. Generally, the fair value of the Credit Facility is determined using a yield analysis, which includes a DCF calculation and also takes into account the assumptions the Valuation Team believes market
participants would use, including the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of December 31, 2020, the discount rate used to
determine the fair value of the Credit Facility was 30-day LIBOR, with a 0.5% floor, plus 2.85% per annum, plus an unused commitment fee of 0.75%. As of March 31, 2020, the discount rate used to determine
the fair value of the Credit Facility was 30-day LIBOR, plus 2.85% per annum, plus an unused commitment fee of 1.0%. Generally, an increase or decrease in the discount rate used in the DCF calculation may
result in a corresponding decrease or increase, respectively, in the fair value of the Credit Facility. As of each of December 31, 2020 and March 31, 2020, the Credit Facility was valued using Level 3 inputs and any changes in its
fair value are recorded in Net unrealized depreciation of other on our accompanying Consolidated Statements of Operations .
The following tables
provide relevant information and disclosures about the Credit Facility as of December 31, 2020 and March 31, 2020, and for the three and nine months ended December 31, 2020 and 2019, as required by ASC 820:
Level 3 Borrowings
Recurring Fair Value Measurements
Reported in Consolidated
Statements of Assets and Liabilities Using Significant
Unobservable Inputs (Level 3)
December 31, 2020
March 31, 2020
Credit Facility
$
84,000
$
49,200
35
Fair Value Measurements of Borrowings Using
Significant
Unobservable Inputs (Level 3) Reported in
Consolidated Statements of Assets and Liabilities
Credit
Facility
Three Months Ended December 31, 2020:
Fair value at September 30, 2020
$
116,600
Borrowings
30,200
Repayments
(62,800
)
Unrealized depreciation
Fair value at December 31, 2020
$
84,000
Nine Months Ended December 31, 2020:
Fair value at March 31, 2020
$
49,200
Borrowings
111,700
Repayments
(76,900
)
Unrealized depreciation
Fair value at December 31, 2020
$
84,000
Fair Value Measurements of Borrowings Using
Significant
Unobservable Inputs (Level 3) Reported in
Consolidated Statements of Assets and Liabilities
Credit
Facility
Three Months Ended December 31, 2019:
Fair value at September 30, 2019
$
46,964
Borrowings
31,400
Repayments
(74,000
)
Unrealized depreciation
(154
)
Fair value at December 31, 2019
$
4,210
Nine Months Ended December 31, 2019:
Fair value at March 31, 2019
$
53,000
Borrowings
131,400
Repayments
(180,200
)
Unrealized appreciation
10
Fair value at December 31, 2019
$
4,210
The fair value of the collateral under the Credit Facility was $507.2 million and $496.4 million as of
December 31, 2020 and March 31, 2020, respectively.
NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK
Preferred Stock Offerings
In May 2020, we entered into
sales agreements with Wedbush Securities, Inc. and Virtu Americas LLC (each a Series E ATM Sales Agent), under which we have the ability to issue and sell shares of our 6.375% Series E Cumulative Term Preferred Stock (our Series E
Term Preferred Stock or Series E), from time to time, through the Series E ATM Sales Agents, up to $50.0 million aggregate liquidation preference in an
at-the-market program (the Series E ATM Program). As of December 31, 2020, we had remaining capacity to sell up to $30.4 million of our
Series E Term Preferred Stock under the Series E ATM Program.
During the nine months ended December 31, 2020, we sold 784,853 shares of our Series E
Term Preferred Stock under the Series E ATM Program with an aggregate liquidation preference of $19.6 million. The weighted-average gross price per share net of discounts was $24.56 and resulted in gross proceeds of approximately
$19.3 million. After deducting commissions and offering costs borne by us, net proceeds totaled approximately $19.1 million.
36
The following tables summarize our 6.250% Series D Cumulative Term Preferred Stock (our Series D Term
Preferred Stock or Series D) and our Series E Term Preferred Stock outstanding as of December 31, 2020 and March 31, 2020:
As of December 31, 2020 :
Class of Term Preferred Stock
Ticker
Symbol
Date Issued
Mandatory
Redemption Date (A)
Interest
Rate
Shares
Outstanding
Liquidation
Preference
per Share
Aggregate
Liquidation
Preference
Series D
GAINM
September 26, 2016
September 30, 2023
6.250
%
2,300,000
$
25.00
$
57,500
Series E
GAINL
August 22, 2018
August 31, 2025
6.375
%
3,774,853
25.00
94,371
Term preferred stock,
gross (A)
6,074,853
$
25.00
$
151,871
Less: Discounts
(3,118
)
Term preferred stock,
net (B)
$
148,753
As of March 31, 2020 :
Class of Term Preferred Stock
Ticker
Symbol
Date Issued
Mandatory
Redemption Date (A)
Interest
Rate
Shares
Outstanding
Liquidation
Preference
per Share
Aggregate
Liquidation
Preference
Series D
GAINM
September 26, 2016
September 30, 2023
6.250
%
2,300,000
$
25.00
$
57,500
Series E
GAINL
August 22, 2018
August 31, 2025
6.375
%
2,990,000
25.00
74,750
Term preferred stock,
gross (A)
5,290,000
$
25.00
$
132,250
Less: Discounts
(3,090
)
Term preferred stock,
net (B)
$
129,160
(A)
As of December 31, 2020, the Series D Term Preferred Stock and the Series E Term Preferred Stock
are redeemable at any time. As of December 31, 2020 and March 31, 2020, asset coverage on our senior securities that are stock, calculated pursuant to Sections 18 and 61 of the 1940 Act, was 250.3% and 293.8%, respectively.
(B)
Reflected as a line item on our accompanying Consolidated Statement of Assets and Liabilities
pursuant to the adoption of Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs.
The following tables summarize dividends declared by our Board of Directors and paid by us on each of our series of mandatorily redeemable preferred stock
during the nine months ended December 31, 2020 and 2019:
For the Nine Months Ended December 31, 2020 :
Declaration Date
Record
Date
Payment
Date
Dividend per
Share of
Series D Term
Preferred Stock
Dividend per
Share of
Series E Term
Preferred Stock
April 14, 2020
April 24, 2020
April 30, 2020
$
0.13020833
$
0.13281250
April 14, 2020
May 19, 2020
May 29, 2020
0.13020833
0.13281250
April 14, 2020
June 19, 2020
June 30, 2020
0.13020833
0.13281250
July 14, 2020
July 24, 2020
July 31, 2020
0.13020833
0.13281250
July 14, 2020
August 24, 2020
August 31, 2020
0.13020833
0.13281250
July 14, 2020
September 23, 2020
September 30, 2020
0.13020833
0.13281250
October 13, 2020
October 23, 2020
October 30, 2020
0.13020833
0.13281250
October 13, 2020
November 20, 2020
November 30, 2020
0.13020833
0.13281250
October 13, 2020
December 23, 2020
December 31, 2020
0.13020833
0.13281250
Total
$
1.17187497
$
1.19531250
37
For the Nine Months Ended December 31, 2019 :
Declaration Date
Record
Date
Payment
Date
Dividend per
Share of
Series D Term
Preferred Stock
Dividend per
Share of
Series E Term
Preferred Stock
April 9, 2019
April 22, 2019
April 30, 2019
$
0.13020833
$
0.13281250
April 9, 2019
May 22, 2019
May 31, 2019
0.13020833
0.13281250
April 9, 2019
June 19, 2019
June 28, 2019
0.13020833
0.13281250
July 9, 2019
July 22, 2019
July 31, 2019
0.13020833
0.13281250
July 9, 2019
August 20, 2019
August 30, 2019
0.13020833
0.13281250
July 9, 2019
September 17, 2019
September 30, 2019
0.13020833
0.13281250
October 8, 2019
October 22, 2019
October 31, 2019
0.13020833
0.13281250
October 8, 2019
November 19, 2019
November 29, 2019
0.13020833
0.13281250
October 8, 2019
December 19, 2019
December 31, 2019
0.13020833
0.13281250
Total
$
1.17187497
$
1.19531250
The federal income tax characteristics of dividends paid to our preferred stockholders generally constitute ordinary income or
capital gains to the extent of our current and accumulated earnings and profits and are reported after the end of the calendar year based on tax information for the full fiscal year. Estimates of tax characterization made on a quarterly basis may
not be representative of the actual tax characterization of dividends for the full year. Estimates made on a quarterly basis are updated as of each interim reporting date. The tax characterization of dividends paid to our preferred stockholders
during the calendar year ended December 31, 2020 was 42.1% from ordinary income and 57.9% from capital gains. The tax characterization of dividends paid to our preferred stockholders during the calendar year ended December 31, 2019 was
27.3% from ordinary income and 72.7% from capital gains.
In accordance with ASC Topic 480, Distinguishing Liabilities from Equity ,
mandatorily redeemable financial instruments should be classified as liabilities on the balance sheet. Our mandatorily redeemable preferred stock is recorded at the liquidation preference, less discounts, on our accompanying Consolidated
Statements of Assets and Liabilities as of December 31, 2020 and March 31, 2020. The related dividend payments to preferred stockholders are treated as dividend expense on our accompanying Consolidated Statements of Operations
on the ex-dividend date.
The following table summarizes the fair value of each of our series of mandatorily
redeemable preferred stock based on the last reported closing sale price as of December 31, 2020 and March 31, 2020, each of which we consider to be a Level 1 input within the fair value hierarchy:
Fair Value as of
December 31, 2020
March 31, 2020
Series D Term Preferred Stock
$
58,604
$
53,590
Series E Term Preferred Stock
95,126
64,554
Total
$
153,730
$
118,144
NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS
Registration Statement
On June 14, 2019, we filed a
registration statement on Form N-2 (File No. 333-232124), which the SEC declared effective on July 24, 2019. 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 December 31, 2020, we had the ability to issue up to $275.5 million of the securities registered under the registration statement.
Common Equity Offerings
In December 2019, we entered
into equity distribution agreements with Wedbush Securities, Inc., Cantor Fitzgerald & Co., and Ladenburg Thalmann & Co., Inc. (each a Common Stock ATM Sales Agent), under which we have the ability to issue and sell
shares of our common stock, from time to time, through the Common Stock ATM Sales Agents, up to an aggregate offering price of $35.0 million in an at-the-market
program (the Common Stock ATM Program). As of December 31, 2020, we had remaining capacity to sell up to $30.1 million of common stock under the Common Stock ATM Program.
38
During the three months ended June 30, 2020, we sold 155,560 shares of our common stock under the
Common Stock ATM Program at a weighted-average gross price of $11.39 per share and raised approximately $1.8 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was
$11.17 and resulted in total net proceeds of approximately $1.7 million. These sales were above our then current estimated NAV per share. We did not sell any shares of our common stock under the Common Stock ATM Program during the period from
June 30, 2020 to December 31, 2020.
During the year ended March 31, 2020, we sold 227,004 shares of our common stock under the Common
Stock ATM Program at a weighted-average gross price of $13.80 per share and raised approximately $3.1 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $13.55
and resulted in total net proceeds of approximately $3.1 million. These sales were above our then current estimated NAV per share.
NOTE 8.
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER WEIGHTED-AVERAGE COMMON SHARE
The following table sets forth the computation of
basic and diluted Net increase in net assets resulting from operations per weighted-average common share for the three and nine months ended December 31, 2020 and 2019:
Three Months Ended
December 31,
Nine Months Ended
December 31,
2020
2019
2020
2019
Numerator: net increase in net assets resulting from operations
$
15,271
$
13,318
$
21,940
$
30,368
Denominator: basic and diluted weighted-average common shares
33,205,023
32,822,459
33,167,511
32,822,459
Basic and diluted net increase in net assets resulting from operations per weighted-average
common share
$
0.46
$
0.41
$
0.66
$
0.93
NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify to be taxed as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, 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). The amount to be paid out as distributions to our stockholders is determined by our Board
of Directors and is based upon managements estimate of Investment Company Taxable Income and net long-term capital gains, as well as amounts to be distributed in accordance with Section 855(a) of the Code. Based on that estimate, our
Board of Directors declares monthly distributions, and supplemental distributions, as appropriate, to stockholders each quarter and deemed distributions of long-term capital gains annually as of the end of the fiscal year, as applicable.
The U.S. federal income tax characteristics of cash distributions paid to our common stockholders generally are reported to stockholders on IRS Form 1099
after the end of each calendar year. Estimates of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of cash distributions for the full year. Estimates made on a quarterly basis are updated as
of each interim reporting date. The tax characterization of cash distributions paid to our common stockholders during the calendar year ended December 31, 2020 was 93.9% from ordinary income and 6.1% from capital gains. The tax characterization
of cash distributions paid to our common stockholders during the calendar year ended December 31, 2019 was 67.8% from ordinary income and 32.2% from capital gains.
We paid the following cash distributions to our common stockholders for the nine months ended December 31, 2020 and 2019:
Fiscal Year
Declaration Date
Record Date
Payment Date
Distribution
per Common Share
2021
April 14, 2020
April 24, 2020
April 30, 2020
$
0.070
April 14, 2020
May 19, 2020
May 29, 2020
0.070
April 14, 2020
June 8, 2020
June 17, 2020
0.090
(A)
April 14, 2020
June 19, 2020
June 30, 2020
0.070
July 14, 2020
July 24, 2020
July 31, 2020
0.070
July 14, 2020
August 24, 2020
August 31, 2020
0.070
July 14, 2020
September 23, 2020
September 30, 2020
0.070
October 13, 2020
October 23, 2020
October 30, 2020
0.070
October 13, 2020
November 20, 2020
November 30, 2020
0.070
October 13, 2020
December 23, 2020
December 31, 2020
0.070
Nine Months Ended December 31, 2020:
$
0.720
39
Fiscal Year
Declaration Date
Record Date
Payment Date
Distribution
per Common Share
2020
April 9, 2019
April 22, 2019
April 30, 2019
$
0.068
April 9, 2019
May 22, 2019
May 31, 2019
0.068
April 9, 2019
June 5, 2019
June 14, 2019
0.090
(A)
April 9, 2019
June 19, 2019
June 28, 2019
0.068
July 9, 2019
July 22, 2019
July 31, 2019
0.068
July 9, 2019
August 20, 2019
August 30, 2019
0.068
July 9, 2019
September 4, 2019
September 13, 2019
0.030
(A)
July 9, 2019
September 17, 2019
September 30, 2019
0.068
October 8, 2019
October 22, 2019
October 31, 2019
0.068
October 8, 2019
November 19, 2019
November 29, 2019
0.068
October 8, 2019
December 3, 2019
December 13, 2019
0.090
(A)
October 8, 2019
December 19, 2019
December 31, 2019
0.068
Nine Months Ended December 31, 2019:
$
0.822
(A)
Represents a supplemental distribution to common stockholders.
Aggregate cash distributions to our common stockholders declared and paid were $23.9 million and $27.0 million for the nine months ended
December 31, 2020 and 2019, respectively.
For the fiscal year ended March 31, 2020, Investment Company Taxable Income exceeded distributions
declared and paid and, in accordance with Section 855(a) of the Code, we elected to treat $17.9 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, 2020, net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $5.3 million of the first distributions
paid subsequent to fiscal year-end as having been paid in the prior year.
For the three and nine months ended
December 31, 2020, we recorded $0.4 million and $1.0 million, respectively, of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in
excess of par value and Accumulated net realized gain in excess of distributions and increased Underdistributed net investment income for both periods on our accompanying Consolidated Statements of Assets and Liabilities .
For the three and nine months ended December 31, 2019, we recorded $0.1 million and $1.4 million, respectively, of net adjustments for
estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Accumulated net realized gain in excess of distributions and increased Underdistributed
(Overdistributed) net investment income for both periods on our Consolidated Statements of Assets and Liabilities .
We may distribute our net
long-term capital gains, if any, in cash or elect to retain some or all of such gains, pay taxes at the U.S. federal corporate-level income tax rate on the amount retained, and designate the retained amount as a deemed distribution. If
we elect to retain net long-term capital gains and deem them distributed, each U.S. common stockholder will be treated as if they received a distribution of their pro-rata share of the retained net long-term
capital gain and the U.S. federal income tax paid. As a result, each U.S. common stockholder will (i) be required to report their pro rata share of the retained gain on their tax return as long-term capital gain, (ii) receive a refundable
tax credit for their pro-rata share of federal income tax paid by us on the retained gain, and (iii) increase the tax basis of their shares of common stock by an amount equal to the deemed distribution
less the tax credit. In order to use the deemed distribution approach, we must provide written notice to our common stockholders prior to the expiration of 60 days after the close of the relevant taxable year. For the year ended March 31, 2020,
we elected to retain $38.0 million, or $1.15 per common share, of long-term capital gains and to treat them as deemed distributions to common stockholders. We incurred $8.0 million, or $0.24 per common share, of federal income taxes on
behalf of common stockholders, which was included in Taxes on deemed distribution of long-term capital gains on our Consolidated Statements of Operations for the year ended March 31, 2020 and in Other liabilities on our accompanying
Consolidated Statements of Assets and Liabilities as of March 31, 2020 and which was paid during the three months ended June 30, 2020.
In addition, we obtained clarification of the treatment of deemed distributions with respect to Virginia state taxes from the Virginia Department of Revenue,
which ruled that Virginia state taxes are imposed. Related to this matter, we previously recorded a $3.0 million reserve for uncertain tax positions, which was included in Taxes on deemed distribution of long-term capital gains on our
accompanying Consolidated Statements of Operations and in Other Liabilities on our accompanying Consolidated Statements of Assets and Liabilities as of and for the year ended March 31, 2019. During the three months ended
June 30, 2020, we reported and paid this amount with an amended Virginia tax return. As a result of the ruling, we also incurred $2.3 million of Virginia state taxes related to the deemed distribution for the year ended March 31,
2020, which was included in Taxes on deemed distribution of long-term capital gains on our Consolidated Statements of Operations for the year ended March 31, 2020 and in Other Liabilities on our accompanying Consolidated Statements of
Assets and Liabilities as of March 31, 2020 and which was paid during the three months ended September 30, 2020.
40
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to certain legal
proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both
probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our
financial condition, results of operation or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of December 31, 2020 and March 31, 2020, we
had no established reserves for such loss contingencies.
Escrow Holdbacks
From time to time, we enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used
to satisfy potential obligations, as stipulated in the sales agreements. We record escrow amounts in Restricted cash and cash equivalents, if received in cash but subject to potential obligations or other contractual restrictions, or as escrow
receivables in Other assets, net, if not yet received in cash, on our accompanying Consolidated Statements of Assets and Liabilities . We establish reserves and holdbacks against escrow amounts if we determine that it is probable and estimable
that a portion of the escrow amounts will not ultimately be released or received at the end of the escrow period. Reserves and holdbacks against escrow amounts were $1.0 million and $2.3 million as of December 31, 2020 and
March 31, 2020, respectively.
Financial Commitments and Obligations
We may have line of credit and delayed draw term loan commitments to certain of our portfolio companies that have not been fully drawn. Since these line of
credit and delayed draw term loan commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term loan 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 loan commitments as of December 31, 2020 and March 31, 2020 to be immaterial.
We have also extended a guaranty on behalf of one of our portfolio companies. As of December 31, 2020, we have not been required to make any payments on
this guaranty, or any guaranties that existed in previous periods, and we consider the credit risk to be remote and the fair value of the guaranty as of December 31, 2020 and March 31, 2020 to be immaterial.
As of December 31, 2020, the following guaranty was outstanding:
A $1.0 million continuing guaranty of a wholesale financing facility agreement (the Floor Plan
Facility) between DLL Finance LLC (f/k/a Agricredit Acceptance, LLC) and Country Club Enterprises, LLC (CCE). The Floor Plan Facility provides CCE with financing to bridge the time and cash flow gap between the order and delivery
of golf carts to customers.
The following table summarizes the principal balances of unused line of credit and delayed draw term loan
commitments and guaranties as of December 31, 2020 and March 31, 2020, which are not reflected as liabilities in the accompanying Consolidated Statements of Assets and Liabilities:
December 31, 2020
March 31, 2020
Unused line of credit and delayed draw term loan commitments
$
5,450
$
1,230
Guaranties
1,000
1,000
Total
$
6,450
$
2,230
41
NOTE 11. FINANCIAL HIGHLIGHTS
Three Months Ended
December 31,
Nine Months Ended
December 31,
2020
2019
2020
2019
Per Common Share Data:
Net asset value at beginning of
period (A)
$
10.86
$
12.39
$
11.17
$
12.40
Income from investment
operations (B)
Net investment income
0.19
0.19
0.45
0.66
Net realized gain on investments and other
0.27
1.04
0.31
1.70
Net unrealized depreciation of investments and other
(0.82
)
(0.10
)
(1.43
)
Total from investment operations
0.46
0.41
0.66
0.93
Effect of equity capital
activity (B)
Cash distributions to common stockholders from net investment income (C)
(0.20
)
(0.20
)
(0.68
)
(0.56
)
Cash distributions to common stockholders from realized gains (C)
(0.01
)
(0.09
)
(0.04
)
(0.26
)
Total from equity capital activity
(0.21
)
(0.29
)
(0.72
)
(0.82
)
Other, net (B)(E)
Net asset value at end of
period (A)
$
11.11
$
12.51
$
11.11
$
12.51
Per common share market value at beginning of period
$
9.10
$
12.34
$
7.85
$
11.60
Per common share market value at end of period
10.09
13.25
10.09
13.25
Total investment return (F)
13.38
%
9.66
%
38.22
%
22.01
%
Common stock outstanding at end of
period (A)
33,205,023
32,822,459
33,205,023
32,822,459
Statement of Assets and Liabilities Data:
Net assets at end of period
$
368,823
$
410,498
$
368,823
$
410,498
Average net assets (G)
362,659
407,740
362,862
407,866
Senior Securities Data:
Total borrowings, at cost
$
89,096
$
9,296
$
89,096
$
9,296
Mandatorily redeemable preferred stock
(H)
151,871
132,250
151,871
132,250
Ratios/Supplemental Data:
Ratio of net expenses to average net assets annualized (I)
12.26
%
9.65
%
9.23
%
9.27
%
Ratio of net investment income to average net assets annualized (J)
6.90
6.04
5.44
7.06
(A)
Based on actual shares of common stock outstanding at the beginning or end of the corresponding period, as
appropriate.
(B)
Based on weighted-average basic common share data for the corresponding period.
(C)
The tax character of distributions is determined based on taxable income calculated in accordance with income
tax regulations, which may differ from amounts determined under GAAP. For further information on the estimated character of our distributions to common stockholders, including changes in estimates, as applicable, refer to Note 9
Distributions to Common Stockholders .
(D)
Reserved.
(E)
Represents the impact of the different share amounts (weighted-average basic common shares outstanding for the
corresponding period and actual common shares outstanding at the end of the period) in the Per Common Share Data calculations and rounding impacts.
(F)
Total return equals the change in the market value of our common stock from the beginning of the period, taking
into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated
character of our distributions to common stockholders, including changes in estimates, as applicable, refer to Note 9 Distributions to Common Stockholders .
(G)
Calculated using the average balance of net assets at the end of each month of the reporting period.
(H)
Represents the aggregate liquidation preference of our mandatorily redeemable preferred stock.
(I)
Ratio of net expenses to average net assets is computed using total expenses, net of any non-contractual, unconditional, and irrevocable credits of fees from the Adviser. Had we not received any non-contractual, unconditional, and irrevocable credits of fees due
to the Adviser, the ratio of expenses to average net assets - annualized would have been 15.10% and 12.21% for the three months ended December 31, 2020 and 2019, respectively, and 12.11% and 11.81% for the nine months ended
December 31, 2020 and 2019, respectively.
(J)
Had we not received any non-contractual, unconditional, and irrevocable
credits of fees from the Adviser, the ratio of net investment income to average net assets - annualized would have been 4.06% and 3.48% for the three months ended December 31, 2020 and 2019, respectively, and 2.56% and 4.51% for the
nine months ended December 31, 2020 and 2019, respectively.
42
NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES
In accordance with the SECs Regulation S-X, we do not consolidate portfolio company investments.
Further, in accordance with ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its
services to the investment company or its consolidated subsidiaries. We did not have any unconsolidated subsidiaries that met any of the significance conditions under Rule 1-02(w) of the SECs Regulation S-X as of or during the nine month periods ended December 31, 2020 and 2019.
NOTE 13.
SUBSEQUENT EVENTS
Distributions and Dividends
In
January 2021, our Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to holders of our Series D Term Preferred Stock and Series E Term Preferred Stock:
Record Date
Payment Date
Distribution per
Common Share
Dividend per
Share of
Series D Term
Preferred Stock
Dividend per
Share of
Series E Term
Preferred Stock
January 22, 2021
January 29, 2021
$
0.07
$
0.13020833
$
0.13281250
February 17, 2021
February 26, 2021
0.07
0.13020833
0.13281250
March 18, 2021
March 31, 2021
0.07
0.13020833
0.13281250
Total for the Quarter:
$
0.21
$
0.39062499
$
0.39843750
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 are focused on ensuring the safety of the Advisers and Administrators 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
continue to demonstrate their ability to respond effectively and efficiently to the challenges posed by COVID-19 and related orders imposed by state and local governments, including paused or reversed
reopening orders. We believe we have sufficient levels of liquidity to support our existing portfolio companies, as necessary, and selectively deploy capital in new investment opportunities.
43
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 with Gladstone 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 particular David Gladstone, David Dullum, or Terry 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; (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; 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
ended March 31, 2020, filed with the U.S. Securities and Exchange Commission (SEC) on May 12, 2020 (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 the SEC, 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 to Gladstone 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.
OVERVIEW
General
We were incorporated
under the General Corporation Law of the State of Delaware on February 18, 2005. On June 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). For U.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 for U.S. federal income tax purposes
and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.
44
We are externally managed by the Adviser, an affiliate of ours and an
SEC-registered investment adviser, pursuant to an investment advisory and management agreement (the Advisory Agreement). We have also entered into an administration agreement (the
Administration Agreement) with Gladstone Administration, LLC (the Administrator), an affiliate of ours and the Adviser. Each of the Adviser and the Administrator are privately-held companies that are indirectly owned and
controlled by David Gladstone, our chairman and chief executive officer. David Dullum, our president, also serves as the executive vice president of private equity (buyouts) of the Adviser. Michael LiCalsi, our general counsel and secretary, also
serves as the Administrators president, general counsel, and secretary, as well as the executive vice president of administration of the Adviser).
Additionally, Gladstone Securities, LLC (Gladstone Securities), a privately-held broker-dealer (indirectly owned and controlled by
Mr. Gladstone, our chairman and chief executive officer) registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, has provided other services, such as investment banking and due
diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee. For additional information refer to Note 4 Related Party Transactions in the accompanying Notes to
Consolidated Financial Statements . Since May of 2020, Gladstone Securities also acts as dealer manager in connection with our offering of up to $350.0 million aggregate principal amount of our 6.00% Notes due 2040 on a reasonable best
efforts basis.
We were established for the purpose of investing in debt and equity securities of established private businesses operating in the
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 $30 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 securities and 25% in equity securities, at cost. As of December 31, 2020, our investment portfolio was comprised of 74.2% in
debt securities and 25.8% in equity securities, 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 the U.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 companys 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 need funds for growth capital, to finance acquisitions, including management buyouts, 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. In July 2012, the SEC 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 Corporation (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. Since 2012, we have opportunistically made several co-investments with Gladstone Capital pursuant to 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.
Our shares of common stock, 6.25% Series D Cumulative Term Preferred Stock (Series D Term Preferred Stock) and 6.375% Series E Cumulative Term
Preferred Stock (Series E Term Preferred Stock) are traded on the Nasdaq Global Select Market (Nasdaq) under the trading symbols GAIN, GAINM, and GAINL, respectively.
45
Business
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 of Lower Middle Market companies in the U.S. During the nine months ended December 31, 2020, we invested in one new portfolio company and exited one portfolio company. As of December 31, 2020, our portfolio was comprised of 28
companies. From our initial public offering in June 2005 through December 31, 2020, we made investments in 53 companies, excluding investments in syndicated loans, for a total of approximately $1.4 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 of December 31, 2020, we had unrecognized, contractual
success fees of $44.6 million, or $1.34 per common share. Consistent with accounting principles generally accepted in the U.S. (GAAP), we have not recognized success fee receivables and related income in our accompanying
Consolidated Financial Statements until earned.
From inception through December 31, 2020, we completed sales of 23 portfolio companies that
we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated $237.7 million in net realized gains and $31.4 million in other income upon exit, for a total increase to
our net assets of $269.1 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 23 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. These successful exits, in part, enabled us to increase the monthly distribution by 75.0% from March 2011 through December 31, 2020, and allowed us to declare and pay 11 supplemental distributions.
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 dated April 30, 2013, as amended (the Credit Facility), and by accessing the capital markets in the form of public
offerings of common and preferred stock. We have successfully extended the Credit Facilitys revolving period multiple times, most recently to August 2021, 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 nine months ended December 31, 2020, we sold 155,560 shares of our common stock under our common stock at-the-market program (the Common Stock ATM Program) for gross proceeds of approximately $1.8 million and 784,853 shares of our Series E Term Preferred Stock
under our preferred stock at-the-market program (the Series E ATM Program) for gross proceeds of approximately $19.3 million. During the year ended
March 31, 2020, we sold 227,004 shares of our common stock under the Common Stock ATM Program for gross proceeds of approximately $3.1 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 and Liquidity and Capital Resources Equity Term Preferred Stock for further
discussion of our common stock, including our at-the-market programs, and mandatorily redeemable preferred stock.
Although we have been able to access the capital markets historically, market conditions, including the impact of
COVID-19, 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. On December 31, 2020, the closing market price
of our common stock was $10.09 per share, representing a 9.2% discount to our net asset value (NAV) of $11.11 per share as of December 31, 2020. 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.
At our 2020 Annual Meeting of Stockholders held on August 20, 2020, our stockholders approved a proposal
authorizing us, with the subsequent approval of our board of directors (Board of Directors), to issue and sell shares of our common stock at a price below our then-current NAV per share, provided that the number of shares issued and sold
pursuant to such authority does not exceed 25.0% of our then-outstanding common stock immediately prior to each such sale. This August 2020 stockholder authorization is in effect for one year from the date of stockholder approval. We sought and
obtained stockholder approval concerning similar proposals at each Annual Meeting of Stockholders since 2008, and with our Board of Directors subsequent approval, we issued shares of our common stock in three offerings at a price below the
then-current NAV per share, once in May 2017, once in March 2015, and once in October
46
2012. Certain sales under the previous Common Stock ATM Program in March and April of 2018 were also below the then-current estimated NAV per share. The resulting proceeds, in part, have allowed
us to (i) grow our portfolio by making new investments, (ii) generate additional income through these new investments, (iii) ensure continued compliance with regulatory tests and (iv) increase our debt capital while still
complying with our applicable debt-to-equity ratios. Refer to Liquidity and Capital Resources Equity Common Stock for further discussion
of our common stock.
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 two series of term preferred stock currently outstanding).
On April 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%, effective as of April 10, 2019, one year after the date of the Board of Directors approval. Notwithstanding the modified asset coverage requirement under the 1940 Act described above, we are separately subject to a
minimum asset coverage requirement of 200% with respect to our Series D Term Preferred Stock.
As of December 31, 2020, our asset coverage ratio on
our senior securities representing indebtedness was 671.0% and our asset coverage on our senior securities that are stock was 250.3%.
Investment
Highlights
Investment Activity
During
the nine months ended December 31, 2020, the following significant transactions occurred:
In July 2020, we invested $46.9 million in Mason West, LLC (Mason West) through a combination of
secured first lien debt and preferred equity. Mason West, headquartered in Placentia, California, is a provider of engineered seismic restraint and vibration isolation solutions. In September 2020, Mason West repaid $7.0 million of secured
first lien debt and redeemed $3.1 million of preferred equity.
In September 2020, we invested an additional $8.0 million in PSI Molded Plastics, Inc. (PSI
Molded) in the form of preferred equity and also amended certain terms of our existing debt.
In December 2020, we recapitalized our investment in Old World Christmas, Inc. (Old World) and
invested an additional $27.0 million in the form of secured first lien debt. In connection with this investment, Old World paid dividend income of $3.2 million and additional equity proceeds of $10.8 million, resulting in a
$7.5 million return of preferred equity cost basis and a realized gain of $3.3 million.
In December 2020, we invested an additional $3.0 million in Galaxy Technologies, Inc. (Galaxy)
in the form of secured second lien debt. In connection with this investment, Galaxy purchased SBS Industries, LLC (a subsidiary of SBS Industries Holdings, Inc. (SBS Industries), one of our other portfolio companies). SBS Industries used
proceeds from the sale to partially repay our $11.4 million first lien debt, resulting in a realized loss of $8.5 million.
In December 2020, we sold our investment in Frontier Packaging, Inc. (Frontier), which resulted in
dividend income of $0.9 million, success fee income of $0.2 million, and a realized gain of $14.0 million. In connection with the sale, we received net cash proceeds of $26.0 million, including the repayment of our debt
investment of $9.5 million at par.
47
Recent Developments
Distributions and Dividends
In January 2020, our
Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to holders of our Series D Term Preferred Stock and Series E Term Preferred Stock:
Record Date
Payment Date
Distribution per
Common Share
Dividend per
Share of
Series D Term
Preferred Stock
Dividend per
Share of
Series E Term
Preferred Stock
January 22, 2021
January 29, 2021
$
0.07
$
0.13020833
$
0.13281250
February 17, 2021
February 26, 2021
0.07
0.13020833
0.13281250
March 18, 2021
March 31, 2021
0.07
0.13020833
0.13281250
Total for the Quarter:
$
0.21
$
0.39062499
$
0.39843750
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. LIBOR is 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 expect we will need to continue to renegotiate certain loan documents with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard
that is established. 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 are focused on ensuring the safety of the Advisers and Administrators 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
continue to demonstrate their ability to respond effectively and efficiently to the challenges posed by COVID-19 and related orders imposed by state and local governments, including paused or reversed
reopening orders. We believe we have sufficient levels of liquidity to support our existing portfolio companies, as necessary, and selectively deploy capital in new investment opportunities.
48
RESULTS OF OPERATIONS
Comparison of the Three Months Ended December 31, 2020 to the Three Months Ended December 31, 2019
For the Three Months Ended December 31,
2020
2019
$ Change
% Change
INVESTMENT INCOME
Interest income
$
12,148
$
12,126
$
22
0.2
%
Dividend and success fee income
5,224
3,870
1,354
35.0
Total investment income
17,372
15,996
1,376
8.6
EXPENSES
Base management fee
3,116
2,970
146
4.9
Loan servicing fee
1,786
1,794
(8
)
(0.4
)
Incentive fee
3,756
2,873
883
30.7
Administration fee
382
369
13
3.5
Interest and dividend expense
3,383
3,053
330
10.8
Amortization of deferred financing costs and discounts
451
373
78
20.9
Other
818
1,017
(199
)
(19.6
)
Expenses before credits from Adviser
13,692
12,449
1,243
10.0
Credits to fees from Adviser
(2,575
)
(2,611
)
36
(1.4
)
Total expenses, net of credits to fees
11,117
9,838
1,279
13.0
NET INVESTMENT INCOME
6,255
6,158
97
1.6
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investments
9,105
34,005
(24,900
)
(73.2
)
Net unrealized depreciation of investments
(89
)
(26,999
)
26,910
99.7
Net unrealized depreciation of other
154
(154
)
(100.0
)
Net realized and unrealized gain
9,016
7,160
1,856
25.9
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$
15,271
$
13,318
$
1,953
14.7
%
BASIC AND DILUTED PER COMMON SHARE:
Net investment income
$
0.19
$
0.19
$
0.0
%
Net increase in net assets resulting from operations
$
0.46
$
0.41
$
0.05
12.2
%
NM = Not Meaningful
Investment Income
Total investment income increased 8.6%
for the three months ended December 31, 2020, as compared to the prior year period. The increase was primarily due to an increase in dividend and success fee income.
Interest income from our investments in debt securities increased 0.2% for the three months ended December 31, 2020, as compared to the prior 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. The weighted-average
principal balance of our interest-bearing investment portfolio during the three months ended December 31, 2020 was $404.0 million, compared to $383.0 million for the prior year period. This increase was primarily due to the
origination of $61.9 million of new debt investments and $55.7 million of follow-on debt investments to existing portfolio companies, partially offset by $55.3 million of pay-offs, restructurings, or write-offs of debt investments and $47.9 million of loans placed on non-accrual status after September 30, 2019, 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 11.9% for the three months ended December 31, 2020, compared to 12.6% 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.
As of December 31,
2020, our loans to B+T Group Acquisition, Inc. (B+T), Horizon Facilities Services, Inc. (Horizon), The Mountain Corporation (The Mountain), PSI Molded, and SOG Specialty Knives & Tools, LLC
(SOG) were on non-accrual status, with an aggregate debt cost basis of $95.1 million. As of December 31, 2019, certain of our loans to Meridian Rack & Pinion, Inc.
(Meridian), The Mountain, PSI Molded, and SOG were on non-accrual status, with an aggregate debt cost basis of $56.4 million.
49
Dividend and success fee income for the three months ended December 31, 2020 increased 35.0% from the
prior year period. During the three months ended December 31, 2020, dividend and success fee income consisted primarily of $5.0 million of dividend income. During the three months ended December 31, 2019, dividend and success fee
income consisted primarily of $3.6 million of dividend income.
As of December 31, 2020 and March 31, 2020, 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, increased 13.0%
during the three months ended December 31, 2020, as compared to the prior year period, primarily due to an increase in the incentive fee and interest and dividend expense.
In accordance with GAAP, we recorded a capital gains-based incentive fee of $1.8 million during the three months ended December 31, 2020, compared
to a capital gains-based incentive fee of $1.4 million during the three months ended December 31, 2019. The capital gains-based incentive fee was a result of the net impact of net realized gains (losses) and net unrealized appreciation
(depreciation) on investments during the respective periods. The income-based incentive fee increased by $0.5 million for the three months ended December 31, 2020, as compared to the prior year period, primarily due to the increase in pre-incentive fee net investment income as well as the decrease in net assets, which drives the hurdle rate.
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
December 31,
2020
2019
Average total assets subject to base management fee (A)
$
623,200
$
594,000
Multiplied by prorated annual base management fee of 2.0%
0.5
%
0.5
%
Base management fee (B)
3,116
2,970
Credits to fees from
Adviserother (B)
(789
)
(817
)
Net base management fee
$
2,327
$
2,153
Loan servicing fee (B)
1,786
1,794
Credits to base management feeloan servicing fee (B)
(1,786
)
(1,794
)
Net loan servicing fee
$
$
Incentive fee income-based
$
2,002
$
1,515
Incentive fee capital
gains-based (C)
1,754
1,358
Total incentive fee (B)
$
3,756
$
2,873
Credits to fees from
Adviserother (B)
Net total incentive fee
$
3,756
$
2,873
(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 Statement 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 increased 10.8% during the three
months ended December 31, 2020, as compared to the prior year period, primarily due to a $0.2 million increase in dividend expense as a result of the Series E ATM Program sales during the current fiscal year. Interest expense increased
$0.1 million primarily as a result of the higher weighted-average balance outstanding on the Credit Facility, which was partially offset by a lower effective interest rate. The weighted-average balance outstanding on the Credit Facility during
the three months ended December 31, 2020 was $104.8 million, as compared to $37.5 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 ended December 31, 2020 was 3.8%, as compared to 9.3% in the prior year period. The decrease in the effective interest rate on the Credit Facility was primarily a result of a decrease in LIBOR and a decrease in unused commitment fees on
the undrawn portion of the Credit Facility. Refer to Liquidity and Capital Resources Revolving Line of Credit for further discussion of the Credit Facility.
50
Realized and Unrealized Gain (Loss)
Net Realized Gain (Loss) on Investments
During the three
months ended December 31, 2020, we recorded net realized gains on investments of $9.1 million primarily related to a $14.0 million realized gain from the exit of Frontier and a $3.3 million realized gain from the recapitalization
of Old World, partially offset by an $8.5 million realized loss related to the partial write-off of a debt investment in SBS Industries. During the three months ended December 31, 2019, we recorded
net realized gains on investments of $34.0 million, primarily related to a $47.9 million realized gain from the exit of Nth Degree, Inc. (Nth Degree) partially offset by a $14.5 million realized loss from the exit of B-Dry, LLC (B-Dry).
Net Unrealized Appreciation (Depreciation)
of Investments
During the three months ended December 31, 2020, we recorded net unrealized depreciation of investments of $0.1 million. The
realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2020 were as follows:
Three Months Ended December 31, 2020
Portfolio Company
Realized
Gain
(Loss)
Unrealized
Appreciation
(Depreciation)
Reversal of
Unrealized
(Appreciation)
Depreciation
Net Gain
(Loss)
Pioneer Square Brands, Inc.
$
$
4,420
$
$
4,420
Educators Resource, Inc.
3,488
3,488
Old World Christmas, Inc.
3,289
27
3,316
Diligent Delivery Systems
2,961
2,961
Frontier Packaging, Inc.
14,032
(11,869
)
2,163
SOG Specialty Knives and Tools, LLC
1,806
1,806
Schylling, Inc.
1,138
1,138
Head Country, Inc.
916
916
Horizon Facilities Service, Inc.
909
909
The Maids International, LLC
495
495
Ginsey Home Solutions, Inc.
480
480
Basset Creek Services, Inc.
469
469
PSI Molded Plastics, Inc.
459
459
ImageWorks Display and Marketing Group, Inc.
(1,411
)
(1,411
)
D.P.M.S., Inc.
(1,805
)
(1,805
)
Brunswick Bowling Products, Inc.
(4,825
)
(4,825
)
SBS Industries Holdings, Inc.
(8,470
)
1,580
(6,890
)
Other, net (<$1.0 million, net)
254
673
927
Total
$
9,105
$
11,780
$
(11,869
)
$
9,016
The primary drivers of net unrealized depreciation of investments of $0.1 million for the three months ended
December 31, 2020 were the reversal of previously recorded unrealized appreciation of our investment in Frontier upon its exit and decreased performance of certain of our portfolio companies, which was partially offset by an increase in
performance of certain of our portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 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.
51
During the three months ended December 31, 2019, we recorded net unrealized depreciation of investments
of $27.0 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2019 were as follows:
Three Months Ended December 31, 2019
Portfolio Company
Realized
Gain
(Loss)
Unrealized
Appreciation
(Depreciation)
Reversal of
Unrealized
(Appreciation)
Depreciation
Net Gain
(Loss)
Nth Degree, Inc.
$
47,861
$
1,926
$
(40,846
)
$
8,941
Galaxy Tool Holding Corporation
6,577
6,577
Old World Christmas, Inc.
2,447
2,447
Counsel Press, Inc.
2,152
2,152
Pioneer Square Brands, Inc.
1,694
1,694
B-Dry, LLC.
(14,452
)
14,699
247
B+T Group Acquisition, Inc.
(526
)
(526
)
Diligent Delivery Systems
(550
)
(550
)
Horizon Facilities Service, Inc.
(584
)
(584
)
Brunswick Bowling Products, Inc.
(1,100
)
(1,100
)
Frontier Packaging, Inc.
(1,145
)
(1,145
)
Educators Resource, Inc.
(1,627
)
(1,627
)
Ginsey Home Solutions
(2,372
)
(2,372
)
PSI Molded Plastics, Inc.
(2,532
)
(2,532
)
SBS Industries Holdings, Inc.
(4,358
)
(4,358
)
Other, net (<$1.0 million, net)
596
(854
)
(258
)
Total
$
34,005
$
(852
)
$
(26,147
)
$
7,006
The primary drivers of net unrealized depreciation of $27.0 million for the three months ended December 31, 2019
were the reversal of previously recorded unrealized appreciation of our investment in Nth Degree upon its exit, a decline in performance of certain of our other portfolio companies, and a decrease in comparable multiples used to estimate the fair
value of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized depreciation of our investment in B-Dry upon its exit and increased performance of
certain of our portfolio companies.
Across our entire investment portfolio, we recorded $0.6 million of net unrealized depreciation on our debt
positions and $0.5 million of net unrealized appreciation on our equity positions for the three months ended December 31, 2020. As of December 31, 2020, the fair value of our investment portfolio was less than the cost basis by
$47.0 million, as compared to September 30, 2020, when the fair value of our investment portfolio was less than the cost basis by $46.9 million, representing net unrealized depreciation of $0.1 million for the three months ended
December 31, 2020. Our entire portfolio had a fair value of 92.9% of cost as of December 31, 2020.
Net Unrealized (Appreciation)
Depreciation on Other
During the three months ended December 31, 2020, we did not record any unrealized appreciation or depreciation of other.
During the three months ended December 31, 2019, we recorded net unrealized depreciation of other of $0.2 million related to the Credit Facility recorded at fair value.
52
Comparison of the Nine Months Ended December 31, 2020 to the Nine Months Ended December 31,
2019
For the Nine Months Ended December 31,
2020
2019
$ Change
% Change
INVESTMENT INCOME
Interest income
$
34,513
$
38,144
$
(3,631
)
(9.5
)%
Dividend and success fee income
5,406
11,798
(6,392
)
(54.2
)
Total investment income
39,919
49,942
(10,023
)
(20.1
)
EXPENSES
Base management fee
8,961
9,285
(324
)
(3.5
)
Loan servicing fee
5,242
5,139
103
2.0
Incentive fee
3,454
6,042
(2,588
)
(42.8
)
Administration fee
1,218
1,106
112
10.1
Interest and dividend expense
9,615
9,499
116
1.2
Amortization of deferred financing costs and discounts
1,291
1,119
172
15.4
Other
3,178
3,942
(764
)
(19.4
)
Expenses before credits from Adviser
32,959
36,132
(3,173
)
(8.8
)
Credits to fees from Adviser
(7,836
)
(7,786
)
(50
)
0.6
Total expenses, net of credits to fees
25,123
28,346
(3,223
)
(11.4
)
NET INVESTMENT INCOME
14,796
21,596
(6,800
)
(31.5
)
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investments
10,479
55,682
(45,203
)
(81.2
)
Net unrealized depreciation of investments
(3,335
)
(46,900
)
43,565
92.9
Net unrealized appreciation of other
(10
)
10
100.0
Net realized and unrealized (loss) gain
7,144
8,772
(1,628
)
(18.6
)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$
21,940
$
30,368
$
(8,428
)
(27.8
)%
BASIC AND DILUTED PER COMMON SHARE:
Net investment income
$
0.45
$
0.66
$
(0.21
)
(31.8
)
Net increase in net assets resulting from operations
$
0.66
$
0.93
$
(0.27
)
(29.0
)%
NM = Not Meaningful
Investment Income
Total investment income decreased 20.1%
for the nine months ended December 31, 2020, as compared to the prior year period. The decrease was due to a decrease in dividend and success fee income, as well as a decrease in interest income.
Interest income from our investments in debt securities decreased 9.5% for the nine months ended December 31, 2020, as compared to the prior year period.
During the nine months ended December 31, 2019, we received $2.1 million of past due interest upon the exit of our investment in Alloy Die Casting Co. (ADC). 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. The weighted-average principal balance of our interest-bearing investment portfolio during the
nine months ended December 31, 2020 was $383.7 million, compared to $373.3 million for the prior year period. This increase was primarily due to the origination of $93.8 million of new debt investments and $81.9 million of follow-on debt investments to existing portfolio companies, partially offset by $109.2 million of pay-offs, restructurings, or write-offs of
debt investments and $47.9 million of loans placed on non-accrual status after March 31, 2019, 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, success fee, and other income, was 11.9% for the nine months ended December 31, 2020, compared to 13.5% 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.
As of December 31, 2020, our loans to B+T, Horizon, The Mountain, PSI Molded
and SOG were on non-accrual status, with an aggregate debt cost basis of $95.1 million. As of December 31, 2019, certain of our loans to Meridian, The Mountain, PSI Molded, and SOG were on non-accrual status, with an aggregate debt cost basis of $56.4 million.
53
Dividend and success fee income for the nine months ended December 31, 2020 decreased 54.2% from the
prior year period. During the nine months ended December 31, 2020, dividend and success fee income consisted of $5.0 million of dividend income and $0.4 million of success fee income. During the nine months ended December 31,
2019, dividend and success fee income consisted of $9.4 million of dividend income and $2.4 million of success fee income.
As of
December 31, 2020 and March 31, 2020, 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 11.4% during the nine months ended December 31, 2020, as compared to the prior year period, primarily due to a decrease in the
incentive fee, other expenses, and the base management fee.
In accordance with GAAP, we recorded a $1.5 million capital gains-based incentive fee
during the nine months ended December 31, 2020, compared to a capital gains-based incentive fee of $1.7 million during the nine months ended December 31, 2019. The capital gains-based incentive fee was a result of the net impact of
net realized gains (losses) and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee decreased by $2.3 million for the nine months ended December 31, 2020, as compared to
the prior year period, as the decrease in pre-incentive fee net investment income more than offset the decrease in net assets, which drives the hurdle rate.
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:
Nine Months Ended
December 31,
2020
2019
Average total assets subject to base management fee (A)
$
597,400
$
619,000
Multiplied by prorated annual base management fee of 2.0%
1.5
%
1.5
%
Base management fee (B)
8,961
9,285
Credits to fees from Adviser
- other (B)
(2,594
)
(2,647
)
Net base management fee
$
6,367
$
6,638
Loan servicing fee (B)
5,242
5,139
Credits to base management fee - loan servicing fee (B)
(5,242
)
(5,139
)
Net loan servicing fee
$
$
Incentive fee income-based
$
2,002
$
4,338
Incentive fee capital
gains-based (C)
1,452
1,704
Total incentive fee (B)
$
3,454
$
6,042
Credits to fees from Adviser
- other (B)
Net total incentive fee
$
3,454
$
6,042
(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 Statement 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 increased 1.2% during the nine
months ended December 31, 2020, as compared to the prior year period, primarily due to the increase in dividend expense which was partially offset by a decrease in interest expense. Dividend expense increased by $0.3 million as a result of
the Series E ATM Program sales during the current fiscal year. Interest expense decreased by $0.2 million due to a decrease in the effective interest rate, partially offset by a higher weighted-average balance outstanding on the Credit
Facility. The weighted-average balance outstanding on the Credit Facility during the nine months ended December 31, 2020 was $88.7 million, as compared to $45.8 million in the prior year period. The effective interest rate on the
Credit Facility, excluding the impact of deferred financing costs, during the nine months ended December 31, 2020 was 4.2%, as compared to 8.6% in the prior year period. The decrease in the effective interest rate on the Credit Facility was
primarily a result of a decrease in unused commitment fees on the undrawn portion of the Credit Facility and a decrease in LIBOR. Refer to Liquidity and Capital Resources Revolving Line of Credit for further
discussion of the Credit Facility.
54
Other expenses decreased 19.4% during the nine months ended December 31, 2020, as compared to the prior
year period, primarily due to a decrease in bad debt expense, professional fees, and tax expense.
Realized and Unrealized Gain (Loss)
Net Realized Gain on Investments
During the nine months
ended December 31, 2020, we recorded net realized gains on investments of $10.5 million, primarily related to a $14.0 million realized gain from the exit of Frontier, a $3.3 million realized gain from the recapitalization of Old
World, and gains from previous exits, partially offset by an $8.5 million realized loss related to the partial write-off of a debt investment in SBS Industries. During the nine months ended
December 31, 2019, we recorded net realized gains on investments of $55.7 million, primarily related to a $47.9 million realized gain from the exit of Nth Degree, a $20.4 million realized gain from the exit of ADC and a
$3.2 million realized gain from the exit of Jackrabbit Inc. (Jackrabbit), which were partially offset by a $2.7 million realized loss from the exit of Tread Corporation (Tread) and a $14.5 million realized loss
from the exit of B-Dry.
Net Unrealized Appreciation (Depreciation) of Investments
During the nine months ended December 31, 2020, we recorded net unrealized depreciation of investments of $3.3 million. The realized gains (losses)
and unrealized appreciation (depreciation) across our investments for the nine months ended December 31, 2020 were as follows:
Nine Months Ended December 31, 2020
Portfolio Company
Realized
Gain
(Loss)
Unrealized
Appreciation
(Depreciation)
Reversal of
Unrealized
(Appreciation)
Depreciation
Net Gain
(Loss)
Pioneer Square Brands, Inc.
$
$
20,635
$
$
20,635
Frontier Packaging, Inc.
14,032
2,534
(11,869
)
4,697
Ginsey Home Solutions, Inc.
4,151
4,151
SOG Specialty Knives and Tools, LLC
3,964
3,964
Educators Resource, Inc.
3,335
3,335
Old World Christmas, Inc.
3,289
37
3,326
Diligent Delivery Systems
2,409
2,409
Galaxy Technologies, Inc.
2,173
2,173
Head Country, Inc.
1,762
1,762
Schylling, Inc.
1,069
1,069
Cambridge Sound Management, Inc.
740
740
ImageWorks Display and Marketing Group, Inc.
(1,312
)
(1,312
)
Bassett Creek Services, Inc.
(1,359
)
(1,359
)
Counsel Press, Inc.
(1,850
)
(1,850
)
Nth Degree, Inc.
113
(3,649
)
(3,536
)
PSI Molded Plastics, Inc.
(3,755
)
(3,755
)
D.P.M.S., Inc.
(4,442
)
(4,442
)
SBS Industries Holdings, Inc.
(8,470
)
1,580
(6,890
)
Brunswick Bowling Products, Inc.
(18,048
)
(18,048
)
Other, net (<$1.0 million, net)
775
(700
)
75
Total
$
10,479
$
8,534
$
(11,869
)
$
7,144
The primary drivers of net unrealized depreciation of $3.3 million for the nine months ended December 31, 2020 were
the reversal of previously recorded unrealized appreciation of our investment in Frontier upon its exit, a decline in performance of certain portfolio companies, and a decrease in comparable multiples used to estimate the fair value of certain of
our portfolio companies, which were partially offset by increased performance of certain of our other portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact
COVID-19 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.
55
During the nine months ended December 31, 2019, we recorded net unrealized depreciation of investments
of $46.9 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended December 31, 2019 were as follows:
Nine Months Ended December 31, 2019
Portfolio Company
Realized
Gain
(Loss)
Unrealized
Appreciation
(Depreciation)
Reversal of
Unrealized
(Appreciation)
Depreciation
Net Gain
(Loss)
Nth Degree, Inc.
$
47,861
$
12,689
$
(40,846
)
$
19,704
Alloy Die Casting Co.
20,355
8,823
(12,634
)
16,544
Counsel Press, Inc.
7,321
7,321
Galaxy Tool Holding Corporation
5,329
5,329
D.P.M.S., Inc.
3,740
3,740
Old World Christmas, Inc.
3,649
3,649
ImageWorks Display and Marketing Group, Inc.
2,019
2,019
Head Country, Inc.
1,423
1,423
Tread Corporation
(2,726
)
3,380
654
Drew Foam Companies, Inc.
565
565
B-Dry, LLC
(14,452
)
14,699
247
The Mountain Corporation
(796
)
(796
)
Pioneer Square Brands, Inc.
(1,092
)
(1,092
)
Frontier Packaging, Inc.
(1,303
)
(1,303
)
Jackrabbit, Inc.
3,198
(4,547
)
(1,349
)
SOG Specialty Knives and Tools, LLC
(2,305
)
(2,305
)
Brunswick Bowling Products, Inc.
(2,419
)
(2,419
)
PSI Molded Plastics, Inc.
(3,668
)
(3,668
)
Educators Resource, Inc.
(3,743
)
(3,743
)
Meridian Rack & Pinion, Inc.
(5,796
)
(5,796
)
Ginsey Home Solutions, Inc.
(5,926
)
(5,926
)
SBS Industries Holdings, Inc.
(6,387
)
(6,387
)
J.R. Hobbs Co. Atlanta, LLC
(17,822
)
(17,822
)
Other, net (<$1.0 million, net)
881
(556
)
(132
)
193
Total
$
55,682
$
(6,820
)
$
(40,080
)
$
8,782
The primary drivers of net unrealized depreciation of $46.9 million for the nine months ended December 31, 2019 were
the reversal of previously recorded unrealized appreciation of our investments in Nth Degree, ADC, and Jackrabbit upon their exit, a decline in performance of certain portfolio companies, and a decrease in comparable multiples used to estimate the
fair value of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized depreciation of our investment in B-Dry and Tread upon their exit and increased
performance of certain of our other portfolio companies.
Across our entire investment portfolio, we recorded net unrealized depreciation of
$1.4 million and $1.9 million on our debt and on our equity positions, respectively, for the nine months ended December 31, 2020. As of December 31, 2020, the fair value of our investment portfolio was less than the cost basis by
$47.0 million, as compared to March 31, 2020, when the fair value of our investment portfolio was less than the cost basis by $43.7 million, representing net unrealized depreciation of $3.3 million for the nine months ended
December 31, 2020. Our entire portfolio had a fair value of 92.9% of cost as of December 31, 2020.
Net Unrealized (Appreciation)
Depreciation on Other
During the nine months ended December 31, 2020, we did not record any unrealized appreciation or depreciation of other.
During the nine months ended December 31, 2019, we recorded net unrealized appreciation of other of $10 related to the Credit Facility recorded at fair value.
56
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operating
activities for the nine months ended December 31, 2020 was $32.6 million, as compared to net cash provided by operating activities of $86.3 million for the nine months ended December 31, 2019. This change was primarily due to
decreases in principal repayments of investments and net proceeds from the sale of investments, partially offset by a decline in purchases of investments.
Purchases of investments were $89.6 million during the nine months ended December 31, 2020, compared to $95.3 million during the nine months
ended December 31, 2019. Principal repayments and net proceeds from the sale of investments totaled $51.2 million during the nine months ended December 31, 2020, compared to $167.0 million during the nine months ended
December 31, 2019.
As of December 31, 2020, we had equity investments in or loans to 28 portfolio companies with an aggregate cost basis of
$657.9 million. As of December 31, 2019, we had equity investments in or loans to 28 portfolio companies with an aggregate cost basis of $573.3 million. The following table summarizes our total portfolio investment activity during the
nine months ended December 31, 2020 and 2019:
Nine Months Ended
December 31,
2020
2019
Beginning investment portfolio, at fair value
$
565,924
$
624,172
New investments
46,902
43,180
Disbursements to existing portfolio companies
42,669
52,124
Unscheduled principal repayments
(20,734
)
(79,216
)
Net proceeds from sales of investments
(29,410
)
(87,060
)
Net realized gain on investments
8,858
54,522
Net unrealized appreciation (depreciation) of investments
8,534
(6,820
)
Reversal of net unrealized appreciation of investments
(11,869
)
(40,080
)
Amortization of premiums, discounts, and acquisition costs, net
14
14
Ending investment portfolio, at fair value
$
610,888
$
560,836
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year,
assuming no voluntary prepayments, as of December 31, 2020:
Amount
For the remaining three months ending March 31:
2021
$
9,050
For the fiscal years ending March 31:
2022
39,720
2023
106,150
2024
116,851
2025
164,277
Thereafter
52,250
Total contractual repayments
$
488,298
Adjustments to cost basis of debt investments
(35
)
Investments in equity securities
169,618
Total cost basis of investments held as of December 31, 2020:
$
657,881
Financing Activities
Net cash provided by financing activities for the nine months ended December 31, 2020 was $31.2 million, which consisted primarily of
$34.8 million of net borrowings under the Credit Facility, $19.3 million of gross proceeds from the issuance of mandatorily redeemable preferred stock under the Series E ATM Program, and $1.7 million of gross proceeds from the
issuance of common stock under the Common Stock ATM Program, partially offset by $23.9 million in distributions to common stockholders.
Net cash
used in financing activities for the nine months ended December 31, 2019 was $75.9 million, which consisted primarily of $48.8 million of net repayments on the Credit Facility and $27.0 million in distributions to common
stockholders.
57
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 $0.07 per common share for each of the nine months
from April through December 2020, and a supplemental distribution of $0.09 per common share in June 2020.
For the fiscal year ended March 31, 2020,
Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $17.9 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, 2020, net capital gains exceeded distributions declared and paid, and, in accordance with
Section 855(a) of the Code, we elected to treat $5.3 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,
2020, we recorded $6.5 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and increased Accumulated net
realized gain in excess of distributions and Underdistributed (overdistributed) net investment income. For the nine months ended December 31, 2020, we recorded $1.0 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Accumulated net realized gain in excess of distributions and increased Underdistributed net investment income.
Preferred Stock Dividends
Our Board of Directors
declared and we paid monthly cash dividends of (i) $0.13020833 per share to holders of our Series D Term Preferred Stock for each of the nine months from April through December 2020 and (ii) $0.1328125 per share to holders of our Series E Term
Preferred Stock for each of the nine months from April through December 2020. 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 the U.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 stockholders 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
On June 14, 2019, we
filed a registration statement on Form N-2 (File No. 333-232124), which the SEC declared effective on July 24, 2019. 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 December 31, 2020, we had the ability to issue up to $275.5 million in securities under the registration statement.
58
Common Stock
In December 2019, we entered into equity distribution agreements with Wedbush Securities, Inc., Cantor Fitzgerald & Co., and Ladenburg
Thalmann & Co., Inc. (each, a Common Stock ATM Sales Agent), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Common Stock ATM Sales Agents, up to an aggregate offering
price of $35.0 million in the Common Stock ATM Program. As of December 31, 2020, we had remaining capacity to sell up to $30.1 million of common stock under the Common Stock ATM Program.
During the three months ended June 30, 2020, we sold 155,560 shares of our common stock under the Common Stock ATM Program at a weighted-average gross
price of $11.39 per share and raised approximately $1.8 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $11.17 and resulted in total net proceeds of
approximately $1.7 million. These sales were above our then current estimated NAV per share. We did not sell any shares of our common stock under the Common Stock ATM Program during the period from June 30, 2020 to December 31, 2020.
During the year ended March 31, 2020, we sold 227,004 shares of our common stock under the Common Stock ATM Program at a weighted-average gross
price of $13.80 per share and raised approximately $3.1 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $13.55 and resulted in total net proceeds of
approximately $3.1 million. These sales were above our then current estimated NAV per share.
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. On December 31, 2020, the closing
market price of our common stock was $10.09 per share, representing a 9.2% discount to our NAV per share of $11.11 as of December 31, 2020.
At our
2020 Annual Meeting of Stockholders held on August 20, 2020, our stockholders approved a proposal authorizing us with the subsequent approval of our Board of Directors, to issue and sell shares of our common stock at a price below our then
current NAV per common share for a period of one year from the date of such approval, provided that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then-outstanding common stock immediately prior to each
such sale.
Term Preferred Stock
In August
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 Consolidated Statements of
Assets and Liabilities and are being amortized over the period ending August 31, 2025, the mandatory redemption date.
Our Series E Term
Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.375% per year, payable monthly (which equates to $6.0 million per year as of December 31, 2020). We are required to
redeem all outstanding shares of our Series E Term Preferred Stock on August 31, 2025, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of
redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series E
Term Preferred Stock, and (2) if we fail to maintain asset coverage as required by Sections 18 and 61 of the 1940 Act (which is currently 150%) and are unable to correct such failure within a specific amount of time, we are required to redeem a
portion of our outstanding Series E Term Preferred Stock or otherwise cure the asset coverage redemption trigger (we may also redeem additional securities to cause asset coverage to be up to 200%). We may also voluntarily redeem all or a portion of
our Series E Term Preferred Stock at our sole option at the redemption price at any time.
In August 2018, we used the proceeds from the initial issuance
of our Series E Term Preferred Stock, along with borrowings under the Credit Facility, to voluntarily redeem all outstanding shares of our 6.750% Series B Cumulative Term Preferred Stock (our Series B Term Preferred Stock) and our 6.500%
Series C Cumulative Term Preferred Stock (our Series C Term Preferred Stock), each of which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption of our Series B Term Preferred Stock and our Series
C Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.7 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.
59
In May 2020, we entered into sales agreements with Wedbush Securities, Inc. and Virtu Americas LLC (each a
Series E ATM Sales Agent), under which we have 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. As of December 31, 2020, we had remaining capacity to sell up to $30.4 million of our Series E Term Preferred Stock under the Series E ATM Program.
During the nine months ended December 31, 2020, we sold 784,853 shares of our Series E Term Preferred Stock under the Series E ATM Program with an
aggregate liquidation preference of $19.6 million. The weighted-average gross price per share net of discounts was $24.56 and resulted in gross proceeds of approximately $19.3 million. After deducting commissions and offering costs borne
by us, net proceeds totaled approximately $19.1 million.
In September 2016, we completed a public offering of 2,300,000 shares of our Series D Term
Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $57.5 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $55.4 million. Total underwriting discounts
and offering costs related to this offering were $2.1 million, which have been recorded as discounts to the liquidation value on our Consolidated Statements of Assets and Liabilities and are being amortized over the period ending
September 30, 2023, the mandatory redemption date.
Our Series D Term Preferred Stock is not convertible into our common stock or any other security.
Our Series D Term Preferred Stock provides for a fixed dividend equal to 6.25% per year, payable monthly (which equates to $3.6 million per year). We are required to redeem all outstanding shares of our Series D Term Preferred Stock on
September 30, 2023, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption
triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series D Term Preferred Stock, and (2) if we fail to maintain asset
coverage of at least 200% and are unable to correct such failure within a specific amount of time, we are required to redeem a portion of our outstanding Series D Term Preferred Stock or otherwise cure the asset coverage redemption trigger (and we
may also redeem additional securities to cause the asset coverage to be 240%). We may also voluntarily redeem all or a portion of our Series D Term Preferred Stock at our sole option at the redemption price at any time.
Each series of our mandatorily redeemable preferred stock has a preference over our common stock with respect to dividends, whereby no distributions are
payable on our common stock unless the stated dividends, including any accrued and unpaid dividends, on the mandatorily redeemable preferred stock have been paid in full. The Series D Term Preferred Stock and Series E Term Preferred Stock are
considered liabilities in accordance with GAAP and, as such, affect our asset coverage, exposing us to additional leverage risks. The asset coverage on our senior securities that are stock (our Series D Term Preferred Stock and Series E Term
Preferred Stock) as of December 31, 2020 was 250.3%, calculated pursuant to Sections 18 and 61 of the 1940 Act.
Revolving Line of Credit
On August 22, 2018, we, through our wholly-owned subsidiary, Gladstone Business Investment, LLC (Business Investment), entered
into Amendment No. 4 to the Fifth Amended and Restated Credit Agreement, originally entered into on April 30, 2013 and as previously amended, with KeyBank 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 to August 22, 2021, and if not renewed or extended by such date, all principal and interest will be due and payable
on August 22, 2023 (two years after the revolving period end date). Additionally, the Credit Facility commitment amount was increased from $165.0 million to $200.0 million and, subject to certain terms and conditions, can be expanded
to a total facility amount of $300.0 million through additional commitments from existing or new lenders. We incurred fees of approximately $1.6 million in connection with this amendment.
On August 10, 2020, we, through Business Investment, entered into Amendment No. 5 to the Credit Facility. Among other things, Amendment No. 5
amends 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. In addition, Amendment No. 5 provides for certain temporary changes during the COVID-19 Relief Period
(which began on August 10, 2020 and ends on March 31, 2021, and which may be extended, subject to certain conditions) including: (i) amending the definition of Effective Advance Rate, provided that during such period the
overall effective advance rate does not exceed 55%; and (ii) removing or changing certain Excess Concentration Limits (as defined in the Credit Facility).
60
Advances under the Credit Facility generally bear interest at 30-day
LIBOR, subject to a floor of 0.5%, plus 2.85% per annum until August 21, 2021, with the margin then increasing to 3.10% for the period from August 22, 2021 to August 21, 2022, 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.
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 by Business 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 with KeyBank. 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 require Business 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
requires Business Investment to comply with other financial and operational covenants, which obligate Business 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 after November 16, 2016, which equated to
$231.0 million as of December 31, 2020, (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 of December 31, 2020, and as defined in the performance guaranty of the Credit Facility, we had a net worth of
$517.0 million, asset coverage on our senior securities representing indebtedness of 671.0%, calculated in accordance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As of December 31,
2020, we had availability, after adjustments for various constraints based on collateral quality, of $96.0 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.
Notes Offering
In May 2020, we entered into a
dealer manager agreement (Dealer Manager Agreement) with our affiliated dealer manager, Gladstone Securities, under which we may sell a maximum of $350.0 million aggregate principal amount of our 6.00% notes due 2040 (the
Notes). However, we can only offer for sale up to $200.0 million aggregate principal amount of the Notes pursuant to a prospectus supplement dated May 22, 2020 and a base prospectus dated July 24, 2019 relating to the
registration statement on Form N-2 (File No. 333- 232124) under the Securities Act of 1933, as amended.
The Notes will mature on November 1, 2040. We will pay interest on the Notes on the first day of each month, commencing on the first day of the month
following the issuance of such Note. Subject to certain limitations, holders of the Notes will have the option to tender their Notes for redemption at a redemption price of $22.50 per Note until the earlier of the date upon which our Board of
Directors, by resolution, suspends or terminates the optional redemption right of the holders or the date, if any, on which the Notes are listed on Nasdaq Global Select Market or another national securities exchange. In addition, we will repurchase
the Notes, upon request, in the event of the holders death at a redemption price of $25.00 per Note. Except upon the occurrence of certain events that would constitute a change in control of us or to comply with applicable law, we may not
redeem the Notes at our option until the later of (1) the one-year anniversary of the termination of the offering of the Notes and (2) July 1, 2025. After such date, we may, at our sole option,
redeem all or a portion of the Notes at a redemption price of $25.00 per Note. The Notes will be our direct unsecured obligations and rank equal in right of payment with all outstanding and future unsecured, unsubordinated indebtedness issued by us.
As of December 31, 2020, no Notes have been issued.
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 of December 31, 2020 and March 31, 2020, we had unrecognized, contractual off-balance sheet success fee receivables of $44.6 million and $37.6 million (or approximately $1.34 and $1.14 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.
61
CONTRACTUAL OBLIGATIONS
We have line of credit and delayed draw term loan commitments to certain of our portfolio companies that have not been fully drawn. Since these line of credit
and delayed draw term loan commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term loan 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 loan commitments as of December 31, 2020 to be immaterial.
As of
December 31, 2020, we have also extended a guaranty on behalf of one of our portfolio companies, Country Club Enterprises, LLC (CCE), whereby we have guaranteed $1.0 million of CCEs obligations. As of December 31,
2020, we have not been required to make payments on this or any previous guaranties, 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 of December 31, 2020, at cost/liquidation preference:
Payments Due by Period
Contractual
Obligations (A)
Total
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
Credit Facility (B)
$
84,000
$
$
84,000
$
$
Mandatorily redeemable preferred stock
151,871
57,500
94,371
Secured borrowing
5,096
5,096
Interest payments on obligations (C)
48,873
13,555
24,925
10,393
Total
$
289,840
$
13,555
$
166,425
$
109,860
$
(A)
Excludes unused line of credit and delayed draw term loan commitments and guaranties to our portfolio companies
in the aggregate principal amount of $6.5 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 and secured borrowing and dividend obligations on each
series of our mandatorily redeemable preferred stock. The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of December 31, 2020. Dividend obligations on our mandatorily
redeemable preferred stock assume quarterly declarations and monthly dividend payments through the date of mandatory redemption of each series.
Critical Accounting Policies
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.
62
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 a SEC-registered Nationally Recognized Statistical Rating Organization (NRSRO), the Adviser generally uses the average of two corporate level
NRSROs 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 Advisers risk rating
system will provide the same risk rating as an NRSRO for these securities. The Advisers risk rating system is used to estimate the probability of default on debt securities and the expected loss, if there is a default. The Advisers risk
rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Advisers understanding that most debt securities of Lower 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 of AAA, AA or A. Therefore, the Advisers 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 Advisers scale is equal to a BBB or Baa2 on an NRSRO scale. The Advisers 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 December 31, 2020 and March 31, 2020:
Rating
December 31, 2020
March 31, 2020
Highest
9.0
9.0
Average
6.2
6.5
Weighted-average
6.5
6.9
Lowest
3.0
4.0
Tax Status
We
intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for U.S. federal income tax purposes. As a RIC, we generally are not subject to U.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, in order 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 Business 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 on October 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 both December 31,
2020 and March 31, 2020.
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.
63
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market
changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies whose securities are owned by us; conditions affecting the general
economy, including COVID-19 or other health emergencies; overall market changes; local, regional or global political, social or economic instability; and interest rate fluctuations.
The primary risk we believe we are exposed to is interest rate risk. Because we borrow money to make investments, our net investment income is dependent upon
the difference between the rates at which we borrow funds, such as under the Credit Facility (which is variable) and our mandatorily redeemable preferred stock (which are fixed), and the rates at which we invest those funds. As a result, there can
be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We use a combination of debt and equity capital to finance our investing activities. We may use interest rate
risk management techniques to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.
We target to have approximately 10% of the loans in our portfolio at fixed rates, with approximately 90% at variable rates or variable rates with a floor
mechanism. As of December 31, 2020 and March 31, 2020, all of our variable-rate loans have rates associated with the current 30-day LIBOR rate and our total debt investment portfolio consisted of the
following breakdown based on the principal balance:
Rates:
December 31, 2020
March 31, 2020
Variable rates with a floor
97.7
%
97.5
%
Fixed rates
2.3
2.5
Total
100.0
%
100
%
There have been no material changes in the quantitative and qualitative market risk disclosures during the nine months ended
December 31, 2020 from those included in our Annual Report.
ITEM 4. CONTROLS AND PROCEDURES.
a) Evaluation of Disclosure Controls and Procedures
As of
December 31, 2020 (the end of the period covered by this report), we, including our chief executive officer and chief financial officer, evaluated the effectiveness, design and operation of our disclosure controls and procedures. Based on that
evaluation, our management, including the chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective at a reasonable assurance level in timely alerting management, including the chief
executive officer and chief financial officer, of material information about us required to be included in periodic SEC filings. However, in evaluation of the disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
b) Changes in Internal Control over Financial Reporting
There were no changes in internal controls for the three months ended December 31, 2020 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
64
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business.
Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While we do not expect that the resolution of these matters, if they arise, would materially affect our business,
financial condition, results of operations or cash flows, resolution will be subject to various uncertainties and could result in the expenditure of significant financial and managerial resources. Further, we are not named as a party to any
proceeding that involves a claim for damages that exceeds 10% of our consolidated current assets.
ITEM 1A. RISK FACTORS.
Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and
the trading price of our securities. For a discussion of these risks, please refer to the section captioned Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year
ended March 31, 2020, as filed with the SEC on May 12, 2020. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially and adversely affect our business, financial condition and/or operating results.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE
SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
65
ITEM 6. EXHIBITS
See the exhibit index.
EXHIBIT INDEX
Exhibit
Description
3.1
Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit A.2 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No.
333-123699), filed May 13, 2005.
3.1.a
Certificate of Designation of 6.25% Series D Cumulative Term Preferred Stock Due 2023, incorporated by reference to Exhibit 3.5 to the Registration
Statement on Form 8-A (File No. 001-34007), filed September 22, 2016.
3.1.b
Certificate of Designation of 6.375% Series E Cumulative Term Preferred Stock Due 2025, incorporated by reference to Exhibit 3.1 to the Current
Report on Form 8-K (File No. 814-00704), filed August 16, 2018.
3.1.c
Certificate of Increase of Shares Designated as 6.375% Series E Cumulative Term Preferred Stock due 2025 of Gladstone Investment Corporation incorporated
by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 814-00704), filed May 21, 2020 .
3.2
Second Amended and Restated Bylaws, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K
(File No. 814-00704), filed May 15, 2020 .
4.1
Specimen Stock Certificate, incorporated by reference to Exhibit
d to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No.
333-123699), filed June 21, 2005 .
4.2
Specimen 6.25% Series D Cumulative Term Preferred Stock Due 2023 Stock Certificate, incorporated by reference to Exhibit 4.5 to the Registration
Statement on Form 8-A (File No. 001-34007), filed September 22, 2016.
4.3
Specimen 6.375% Series E Cumulative Term Preferred Stock Due 2025 Stock Certificate incorporated by reference to Exhibit 4.1 to the Current Report
on Form 8-K (File No. 814-00704), filed August 16, 2018 .
4.4
Indenture, dated as of May
22, 2020, between Gladstone Investment Corporation and UMB Bank, National Association, as trustee incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 814-00704), filed May 22, 2020 .
4.5
First Supplemental Indenture, dated as of May
22, 2020, relating to the 6.00% Notes due 2040, between Gladstone Investment Corporation and UMB Bank, National Association, as trustee incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K (File
No. 814-00704), filed May 22, 2020.
4.6
Form of 6.00% Notes due 2040 incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K (File
No. 814-00704), filed May 22, 2020 (contained in the First Supplemental Indenture filed as Exhibit 4.2 thereto).
31.1*
Certification of Chief Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer and Treasurer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer and Treasurer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
*
Filed herewith
Furnished herewith
All other exhibits for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related
instruction or are inapplicable and therefore have been omitted.
66
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
GLADSTONE INVESTMENT CORPORATION
By:
/s/ Julia Ryan
Julia Ryan
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
Date: February 2, 2021
67
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.